U.S. SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-K





R
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2012





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from ________ to ________





Commission File No. 000-26139





Titan Energy Worldwide, Inc.





Nevada
26-0063012(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)





6321 Bury Drive, Suite 8, Eden Prairie, MN 55346


(Address of principal executive offices) (Zip Code)





Company’s telephone number, including area code: (952) 960-2371


Securities registered under Section 12(b) of the Exchange Act: None.





Securities registered under Section 12(g) of the Exchange Act:





Common stock, par value $0.0001 per share.


(Title of class)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act       Yes  ̈ No R





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ̈ No R





Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No  ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  No R





Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” ““accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer £
Accelerated filer £
Non-accelerated filer £
Smaller reporting company R





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  ̈ No R





State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter):      $419.691





Indicate the number of shares outstanding of the Company’s classes of common stock as of March 26, 2013 was 71,200,092 shares.





Documents incorporated by reference: None.









TABLE OF CONTENTS





PART I

3ITEM 1.
DESCRIPTION OF BUSINESS
3ITEM 2.
DESCRIPTION OF PROPERTY
22ITEM 3.
LEGAL PROCEEDINGS
23ITEM 4.
(REMOVED AND RESERVED)
23PART II

24ITEM 5.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
24ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
25ITEM 8.
FINANCIAL STATEMENTS
33ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
34ITEM 9A.
CONTROLS AND PROCEDURES
34ITEM 9B.
OTHER INFORMATION
35PART III

35ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
35ITEM 11.
EXECUTIVE COMPENSATION
37ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
40ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
41ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
41ITEM 15.
EXHIBITS
42









PART I





ITEM 1.  Description of Business





Statements in this Form 10-K Annual Report may be “forward-looking statements.”  Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by our management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and probably will, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this Form 10-K Annual Report, including the risks described under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other documents which we file with the Securities and Exchange Commission (“SEC”).





In addition, such statements could be affected by risks and uncertainties related to our financial condition, factors that affect our industry, market and customer acceptance, competition, government regulations and requirements, pricing, general industry and market conditions, growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-K Annual Report.





Overview





We specialize in the sales, service 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 management 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.





We provide our products and services to customers nationwide. These customers include utilities, major national retailers, telecommunications companies, banks, data centers, grocery stores, hospitals and other health care facilities, schools and colleges, property management companies, government and military facilities, manufacturers, retail stores among others. We offer a range of state-of-the-art generators supplied by some of the leading generator manufacturers such as MTU Onsite and Generac Power Systems. We also provide and service automatic transfer switches and UPS systems so as to completely meet the onsite energy management needs of our customers.





We have dedicated considerable resources to developing a technologically superior program that benefits our customer from a cost and quality standpoint. Our professionally trained technicians service more than 5,000 generators owned by more than 1,000 customers with facilities located throughout the United States. We are always striving to advance our capabilities and improve our customers’ experiences. For example, to meet a critical need in our industry, we engineered our own proprietary remote monitoring and automated control system for onsite power generation. In addition, we have developed specialized asset management and auditing tools to more efficiently and cost effectively provide our customers with detailed information about their onsite power systems.  These tools provide Titan with a market advantage over service companies that do not have these technologies as we believe we can complete certain jobs more efficiently, maintain higher levels of service quality and realize higher margins by using these tools.   We have also created a national network of professionally trained service technicians so that we can effectively service equipment in any city of the United States and maintain the same high level of quality for each job at every site.
  Since our inception in 2006, we have grown substantially. We reported gross sales revenues of more than $19 million in 2012, which is an increase of 36% over 2011.  Service sales grew in 2012 even more significantly, from $5.0 million to $7.5 million in 2012, an increase of 51%.  We have significantly grown our service business which largely consists of recurring revenue service contracts to maintain and manage our customers’ power generation assets. As discussed in more detail below, 60% of our sales revenues were from power generation equipment and 40% from our service programs.  Our current equipment backlog at the end of 2012 was nearly $6 million, which represents jobs on hold and purchase orders for new jobs.  These are revenues that are expected to be realized in 2013.   This backlog number, which can fluctuate between $4 million and $7 million, was relatively high for our Company at the end of 2012, and so is suggestive of stronger equipment sales in 2013.




Currently, we are reporting a net loss of $1,430,961 for 2012. This net loss includes more than $800,000 in noncash items that are required by GAAP to be reported against our earnings.  The Company believes the “Adjusted EBITDA” (a non-GAAP financial measure) is a better indicator of our liquidity position which is calculated by adjusting our cash outflow by the changes in operating assets and liabilities and reducing it by interest expense. Our 2012 adjusted EBITDA was a positive $348,720. Our adjusted EBITDA improved steadily month by month throughout 2012. Based on a number of positive economic factors that are carrying forward into 2013, including increased sales revenues, sales backlog and higher margin service sales, Management believes that the Company can achieve profitability in 2013.




Management has recently 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.




3





Significant Recent Developments





The following developments were critical to building our business in 2012:





1.
Establishment of our National Accounts Business. Our national accounts business services customers that have multiple locations throughout the United States. In less than a year we have successfully grown our national accounts business from a few locations to more than 2000 locations nationwide. Many of our customers are Fortune 100 companies and we believe we will continue to see significant growth and expansion in this business in 2013.





2.
Commercial launch of our remote monitoring and automated control platform for power generation systems.In 2012 we began commercial deployment of our proprietary remote monitoring platform. The need for remote monitoring is growing throughout the onsite power industry as customers seek improved operating and maintenance information on their power investments. New EPA regulations will require regular monitoring of emissions. Programs such as demand response and distributed generation will require our monitoring to operate more effectively and reliably in these critical energy management efforts. We expect our remote monitoring system to be a market differentiator for Titan and our service programs, as well as support our penetration into the demand response and distributed generation markets.





3.
Restructuring of underperforming divisions of the Company. In 2012 we identified operations within the company which were underperforming and did not seem to be positioned to turn around financially in the near future.  We closed down the equipment division of the Florida operation, saving the company nearly $30,000 in losses a month while establishing a service operation which is now basically operating profitably.





4.
Automated audit and asset management program. Responding to the needs of our national account customers, we have developed an automated equipment audit and asset management program utilizing state of the art equipment and specialized software solutions for the collection, transmission and reporting of audit data. These technologies greatly facilitate our ability to service and manage multiple sites and provide our customers with much better data and reporting on their onsite power systems.  We are able to complete our tasks more efficiently and profitably, while saving our customers time and money.  We have begun to offer this service to all of our customers as well as use it as a tool to garner more national account business.





5.
Launch of our SMART POWER program for servicing generators in demand response programs. The Midwest has thousands of industrial customers on Interruptible Rate demand response (peak shaving) programs and the number of customers across the nation is expected to grow as utilities seek to expand their demand response resources. (See Section “Our Products and Services” below). To better serve these customers and provide  more comprehensive and effective service programs, we have developed our  SMARTPOWER program which combines onsite monitoring with advanced service and asset management capabilities to create a program that improves generator performance, helps support utilities’ demand response programs and provides all required reporting.





6.
Success of our RICE NESHAP program. Titan is one of the few companies that are capable of providing the modifications to generators in peak shaving programs required by recent changes in EPA standards for emissions.  We began this program in 2012 and to date we have received nearly $2 million in purchase orders for these modifications.  In addition to the modifications, Titan is also one of the few companies that offer the specialized monitoring service which is required by the RICE NESHAP standards set forth by the EPA.  Our monitoring system is one of the only technologies that can provide EPA monitoring requirements as well as provide full generator monitoring.  We expect this business to grow significantly in 2013.




4





Background





To appreciate how our business operates within the electrical utility industry requires some background of the electrical power industry, the Smart Grid, Demand Response, Distributed Generation and the Regulatory Organizations that influence our industry.





The Electric Power Industry





When the National Academy of Engineering convened a jury in 2003 to recognize the most important technological developments of the twentieth century, they chose national electrification as the preeminent engineering achievement. Across the country, an integrated system of nearly ten thousand power plants and six million miles of power lines had been constructed, connecting an inconceivable array of electric devices. This massive, complicated network with its millions upon millions of circuits, switches, breakers and other elements, operated with 99.97% reliability. Impressive as that may sound, it is simply not good enough. According to the DOE, the 0.03% unreliability resulting from grid failures is responsible for $150 billion in annual losses in the U.S. (Source: U.S. Department of Energy (DOE), The Smart Grid: An Introduction, 2009).




Traditionally, the utility system can be thought of in terms of three interconnected segments: energy production, transmission and distribution. Utilities have been constrained in their ability to invest in new power production plants needed to meet projected growth in demand by a restrictive regulatory process, the increased burden of environmental constraints and a lack of government and public support for long-term, major capital infrastructure projects. This has increased the strain on the existing electric power grid , in particular in capacity constrained areas and, combined with higher costs to produce electricity, has caused the price of electricity to increase in nearly all areas of the country, especially during peak demand periods.





Challenges at the level of production are mirrored on the transmission side of the electrical power grid. Under-investment in the transmission infrastructure required to deliver power from centralized power plants to end-use customers has resulted in an overburdened electric power grid. This periodically prevents the transport of the lowest cost power to constrained areas, which can affect reliability and cause significant economic impact. For example, although a base load power plant might have sufficient capacity, if the grid is underdeveloped for delivery, it will result in congestion on the grid. When there is congestion on the grid, the grid operator might call upon a generating plant to operate based on its ability to alleviate the congestion (its location). If the called-upon generator is a peaking plant the cost of energy will be higher. Not only does this increase the cost of energy during non-peak times, when a peaking event occurs the capacity intended for peaking is already being used.





This under-investment in generation and transmission, coupled with a growth in electricity consumption, has led to an increased frequency of brownouts (when power delivery is severely reduced) and blackouts (when power delivery is completely disrupted), which results in lost productivity, loss of perishable goods, and other major problems. This environment of increasing demand coupled with inadequate resources has generated a growing need in the marketplace for products and services in our strategic growth areas of Emergency and Back-up Power, Power Generation Maintenance Programs, Demand Response and Distributed Generation. Titan has created programs that will allow onsite power generation to participate more effectively and reliably in these programs as they become more popular across the United States.





While grid failures impact all of us to some extent, there are many industries which simply cannot afford to lose power for any length of time for economic reasons. The table below illustrates the economic damages across several industries:





Cost of One-Hour Power Service

Interruption in Various

Industries

Average Cost of

1-Hour of InterruptionCellular communications

$
41,000Telephone ticket sales

$
72,000Airline reservation system

$
90,000Semiconductor manufacturer

$
2,000,000Credit card operation

$
2,580,000Brokerage operation

$
6,480,000





Source: U.S. Department of Energy




5





Its impressive engineering accomplishments notwithstanding, the electrical utility industry has not kept up with the growth in demand for power during the last decades, potentially increasing rates of failure especially in densely populated cities and rapidly growing industrial zones. While energy consumption has actually declined in the United States the last few years, partially due to the response to the recent economic downturn, according to the North American Electric Reliability Council, demand for electricity is expected to increase over the next 10 years by approximately 18%, while generation capacity is expected to increase by only 6%. Another way of looking at this is that since 1982, growth in peak demand for electricity – driven by population growth, bigger houses, bigger TVs, more air conditioners and computers – has exceeded growth by almost 25% every year.As a result, in North America, margin between electric supply and demand is projected to drop below minimum target levels (below what is needed for regulatory requirements) over the next few years.





Population growth has the most straightforward effect on energy consumption. According to the U.S. census estimate, the United States will grow by over 100 million people by 2050. Even if we could keep per capita electricity use constant, as California has done for a decade, we would increase total power sales by nearly 33%. Distribution companies will also need to install about forty million more electric meters in new housing units and expand their systems accordingly. Economic activity and power use are, of course, related. The stronger the U.S. economy grows, that more power is used by industrial and commercial firms and more residential customers buy and more use electrical equipment.





In addition, electricity is gradually stealing market share from other fuels for the overall mix of applications we use in the United States. In the residential sector, for example, electricity use is projected to grow six times faster than natural gas use through 2030. During the next century this trend will take a giant leap forward. In the United States the largest use of energy outside the power sector is gasoline use for personal vehicles. As plug-in hybrid-electric vehicles (PHEVs) are introduced, electricity will gradually displace gasoline, boosting power sales at the expense of oil-based fuels. Over the long run, PHEVs represent a large new use of electricity. The timing depends on how quickly these vehicles will become affordable and how well public policies encourage their adoption. A 2007 study by the Electric Power Research Institute (EPRI) forecasts that we will need 282 million megawatt hours - the output of thirty-eight large power plants - to "fuel" all these cars.





In any case, many experts have argued that our ability to manage consumption and maintain reasonable pricing for electricity as the EIA has set forth will ultimately depend on the availability, strength and efficacy of our energy efficiency, demand response and distributed generation programs. (For example, Peter Fox-Penner. Smart Power: Climate Change, the Smart Grid, and the Future of Electric Utilities,2010; and Amory Lovins, Reinventing Fire, 2011). Advanced technologies, improved service and better management are the keys, and this is where the expertise of Titan Energy can play a significant role in our nation’s energy management programs.





The Smart Grid





Technological advances are beginning to have a profound impact on how the electrical grid operates and how it is envisioned to function in the future. Indeed, the success of energy efficiency programs and demand response will in many ways be measured in how it is able to meet the challenges presented by electrical utility systems that are not technologically efficient or controlled. In particular, key developments have come in the way of metering, web-based tools and applications and communication protocols.





While definitions of what constitutes a Smart Grid vary, nearly all attempts to describe the Smart Grid include one key element: the need to provide accurate and reliable communication of information. What this really means is the intersection of modern information technology and the electric system. Combining time-based prices with the technologies that can be set by users to automatically control their use and self-production, can lower power costs and offering other benefits such as increased reliability to the system as a whole.





For the most part, the electrical utility grid that we have been referring to is not exceedingly “smart.” The foundation of the transmission system consists of decade’s old technology that oftentimes requires customers to notify the utility of power outages, costly truck rolls to read electrical meters, and inefficient load profiles of electrical consumption. Too often utilities learn of a power outage only when a customer calls, and utilities and electric consumers still lack the information intelligence to prevent many problems and disasters even when we see them coming. However, billions of dollars, dozens of utilities and hundreds of companies are dedicated to finding a way to bring a new level of intelligence, communication and efficiency to the electrical utility grid. In fact, many believe the utility grid holds the same if not greater promise as the Internet in our future.





Electric utilities are under increasing economic, regulatory, environmental and societal pressure to deploy open standard based smart grid technologies to more efficiently serve their customers and the public at large. Likewise, FERC, Federal Energy Regulatory Commission (the Federal agency that regulates electricity infrastructure and transmission among other mandates) has been directed by Congress to adopt standards and protocols over Smart Grid technologies and FERC has committed to implement rate treatment policies that support investments in Smart Grid technologies. On July 16, 2009, FERC issued a Policy Statement for development of key standards for Smart Grid devices and systems and an interim rate. (FERC, Smart Grid Policy, 128, ¶ 61,060 (2009))




6





The economic advantages of having a more intelligent electrical grid are numerous. Smart Grid technologies could reduce power disturbance costs to the U.S. economy by $49 billion per year. (Source: Electric Power Research Institute (EPRI),“Electricity Sector Framework for the Future”). EPRI estimates $1.8 trillion in annual additive revenue by 2020 with a substantially more efficient and reliable grid. Delivering the electrical power generated today by more efficient means can greatly reduce the need to build out new power plants by between $46 billion and $117 billion over the next 20 years. Additional benefits include the avoided costs of additional in GHG emissions that would result from fewer new power plants. Widespread deployment of technology that allows businesses to more easily control their power consumption could add $5 billion to $7 billion per year back into the U.S. economy by 2015, and $15 billion to $20 billion per year by 2020. According to the EPRI’s same report, distributed generation technologies and smart, interactive storage capacity could add another $10 billion per year to the U.S. economy by 2020.





Titan Energy, through its development of remote monitoring and asset management platforms, considers itself to be a key participant in Smart Grid development and implementation, Titan also consider itself to be a company that can contribute solutions, new technologies and results that will benefit the utilities and customers alike.





Demand Response Programs





Demand response is a program that changes the consumer’s usage of electrical energy either through behavioral or load shifting methods (i.e. method of reducing electric demand at critical times for the grid)... Demand response is a resource that is often utilized to mitigate the effects of peak demand, those times when the load on the grid outstrips either production or transmission capacity or creates detrimental pricing effects. According to the DOE, the majority of operational problems on the electrical grid occur during times of peak demand. While these periods of peak load occur relatively infrequently, less than 1% of the time, they are often responsible for the economic impacts of power failures as well as the utility’s need to build additional infrastructure or buy expensive energy to meet the need during these relatively rare periods. Utilities are mandated to have this additional capacity and performance standards in place and it is very expensive to do so










Demand response is recognized as an important solution to help address the imbalance in electric supply and demand. The role of demand response as an electrical utility recourse has increased as the feasibility of building new production facilities or transmission lines has lessened. As a result, greater and more specific support has been forthcoming from government and regulatory agencies for demand response. For example, the Energy Policy Act of 2005 declared it the official policy of the United States to encourage demand response and the adoption of devices that enable it.





More than 500 utilities and utility service entities are currently offering demand response programs in the U.S. and the potential demand response resource contribution from all programs in 2011 was estimated to be more than 58,000 MW or about 7.6% of U.S. peak demand. (FERC 2011). This is an increase of about 17,000 MW from 2008. The regions with the largest demand response resources are the Midwest, Mid-Atlantic, and the Southeast regions.




7





Over the past 10 years, demand response has become such an important resource in helping to maintain the electrical utility grid, that some have gone so far as to proclaim that demand response will evolve beyond its current role in load curtailment to fundamentally change how electricity is produced, transported and consumer. (ACEEE Report). Already demand response program have had an impact on price stability, reliability and operations in many of the bid-based organized markets.





Demand response can have an economic effect beyond price savings for customer and utilities. Depending on its effectiveness in managing peak demand, demand response programs can also influence money spent on new power plants and infrastructure. It is estimated by the International Energy Agency that over 10% of the $2.65 trillion in electrical power infrastructure to be built between 2007 and 2030 will be constructed specifically to meet peaks in electricity demand which occur less than 88 hours per year. Based on these estimates, the market in North America for reducing demand during these critical peak hours, in place of building supply infrastructure, is $11.5 billion per year, if the need to build-out infrastructure occurs on an equal annual basis. Using these same assumptions, the market for eliminating the top 1% of peak demand for electricity worldwide during this same period could be over $59.2 billion per year. Based on its June 2009 Congressionally-mandated National Assessment of Demand Response Potential, FERC estimates the potential for peak electricity demand reductions across the country to be between 38 Gigawatts (GW) and 188 GW. Another industry analyst, the Brattle Group, estimates that reducing peak demand in America by a mere 5% would yield savings of about $66 billion over 20 years. This avoided capacity cost is often the largest benefit from demand response, even larger than the energy savings to all customers. In fact, demand response from both traditional and Smart Grid sources is expected to eliminate 80% of all peak power growth through 2016.




New uses of demand response are beginning to be accepted as the U.S. moves towards greater use of wind and solar power generation. Demand response has the potential to reduce transmission capacity by reducing peak demand, run the amount of ancillary service needed by reducing the peak and to directly provide ancillary services such as short term reserves and frequency support.





Interruptible Rate Demand Response




One of the most available sources of Demand Reduction is the on-site power generator. The DOE estimates that there are more than 192 GW of potential demand reduction capability in onsite power generation currently installed in the United States (Backup Generators (BUGS): The Next Smart Grid Resource, April 10, 2010). Diesel and natural gas generators offer the largest and most available source of immediate power. It is likely that generators will remain the on-site generation system of choice for many years to come. Developments in the design of diesel and other generators have produced a new echelon of engine powered generators that are cleaner, quieter and more environmentally friendly. Power generators as a demand response resource have environmental benefits as well. The DOE also provides data to support the conclusion that the use of onsite diesel power generators in a demand response program would produce fewer pollutants than gas powered peaking plants





Demand response programs aimed at reducing peak load by having onsite generators (called “peak shaving generators”) provide a facility’s electrical power can have economic benefits for both the utility and the consumer. In many cases, peaking generators only need to run a few hours a year when the load on the grid is at its highest, when energy costs are as high as $1000 per megawatt hour (MWh) to generate (Source: Electricity Advisory Committee's report, “Keeping the Lights On in the New World”). In the longer term, the use of demand response / load management programs as a power generation resource avoids the expense of building peak generation infrastructure. The same BUGS report by the DOE referenced above also presents data suggesting that the use of diesel generators during peak demand periods can produce fewer emissions than gas-fired peaking plants.





The Impact of Regulation and the Opportunity It Creates





Regulation by State and Federal Government.The state and federal governments’ regulation of the energy industry continue to advance our market opportunities. The states regulate the retail sales and transmission of energy to consumers, whereas the Federal Energy Regulatory Commission (FERC) protects consumers by ensuring the wholesale electric market is just and reasonable.





FERC’s regulation of the wholesale electric market includes sales and transmission of electricity in interstate commerce, and promoting safe, reliable and efficient energy infrastructure. In The Strategic Plan FY 2009-2014 (September, 14, 2009)FERC identifies key strategies which include the Smart Grid, Demand Response, and Renewable Resources.





The states regulatory oversight of retail energy rates for consumers also encompasses renewable energy and energy conservation mandates and programs. Interruptible rate programs, offered by utilities and regulated by each state’s Public Utility Commission, or other state regulatory agency, have increased the payback for customers who choose on-site generation. These rate programs and our ability to work with the utility on behalf of a customer provide us with a substantial strength in marketing our on-site generation products.




8





Regulation of Power Engines and Emission.In 1996, the Environmental Protection Agency (EPA) introduced new emission standards aimed at non-road mobile diesel engines including onsite stationary power generators. To be phased in over a four-year period beginning January 2007, these regulations require the new diesel engines that power these generators to comply with a tiered timing structure of emission allowances. Based on the system’s engine horsepower rating, generators are rated from Tier 1 to 4, with most non-emergency diesel engine generators required to arrive at Tier 4 by 2012. Tier 4 requirements are the most stringent.





Beginning January 1, 2011, the EPA will introduce the next phase of its Tier 4 emissions control regulations. The regulations limit emissions of oxides of nitrogen, particulate matter, hydrocarbons and carbon monoxide. Non-emergency diesel engines less than 10 liters per cylinder and greater than 175 hp will be required to meet Tier 4 regulations. The term “non-emergency” is very important in this context. Essentially, if an installation is classified as emergency, the power generator must not run unless the primary electrical power source is not available. However, owner/operators are allowed to run their emergency-classified power generators up to 100 hours per year for maintenance and testing. There is no current limit for run time during an emergency or power outage. The challenges facing the electric power industry are unique in a number of areas, particularly with the larger power generators, where regulations focus on reducing nitrogen oxide emissions from generator sets by 90 percent, compared to a 45 percent reduction for other equipment types


.


Since the Tier 4 emissions levels are so low, the EPA decided that emergency standby generator sets, which by their nature run very few hours per year, would be exempt from Tier 4 regulations, including any associated after-treatment. Furthermore, the EPA states that emergency standby applications can utilize current Tier products such as today’s Tier 2 and Tier 3 offerings. The list of applications that will require Tier 4 certified generator sets are as follows: non-emergency standby units, prime power applications, load management/peak shaving and electric power rental units. These include nearly all generators that would be deployed in a demand reduction or load management type of program.





In addition to these federal standards, there are state and local regulations that may force the use of Tier 4 generator sets in 2012 and beyond. The State of California will most likely have emissions regulations requiring the use of after-treatment on all standby generator sets including emergency units. As a result it is believed that the vast majority of standby generator sets sold into the State of California in 2012 will be Tier 4.Along with California, some regions and localities have stationary emission limits far more stringent than EPA diesel engine tier levels including: the New England states; Atlanta, Georgia; and Houston, Texas. The result is that diesel-fueled generator sets deployed in these areas, even if certified to the appropriate EPA tier level, may not meet local requirements.





While good maintenance has always been among end-user best practices, the new emissions regulations now imply that maintenance will be larger part of compliance. Although the regulations are not explicit, the EPA requires a diesel power generator to remain in compliance throughout its defined useful life, and that normal maintenance is the only way to accomplish this. This may also include record keeping, validation and other compliance measures that could be audited.





Diesel engine manufacturers will bear the burden of testing their diesel engines and certifying them according to EPA guidelines. However, owner/operators have a great deal of responsibility to understand how the regulations affect power generator availability, how installations are classified, as well as the record-keeping and maintenance requirements. Many companies in the standby and demand reduction industry are rightfully concerned about the impact these new standards will have on their respective businesses. In effect, Tier 4 will likely increase the expense, lower profitability, and lengthen returns on investment for both back-up power and demand reduction providers and consumers. However, these new requirement have long been anticipated and the major generator engine manufacturers have been announcing their technological answers to Tier 4 standards and more solutions are becoming available both for new engines as well as for after treatment options. Management believes that engine design and engineering will solve many of these problems and that suitable solutions to its business applications will be available and affordable.





At the same time, we believe that this change in emission policy brings significant opportunity for Titan Energy. The need for emergency power and demand reduction is not going to lessen. The costs of not having power or the ability to support our ailing grid are too high. We feel that we have alternative equipment technologies that will satisfy Tier 4 standards, superior solutions such as natural gas engines and smaller diesel units arranged in parallel configurations. There will also be a greater need for our maintenance and service programs as this will be a requirement of the owners/operators. And Titan Energy will benefit from the monitoring and validations technologies what will allow for improved operations and compliance with the new regulations.





Our Market





We have developed the expertise, strategic relationships and technological solutions that we believe will help customer avoid potentially devastating electrical grid failures, save customers money, improve the operation of the electrical utility system, and help our nation build a stronger and more effective Smart Grid. We operate our business in the industrial and commercial sectors of the US economy. According to a study by McKinsey & Company (“Unlocking Energy Efficiency in the US Economy”), the industrial sector accounts for 51 percent of the end use consumption and 40 percent of the end use potential for energy efficiency. The commercial sector consumes 20 percent of the end use energy and offers 25% of the efficiency potential. Electricity represents the major share of consumption in this sector. Therefore, the industrial and commercial sectors combined represent more than 75% of the energy market as well as the greatest potential for creating energy efficiency results for every dollar invested in energy efficiency.




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Business Segments





We operate under two business segments: Power Distribution Segment and Energy Services Segment. Within these business segments we provide our products and services across five strategic business areas: Emergency and Back-up Power Solutions, Renewable Energy Technologies, Power Maintenance Programs, Remote Monitoring and Control Technologies, Demand Response Solutions, and Energy Efficiency.





POWER DISTRIBUTION SEGMENT





Emergency and Back-up Power Solutions.Our Emergency and Back-up Powerbusiness provides customers with sophisticated electrical power generation equipment to be used during a power outage or emergency or for load shedding in demand response programs. Titan Energy offers a complete turn-key solution to help companies avoid costly power outages as well as ensure smooth, uninterrupted operations during times of emergency. We help design, engineer and install the power equipment needed by each customer.





In 2012, sales of power generation equipment accounted for more than $11.6 million or 60% of our business. We provide what we consider to be the most advanced and reliable power generation systems on the market and operate as an exclusive dealer (10KW and above) for Generac Power Systems in five Midwestern states, and a Power Partner dealer (10KW to 600 KW) for MTU Onsite Energy in Florida. We also sell switchgear, UPS and related equipment used to support our customers’ power generation systems.




There are an estimated 330,000 industrial enterprises and 4.9 million commercial buildings in the United States (Source: McKinsey, “Unlocking Energy Efficiency in the U.S. Economy”).In terms of population, based on geographic territories that we service, Titan Energy covers approximately 25% of the total US population. Assuming a roughly equal distribution of facilities across the population, this translates into about 80,000 existing industrial facilities and 1,250,000 commercial buildings within our service territories. Many of these buildings will already have back power generation systems installed, while many will have older or inadequate systems that need to be replaced, and still others will need to upgrade their system in order to meet new federal and regional regulations and mandates.





Our market potential is further influenced by regional factors. All areas of the United States are subject to failures of the electrical utility grid and the resultant interruption in power, unstable power and greatly increased energy prices during peak periods. Some areas, however, are more susceptible to power problems. Our opportunity in some areas of the country is increased due to the occurrence and frequency of storms and other natural disasters. Florida is a key example of a state that frequently needs to respond to power outages due to hurricanes and high winds. Other areas of the country experience brown outs and black outs due to heavy snow and ice storms, floods and other natural catastrophes. Customers in these regions of the U.S. include grocery stores who must maintain power to keep produce chilled or frozen, gas stations and toll booths that must remain operational during time of emergency, bank and financial institution that require constant online capabilities, health care institutions, public buildings, government buildings and many other businesses.





Federal, state and regional regulations also impact our opportunities. Some industries are nationally mandated to have adequate emergency and back power due to the nature of their services; hospitals and critical care facilities, and financial institutions are a few such examples. Some states have placed mandates across additional industries due to the frequency of natural disasters and other factors. In Florida for example, gas stations must have power back-up systems, as well as apartments, schools and many other public buildings.





ENERGY SERVICES SEGMENT





Power Maintenance Programs.Power generation systems represent considerable investments that require proper maintenance and service in order to operate when required during a time of emergency or during a demand reduction request. Titan Energy’s Power Maintenance Programs offer maintenance, repair and support service for our customers’ power generation systems. In 2012 these annualized contracts contributed $7.55 million (40%) of our gross sales revenues. To support our customers, we maintain warehouses of inventory and parts, a fleet of service trucks and a staff of 16 trained service technicians in the Midwest, New Jersey and Florida.




We expect our service business to grow considerably in the coming years. With every new generator we sell, we expect to sign a service contract for one to five years in term-length. Our market potential however is not solely defined by the generators we sell but also by our service of any manufacturers’ generator. Titan continues to service an increasing number of customers who have acquired generators from our competitors but sign up with Titan Energy for their service needs.




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With regards to the size of our potential service market, we estimates that approximately 30,000 industrial and commercial generators are sold each year in the US by the four major manufacturers. Assuming that sales have been somewhat consistent over the last twenty years, the average lifetime of a generator has remained constant; suggest that there are at least 600,000 working, serviceable generators installed in the US. If Titan’s territory covers 25% of the US population then this creates a market of 150,000 working generators that we could potentially service.





Because we are able to service facilities far outside our sales territories, we estimate that these potential numbers are probably only half of what our true total market potential is at this time. In addition, this does not take into account that we also service numerous cellular transmission towers, highway toll-booths, direction signs, government and institutional facilities that may not be included in these estimates. New regulations are expected increase the demand, sophistication and cost of energy back-up systems that will in turn require managed preventive maintenance and improved performance records. Customers are expected, as a result of both cost and economic opportunity, to be more likely to adopt preventive maintenance programs to protect their investment, ensure economic benefit and comply with continuingly more complex regulations.





Our ability to achieve such sale numbers would require dramatic changes and expansion in our service program and company infrastructure, but more accurately indicates that our potential market is large enough to support significant growth for many years.





Our Products and Services





Emergency and Back-Up Power Generation Systems.





We provide a variety of customers with power generation equipment, depending on their needs and application that can range from 5kW to several Megawatts. We also provide the transfer switches, UPS systems and other necessary equipment to create a reliable and dependable power generation systems. We currently represent several brands of generator manufacturers. In some areas of the country, we have exclusive distribution and service territories for certain manufactures. For switch gear, we utilize ASCO Power Technologies and others. For UPS systems, we are an authorized dealer for GE.





Generac Power Systems Generators.In the Midwest, through our Titan Energy Services, Inc. (TESI) subsidiary, we are an authorized dealer for Generac Power Systems, Inc. (“Generac”) generators and other products in four Midwestern states. TESI provides products to protect a company’s critical equipment from over/under voltage or outages, transient surges and harmonic distortion. TESI provides a full line of power generation equipment for all kinds of applications, in both diesel and natural gas fuel options. The Generac brand features fully integrated power generation systems that include industrial, commercial, and residential generator sets, as well as automatic transfer switches, controls, fuel tanks, enclosures and remote monitoring software. For higher kilowatt requirements, Generac’s Modular Power System (“MPS”) utilizes multiple diesel or natural gas generators in various side-by-side arrangements that match the power output of large single engine units.  The MPS system is based upon diesel fueled units of 400, 500 or 600 kW working in concert to offer outputs ranging from 800 to 6000 kW, and natural gas units of 100 to 300 kW with combined outputs of 200 to 3000 kW. In addition to the above models, the entire MPS product offering uses Generac’s PowerManager® Digital Control Platform, which brings reliability and flexibility to the control of these systems.





Generac Natural Gas Generators. Many of our customers are seeking “greener” solutions for stand by and emergency power generation, considering how their overall environmental footprint affects the world. Regulatory issues are also impacting these decisions and the cost of diesel generators. Diesel engines have been subject to intense emission level regulations and have seen aggressive Environmental Protection Agency (EPA) regulatory changes. This additional oversight has increased the total cost of both diesel engines and fuel. Future governmental cap and trade regulations for emissions trading may cause diesel engines to be taxed at a higher rate due to higher CO2 emissions. Fuel containment and the environmental concerns surrounding large quantities of fuel stored on site are considerable issues, as well.





Combining fuel cost with environmental impact provides companies with a broader view to the true bottom line, and overall environmental impact, of their generator choice. Natural gas generators have historically cost less per installed kilowatt than their diesel counterparts in the smaller sizes. The most noticeable advantage of natural gas-fueled generators over diesel is the extended run time provided by a continuous supply of natural gas. According to the Edison Electric Institute, severe weather events account for 62% of unexpected power outages in the United States. These events can close roads and cripple municipal infrastructures, making it difficult or impossible to refuel the diesel generators used in so many standby applications. The natural gas infrastructure has shown itself to be extremely reliable in situations that cause power outages; through four Florida hurricanes in 2004 and Northeast grid failure of 2003, the natural gas supply was unaffected.





The Generac Bi-FuelTM configuration provides a number of alternative energy options. This technology uses a combination of diesel and natural gas to take advantage of the best qualities of each fuel (more power from diesel, lower emissions from natural gas). Bi-Fuel configurations are available for both stand-alone and MPS applications.  Single-engine units are available at 300 and 375 kW output, while Gemini Twin Pack modules are rated at 600 and 750 kW. MPS versions can be combined as needed to achieve numerous power outputs up to 3750 kW.  While operating under load, Bi-Fuel units can operate on up to 90% natural gas. If conditions dictate, the unit can revert to 100% diesel fuel with a no-break, automatic fuel changeover. The on-site diesel fuel tank required for Bi-Fuel units can also be smaller, if desired, to save space and cost.




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MTU On-Site Energy Generators. In the Northeast, we are a sub-dealer and offer a complete line of MTU Onsite Energy diesel, natural gas, and propane generator sets, including digital engine and generator controls which provide superior performance and response time, proven reliability and durability reducing maintenance costs, state-of-the-art emissions technology and UL2200 listing for both standby and prime power applications. The MTU (Detroit Diesel) engine line-up is a world premier class of products recognized and accepted throughout North America and the international market place. MTU offers diesel generator set ratings range from 20 kW to 3250 kW, using John Deere and MTU (Detroit Diesel) engines, and natural gas generator set ratings range from 20 kW to 400 kW, using GM and Doosan engines.




Transfer Switches and Switchgear.ASCO Power Technologies and General Electric-Zenith offer automatic transfer switches and paralleling switchgear built for dependability and ease of operation, ranging from 40amp to 4000amp, in 2, 3, and 4 pole configurations.





Uninterruptible Power Supply (UPS) Systems–The Digital Energy General Electric (GE) UPS Series was developed using GE’s Design for Six Sigma methodology to ensure that the product fully meets customer requirements and expectations. GE has one of the most extensive and accepted UPS products available in the market today. They manufacture systems from 10 -750 KVA. The UPS system is designed to provide seamless power during any utility fluctuations or loss of power. The UPS system provides battery backup power until an emergency backup engine generator comes online. Once the engine generator is producing proper voltage and frequency the UPS switches the building load onto the engine generator. This provides the highest degree of protection typically used by Data Centers, Banks and Credit Card companies.





Maintenance and Service Programs.





Titan Energy recognizes additional revenues from service contracts, installation and maintenance services for its customers and owners of power generation equipment. We offer service contracts and support to all generator owners. The service contracts yield higher margins as compared to equipment sales and help support our effort to achieve profitability. These service contracts may also include remote monitoring services that allow owners to be informed of the condition and operations of their equipment at any time and from any place. With terms ranging from one to five years, service and remote monitoring contracts are providing the Company with strong recurring revenues.




We provide factory-trained technicians equipped with the necessary tools, parts and manuals in their trucks. We support our technicians with our specialized service experts and our warehouse, and we manage our service activities to provide the most responsive and proficient service available. Our services have these specific advantages:





·
Factory trained technicians. No other organization has Generac, MTU Online Energy, Lister-Petter, ASCO Power Technologies and GE-Zenith factory trained technicians. All Titan Energy technicians attend factory training on regular intervals.




·
Warranty. As the authorized distributor, only Titan can perform warrant work on the manufacturer’s products.




·
Service Manuals and technical documents. As the exclusive Industrial Distributor in certain territories, we are the only company that has these technical documents to provide the necessary service. Any other organization must get these from us.




·
Parts. To meet the needs of our customers quickly and efficiently, we inventory the common service items in our warehouses and in our trucks, so as to avoid the need and expense to special order from another source.





Remote Monitoring and Control Technology for Onsite Power Generation.





The ability of onsite power generation to respond quickly and sufficiently to either a grid failure or a utility demand response event is critical to the operations of the facility that it supports as well as to the utility that depends on its load shift for peaking shaving purposes. Titan has developed a monitoring and control systems that performs 24 hours/7 days a week, monitoring of dozens of critical functions on these onsite generators. In this way, we can see in advance if there is a problem that needs to be addressed, if servicing programs are being administered appropriately and if trends are occurring that suggest and can prevent future problems. This information can be incorporated into a comprehensive service and management program to insure that these power generators are ready to perform when called upon. The result is a system that is as reliable as any other demand response program in the marketplace.




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This level of efficiency has not been historically available from onsite power generation. In fact, for decades, generators were often referred to as the “blunt instrument” of demand response. This was due to inefficient communications, monitoring and control programs. Titan has developed a fully integrate program that not only monitors and provides alarm for generators, but offers a complete asset management program that can offer multiple levels of reliability, efficiency that customers require and all utilities need to effectively manage their load control programs.





Our program will be designed to offer the following features and capabilities:





·
Reliable asset managementthe ability to engineer, install, service and manage all forms of onsite power generation





·
State of the art communicationsbetween distributed sources of power generation, the Titan NOC, and utilities





·
New levels of intelligencecreating unprecedented efficiencies, reliability and functionality





·
Real time monitoring and controlof multiple disparate power sources now available for the first time





·
New forms of data collection, reporting and validation





·
Immediate value.Built to take on current needs in IR, DR, real time pricing and maintenance of power generation assets





·
Versatile. Created to work with all forms of power generation – from diesel generators to renewable.





·
Future applications.Designed for all future energy programs.





Current monitoring systems are primarily defined by the system architecture chosen and the technology used to build it Supervisory Control and Data Acquisition (SCADA) systems are built on a point-to-multipoint architecture, based on central processing, low latency communications, and master/slave protocols. Decisions are made by a central “master station” or by the operator. These systems were first designed for central control operations of pipelines, substations and large central power plants. The disadvantages for onsite power generation application are: Expensive hardware, high monthly operations cost, scalability is an issue and, difficulty in sharing data





Machine-to-Machine (M2M) are web based systems that work off a multipoint-to-multipoint architecture, shared and hosted applications, low to high latency communications, internet protocols (connection and connectionless). M2M is designed to monitor remote sites where SCADA is too expensive and not time sensitive and is often utilized to provide owners of equipment a means to obtain remote data. Advantages are lower hardware costs, reasonable monthly cost, easier to scale. Disadvantages are that user interfaces typically is less sophisticated than SCADA, problems with variable latency, can be difficult to manage and secure, user interfaces typically rudimentary





Titan has recognized that the industry needed much more: and in fact what was required was a hybrid system of SCADA and M2M. Titan’s program is an Asset Management System for Generators, not just an alarm or monitoring system. Titan’s system will incorporate a variety of new data communication technologies: wireless, secure, efficient and cost effective, in order to provide 24/7 information on all aspects of generation assets. This is a new control system that allows real time management of equipment and, immediate response to events: dynamic systems to manage larger networks of power generation assets – networks with automated decisions making and controls to solve problems and optimize operations. New validation measures and reporting: immediate real time information on activities, results and impact and trending, improvement factors, etc.





Our system will be capable of collecting data from all types of Distributed Energy Resources (DERs) or “micro-generators” — diesel and natural gas generators, solar, UPS’s, battery storage, and wind. It is a fully featured and highly engineered system that will be capable of:





·
Being scaled and utilized for thousands of DER’s managed from a central site or distributed locations, and by field technicians nationwide





·
Interfacing and integrating with current and future operations applications





·
An extensible, easily changed User Interface and reporting system





·
An Energy Management System for controlling and scheduling IR generation independently or through utility interaction





·
Aggregating available generation for sale to utilities





·
Capable of integration into future Smart Grid Distributed Generation Programs





·
A “ Utility Grade” Managed Service





A unique feature of Titan’s technology is that it is an architecture that utilizes distributed intelligence. End-Devices act as SCADA Masters and poll in real-time and so can make decisions and report events on an exception basis, perform scheduled tasks utilizing connectionless “over-the-air” protocol. This system is designed to work efficiently and reliably over packet switched networks (e.g.3G and 4G) networks with the following features:





•
End-Devices log data and use store-and-forward data transfer method




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•
A data collection engine and database designed for interfacing to any type of equipment





•
Designed to interface to outside or 3rd party systems





•
Designed as a managed service with metadata collected and network management tools used to guarantee and optimize system performance





We have created tools that allow us to ensure reliable data collection and control. We monitor the end-devices, communications paths, data usage, network components, etc.





Future Uses of Titan’s Monitoring and Control Technology.While Titan’s technology was designed and developed to allow us to move quickly and effectively into the IR and DR markets, this versatile system offers many other opportunities for titan to expand its sales and services:





•
Generator (DER) Monitoring: Private Label Monitoring for Manufacturers and Distributors





•
Distributed Generations: Generators, Combined Heating and Power, Solar, Wind





•
Energy Industry: Large industrial and commercial facility energy management; Gas pipeline and compressor stations





•
Water and Wastewater utilities: Water Quality monitoring , water inlets; Wastewater pumping stations





•
Large Industrial Equipment: Rentals (Geofencing and usage monitoring), Chillers, Pumps





SMART POWER: Our Demand Response Service Offering





Our services provide assistance to reduce electric demand during periods of peak demand using onsite generation to shift load off the electrical grids and thereby preventing grid failures. By improving grid reliability and efficiency, we delay the need for construction of new electrical generating plants. In effect, all consumers of electricity benefit from our demand response activities. We enter into management contracts with commercial, institutional and industrial customers to help them negotiate and comply with utility sponsored programs for demand reduction.





Our SMARTPOWERbusiness is responsible for managing the power generation assets of our customers in utility-sponsored programs that lessen demand during peak periods and lower utility rates for participating customers. When used at specific times, onsite generators can significantly reduce peak loads and reduce energy expenses for industrial and commercial customers in areas where utilities offer reduced rates for participation in peak load reduction programs.




We believe that the market opportunity is significant and will remain so as demand response programs, operational efficiency and energy savings are given increased priority by commercial, institutional and industrial end-users of electricity, and as energy market prices remain volatile. Titan Energy generates revenues in various ways from this program: the sale of power generation equipment, service and maintenance contracts for the equipment after installation, and separate monitoring and management fees for helping the customer comply with the utilities and the regulatory agencies. Our experience with industrial generators, our established relationships with utilities and ability to integrate new communications technology to support demand response programs uniquely position Titan Energy in this business segment.




Automated Audit and Inventory Services





We have developed a state of the art auditing and asset management application that can be used to quickly and efficiently record and categorize the power generation assets of a facility. These applications utilize handheld computer tablets and specialized software that downloads wirelessly to Titan’s servers. The process was designed so as to minimize input errors, mistakes in categorizations, or missed data points by the recording technicians. Reports are available immediately to Company personnel and the customer and can be updated anytime.





The advantage of these electronic audit systems is that when combined with Titan’s remote monitoring and service programs, the customer now has a comprehensive asset management program that better protects its equipment, ensures that systems will operate properly and when needed and will save costs on service and repairs through preventative maintenance.




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Strategy





Currently, Titan Energy specializes in providing industrial, commercial and institutional customers with the power generation equipment and energy management solutions that enable our customers to maintain critical operations during a grid failure and to better manage their energy usage and save money. We consider ourselves the experts when it comes to integrating onsite power generation equipment with the needs of the local electrical grid and utility based programs. Our knowledge of key technologies, our network of offices and service centers in more than 12 key states, our expanding base of more than 1,000 customers including several Fortune 500 companies, and our established working relationships with utilities across the country are all key factors that position Titan Energy to capitalize strongly in the energy management and Smart Grid arena.





Our strategy is to capitalize on our growing national footprint of sales and service centers, our scalable technology platform and our market position to continue providing intelligent energy solutions to commercial, institutional and industrial customers and utilities. Ultimately, our aim is to become one of the leading energy management solutions providers for commercial, institutional and industrial customers throughout the United States.




We plan to grow significantly as a company over the next several years through the development and successful implementation of the following business initiatives:





Expansion of Our Power Generation Sales in Existing Territories.





Sales of power generation and associated equipment will provide the company with significant revenues and create opportunities for Titan Energy to develop long term customer contracts for service and in some cases demand reduction programs. These sales also create opportunities for us to deploy our monitoring and communication technologies, services that generate recurring revenues and stronger profit margins. We will grow our Equipment sales in the following ways:





Increase Equipment Sales in Existing Territories.We now cover rich market territories in the Midwestern, Southeastern and Northeast United States. Our goal is to now begin to exploit these territories by bringing in qualified, professional sales people from the power generation industry that can help us build our brand, our sales and our revenues.





Expand Equipment Sales through Sub Dealer program. Titan Energy has made a commitment to expand its Sub-dealer program in all Titan Energy’s existing territories where it has an exclusive relationship with a manufacturer. Sub-dealers are independent sales and service companies that are authorized by Titan to market, sell and service our line of power generation equipment. Sub-dealers are generally paid a commission on sales. There are several potential sub-dealers in our current territories, representing the ability of Titan Energy to double its equipment and service sales through this program alone.





Expand Our Equipment offerings.UPS, emissions retrofits, others.





Web based Sales.We will seek to expand our ability to offer web based sales of equipment and parts through the development of a sophisticated online ordering system.





Expansion of Our Power Maintenance Programs





Our Maintenance and Service programs usually involve recurring revenues and offer the Company higher margins than equipment sales. Therefore, the Company is focused on aggressively increasing the number of these contracts throughout our territories and expanding the number of national accounts that allow us to service multiple facilities for a customer throughout the United States. We will seek to accomplish this expansion in the following ways:





Improve our Service Management Systems.We are in the process of improving the capability and efficiencies of our software systems that support our Service programs. These improvements will allow us to process, monitor, and validate orders more accurately and efficiently, thereby allowing our company to take on getter numbers of customers.





Increase the number of national accounts.We have been very successful in 2010 and 2011 in acquiring national accounts for our service program. We have developed a nationwide network of service providers that can assist us in providing Titan level of service to our customer anywhere in the United States.





Expand Our Service Sales Force.We believe we have the internal capacity to aggressively expand our service sales in the Midwest and Florida, where we have established operations, without adding significantly to our administrative or overhead expenses. We also plan to open service sales operations in additional territories such as New York, New Jersey and parts of the Midwest where we do not current have service operations.




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Sub Dealer Program.Through our sub-dealer program in the Midwest, we expect to acquire relationships with a number of established companies that will also offer Titan Energy additional service opportunities. As with equipment sales, the cost of new service contracts through our sub-dealer program is minimal and as an exclusive dealer in these territories, we are the only authorized service provider for the industrial line of products.





Expansion of Our Demand Response Programs





Management believes that onsite distributed power generation systems offer an under-utilized resource for solving problems related to congestion and failure on our electrical power grids. These programs are also of potential economic benefit to the customers who participate. According to the DOE, less than 5% of the potential power available from distributed generators is being utilized to support our electrical power grid and that utilizing only 5% of this potential would save the U.S. economy more than $40 billion per year.





As more Demand Response programs are developed and offered, Titan is well suited to help customers participate. Customers with very small generators will be able to participate through an Aggregator. Savvy customers will want to take-advantage of the potentially more lucrative programs the wholesale market. Titan Energy will seek to expand its role in the demand response industry providing a full range of load management services to our industrial and commercial customers. Our services will allow our customers to utilize incentives to reduce electric demand during periods of peak demand using onsite generation to shift load off the electrical grids and thereby preventing grid failures. By improving grid reliability and efficiency, we delay the need for construction of new generation plants. In effect, all consumers of electricity would benefit from our demand response activities. We will enter into contracts with commercial, institutional and industrial customers to help them negotiate and comply with utility sponsored programs for demand reduction. We will support these programs with the ability to install new equipment, maintain existing power generation systems and advanced communications and control technologies. We believe we can attain good growth within our current customer base as well as through establishing these programs with new customers in our service territories.





Utilizing our current customer base of more than 1,000 companies with more than 5,000 generators creates a base of potential customers for Demand Response Programs. Management estimates that if we can attain 5% penetration of our current customer base per year, the result would generate as much as $6 million in new recurring revenues contracts per year. In other words, over five years we could expect to generate as much as $60 million in annual revenues from these kinds of programs. However, we will not limit our demand response programs to our current customers, and will seek contracts with any eligible customer within our service territories, thereby increasing our potential market opportunity several fold.





In addition, we are committed to the development, implementation and broader adoption of technology-enabled demand response solutions. This technology enables us to continuously monitor remotely, deliver and receive alerts, send control signals to, and receive bi-directional communications from an Internet-enabled network of dispersed end-use customer sites. With this technology we can better coordinate requests from utilities as well as manage, monitor and remotely maintain our customers’ generators. We believe that improved communications and network technologies will increase our opportunities in the demand reduction industry by giving us the ability to offer a more efficient and responsive service to a broader range of potential customers.





Sales of Technology-Enabled Energy Management Solutions





At Titan Energy, we believe literally in the maxim: “You can’t manage what you can’t measure.” One of our goals is to develop and expand the use of more effective monitoring and communication technologies that will allow us to better measure and so manage our customers’ energy assets. We feel that as the industry experts in power generation systems and maintenance, we should offer the most sophisticated and effective monitoring and reporting systems on the market. We plan to develop these programs through internal development and acquisition of key companies and/or technologies. The result of utilizing these technologies will be greater efficiencies in managing customer assets, greater revenues through the deployment of recurring revenue service programs, and lowered costs due to less need for technicians to manually monitor and service equipment. Key systems we plan to offer include:





Remote, Automated, On-line Monitoring Systems.Titan Energy offers one of the most effective and reliable online metering systems for power generation systems. We plan to expand the capabilities of this technology and make it available to a greater number of our customers as part of our services and maintenance program.





Metering Systems. We have identified a number of metering systems that provide onsite monitoring and information to consumers. We are currently working with a number of end users to determine the validity, efficacy and pricing for these newer series and hope to move into commercial implementation in 2012.




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Online, Automated Reporting Services. As the need increases for detailed, real-time information about generator operations and efficiencies due to regulatory and other factors, we intend to provide the reporting and management programs that will allow our customers to more easily and cost effectively comply with regulators.





Sales and Service Support for EPA Requirements on Diesel Engines





Changes in the EPA’s regulatory requirements for diesel engines could have a number of significant impacts on owners of diesel engine generators. We believe that these changes in emissions policy, while posing challenges to everyone in the industry, also bring significant opportunity for Titan Energy. The EPA estimates that there are more than 900,000 back up diesel generators in the U.S. EPRI estimated more than 50,000 of these onsite power generators were enrolled in utility sponsored DR programs back in 2003. The need for emergency power and demand reduction is not going to lessen. The costs of not having power or the ability to support our ailing grid are too high. It is safe to assume that this number could well have doubled by 2012. All of these generators face modification, replacement or additional service requirements in light of the new regulatory requirements as the EPA rolls out its changes in emission policies in 2013 and beyond. This creates a significant market where the expertise of Titan Energy can be uniquely valuable.





Requirements were also established for the cleaner natural gas burning engines. For example, the customer gets the option of buying either a rich-burn natural gas fueled manufacturer certified EPA compliant product or a non-certified product and getting it certified it in the field. For certified engines the owner/operator may adjust, operate, and maintain engine per manufacturer’s instructions and would have to keep records of it. If manufacturer’s instructions are not followed, engine becomes non-certified and compliance must be demonstrated.





For non-certified rich-burn, natural gas fueled engines; the provisions include keeping maintenance plan & records and performance testing on a scheduled basis depending on the size of the engine. These are detailed and technically demanding requirements of any business owner. The ability of a Titan to manage these reporting and testing requirements as well as mange paperwork and compliance, will be a valuable resource to many business owners.





We feel that we have alternative equipment technologies that will satisfy Tier 4 standards, technologies which offer superior solutions such as natural gas engines and smaller units arranged in parallel configurations. There will also be a greater need for our maintenance and service programs as this will be a requirement imposed on the owners and operators. And Titan Energy will benefit from the monitoring and validation technologies what will allow for improved operations and compliance with the new regulations.





We see the following as new areas of significant business for the Company in 2013 onward:







·
New Engines – to replace old generators that either does not meet EPA standards or do not run properly or efficiently. Replacement of diesel with natural gas engines is an opportunity to upgrade as well as meet EPA requirements.





·
Retrofits of old engines – many diesel engines that are enrolled in load shaving programs will have to be retrofitted with systems that remove pollutants from the exhaust. There may also be added requirements and modifications for fuel storage, cleaning and treatment.





·
Improved service and maintenance – all generators, whether in back up or peak shaving, will require improved and more regular service and maintenance.





·
Monitoring, reporting – all generators, diesel and natural gas, will require monitoring and reporting functions that Titan can provide through its automated management platform.





Equipment and Service Sales to Electrical Utilities





Other key utility providers market for Titan Energy includes co-operatives, municipalities, and aggregators. Historically, electric utility companies were formed in North America as regulated monopolies to manage the capital intensive, mission critical service of delivering electricity to end-use customers. In restructured markets, utilities continue to own and maintain their generating plants and transmission and distribution lines, but now independent power generators and electricity suppliers are allowed to openly compete in the market as well.





Titan Energy often works closely with utilities and cooperatives when it comes to interfacing between a customer’s power generation systems and the electrical grid. We also provide energy audits and efficiency programs for the utilities to their customers. When it comes to demand reduction programs we often work with the utility or cooperative to ensure that a customer is meeting the requirements of the rate savings program that the utility sponsors.




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Operations





As of December 31, 2012, we had 46 employees. None of our employees is covered by a collective bargaining agreement, and we have not experienced any work stoppage. We consider our relations with our employees to be good. Our future success is dependent in substantial part upon our ability to attract, retain and qualified management, technical, marketing and other personnel. Our operation comprises several functionally distinct sub-groups: Executive, Customer, Sales and Services.





Company Offices





Currently we have five offices covering operations in more than twelve states.  Our offices are located in Minneapolis, MN; Des Moines, IA; Omaha, NE; Bernardsville, NJ; and Miami, FL. We also have home offices in Houston TX and Detroit MI.





Executive Operations





Executive operations primarily deal with the roles and responsibilities that we have as a public traded company.  This involves general fiduciary and operational oversight, compliance with SEC financial reporting requirements, meeting with our Board of Directors, as well as shareholder and investor relations.  Currently we have two individuals in executive operations: our Chief Executive Officer and Chief Financial Officer.





Customer Operations





Customer operations are responsible for all project management, hardware installation, and on-going customer relationship management. The 9 members of this group include project managers, accounts receivable and accounts payable personnel, warranty specialists, accounting directors and assistants and administrative support. five of these individuals are located at our Minneapolis office, one in Florida, one in Iowa one in Texas and one in New Jersey.





Sales Operations





As of December 31, 2012, our sales team consisted of 18 employees. We organize our sales efforts by product type.




Our commercial and industrial sales group sells power generation equipment to commercial, institutional and industrial customers. Our commercial and industrial sales group is located in major electricity regions throughout the United States, including New York, Florida, and the Midwest.





Our service sales department sells maintenance and repair service contracts to industrial and commercial customers which have power generators.  These contracts can vary in term from one year to as many as ten years. In many cases, our service sales teams follow up on sales of power generators from our industrial sales group, while also pursuing service contracts with customers which own power generation equipment from other suppliers. We have service sales personnel in the Midwest and in Florida.  These people report to the General Manager in each of these areas.





Our contract programming is provided by our Houston, TX home office and consists of 1 employee and 1 contract employee.





Service Operations





Titan Energy prides itself on the quality, training and commitment of our Service Department.  We feel that delivering timely, quality service to our customers is the best way to maintain loyalty and generate new sales.





Personnel.  We have a total of 16 service technicians located in the Midwest, New Jersey and Florida.  Three of these people are considered master technicians who have received advanced training and instruction on power generation systems and related equipment.  All technicians are required to receive on-going training and education through programs offered by our manufacturers.




18




Trucks and Service Vehicles – we have a total of 15 modern, fully equipped service trucks which carry more than $115,000 of equipment, parts and tools.  Since some of our customers are located in remote areas, our trucks must be properly equipped to complete a job while on site.





Equipment – we also have numerous special tools and equipment which are necessary to perform our duties as service technicians for these sophisticated power generation systems.  These tools include load banks, fuel cells for refueling, fluke meters, infrared scanners, warranty kits, and all tools required to work on electrical and mechanical systems that make up a power generation system.





Technologies – we offer remote monitoring systems which allow us to place a monitoring device on a power generation system and transmit data from that equipment to our offices where systems can be monitored 24-hours a day.  These systems can also be used to remote start power generation equipment and perform various tests that provide the equipment’s status and diagnostics...




Inventory -- Titan Energy carries approximately $1,000,000 in inventory.  Our inventory has grown over 30% due to the increase in our national account business.





Warehouses – we have fully equipped and stocked warehouses in Eden Prairie, Minnesota; Ankeny, Iowa; Omaha, Nebraska; and Miami, Florida.




Competition




We face intense competition in all of our business segments, strategic growth areas and business units.




In our Emergency and Back-Up Power business, we face competition from larger more established companies that represent Caterpillar, Cummins, Kohler and other smaller equipment manufacturers. We believe we offer power generators that in many cases feature improved capabilities, more fuel alternatives and greater redundancy features.




In our Power Maintenance business, we face some competition from manufacturers of power generation equipment as well as electrical contractors and small companies that specialize in service of power generation equipment.  Management believes that we offer a higher level of service, provided by better trained and more professional service technicians.  We also believe we offer technological service tools that improve our service offerings and allow us to act proactively in more cases.




In our Demand Reduction business, several companies are also becoming leaders in uninterruptible power supply system technology, and companies developing and marketing their proprietary smart grid technologies are also potential competitors. To a lesser extent, we face competition from small regional electric engineering firms that specialize in the engineering aspects of the distributed generation. We believe that we have engineered a superior solution for demand reduction programs for industrial and commercial customers, a solution that offers greater reliability, reduced costs and improved operational qualities.




Overall, the markets for our products, services and technologies are competitive and are characterized by rapidly changing technology, new and emerging products and services, frequent performance improvements and evolving industry standards. We expect the intensity of competition to increase in the future because the growth potential of the energy market has attracted and is anticipated to continue to attract many new competitors, including new businesses as well as established businesses from different industries. As a result of increased competition, we may have to reduce the price of our products and services, and we may experience reduced gross margins, loss of market share or inability to penetrate or develop new markets, any one of which could significantly reduce our future revenues and adversely affect our operating results.




We believe that our ability to compete successfully will depend upon many factors, some of which are outside of our control. These factors include:




•
The performance and features functionality and benefits of our, and of our competitors’ products and services;•
The value to our customers for the price they pay for our products and services;•
The timing and market acceptance of new products and services and enhancements to existing products and services developed by us and by our competitors, including the effects of environmental initiatives on new technologies and customer preferences;•
Our responsiveness to the needs of our customers;•
The ease of use of our, and of our competitors’ products and services;•
The quality and reliability of our, and of our competitors’ products and services;  19
  •
Our reputation and the reputation of our competitors;•
Our sales and marketing efforts;•
Our ability to develop and maintain our strategic relationships; and•
The price of our, and of our competitors’ products and services, as well as other technological alternatives in the marketplace.




We believe that in many of our markets we have established ourselves as a niche supplier of high quality, reliable products and services and, therefore, compete favorably with respect to the above factors, other than price. We do not typically attempt to be the low cost provider. Rather, we endeavor to compete primarily on the basis of the quality of our products and services. In order to be successful in the future, we must continue to respond promptly and effectively to the challenges of technological change and our competitors’ innovations. We cannot provide any assurance that our products and services will continue to compete favorably in the future against current and future competitors or that we will be successful in responding to changes in other markets including new products and service and enhancements to existing products and service introduced by our existing competitors or new competitors entering the market.




Many of our existing and potential competitors have better name recognition, longer operating histories, access to larger customer bases and greater financial, technical, marketing, manufacturing and other resources than we do. This may enable our competitors to respond more quickly to new or emerging technologies and changes in customer requirements or preferences and to devote greater resources to the development, promotion and sale of their products and services than we can. Our competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential employees, customers, strategic partners and suppliers and vendors than we can. Our competitors may develop products and services that are equal or superior to the products and services offered by us or that achieve greater market acceptance than our products do. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to improve their ability to address the needs of our existing and prospective customers. As a result, it is possible that new competitors may emerge and rapidly acquire significant market share or impede our ability to acquire market share in new markets. Increased competition could also result in price reductions, reduced gross margins and loss of market share, and the inability to develop new businesses. We cannot provide any assurance that we will have the financial resources, technical expertise, or marketing and support capabilities to successfully compete against these actual and potential competitors in the future. Our inability to compete successfully in any respect or to timely respond to market demands or changes would have a material adverse effect on our business, financial condition and results of operations.





Regulatory Issues




Our businesses and operations are affected by various federal, regional, state, local and foreign laws, rules, regulations and authorities. While to date, our compliance with those requirements has not materially adversely affected our business, financial condition or results of operations, we cannot provide any assurance that existing and new laws and regulations will not materially and adversely affect us in the future. Likewise, as promising as we hope some of the new regulations are for Titan’s business, it is feasible that those opportunities may not come to fruition.  At this time we cannot assess the impact that the new stimulus package adopted by Congress in February 2009, the American Recovery and Reinvestment Act, will have on our business and operations or on our competitors.  Nor can we assure results from the National Action Plan for Demand Response or dynamic or real-time rates.




Regulation of Electricity. Rules and regulations within the electricity markets impact how quickly our projects may be completed, could affect the prices we can charge and the margins we can earn, and impact the various ways in which we are permitted or may choose to do business and, accordingly, our assessments of which potential markets to most aggressively pursue. The policies regarding our distributed generation solutions, safety regulations and air quality or emissions regulations, which vary by state, could affect how we do business. For example, some state environmental agencies may limit the amount of emissions allowed from generators utilized by our customers. We expect the electric industry to continue to undergo changes due to the changing and uncertain regulatory environment.


Regulation of Diesel and Other Engine Generators. In 1996, the Environmental Protection Agency (EPA) introduced new emission standards aimed at non-road mobile diesel engines such as construction and agriculture equipment. Based on the systems’ engine horsepower rating, generators are rated from Tier 1 to 4, with most non-emergency diesel engine generators required to arrive at Tier 4 by 2012. Tier 4 requirements are the most stringent and will most likely increase the expense, lower profitability, and lengthen returns on investment of back-up power and demand reduction solutions.
  20
  Management believes that engine design and engineering on the part of the manufacturers will solve many of these problems and that suitable solutions to its business applications will be available and affordable.  At the same time, we believe that this change in emission policy brings significant opportunity for Titan Energy.   We feel that we have alternative equipment technologies that will satisfy Tier 4 standards, technologies which actually offer superior solution such as natural gas engines and smaller units arranged in parallel configurations.  There will also be a greater need for our maintenance and service programs as this will be a requirement of the owners and operators.  And Titan Energy will benefit from the monitoring and validation technologies what will allow for improved operations and compliance with the new regulations.
  Overall we believe current regulatory changes bring Titan and our customers more opportunities.  Savvy customers will be the first to take advantage of Smart Grid opportunities and will participate in cutting-edge energy rates and incentives for renewable and efficient technologies to help their bottom line.  Titan’s core offerings are a good match for these applications and we are well positioned to facilitate our customers’ participation.  Likewise, we are committed to helping our customers achieve compliance of regulations, such as Tier 4, and will continue to monitor regulatory agencies and industry to help our customers and make wise cost-effective business decisions.


Research and Development




We have expended considerable resources in the development of our monitoring and control technologies.  This includes the acquisition of Stanza Systems as well as more than $547,000 in development money to building out this program and making it ready for market.  We expect to continue to have to expense additional capital and resources to expand the capabilities of these systems and to maintain it as we introduce it into the marketplace.





Seasonality





The demand for equipment and service varies from region to region and by season.  In the Midwest, we often experience a dramatic slow-down in orders and completed jobs during the winter months due to ice, snow and cold weather conditions.  In the Southeast, we often see increased business activity during times of storms or hurricanes.  Typically we experience considerably higher revenues in our second and third quarters as compared to our first and fourth quarters.




Available Information




Our corporate website is located atwww.titanenergy.com. On the investor relations section of our website,  we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file them with or furnish them to the SEC. Further, a copy of this Annual Report on Form 10-K is located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, and D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings at http://www.sec.gov.




We provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events and press and earnings releases as part of our investor relations website. The contents of and the information on or accessible through our corporate website and our investor relations website is not a part of, and is not incorporated into, this report or any other report or document we file with or furnish to the SEC.


21




Risk Factors




Our Need for Capital to Support Future Growth




Titan Energy will need additional capital to continue operations and will endeavor to raise funds through the sale of equity shares and revenues from operations. There can be no assurance that Titan Energy will generate revenues from operations or obtain sufficient capital on acceptable terms, if at all. Failure to obtain such capital or generate such operating revenues would have an adverse impact on Titan Energy’s financial position and results of operations and ability to continue as a going concern. Operating and capital requirements during the next fiscal year and thereafter will vary based on a number of factors, including the level of sales and marketing activities for services and products. There can be no assurance that additional private or public finances, including debt or equity financing, will be available as needed, or, if available, on terms favorable to Titan Energy. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing common stock





ITEM 2.  Description of Property





We lease office space and warehouses at the following locations:





o
55820 Grand River Avenue, Suite 225, New Hudson MI 48165. This is a 3-year lease agreement, at a cost of $1,500 per month. The expiration date for this lease is September 30, 2013.o
6177 Center St., Suite 103, Omaha, NE 68106. This is a 2-year lease agreement, at a cost of $1,151 per month. This lease expiration date is February 28, 2014.o
6321 Bury Drive, Suite 8, Eden Prairie, MN 55346 (our executive offices). This is a 38 month lease with a cost of 1st year: $4,991.96 per month, 2nd year: $5,141.72 per month, 3rd year: $5,295.97 per month, 4thyear (2 months): $5,454.85 per month. The lease expiration date is January 31, 2016.o
1531 Maine Street, Des Moines, IA 50314. This is a 3-year lease at a cost of $1,200 per month. This lease expiration date is July 31, 2014.o
1900 N. W. 84thStreet, Doral, FL 33126. This is a lease for 38-months at a cost of $7,209.00 per month. This lease expiration date is August 31, 2013.o
150 Morristown Road, Suite 207, Bernardsville, NJ  07924. This is a 39 month lease at a cost of 1st year: $3,000 per month, 2nd year: $3,150 per month, 3rd year: $3,300 per month, 4th year (3 months): $3,300. This lease expiration date is January 31, 2014.




22




ITEM 3.  Legal Proceedings





The Company subsidiary Titan Energy Development, Inc. (“TEDI”) has been sued by TEDI’s landlord (the “Plaintiff”) for non-payment of the office lease in the name of Stanza Systems, Inc. in Houston, TX. The Plaintiff has received a judgment in the amount of $302,227 on September 24, 2012. Cost and interest will accrue on judgment amount from date of entry until satisfied in full. TEDI has received a subpoena to provide certain financial information on November 27, 2012. The Company is currently in negotiations to settle this complaint.




The Company has also been sued on the non-payment of a settlement agreement with a Control Crew, Inc. (the “Plaintiff”) for the work performed in 2008 and 2009 for a discontinued operation. The Plaintiff has requested that the total invoices of $44,481 be paid.  On March 29, 2012 an Entry of Default was filed with the State of Michigan in the Circuit Court for the County of Oakland. On April 18, 2012, the Plaintiff’s motion for default judgment was granted. The judgment amount includes the invoices of $44,481, plus interest, totaling $52,372.The Company made its final payment to satisfy the judgment on March 11, 2013.




ITEM 4.  [REMOVED AND RESERVED]




23





PART II





ITEM 5.  Market for Common Equity and Related Stockholder Matters





MARKET INFORMATION





Since May 19, 2003, our common stock has been quoted on the OTC Bulletin Board under the symbol “SFTV.OB.” On December 28, 2006, our symbol was changed to “TEWW.OB.” On August 10, 2007, our symbol was changed to “TEWI.OB”.





The following table sets forth, for the fiscal quarters indicated, the high and low bid prices. These quotations reflect the closing inter-dealer prices, without mark-up, mark-down or commission, and may not represent actual transactions.





High


LowCalendar Year 2012First Quarter


0.0700



0.0200Second Quarter


0.0600



0.0070Third Quarter


0.0100



0.0063Fourth Quarter


0.0100



0.0049Calendar Year 2011First Quarter


0.3800



0.2100Second Quarter


0.2800



0.1700Third Quarter


0.2500



0.1100Fourth Quarter


0.1200



0.0100





HOLDERS





We have 71,200,092 shares of our common stock outstanding as of March 25, 2012 held by approximately 282 stockholders of record. The number of record holders was determined from the records of our transfer agent and does not include beneficial owners of common stock whose shares are held in the names of various security brokers, dealers, and registered clearing agencies.





DIVIDENDS





We have not paid dividends to our stockholders in the last two fiscal years and have no intention to pay dividends in the foreseeable future.





SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS





See “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”





RECENT SALES OF UNREGISTERED SECURITIES





During the year ended December 31, 2012 the Company sold following securities:




1.
8% Promissory Note with a term of one year from date of issuance. The Noteholder, at its sole option, shall have the right to convert the Principal Amount and all accrued but unpaid interest into Common Stock of the Company. The number of common shares issued to the Noteholder upon conversion will be determined as Principal plus interest at the lesser of (i) $0.03 per share or (ii) the “Qualified Offering” price.  A Qualified Offering is a transaction resulting in $2,000,000 of gross proceeds. The company issued a $200,000 promissory note in the first quarter of 2012.




PURCHASES OF EQUITY SECURITIES BY THE ISSUER





The  Company and our affiliated did not purchases during the year ended December 31, 2012 of equity securities that are registered by us pursuant to Section 12 of the Securities Exchange Act of 1934





24




ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.





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


EnergyDistribution


Services2012

$
11,598,000


$
7,553,8742011


9,056,035



5,009,945Increase

$
2,541,965


$
2,543,929Percent 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


EnergyDistribution


Services2012

$
9,781,864


$
4,138,7072011


7,586,719



2,502,192Increase

$
2,195,145


$
1,636,515Percent of Sales2012


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


Energy2012

Distribution


ServicesPayroll related costs

$
1,209,579


$
1,279,945Shared based compensation


25,040



51,209Other


90,012



384,030Total

$
1,324,631


$
1,715,1842011Payroll related cost

$
1,135,918


$
1,026,965Shared based compensation


40,565



54,483Other


84,761



224,383Total


1,261,244


$
1,305,831Increase

$
63,387



409,353Percent of Sales2012


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


Energy2012

Distribution


ServicesPayroll related costs

$
106,647


$
280,699Shared based compensation


25,225



46,847Facilities


213,150



253,409Travel and Meals


79,929



72,474Other


230,599



268,690Total

$
655,550


$
922,1192011Payroll related cost

$
85,840



425,251Shared based compensation


10,170



38,426Facilities


221,064



284,193Travel and Meals


59,793



39,235Other


196,336



308,540Total

$
573,203


$
1,095,645Increase (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


2011Payroll related activates

$
286,604


$
645,188Stock Compensation


72,289



103,011Professional Fees


24,101



310,983Shared based payments for professional services


43,324



-Travel


20,393



138,378Other


71,194



78,496Total

$
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


2011Interest expense, net

$
630,173


$
520,022Factoring fees


326,203



119,083Loss related to lease obligation


162,278



105,693Loss on modification of debt


-



253,181Amortization of debt discount


105,625



916,379Amortization of deferred financing costs


25,506



150,458Change 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 impacton 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


2011Net loss

$
(1,430,961
)

$
(3,435,009
)Add back:Depreciation and amortization


352,399



352,233Stock based compensation and payments


263,933



274,912Interest and factoring fees


956,376



639,105Amortization of debt discount


131,131



1,066,837Loss on modification of convertible debt


-



253,181Loss related to lease obligation


162,278



105,693Fair 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.




32




ITEM 8.  Financial Statements





TITAN ENERGY WORLDWIDE, INC.


Unaudited Consolidated Financial Statements


December 31, 2012 and 2011





Table of Contents





PageManagement Report
F-1Unaudited Consolidated Balance Sheets
F-2Unaudited  Consolidated Statements of Operations
F-3Unaudited Consolidated Statements of Changes in Stockholders’ Equity
F-4Unaudited Consolidated Statements of Cash Flows
F-6Unaudited Notes  to Consolidated Financial Statements
F-7




33




MANAGEMENT REPORT




The Company’s Consolidated Financial Statements have not been audited as of December 31, 2012 or for the years ended December 31, 2012 and 2011.  The audit has not been performed due to the cost and availability of cash required to pay past due fees owed to our independent accountant firm.  These Consolidated Financial Statements have been prepared by Management in accordance with generally accepted accounting principles and applicable rules and regulation of the Securities and Exchange Commission.




F-1





Titan Energy Worldwide, Inc.


UNAUDITED CONSOLIDATED BALANCE SHEETS


December 31, 2012 and 2011




2012


2011ASSETSCurrent assetsCash and cash equivalents

$
304,374


$
139,432Accounts receivable less allowance for doubtful accounts


2,419,067



2,045,766Inventory, net


1,056,099



619,518Other current assets


99,709



52,996Total current assets


3,879,249



2,857,712Property and equipment, net


592,995



747,566Customer and distribution lists, net


470,985



628,118Goodwill


1,351,695



1,351,695Other assets


37,194



31,092Total assets

$
6,332,118


$
5,616,183LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)Current liabilitiesAccounts Payable

$
2,637,951



2,404,538Accrued liabilities


2,352,653



1,807,422Customer deposits and deferred revenue


774,518



234,339Factoring obligation


934,930



959,868Notes payable - current portion


118,000



240,370Current portion of convertible debt, net of discount


2,740,000



2,521,216Total current liabilities


9,558,052



8,167,753Notes payable, less current portion


67,700



-Other long term liabilities


302,227



122,248Total long –term liabilities


369,927



122,248Total liabilities


9,927,979



8,290,001Commitments and ContingenciesStockholders’ equity (deficit)Preferred Stock Series D, 10,000,000 authorized, $,0001 par value, issued and outstanding 341 and 344 shares, respectively


1



1Common stock 1,800,000,000 shares authorized, $.0001 par value, issued  70,800,092 and 31,472,127 shares, respectively


7,080



3,147Treasury stock, at cost, held 1,550,000 and 1,550,000, shares, respectively


(775,000
)


(775,000
)Additional paid-in capital


31,967,753



31,462,768Accumulated deficit


(34,795,695
)


(33,364,734
)Total stockholders’ equity (deficit)


(3,595,861
)


(2,673,818
)Total liabilities and stockholders’ equity

$
6,332,118



5,616,183





See accompanying notes to the unaudited consolidated financial statements.




F-2





Titan Energy Worldwide, Inc.


UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS


For the Years Ended December 31, 2012 and 2011




2012


2011Sales of equipment

$
11,598,000


$
9,056,035Sales of service and parts


7,553,874



5,009,945Net  sales


19,151,874



14,065,980Material cost and labor for equipment


9,781,864



7,586,719Material cost and labor for service and parts


4,138,707



2,502,192Total cost of  sales


13,920,571



10,088,911Gross profit


5,231,303



3,977,069Operating expenses:Selling and service expenses


3,039,816



2,567,073General and administrative expenses


1,577,669



1,668,848Research and development


8,669



194,239Corporate overhead


517,905



1,276,056Depreciation and amortization


352,399



352,233Loss on sale of fixed assets


2,456



3,813Total operating expenses


5,498,915



6,062,262Operating Loss


(267,612
)


(2,085,193
)Other ExpensesInterest expense, net


956,376



639,105Amortization of debt discount and financing costs


131,131



1,066,837Present value of lease obligation


162,278



105,693Loss on modification of convertible debt


-



253,181Change in fair value of contingent consideration


-



(117,898
)Change in fair value of embedded conversion feature


(74,447
)


(246,862
)Change in fair value of warrants


(11,988
)


(350,240
)Total Other Expense, net


1,163,350



1,349,816Net loss


(1,430,961
)

$
(3,435,009
)Weighted average number of shares outstanding


48,714,441



31,043,281Basic and diluted (loss) per common share

$
(0.03
)

$
(0.11
)





See accompanying notes to consolidated financial statements.




F-3





Titan Energy Worldwide, Inc.


UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


For the Years Ended December 31, 2012 and 2011


Common Stock


Preferred Stock


Treasury sharesShares


Amount


Shares


Amount


Shares


AmountBalance December 31, 2010


30,371,572


$
3,037



368


$
1



1,700,000


$
(850,000
)Stock issued for the conversion of Preferred D


860,599



86



(24
)






(150,000
)

$
75,000Stock issued for conversion of convertible  notes


239,956



24Stock issued for the exercise of optionsStock options issued for compensationBeneficial conversion feature on Convertible debtCost of issuing stock certificatesNet loss for the yearBalance December 31, 2011


31,472,127


$
3,147



344


$
1



1,550,000


$
(775,000.0
)Stock issued for the conversion of Preferred D


793,648



79



(3
)Stock issued for conversion of convertible  notes


33,881,203



3,388Stock issued for services


4,653,797



466Stock options issued for compensationBeneficial conversion feature on convertible debtCost of issuing stock certificatesNet loss for the yearBalance December 31, 2012


70,800,775


$
7,080.0



341


$
1



1,550,000


$
(775,000.0
)





See accompanying notes to consolidated financial statements.





F-4





Titan Energy Worldwide, Inc.


UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


For the Years Ended December 31, 2012 and 2011 (Continued)





Additional Paid in Capital


Accumulated

Deficit


TotalBalance December 31, 2010

$
31,093,925


$
(29,929,725
)

$
317,236Stock issued for the conversion of Preferred D


(75,086
)






-Stock issued for conversion of convertible  notes


39,969







39,993Stock option issued for services


125,000







125,000Stock options issued for compensation


274,912







274,912Beneficial conversion feature on convertible debt


4,000







4,000Cost of issuing stock certificates


(270
)






(270
)Other


317







319Net loss for the year


-



(3,435,009
)


(3,435,009
)Balance December 31, 2011

$
31,462,767


$
(33,364,734
)

$
(2,673,819
)Stock issued for the conversion of Preferred D


(79
)






-Stock issued for conversion of convertible  notes


160,863







164,251Stock issued for services


82,596







83,062Stock options issued for compensation


229,433







229,433Beneficial conversion feature on convertible debt


32,422







32,422Cost of issuing stock certificates


(249
)






(249
)Net loss for the year






(1,430,961
)


(1,430,961
)Balance December 31, 2012

$
31,967,753


$
(34,795,695
)

$
(3,595,861
)





See accompanying notes to consolidated financial statements.




F-5





Titan Energy Worldwide, Inc.


UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended December 31, 2012 and 2011




Operating activities:

2012


2011Net loss

$
(1,430,961
)

$
(3,435,009
)Adjustments to reconcile net loss to net cash used in operating activities:Compensation paid by issuance of stock and stock options


220,610



274,912Depreciation and amortization


352,399



352,223Amortization of debt discount and financing costs


131,131



1,066,837Stock issued for services


43,324



122,248Loss on modification of convertible debt


-



253,181Change in fair value of contingent consideration


-



(117,898
)Change in fair value of lease obligation


162,278



-Change in fair value of warrants


(11,988
)


(350,240
)Change in fair value of embedded conversion


(74,447
)


(33
)Loss on sales of fixed assets


2,456



3,813Changes in operating assets and liabilities:Accounts receivables


(373,302
)


246,071Inventory


(530,231
)


61,495Other assets


(44,707
)


90,339Accounts payable


329,117



(19,329
)Accrued liabilities and customer deposits


1,152,606



359,469Net cash used in operating activities


(71,715
)


(1,091,921
)Investing activities:Purchase of  fixed assets


(24,297
)


(29,940
)Proceeds from sales of fixed assets


40,569Net cash (used) provided in investing activities


16,272



(29,940
)Financing activities:Proceeds provided  by Convertible Debt


310,000



330,000Payment of short-term credit line


-



(992,558
)Net borrowings from Factoring Obligation


(24,938
)


959,868Proceeds from stock warrant exercised


-



2,250Proceed of promissory note


67,700



100,000Payment of notes payable and convertible debt


(132,037
)


(106,413
)Cost associated with stock issuances


(340
)


(270
)Net cash (used) provided by financing activities


220,385



292,877Increase (decrease) in cash and cash equivalents


164,942



(828,984
)Cash and cash equivalents, beginning of year


139,432



968,416Cash and cash equivalents, end of period

$
304,374


$
139,432





See accompanying notes to consolidated financial statements.




F-6




TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1 - BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Background





Titan Energy Worldwide, Inc. (the “Company”) was incorporated on December 28, 2006 in the state of Nevada. The Company’s stock is traded on the OTC s under the symbol of TEWI





On December 28, 2006, the Company acquired Stellar Energy Services, Inc., a Minnesota corporation (“Stellar”), whereby Stellar exchanged all its common shares for 750,000 newly issued shares of the Company’s preferred stock, plus a Note payable to Stellar shareholders of $823,000. This Note obligation has been fully satisfied. The Stellar shareholders also received 1,000,000 shares of Common Stock.  Stellar is doing business as Titan Energy Systems, Inc (“TES”).




On June 11, 2009, the Company through its wholly owned subsidiary, Grove Power, Inc., a Florida corporation (“GPI”), acquired certain assets and assumed liabilities of R.B. Grove, Inc. Industrial and Service Divisions. The purchase was effective June 1, 2009. The purchase price consisted of a cash payment of $214,827 and an $86,612 secured promissory note at 8% interest rate due November 11, 2010. This Note obligation has been fully satisfied. The seller also received five year warrants to purchase 200,000 shares of the Company common stock at a price of $0.01 per share. The Company determined the fair value of these warrants to be $32,000.




On November 1, 2009, the Company acquired certain assets and assumed liabilities for a sales office in New Jersey. This business had open orders at date of acquisition of approximately $3,000,000. The Company agreed to pay the owner $150,000. This sales office has been consolidated with the TES operations.





On January 1, 2010, the Company acquired the stock of Sustainable Solutions, Inc., (“SSI”) a company that performs energy audits, consulting and management services. The purchase price for this business was a stock option to purchase 200,000 shares of the Company’s common stock at of $0.50 per share. We used the Black-Scholes method to value the stock option for this acquisition at $71,671. The primary asset of the business was a contract with a major utility company to perform energy assessments for the three year period from 2010 to 2012.





On November 1, 2010, the Company acquired the assets of Stanza Systems, Inc., a software development company specializing in smart-grid applications. This company is doing business as Stanza Technologies (“Stanza”). The purchase price for this company consisted of $175,000 cash and assumed liabilities of   $481,190. In addition, to complete this acquisition the Company had to satisfy the senior debt holders by offering common shares of the Company. The Company’s offered these debt holders 413,333 shares of common stock which was valued at the closing price of our stock as of November 1, 2010 resulting in a value of $186,000.





At December 31, 2012 and December 31, 2011, the Company has no Preferred Stock Series A, B and C outstanding. The description of these securities is as follows:





Preferred Stock, Series A, authorized 10,000,000, $.0001 par valuePreferred Stock, Series B, authorized 10,000,000, $.0001 par valuePreferred Stock, Series C, authorized 10,000,000, $.0001 par value





Following is a summary of the Company’s significant accounting policies.





Principles of Consolidation





The financial statements include the accounts of the Company and its 100% owned subsidiaries, TES, GPI, SSI and Stanza.




Reclassifications





In 2012, the Company’s presentation of the Statement of Operations changed to reflect factoring fees as additional interest expense. The Company believes that the factoring fees are another form of interest expense and is not a fee for collection purposes. Previously, these factor fees were classified in the line item general and administrative expense.




F-7




TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Basis of Presentation


The accompanying Consolidated Financial Statements (“Financial Statements”) have been prepared by management in accordance with U.S. generally accepted accounting principles (“GAAP”) for financial information and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”).





Going Concern





The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred a net loss for the year ended December 31, 2012 of $1,430,961. At December 31, 2012, the Company had an accumulated deficit of $34,795.695. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern.  These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management has taken the following steps that it believes will be sufficient to provide the Company with the ability to continue its operations:





·
The Company has achieved several profitable months in 2012 as the growth in our service sales has improved the overall margins


·
Management will continue to take steps to expand and increase its service sales and work order flow.  Service sales account for the highest margins of any business segment and the quickest turnaround in terms of customer payments.


·
The Company has terminated the Florida equipment sales department as it was an unprofitable business division thereby improving the future overall cash position of the Company.


·
The Company has achieved a lower cost in Corporate Overhead by limiting by reducing the number of executives and limiting legal and travel expense. Corporate Overhead has declined by $758,000 compared to 2011.


·
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.


·
Management will consider stock payments for certain to reduce cash liabilities.




Supplemental Cash Flow Information Regarding Non-Cash Transactions





During the years ended December 31, 2012 and 2011, the Company has entered into several non-cash transactions in order to provide financing for the Company and conserve cash. The table below shows the transactions that occurred during the past two years.




2012


2011Stock  issued for services

$
44,500



-Common stock issued for conversion of Series D Preferred Stock

$
30,000


$
113,568Stock issued for the conversion of convertible debt

$
164,251


$
39,992Accounts Payable settled with stock

$
39,002



-Stock warrants not subject to fair value

$
-


$
125,000





Interest paid for the years ended December 31, 2012 and 2011 were $105,238 and $88,049 respectively. The factoring fees paid for the years ended December 31, 2012 and 2011 were $326,203 and $119,083, respectively.





Use of Estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and assumption earn- out at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.




F-8




TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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.





Cash Equivalents





For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be a cash equivalent.





Concentration of Credit Risk





Financial instruments that subject the Company to concentrations of credit risk include cash and cash equivalents. The Company maintains its cash in well-known banks selected based upon management’s assessment of the bank’s financial stability. The Company has utilizes banks that have Federal Deposit Insurance Corporation protection.


Property and Equipment





Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.




December 31


December 312012


2011Furniture and office equipment

$
230,171


$
203,769Software


649,171



644,550Vehicles


59,733



57,900Tools and shop equipment


181,529



169,733Leasehold improvements


23,855



-Rental equipment


40,759



97,983Accumulated depreciation


(592,223
)


(426,369
)Net property and equipment

$
592,995


$
747,566Depreciation expense

$
195,266


$
192,986




Intangible Assets





The Company evaluates intangible assets and other long-lived assets for impairment 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  that represent  customer lists, distribution list and contracts. These intangible have finite lives and therefore are required to be amortized to expense. The Company believes that the useful life of these intangibles range from 5-10 years. The accumulated amortization at December 31, 2012 and December 31, 2011 was $717,775 and $560.699, respectively. The Company expects amortization expense for the next five years as follows: 2013-$136,617: 2014-$121,117: 2015-$88,617: 2016-88,617: 2017-35,693.




F-9


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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:





Goodwill Carrying Value:Gross

$
2,042,024Accumulated impairment


(690,339
)Net  Goodwill

$
1,351,685





Income Taxes





The Company accounts for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement 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 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 and 2011 there were no amounts that had been accrued in respect to uncertain tax positions.





The Company’s federal state income tax is not currently under examination by the Internal Revenue Service (“IRS”) or by state authorities.  However, fiscal years 2009 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 and 2011, 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. At December 31, 2012 and 201, the following table sets forth potentially dilutive shares:




2012


2011Conversion of Series D Preferred stock


159,345,794



15,154,185Conversion of 8% convertible notes and warrants


9,109,813



2,443,832Conversion of 10% convertible notes and warrants


1,660,000



1,700,000Stock warrants


106,542



228,607Vested stock options


32,710



64,339Conversion of the 11% notes


566,038



943,396Conversion of 10% convertible notes and warrants


21,250,000



5,500,000Conversion of 8% promissory note


6,666,667



-Total


198,737,564



26,034,359




F-10


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The above table uses the December 31, 2012 and 2011 average closing stock price to determine securities that may be dilutive. The average stock prices for the years ended December 31, 2012 and 2011 were $0.02 and $0.22, respectively. The Series D Preferred Stock can be converted by dividing the amount invested by the 20 days VWAP price. The 8% convertible notes can be converted by taking the principal and accrued interest and dividing by the average closing bid price for five days before closing. In addition, upon conversion the note holder receives ten stock warrants for every $1000 of principal with an exercise price of $.01. The 10% convertible notes may be converted by multiplying the  principal and accrued interest by four, in addition these notes have warrants equal to 2 stock warrants for every $1,000 of principal with an exercise price of $.25. The conversion of the 11% notes may be converted by dividing the principal and accrued interest by amount equal to 50% discount of the last three closing prices, with a floor of $.03 per share. The 10% convertible notes issued in 2010 and amended at September 30, 2011 may be convert principal and accrued interest at $.12 per share.  The 8% promissory note issued in 2012 is convertible into common stock by dividing the principal and accrue interest by the conversion price of $.03 per share .In addition these convertible notes were issued with detachable warrants equal to 1 warrant per principal invested. These warrants are exercisable at $0.15 per share. The 8% promissory note has the right to convert principal and accrued interest by dividing by $.03 per share. The stock warrants and vested stock options are those securities that are in-the-money at December 31. We use the treasury method to compute the shares that would be issued.




Share-Based Compensation





The company uses the fair value method of accounting for share-based payments. Accordingly, the Company recognizes 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.





Supplier Concentration





The Company has an exclusive distribution agreement with one supplier that comprised of 54% and 37% of its total purchase for the years ended December 31, 2012 and 2011, respectively. The loss of this exclusive distribution agreement could cause a delay or loss of sales which would affect the operating results adversely. Although there are other vendors from which the Company could make these purchases, management believes that they may not be on the same terms and conditions as our current supplier.





Segment Reporting





The Company operates in a two business segments, Power Distribution and Energy Services. Power Distribution consists of the sale of emergency, standby power equipment and renewable energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate demand response programs, monitoring program and energy audits.




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.





F-11


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 – INVENTORY, NET





Inventory is stated at the lower of cost, determined by a first in, first out method, or market. Inventory is adjusted for estimated obsolescence and written down to net realizable value based upon estimates of future demand, technology developments and market conditions. Inventories are comprised of the following:





December 31


December 31,2012


2011Parts

$
543,551


$
464,225Work in process


577,297



125,071Finished Goods


85,251



133,397Obsolescence Reserve


(150,000
)


(103,175
)$
1,056,099


$
619,518




NOTE 3 - NOTES PAYABLE





Notes payable consists of the following at December 31, 2012 and 2011:




December 31


December 31,Short -Term Debt

2012


2011Convertible Notes bearing interest at 12% due on demand

$
650,000


$
350,000Convertible Note bearing interest at 12% due January 2012 to March 2012


-



1,250,000Convertible Note bearing interest at 12% due April 2013


1,890,000



-Convertible Note bearing interest at 8% due April 2013


200,000



-Convertible Note bearing interest at 10% due January 2012 to March 2012


-



350,000Convertible Note bearing interest at 12% due April 2012


-



300,000Convertible Note bearing interest at 10% due April 2012


-



300,000Other loans


118,000



240,370$
2,858,000


$
2,790,370Long-termPromissory Note bearing interest at 8% due March 9, 2014

$
67,700Total debt

$
2,925,700




At December 31, 2012 the Company was in default on $675,000 of convertible notes payable and is accruing interest at the default rate of 12%. The convertible notes of $1,890,000 have agreed to extend their notes to April 1, 2013 in return for receiving 2,143,425 additional five year warrants with an exercise price of $0.10 per share. The Company has determined using the Black-Scholes method the value of these warrants to be $32,442, which will be amortized over the extension period. The Company has also issued a convertible note for $200,000 due April 1, 2013 with a conversion feature that allowed the note holder to convert the note and the interest at $.03 per share. This note does not have any warrants and the conversion feature was issued at market price resulting in no beneficial conversion feature. The Company also issued a promissory note to an individual for $67,700 at 8% and maturity March 9, 2014. There are no conversion rights or warrants associated with this debt.





F-12


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Certain outstanding notes related to the Stanza purchase have been sold to Southridge Partners II L.P. As of April 2, 2013 Southridge Partners II L.P has converted all notes and accrued interest of $156,505 into 34,089,752 shares of common stock.




During the year ended December 31, 2011, the Company issued $430,000 of debt. The Convertible Notes were due April 2012 have a conversion feature that allows the Noteholder to convert its principal and unpaid interest at the lesser of $0.25 cents per share or a “Qualified Offering Price” defined as a transaction with gross proceeds of $2,000,000. On December 9, 2011 the company issued an 11% Convertible Note for $30,000. The Company has agreed with this Noteholder to pay $3,000 a month beginning September 1, 2012. The outstanding balance of this note at December 31, 2012 is $18,000.




NOTE 4- FACTORING AGREEMENT





On June 15, 2011, the Company replaced its bank line of credit with a Factoring and Security Agreement (“Agreement”) with Harborcove Fund I, LP. (“Harborcove”). There are two agreements that provide financing separately to TES and GPI with identical terms. This agreement was extended and amended on December 10, 2012 for twelve months with cancellation after 60 days’ notice and a right of first refusal to match the term of a competing offer.


The amended Agreement allows the Company to sell, transfer and assign its receivables to Harborcove. In return Harborcove will loan the Company 90% of the face value of the receivable. The balance, less factoring fees and interest, are paid to the Company once the final payment is received. Harborcove has the right to reject any receivables that do not meet their credit requirement approvals. The Company pays a fee on each invoice purchased by Harborcove equal to 1.00% (as amended) of the face value of the invoice, with a minimum fee of $5.00. The Company also pays interest on the amount advanced at prime plus 4.5%. If the receivable is not paid within 90 days of the invoice date or 45 days from due date, Harborcove can chargeback the receivable to the Company, unless the debtor was credit approved and the sole reason for not paying is financial difficulty.





The security for this amended Agreement includes all the assets of the Company including the assets of TEWI, Stanza and SSI.





The amounts outstanding at December 31, 2012 and December 31, 2011 were $934,930 and $959,868, respectively. The factoring fees for the years ended December 31, 2012 and 2011 were $326,203 and $119,083 respectively. The interest expenses on this amended Agreement for the years ended December 31, 2012 and 2011were $102,630 and $34,915 respectively. The factoring fees have been reclassified as additional interest expense.





NOTE 5 – ACCRUED LIABILITIES





Accrued liabilities consist of the following at December 31, 2012 and 2011:





2012


2011Accrued Compensation

$
604,785


$
533,717Accrued Interest


732,291



439,383Embedded conversion feature at fair value


2,942



648Common stock warrants, at fair value


763



12,651Purchase obligation on stock option, at fair value


250,000



250,000Stanza payroll taxes including interest and penalties


278,137



304,773Accrued costs on completed jobs


232,695



154,585Accrued sales tax


246,355



95,288Accrued other


4,685



16,377$
2,352,653


$
1,807,422




F-13


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The amount listed as Purchase obligation on stock option is a stock option that permits the holder to demand payment in lieu of exercising the option. The Company has reached agreements with various states to pay past due sales tax amounts on installment plans.





NOTE 6 - INCOME TAXES


The Company’s effective income tax rate of 0.0% differs from the federal statutory rate of 34% for the reason set forth below for the years ended December 31:




2012


2011Income taxes at the statutory rate

$
(486,526
)

$
(1,167,903
)Valuation Allowance


465,382



1,124,115Permanent differences and other


21,144



43,788Total income tax

$
-


$
-





The following presents the components of the Company total income tax provision:




2012


2011Current expense

$
-


$
-Deferred benefit


(465,382
)


(1,124,115
)Change in valuation


465,368



1,124,115Total

$
-


$
-





Deferred tax assets and liabilities reflect the net effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and amounts used for income tax purposes. The tax effect of primary temporary differences giving rise to the Company deferred tax assets and liabilities for the years ended December 31, 2012 and 2011 are as follows:




2012


2011Deferred tax assetsAmortization

$
7,531


$
8,250Non qualify stock option expense


75,007



93,470Operating losses carry forward


6,481,977



5,548,085Deferred Tax LiabilitiesFair value income


(29,388
)


(203,015
)Depreciation


(20,828
)


(18,984
)Net deferred assets


6,514,299



5,427,806Valuation Allowance


(6,514,299
)


(5,427,806
)Total net deferred tax asset liability

$
-


$
-





The Company has recorded a valuation allowance to fully offset the net deferred assets based on the fact that the Company has not recognized taxable income since its inception.


At December 31, 2012, the Company had consolidated federal net operating losses of $19,064,639. The expiration date of these net operating losses are as follows:




2019

$
104,6042020


654,4542021


1,700,7032022


72,2092023


451,3822024


262,7952025


385,4102026


911,6842027


2,540,3632028


1,543,5732029


2,807,5612030


2,795,0062031


2,088,1532032


2,746,742





F-14


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 7 – RETIREMENT PLAN




All eligible employees are covered under the Company 401(k) pension and profit sharing plan. The Company did not make any contribution to the plan for the years ended December 31, 2012 and 2011.




NOTE 8 - SERIES D CONVERTIBLE PREFERRED STOCK





On October 3, 2007, the Company issued a private placement memorandum to sell up to $10,000,000 of Units consisting of one share of Series D Convertible Preferred Stock, one Class A warrant and one Class B warrant. Each Unit was offered at $10,000. The holder of the Convertible Preferred Stock may convert, at any time and is required to convert their preferred stock 24 months after issuance, in whole or in part, into shares of Common Stock. Assuming an initial conversion price of $1.00, each one (1) share of Preferred Stock is convertible into 10,000 shares of Common Stock. Each Class a Warrant and Class B Warrant entitles the holder to purchase three thousand three hundred and thirty-three (3,333) shares of Common Stock with exercise prices of $1.20 and $1.40, respectively. All the warrants will expire by January 31, 2013.





In the year ended December 31, 2012, investors holding the Series D Preferred Stock elected to convert their holdings into Common Stock using the Volume Weighted Average Price “VWAP” formula as provided for in the offering documents. A total of 3 shares of Series D Preferred Stock elected to convert into common stock receiving an aggregate of 793,648 shares of common stock. The weighted average conversion price per share was $0.25. In addition, the Class A and Class B warrants were repriced based on conversion price times 120% and 140%, respectively.





In an Event of Liquidation (as defined below) of the Company, holders of any then-unconverted shares of Preferred Stock will be entitled to immediately receive accelerated redemption rights in the form of a Liquidation Preference Amount. The Liquidation Preference Amount shall be equal to 125% of the sum of: (I) the Stated Value ($10,000) of any then-unconverted shares of Preferred Stock and (ii) any accrued and unpaid dividends thereon. An “Event of Liquidation” shall mean any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, as well as any change of control of the Company which shall include, for the purposes hereof, sale by the Company of either (x) substantially all of its assets or (y) that portion of its assets which comprises its core business technology, products or services.





NOTE 9 – TREASURY SHARES





On June 30, 2009, the Company offered to the common shareholders that were converted in the Series D Convertible Preferred stock offering the opportunity to exchange the common shares received into units of Series D Preferred Stock. A total of 2,740,000 shares of common stock were repurchased for 137 Units of Series D Preferred Stock and 456,621 of detachable Class Warrants and 456,621 of detachable Class B Warrants. This transaction has been accounted for using the Black–Scholes method to determine the value of the detachable warrants. This method resulted in a cost of the treasury shares of $1,370,000, which is the sum of the value of the Series D Preferred Stock of $1,285,553, and the fair value of the warrants of $84,467.





During the year ended December 31, 2012, no treasury shares were converted into Common Stock.




NOTE 10 – STOCK OPTIONS





The Company issued nonqualified stock options to employees on January 16, 2012. These options were not issued under any plan that required stockholder approval. The Company believes that such stock options align the interest of its employees with the shareholders. Stock option awards are granted with an exercise price equal to the market price of the Company common stock at the date of grant. The options granted to employees have a term of 10 years with a vesting commencing on January 16, 2013 over the four year period. The Company used the Black-Scholes method to evaluate the value of the options. The option granted on March 27, 2012 was to a member of our advisory board. The option is for 5 years and vesting immediately. We determined that the value of the option was $11,405 and will be charged to income over the one-year term to serve as an advisory board member. The expected volatility is computed based on a twelve month standard deviation of our month ended closing price. The risk free rate for periods within the contractual life of the option is based on the U.S. treasury yield curve in effect at time of grant. Below are the parameters in determining the fair value of these options.





F-15


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2012Excepted volatility


96
%Vesting period


5Expected term


7Expected dividends


0
%Risk free rate


1
%





A summary of activity for the years ended December 31, 2012 and 2011




WeightedWeighted


AverageAverage


Remaining


GrantExercise


Contractual


DateShares


Price


Terms


Fair ValueOutstanding December 31, 2010


8,245,000


$
0.31



9GrantedExercised


-Forfeited


(510,000
)

$
0.33Outstanding December 31, 2011


7,735,000


$
0.31Granted January 16.2012


4,025,000


$
0.07



4.25


$
127,111Granted March 27 2012


500,000


$
0.02



4.5


$
11,405ExercisedForfeited


(2,030,000
)

$
0.26Outstanding December 31, 2012


10,230,000


$
0.23



3.5Exercisable as of December 31, 2012


5,793,845


$
0.27





As of December 31, 2012, the non-vested options total 4,435,155 shares. There is approximately $290,000 of unrecognized compensation and share based expense arrangements have been granted. These costs will be recognized over the weighted average period of 3 years. At December 31, 2011 the aggregate intrinsic value of the stock options not exercisable was $58,000.


NOTE 11- COMMON STOCK TRANSACTIONS





During the year ended December 31, 2012 the Company issued the following shares of common stock:





●
The company issued 793,648 shares of common stock for the conversion for the Series D Preferred Stock.●
The company issued 100,000 shares to a consultant for services performed with a value of $2,500.●
The company issued 33,881,203 shares of common stock for the conversion in accordance with Security Transfer Agreements in exchange for the retirement of $153,602 of convertible notes and accrued interest.●
The company issued 303,797 shares for investor relations services value at $12,000.●
The company issued 750,000 shares to the Company’s Advisory Board for services value at $30,000.●
The company issued 3,500,000 shares to settle an accounts payable totaling $39,162.




F-16


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During the year ended December 31, 2011, the Company issued 810,569 shares of common stock for the conversion of the Series D Preferred Stock. The Company also issued 239,956 shares for the conversion of Convertible Notes and accrued interest of $39,992.




NOTE 12- COMMON STOCK WARRANTS





There were 2,143,425 warrants issued for the extension of $1,890,000 of convertible notes during the year ended December 31, 2012. There were no warrants exercised during the year ended December 31, 2012. However 1,801.827 warrants have expired without being exercised during the year ended December 31, 2012. The following table shows the warrants outstanding at December 31, 2012:





Number of

Exercise

ExpirationWarrants
Purpose
Price range

Date200,000
Acquisition of Grove Power, Inc.
$0.01

14-Jun2,143,425
Extension of Convertible Notes
$0.10

17-Apr7,851
Broker warrants on Debt Offerings
$0.10-$0.625

13-Jan830,000
Convertible Debt Offering 2009/2010
$0.25

Dec-14 - Mar 151,650,000
Convertible Debt Offering 2010
$0.60

May - Nov -151,476,522
Converted Preferred D Class A
$0.03 -$0.89

13-Jan1,476,522
Converted Preferred D Class B
$0.04-$0.63

13-Jan1,136,559
Unconverted Preferred D Class A
$1.20

13-Jan1,136,559
Unconverted Preferred D Class B
$1.40

13-Jan777,135
Broker warrants on Preferred D
$1.25

13-Jan





NOTE 13 – OPERATING LEASES





The Company leases office space, vehicles, equipment and warehouses. Rent expense for the years ended December 31, 2012 and 2011 was $503,191 and $579,418. Future minimum rental payments required under the non-cancelable operating leases are as follows: 2013 - $408,292; 2014 - $161,537; 2015-$137,390; 2016 -$9,341.





NOTE 14 – FAIR VALUE





GAAP provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. GAAP also emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. The fair value measurements are disclosed by level within that hierarchy.   The Company adopted the provisions of fair value measurements as of January 1, 2009. Hierarchical levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:





Level 1 — Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.


Level 2 — Inputs (other than quoted prices included in Level 1) were either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.


Level 3 — Inputs reflected management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.





1.
Common Stock Warrants – are valued using the Black-Scholes model updated for current stock price, volatility, interest rate and remaining term. The following were the assumptions used to compute the fair value:




F-17


TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31,


December 31,2012


2011Common stock price

$
0.01


$
0.03Exercise price

$
0.15


$
0.15Volatility


89.8
%


82.7
%Interest rate


0.15
%


0.12
%Remaining Terms

3 yrs


4 yrs





2.
Purchase obligation of a stock option – represents the value of the purchase obligation to buyback these options at any time during the next two years. The agreement is for 1,000,000 options with a guarantee buy back provision at $0.25, which is also the exercise price.


3.
Embedded beneficial conversion options was determined by using the Black –Scholes methods with the following input variables at December 31, 2012 and 2011:




December 31,


December 31,2012


2011Common stock price

$
0.01


$
0.03Exercise price

$
0.005


$
0.12Volatility


89.8
%


82.7
%Interest rate


0.15
%


0.05
%Remaining Terms

0.1yrs


0.3 yrs





The following table summarizes the financial instruments measured at fair value in the Unaudited Consolidated Balance Sheet as of December 31, 2012:




Fair Value MeasurementsAssets
Level 1
Level 2
Level 3
TotalLiabilitiesCommon stock warrants


$               763
$               763Purchase obligations for stock option


$        250,000
$        250,000Embedded beneficial conversion options


$            2,942
$            2,942Total


$        253,705
$        253,705





The following table summarizes the financial instruments measured at fair value in the Unaudited Consolidated Balance Sheet as of December 31, 2011:




Fair Value MeasurementsAssets
Level 1
Level 2
Level 3
TotalLiabilitiesCommon stock warrants


$          12,651
$          12,651Purchase obligations for stock option


$        250,000
$        250,000Embedded beneficial conversion options


$               648
$               648Total


$        263,299
$        263,299






F-18




TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




The table below includes a roll forward of the fair value of financial instruments that are classified as within Level 3 of the valuation hierarchy.





Level 3LiabilitiesBalance at December 31, 2011

$
263,299Embedded Conversion Option


76,841Change in fair value common warrants stock recorded in other expense


(11,988
)Change in fair value of embedded conversion option


(74,447
)Balance at December 31, 2012

$
253,705




Note 15 –Segment Data





Our operating segments represent components of our business for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We conduct our operations through two operating segments: Power Distribution and Energy Service. Our reportable segments are strategic business units that offer different products and services and serve different customers. Power Distribution consists of the sale of equipment Emergency, Standby Power and Renewal Energy solutions. Energy Services consist of the sale of maintenance and service programs, interruptible rate program, monitoring program and energy audits.




Summarized financial information concerning our reportable segments is shown in the following table. Unallocated costs amounts include corporate overhead, research and development. Other expense which, for purposes of evaluating the operations of our segments, is not allocated to our segment activities. Total asset amounts exclude intercompany receivable balances eliminated in consolidation.  The Unallocated costs assets include cash and goodwill. Customer list and other intangible are allocated to their segments.


For the Year Ended December 31. 2012Power


Energy


UnallocatedDistribution


Services


Costs


TotalSales

$
11,598,000


$
7,553,874





$
19,151,874Cost of Sales


9,781,864



4,138,707






13,920,571Gross profit


1,816,136



3,415,167






5,231,303Operating Expenses:Selling and service expenses


1,324,631



1,715,184






3,039,815General and administrative expenses


655,550



922,120






1,577,670Depreciation & Amortization


97,339



251,815



3,245



352,399Research and Development


-



-



8,669



8,669Corporate overhead


-



-



517,905



517,905Gain or loss on sale of fixed assets


1,609



(60
)


907



2,456Operating Expense


2,077,520



2,889,059



530,726



5,498,914Operating Income (Loss)

$
(261,384
)

$
526,108


$
(530,726
)

$
(267,611
)Total assets

$
1,979,657


$
2,680,370


$
1,672,091


$
6,332,118




F-19




TITAN ENERGY WORLDWIDE, INC. AND SUBSIDIARIES
 UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


For the Year Ended December 31 2011Power


Energy


UnallocatedDistribution


Services


Costs


TotalSales

$
9,056,035


$
5,009,945





$
14,065,980Cost of Sales


7,586,719



2,502,192






10,088,911Gross profit


1,469,316



2,507,753






3,977,069Operating Expenses:Selling and service expenses


1,261,244



1,305,829






2,567,073General and administrative expenses


573,203



1,095,645






1,668,848Depreciation & Amortization


103,660



244,754



3,819



352,233Research and Development


-



-



194,239



194,239Corporate overhead


-



-



1,276,056



1,276,056Gain or loss on sale of fixed assets






2,468



1,345



3,813Operating Expense


1,938,107



2,648,696



1,475,459



6,062,262Operating Income (Loss)

$
(468,791
)

$
(140,943
)

$
(1,475,459
)

$
(2,085,193
)Total assets

$
2,227,485


$
1,890,085


$
1,498,613


$
5,616,183





NOTE 16 SUBSEQUENT EVENTS – COMMON STOCK ISSUED AND STOCK WARRANTS





On January 31, 2013 a total of 6,011,148 stock warrants expired without being exercised. These warrants were granted as part of the Company Preferred D offering in 2007-2008.  In March 2013, the Company issued 500,000 shares of common stock for services performed. The value of this stock payment was $8,000. The Company has performed a review of events subsequent to the balance sheet date and, except for the matters described above in this note, no other matters require disclosure.





F-20


ITEM 9.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure





None.





ITEM 9A: Controls and Procedures





Evaluation of Disclosure Controls and Procedures





Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2012 have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.





Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.





(b) Management’s Report on Internal Control over Financial Reporting




Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:





•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.




Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO criteria. Based on this assessment, management believes that, as of December 31, 2012, our internal control over financial reporting was effective at a reasonable assurance level based on these criteria.





This annual report does not include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Company's independent registered public accounting firm pursuant to  rules of the Securities and Exchange Commission that permit the Company to provide only management's report in this annual report.





(c) Changes in Internal Control over Financial Reporting





No changes in the Company’s internal control over financial reporting have occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.





34




ITEM 9B.  Other Information





None.





PART III





ITEM 10.  Directors, Executive Officers and Corporate Governance





Our directors and executive officers are:





Name

Age

Position

Position Held SinceJeffrey W. Flannery

56

Chairman, Chief Executive Officer. Chief Operating Officer and Director

Chairman – 2005;CEO  2005-2007, 2009James J. Fahrner

61

Chief Financial Officer and Director

2007





A description of our directors’ business experience during the past five years is set forth below.





Jeffrey Flannery, Chairman, CEO and Director, Titan Energy Worldwide, Inc. Mr. Flannery has been the Company’s Chairman since December 15, 2005 and the Company’s Chief Executive Officer since July 2009, when he was appointed to replace John Michael Tastad.  Mr. Flannery previously had served as the Company’s CEO from December 2005 until October 2007.  Mr. Flannery also has served as the Company’s Chief Financial Officer from December 2005 until May 2007. In September 2011, Mr. Flannery assumed the duties of the Chief Operating Officer upon the departure of Mr. Black. From 1994 to 2004, Mr. Flannery was the founder and Chief Executive Officer of Enhanced Information Systems, Inc., an online home health care provider for the pharmacy industry, Vice President of Development for IUSA, an information technology company, and Vice President of Corporate Communications for Center For Special Immunology, a public company dedicated to medical treatments for immune disorders. As President of FLC Partners, Inc., an advisory company, Mr. Flannery has provided financial consulting and business development services for many public and private companies. Mr. Flannery received his B.A. in Philosophy from the University of California, Los Angeles. The Board believes that Mr. Flannery has the experience, qualifications, attributes and skills necessary to serve on the Board because of his experience with several companies that were in the public markets as a start-up venture, his having provided leadership and strategic direction to the Company as its founder.




James Fahrner, Chief Financial Officer and Director, Titan Energy Worldwide, Inc. Mr. Fahrner has been the Chief Financial Officer of the Company since May 2007 and currently works as a consultant.  A seasoned financial executive with 38 years of experience in accounting, audit internal control, cash flow management, purchase accounting, budgeting and forecasting, Mr. Fahrner was Senior Consultant for Callaway Partners from 2006 until his employment with the Company in May 2007. From 2000 to 2006, he was the Controller for DTE Energy Technology. Mr. Fahrner has his B.S. in Mathematics from Eastern Michigan University. He is a Certified Public Accountant, and a member of the AICPA and MACPA organizations.The Board believes that Mr. Fahrner has the experience, qualifications, attributes and skills necessary to serve on the Board because of his over 39 years of experience being a financial executive or an auditor for several public companies and his unparalleled knowledge of accounting and securities and exchange matters as they affect the Company and its business.




Other significant employees





George Wren, Chief Technology Officer and Vice President of Strategy, Titan Energy Worldwide, Inc


Mr. Wren’s experience includes: project management and installation of 4MW peaking and back-up generators for General Motors in the United States and Brazil; managing Schlumberger Industries’ precision line of metering and instrumentation products, founding and managing a manufacturer’s representative firm in the southeast United States specializing in SCADA systems, metering products and communications networks for electric utility clients; and profit and loss responsibility for Metricom’s UtiliNet private network product line for distributed control systems in the water, gas and electric utility industries.




Clifford Macaylo, President of Northeast Operations, Titan Energy Systems


Mr. Macaylo has over 25 years of experience in energy conservation, power systems, controls, manufacturing and general management. Previously, Mr. Macaylo was the founder and principal of CMAC Partners, LLC, and an energy company focused on CHP / DG development. Other positions include Vice President Fischbach & Moore from 1999 to 2001, (Electrical Contractor 300 Million  (Annual Revenue); Marketing Manager Global Sales for Eaton from 1998 to 1999, (Electrical); General Manager and Director of Asia Pacific 1996 to 1998, (Country Entry Strategy & Acquisitions); Sales Manager - Distribution and Control Business Unit, Westinghouse, from 1990 to 1994.





35





Thomas Vagts, President of Minnesota Operations, Titan Energy Systems




Mr. Vagts is a licensed professional engineer and business manager whose professional experience spans 15 years. Prior to joining Titan Energy Systems, Vagts was sales manager for Cummins Power Generation in Fridley, MN, where he oversaw four regional sales managers and five sales engineers, supporting paralleling switchgear and network sales in North and South America. He also served as district sales manager for DTE Energy Technologies in Chanhassen, MN; sales engineer and project engineer for Energy Alternatives in Farmington, MN; and energy engineer for A & C Enercom in Eden Prairie, MN.




Mr. Vagts sold his company. Sustainable Solutions, Inc (“SSI”), which is engaged in the energy audits, energy consulting and energy management services in the Midwest region to TEWI for stock options of 200,000 shares of common stock with a strike price of $0.50 and vesting over 3 years.





Involvement in Certain Legal Proceedings





None




Section 16(A) Beneficial Ownership Reporting Compliance





Under Section 16(a) of the Exchange Act, our directors and certain of our officers, and persons holding more than 10 percent of our common stock are required to file forms reporting their beneficial ownership of our common stock and subsequent changes in that ownership with the Securities and Exchange Commission. Such persons are also required to furnish us with copies of all forms so filed.





Based solely upon a review of copies of such forms filed on Forms 3, 4, and 5, we are not aware of any person who during the year ended December 31, 2012, was a director, officer, or beneficial owner of more than ten percent of our common stock, and who failed to file, on a timely basis, reports required by Section 16(a) of the Securities Exchange Act of 1934.





Code of Ethics





We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The code of ethics is designed to deter wrongdoing and to promote:





·
Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;





·
Full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications made by us;





·
Compliance with applicable governmental laws, rules and regulations;





·
The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and





·
Accountability for adherence to the code.





A copy of our code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions previously has been filed with the SEC.





We will provide to any person without charge, upon request, a copy of our code of ethics. Any such request should be directed to our corporate secretary at 6321 Bury Drive, Suite 8, Eden Prairie, MN 55346 telephone number (952) 960-2371.





36





Nominating, Audit or Compensation committees





The Company does not have Nominating, Audit or Compensation committees.





ITEM 11.  Executive Compensation





Compensation of Executive Officers





The following table sets forth, for the fiscal years ended December 31, 2012 and 2011, all compensation paid by the Company, including salary, bonuses and certain other compensation, if any, to its Chief Executive Officer,  and  are and its Chief Financial Officers the three most highly compensated employees. The CEO and CFO listed in the table below are sometimes referred to as the “named executive officers” in this Form 10-K.





Summary Compensation Table for 2012 and 2011(6)




Non-Equity


AllStock


Option


Incentive Plan


OtherSalary


Bonus


Awards


Award


Compensation


Compensation


TotalYear

($)


($)


($) (7)


($)


($)


($)


($)Jeffrey W. Flannery (1)
2012


130,000



0



0



0



0



10,152



140,152Chairman, and
2011


124,615



0



0



0



0



13,500



138,115Chief Executive OfficerJames Fahrner(2)
2012


104,896



0



0



12,632



0



0



117,528Chief Financial Officer
2011


117,478



0



0



0



0



0



117,478George Wren (3)
2012


110,354



0



0



10,527



0



1,296



122,177Chief Technology Officer and Vice President of Strategy
2011


87,614



0



0



0



0



864



88.478Clifford Macaylo (4)
2012


123,682



9



0



10,527



0



33,150



167,359President

Northeast Operation
2011


111,930



9,000



0



0



0



49,828



170,758Thomas Vagts(5)
2012


119,769



0



0



10,527



0



8,032



138,328President Minnesota Operation
2011


111,231



0



0



0



0



7,391



118,632




37




1)   Mr. Flannery became a full-time employee on January 11, 2011.   The amount under All Other Compensation for 2011 is a car allowance.  Mr. Flannery pay was adjusted effective April 1, 2011 to $130,000 salary and a $9,000 car allowance as part of the Company cost cutting activities. In June 2012, the company provided Mr. Flannery a lease vehicle instead of a car allowance.




2)   Mr. Fahrner became a full time employee on October 1, 2010.   Mr. Fahrner pay was adjusted effective April1, 2011 to $120,000 as part of the company cost cutting activities. Mr. Fahrner is working part-time in 2012.  Mr. Fahrner was granted 300,000 stock options with an exercise price of $.07. These options expire on January 16, 2022. The amount under option award is the fair value at date of grant using the Black-Scholes formula.




(3)   Mr. Wren was appointed as Chief Technology Officer and Vice president of Strategy on October 20, 2010 as part of the acquisition of Stanza Systems, Inc. This position is not an executive officer, but is the title for Stanza. Mr. Wren has an employment contract that set his salary at $150,000 for two months to be increased to $180,000 for 2011. Mr. Wren was granted 250.000 stock options with an exercise price of $.07.  This option expires on January 16, 2022.  The amount under option award is the fair value at date grant using the Black-Scholes formula.  Mr. Wren was not paid his full salary in 2012 and 2011. The Company has accrued salary at December 31, 2012 of $56.100 based on his adjusted effective April 1, 2011 pay level of $130,000 per year. Mr. Wren other compensation is the value of life insurance in excess of $50,000 of coverage.




(4) Mr. Macaylo was appointed the President of   Northeast Operations of TESI on December 19; 2009.The employment agreement set his salary at $120,000 per year. He was entitled to a $100,000 bonus on the first anniversary. The Company has paid the amount under the bonus column and has accrued the remaining amount. He receives $700 a month car allowance and $2,250 month payment for office space that he owns. These amounts are shown under other compensation.  Macaylo pay was adjusted effective April 1, 2011 to $108,000 as part of the Company cost cutting activities. Mr. Macaylo was granted 250,000 stock options with an exercise price of $.07.  This option expires on January 16, 2022.  The amount under option award is the fair value at date grant using the Black-Scholes formula.




(5) Mr. Vagts was appointed President of Titan Energy Systems, Inc the Minnesota Operations on January 11, 2012. Prior to this appointment, Mr. Vagts was Vice President of Business Development with a salary of $120,000. In January 2010, Mr. Vagts sold his energy consulting company to the Company for an option of 200,000 shares of the Company’s common stock with an exercise price of $.50 and 3 year vesting period. In addition, this agreement allows Mr. Vagts to have a profit sharing plan related to this company. Mr. Vagts profit sharing amounts are shown under other compensation. Mr. Vagts pay was adjusted effective April 1, 2011 to 108,000 as part of the Company cost cutting activities.  Mr. Vagts salary was increased to $120,000 effective January 13, 2012. Mr. Vagts was granted 250,000 stock options with an exercise price of $.07.  This option expires on January 16, 2022.  The amount under option award is the fair value at date grant using the Black-Scholes formula.




(6) The column for “Change in Pension Value and Nonqualified Deferred Compensation Earning” has not been included as the Company has no plans of this nature





(7) The amount under stock option award is determined based on date of grant and we use the Black-Scholes method to compute the value. These amounts are charged to expense over the vesting period.




38




Outstanding Equity Awards as of December 31, 2012 (1)





Market valueNumber of






Number of


of sharesSecurities


Option



Shares


thatUnderlying


Exercise

Option

that


have notUnexercised


Price

Expiration

have not


Vestedoptional


($)

Date

Vested


($)Jeffrey W. Flannery(2)Chairman, and


500,000


$
0.25

11/23/2014


0



0Chief Executive OfficerJames Fahrner(2)


500,000


$
0.25

11/23/2014


0



0Chief Financial Officer


300,000


$
0.07

01/16/2022


300,000


$
3,000George Wren (3)


1,000,000


$
0.60




500,000


$
5,000Chief Technology Officer and Vice President of Strategy


250,000


$
0.07

01/16/2022


250,000


$
2,500Clifford Macaylo(4)


1,000,000


$
0.25

12/14/2014


0



0President of Northeast Operations


250,000


$
0.07

01/16/2022


250,000


$
2,500Thomas Vagts (5)President ofMinnesotaOperations


200,000


$
0.50

11/09/2017


66,667


$
667250,000


$
0.25

12/12/2019


125,000


$
1,25025,000


$
0.10

04/30/2016250,000


$
0.07

01/16/2022


250,000


$
2,500




(1)
The Company does not have any Equity Incentive Plan or Awards, therefore columns related to this plan have not been shown in the table.


(2)
The Company’s stock options for the named executives are based on two year vesting schedule and are exercisable any time during the five year term. These shares can be exercised on a cashless basis. Mr. Fahrner options granted in 2012 have a four year vesting period beginning with January 16, 2013. Mr. Flannery was not granted any options in 2012.


(3)
Mr.  Wren’s stock option vesting is 25 % per year; the first vesting period will be January 1, 2011. The options granted in 2012 have a four year vesting period beginning with January 16, 2013


(4)
Mr. Macaylo’ stock options vest on December 31, 2011. Mr. Macaylo has a put on the options which would require the Company to pay him $250,000. The options granted in 2012 have a four year vesting period beginning with January 16, 2013.


(5)
Mr. Vagts was granted options for selling his energy consulting business on January 1, 2010, this grant vest over three years. Mr. Vagts also received grants in April and November 2009. The vesting period for the April grant is  four years and the November  grant had  a one year delay before vesting commence and then equally over four years. The options granted in 2012 have a four year vesting period beginning with January 16, 2013





Compensation of Directors





We have no formal or informal arrangements or agreements to compensate our directors for services they provide as directors of the Company.





Employment Agreements





The Company has the following employment agreements:




39





Clifford Macaylo.  Mr. Macaylo signed an employment agreement with the Company effective December 18th 2009 to serve as the President of Northeast Operations for Titan Energy Systems, Inc.   The employment agreement has term of one year with automatic one year renewals.  The base salary is $120,000 for 2010, with no built- in escalator for additional renewal periods.  Mr. Macaylo shall be entitled to receive an anniversary renewal bonus of $100,000 on January 1; 2011and will receive a monthly car allowance.  Mr. Macaylo received one million nonqualified stock options with and exercise price of .25 cents with a one year vesting period.  Mr. Macaylo has the ability to earn additional stock options based on the business performance.  Mr. Macaylo is not entitled to any payments in the event of a change of control of the Company.





George Wren. Mr. Wren signed an employment agreement with the Company effective October 20, 2010 to serve as the Company’s Chief Technology Officer and Vice President of Strategy.  The employment agreement has a term of three year period ending October 31, 2013.  The base salary is $150,000 and could increase to $180,000 if certain performance goals are met.  Mr. Wren received a $10,000 dollar signing bonus and one million stock options at an exercise price of 60 cents per share.  Mr. Wren is entitled to payments in the event of a change of control of the Company.





The company does not have an employment agreement with its CEO and Chairman, Jeffrey Flannery, Chief Financial Officer, James Fahrner or its President of TESI Minnesota Operations, Thomas Vagts .





Confidentiality Agreements





None.





ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters





Securities Authorized for Issuance under Equity Compensation Plans





None.





Security Ownership of Certain Beneficial Owners and Management





The following table sets forth, as of March 25, 2013, information concerning ownership of our securities by






Each person who beneficially owns more than five percent of the outstanding shares of our common stock;






Each director;






Each named executive officer; and






All directors and officers as a group.





Beneficial ownership is determined in accordance with the rules of the SEC and includes any shares which the person has the right to acquire within 60 days through the exercise of any stock option, warrant or other right.




Common Stock

Beneficially OwnedName and Address of Beneficial Owner (1)


Number



Percent (2)Jeffrey W. Flannery, Chairman


2,375,650
(3)


3.4
%James A. Fahrner, Chief Financial Officer


735.735
(4)


1.0.
%Total  directors and executive officers as a group (two persons)


3,111,385



4.4
%




1)
Unless otherwise indicated, the address for each of these stockholders is c/o Titan Energy Worldwide, Inc., 6321 Bury Drive Suite 8, and Eden Prairie, MN 55346. Also, unless otherwise indicated, each person named in the table above has the sole voting and investment power with respect to his shares of our common and preferred stock beneficially owned.





2)



3)
Based on 71,200,092 shares of common stock outstanding as of March 26, 2012.



Mr. Flannery ownership includes 500,000 vested options at an exercise price of $0.25.





4)
Mr. Fahrner ownership includes 500,000 vested options at an exercise price of $0.25.





40





Change in Control Arrangements





There are no arrangements, known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change in control of the Company.





ITEM 13.  Certain Relationships and Related Transactions.





Promoters and Control Persons





Not applicable.





Parents





None.





ITEM 14.  Principal Accounting Fees and Services





These statements are unaudited and as such this is not applicable.





Audit Fees





We incurred no audit fees in 2012





Audit-Related Fees





None





Tax Fees





None.





Other Fees





None.




41




ITEM 15.    Exhibits





Exhibit No.

Identification of Exhibit3.1*

Amended and Restated Articles of Incorporation, filed with the Nevada Secretary of State on December 26, 2006.3.2*

Bylaws4.1*

Certificate of Designation establishing our Series D Preferred Stock filed February 26, 200810.1*

Agreement and Plan of Merger with Titan Energy Development, Inc., dated July 21, 200610.2*

Stock Purchase and Exchange Agreement with Stellar Energy Services, Inc., dated December 28, 200614*

Code of Ethics21**

Subsidiaries31.1**

Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2**

Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1**

Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2**

Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





*
Previously filed.





**
Filed herewith.





42





SIGNATURES





In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.





TITAN ENERGY WORLDWIDE, INC.Dated: April 3, 2013
By:
/s/ Jeffrey W. FlanneryJeffrey W. Flannery

Chairman and Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.





Signature

Title

Date/s/ James J. Fahrner

Chief Financial Officer (Principal Financial Officer) and Director

April 3, 2013James J. Fahrner/s/ Jeffrey W. Flannery

Chief Executive Officer (Principal Executive Officer), Chairman and Director

April 3, 2013Jeffrey W. Flannery




43




EXHIBIT INDEX





Exhibit No.

Identification of Exhibit3.1*

Amended and Restated Articles of Incorporation, filed with the Nevada Secretary of State on December 26, 2006.3.2*

Bylaws4.1*

Certificate of Designation establishing our Series D Preferred Stock filed February 26, 200810.1*

Agreement and Plan of Merger with Titan Energy Development, Inc., dated July 21, 200610.2*

Stock Purchase and Exchange Agreement with Stellar Energy Services, Inc., dated December 28, 200614*

Code of Ethics21**

Subsidiaries31.1**

Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2**

Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1**

Certification of Jeffrey W. Flannery, Chief Executive Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2**

Certification of James J. Fahrner, Chief Financial Officer of the Company, pursuant to 18 U.S.C. §1350, as adopted

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





*
Previously filed.





**
Filed herewith.




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