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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

Commission file number 0-31313

 

 

BROADWIND ENERGY, INC.

 (Exact name of registrant as specified in its charter)

 

 

47 East Chicago Avenue, Suite 332, Naperville, IL 60540

(Address of principal executive offices)

 

(630) 637-0315

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No o

 

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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 1, 2008, 96,470,415 shares of the registrant’s common stock were outstanding.

 

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

 

INDEX

 

				Page No.
PART I. FINANCIAL INFORMATION
Item 1.		Condensed Consolidated Financial Statements		3
		Condensed Consolidated Balance Sheets (Unaudited)		3
		Condensed Consolidated Statements of Operations (Unaudited)		4
		Condensed Consolidated Statements of Cash Flows (Unaudited)		5
		Notes to Condensed Consolidated Financial Statements (Unaudited)		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 4T.		Controls and Procedures		31
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings		32
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3.		Defaults Upon Senior Securities		32
Item 4.		Submission of Matters to a Vote of Security Holders		33
Item 5.		Other Information		33
Item 6.		Exhibits		33
Signatures				34
Exhibit Index				35

 

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PART I.        FINANCIAL INFORMATION

 

Item 1.                    Condensed Consolidated Financial Statements

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share and per share data)

 

		June 30, 2008			December 31, 2007
		(Unaudited)
ASSETS
Current assets:
Cash		$	81,869		$	5,782
Restricted cash		1,000			500
Accounts receivable, net of allowance of $1,275 and $2,983, respectively		31,016			13,541
Inventories, net of allowance of $1,096 and $1,096, respectively		19,232			12,983
Prepaid expenses and other current assets		1,000			1,946
Total current assets		134,117			34,752
Property and equipment, net of accumulated depreciation of $6,957 and $2,476, respectively		86,802			58,890
Goodwill		37,819			27,611
Intangibles, net of accumulated amortization of $6,972 and $1,655, respectively		110,334			84,022
Other noncurrent assets		1,427			543
TOTAL ASSETS		$	370,499		$	205,818
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Lines of credit and notes payable		$	6,928		$	440
Notes payable to related parties		—			25,000
Current maturities of long-term debt		17,176			12,693
Current portions of long-term capital lease obligations		295			300
Accounts payable		13,643			10,136
Accrued liabilities		9,988			12,457
Unearned revenue		91			97
Customer deposits		13,486			1,326
Total current liabilities		61,607			62,449
Long-term debt, net of current maturities		21,921			17,620
Capital lease obligations, net of current portions		2,165			686
Interest rate swaps		377			388
Deferred income taxes		3,542			139
Total liabilities		89,612			81,282
Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value: 150,000,000 and 100,000,000 shares authorized, respectively; 96,470,415 and 76,260,912 shares issued and outstanding, respectively		96			76
Additional paid-in capital		296,127			133,033
Accumulated deficit		(15,336		)	(9,877		)
Interest in variable interest entity		—			1,304
Total stockholders’ equity		280,887			124,536
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	370,499		$	205,818

 

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(UNAUDITED)
(in thousands, except share and per share data)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2007			2008			2007
Net sales		$	40,830		$	2,643		$	75,994		$	4,862
Cost of sales		30,739			1,527			57,893			3,050
Gross profit		10,091			1,116			18,101			1,812
Operating costs and expenses:
Selling, general and administrative expenses		8,995			751			16,365			1,211
Amortization of intangible assets		2,738			—			5,317			—
Total operating costs and expenses		11,733			751			21,682			1,211
Operating income (loss)		(1,642		)	365			(3,581		)	601
Other income (expense):
Interest expense, net		(794		)	114			(2,011		)	59
Other, net		475			—			376			—
Total other income (expense), net		(319		)	114			(1,635		)	59
Income (loss) before provision for income taxes		(1,961		)	479			(5,216		)	660
Provision for income taxes		12			—			200			—
Net income (loss)		$	(1,973	)	$	479		$	(5,416	)	$	660
Net income (loss) per common share - basic and diluted		$	(0.02	)	$	0.01		$	(0.07	)	$	0.02
Weighted average common shares outstanding - basic and diluted		86,821,984			47,724,464			83,255,004			43,584,476

 

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(UNAUDITED)
(in thousands)

 

		Six months ended June 30,
		2008			2007
Cash flows from operating activities:
Net income (loss)		$	(5,416	)	$	660
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		4,481			198
Amortization of intangible assets		5,317			191
Change in valuation of interest rate swap		(11		)	—
Deferred income taxes		200			—
Stock issued for marketing costs		—			240
Stock-based compensation expense		784			—
Loss on disposal of assets		22			—
Allowance for doubtful accounts		(1,708		)	—
Changes in operating assets and liabilities:
Accounts receivable		(10,472		)	(1,784		)
Inventories, net		(5,753		)	(91		)
Prepaids and other accounts receivable		1,101			(512		)
Other non-current assets		(865		)	(2		)
Accounts payable		(2,554		)	(1,055		)
Accrued liabilities		(3,709		)	(1,013		)
Customer deposits		12,160			1,664
Unearned revenue		(11		)	—
Net cash used in operating activities		(6,434		)	(1,504		)
Cash flows from investing activity:
Cash paid for acquisitions, net of cash received		(24,955		)	—
Purchases of property and equipment		(20,465		)	(1,778		)
Increase in related party receivable		—			(34		)
Increase (decrease) in restricted cash		(500		)	(500		)
Net cash used in investing activities		(45,920		)	(2,312		)
Cash flows from financing activities:
Proceeds from the issuance of common stock		117,725			15,400
Payment of lines of credit		(1,000		)	(3,512		)
Payments on related party notes payable		(1,365		)	—
Increase in notes payable and lines of credit		5,942
Payments on notes payable and lines of credit		(315		)	—
Proceeds from long-term debt		8,893			—
Payments on long-term debt		(70		)	(527		)
Principal payments on capital leases		(1,488		)	—
Issuance of restricted stock grants		119			—
Refund of bond issuance fees		—			11
Net cash provided by financing activities		128,441			11,372
Net increase in cash		76,087			8,353
Cash at beginning of period		5,782			125
Cash at end of period		$	81,869		$	8,478
Non-cash disclosure information:
Accounts payable incurred for the purchase of equipment		$	4,518
Common stock issued for acquisitions		$	19,821
Non-cash purchase accounting allocation changes		$	2,758

 

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BROADWIND ENERGY, INC AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited and in thousands, except share and per share data)

 

Note 1 — Nature of business and summary of significant accounting policies

 

The accompanying unaudited condensed consolidated financial information has been prepared by Broadwind Energy, Inc., a Delaware corporation (“Broadwind”), and its subsidiaries (also referred to as “we,” “us,” “our,” or the “Company”) in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 8-03 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, it does not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim three and six-month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The December 31, 2007 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007.

 

Broadwind became a public company in February 2006, after a reverse shell transaction with Blackfoot Enterprises, Inc. which was incorporated in Nevada in 1996.  From the time following the reverse shell transaction through February 2008, we were known as Tower Tech Holdings Inc.  On February 28, 2008, we changed our name to Broadwind Energy, Inc., and on June 20, 2008, Broadwind changed its state of incorporation from Nevada to Delaware.  Our principal executive office is located at 47 East Chicago Avenue, Suite 332, Naperville, IL 60540. Our phone number is (630) 637-0315 and our website address is www.broadwindenergy.com.

 

Our business is dedicated to the production and servicing of components for energy and infrastructure-related industries. We are primarily focused on manufacturing components for the wind industry, including: tower support structures through our Tower Tech Systems, Inc. (“Tower Tech”) subsidiary; mining and other heavy equipment through our R.B.A. Inc. (“RBA”) subsidiary; gearing systems through our Brad Foote Gear Works, Inc. (“Brad Foote”) subsidiary; construction, operations, support, maintenance, and component repairs for wind turbines through our Energy Maintenance Service, LLC (“EMS”) subsidiary; and transportation services through our Badger Transport, Inc. (“Badger”) subsidiary.

 

Manitowoc, Wisconsin serves as the main location of the manufacturing facilities for our Tower Tech and RBA subsidiaries.  RBA also operates in a second facility located in Clintonville, Wisconsin, which was established during the second quarter of 2008.  Our Brad Foote subsidiary has manufacturing and administrative facilities in Cicero, Illinois and Neville Island, Pennsylvania. Our EMS subsidiary is headquartered in Gary, South Dakota and established a service hub facility in Abilene, Texas during the second quarter of 2008.  Badger is headquartered in Clintonville, Wisconsin with equipment dispatched throughout the United States.

 

During the second quarter of 2008, the Company completed transactions resulting in the sale of an aggregate of $100,500 worth of its common stock at $7.96 per share, of which $500, or 62,814 shares, were purchased by a member of the Company’s Board of Directors and an aggregate of $100,000 worth, or 12,562,814 shares, were purchased by Tontine Capital Partners, L.P. (“TCP”), Tontine Partners, L.P. (“TP”), Tontine Overseas Fund, Ltd. (“TOF”) and Tontine 25 Overseas Master Fund L.P. (“T25”, and collectively with Tontine Capital Overseas Master Fund, L.P. (“TMF”), TCP, TP and TMF, “Tontine”).  Thomas Weisel Partners issued a fairness opinion in connection with the Tontine parties’ investment.

 

On June 4, 2008, the Company acquired all of the outstanding capital stock of Badger for total purchase price of $11,811, excluding acquisition costs.  The purchase price consisted of $5,811 of cash and 581,959 unregistered shares of Broadwind common stock at a price per share of $10.31, which represented the average closing price of Broadwind common stock for the thirty trading days preceding execution of the Badger acquisition agreement.  The Company entered into a registration rights agreement with the former owner of Badger that provides the former owner with limited piggyback registration rights.  The Company financed the cash portion of the acquisition with cash on hand.

 

The Company held its Annual Meeting of Stockholders on June 20, 2008 in Naperville, Illinois.  At the Annual Meeting, the Company’s stockholders approved the Broadwind Energy, Inc. 2007 Equity Incentive Plan (“EIP”); elected six incumbent director nominees to the Company’s Board of Directors for one year terms; approved the reincorporation of the Company from the State of Nevada to the State of Delaware; approved an amendment to the Company’s Articles of Incorporation to

 

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increase the authorized number of common shares from 100,000,000 to 150,000,000; and ratified the selection of Grant Thornton LLP as the Company’s independent registered public accounting firm for 2008.

 

Significant accounting policies disclosed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007 remain applicable at June 30, 2008, with the exception of the following:

 

Basis of consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Tower Tech, RBA, Brad Foote, EMS, and Badger. RBA and Brad Foote were acquired by the Company on October 1, 2007 and October 19, 2007, respectively. EMS and Badger were acquired by the Company on January 16, 2008 and June 4, 2008, respectively.  The financial position and results of operations of these subsidiaries are included in the Company’s consolidated financial statements from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Revenue Recognition

 

We recognize revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable, collectability is reasonably assured, and delivery has occurred per the contract terms. Customer deposits and other receipts are deferred and recognized when earned.

 

Segment reporting

 

As of June 30, 2008, Broadwind operates and manages two reporting segments:  Products and Components; and Service, Transportation and Maintenance. Initially, the Company created a Service and Maintenance segment in January 2008 when it acquired EMS.  In connection with the June 2008 acquisition of Badger, a transportation services company, we added a transportation component to this segment and created the Service, Transportation and Maintenance segment.  For the three and six months ended June 30, 2007, the Company operated as a single segment, Towers & Fabrication, as the Company’s only subsidiary in existence as of June 30, 2007 was its Tower Tech subsidiary.  The Towers & Fabrication segment is now part of the Products and Components segment, which also includes the Company’s previously reported Gearing Systems segment.  Refer to Note 18 for summarized financial information of the Company’s segments.

 

Reclassification

 

Certain reclassifications have been made in the prior periods financial statements to conform to current period presentation.

 

Effect of recently issued accounting standards

 

In February 2007, the FASB issued Statement of Financial Accounting Standards Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 (“SFAS 159”). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We adopted the provisions of SFAS 159 on January 1, 2008. The Company did not elect to measure any of our financial assets or liabilities using the fair value option of SFAS 159. The Company will assess at each measurement date whether to use the fair value option on any future financial assets or liabilities as permitted pursuant to the provisions of SFAS 159.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.

 

In February 2008, the FASB issued FASB Staff Position No. 157-2 (“FSP 157-2”), which delayed the effective date by which companies must adopt the provisions of SFAS 157. FSP 157-2 defers the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The adoption of this standard is not anticipated to have a material impact on our financial position, results of operations, or cash flows.

 

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In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R, Business Combinations (“SFAS 141R”), which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Early adoption is not permitted.  SFAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after the first reporting period beginning on or after December 15, 2008.

 

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51 (“SFAS 160”), which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company has evaluated the effect of the adoption of SFAS 160, but does not presently anticipate it will have a material effect on its consolidated financial position or results of operations, as all subsidiaries are 100% owned.

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”). This statement is intended to enhance required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how: (a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the effect of adoption of SFAS 161, but does not presently believe that it will have a material effect on its consolidated financial position or results of operations.

 

Note 2 — Inventories

 

The components of inventories as of June 30, 2008 and December 31, 2007 are summarized as follows:

 

		June 30, 2008			December 31, 2007
Raw materials		$	11,538		$	4,230
Work-in-process		8,195			8,976
Finished goods		595			873
		20,328			14,079
Less: Reserve for excess and obsolete inventories		(1,096		)	(1,096		)
Net inventories		$	19,232		$	12,983

 

Note 3 — Acquisitions

 

Badger Transport, Inc.

 

On June 4, 2008, the Company acquired all of the outstanding shares of Badger for aggregate purchase price of $11,811 exclusive of $125 of transaction-related acquisition costs.  The purchase price consisted of $5,811 of cash and 581,959 unregistered shares of Broadwind common stock at a price per share of $10.31.  The Company entered into a registration rights agreement with the former owner of Badger that provides the former owner with limited piggyback registration rights.  The Company financed the cash portion of the acquisition with cash on hand.

 

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The following table summarizes the estimated fair values of the Badger assets acquired and liabilities assumed on the date of the acquisition:

 

 

The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions.  Typical adjustments include outstanding professional fees and fixed asset valuations.  None of the goodwill associated with the purchase of Badger is expected to be deductible for income tax purposes.

 

In connection with the Badger acquisition, the Company was required to fund approximately $4,500 of equipment purchases that Badger had on order for expansion.  The Company has funded $3,933 of this commitment as of August 11, 2008.

 

Energy Maintenance Service, LLC

 

As disclosed in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008, on January 16, 2008, the Company acquired all of the outstanding membership interests in EMS, a South Dakota based company engaged in the sale, installation, and repair of wind-powered electric generators. The aggregate consideration paid was $32,772, which included 1,629,834 shares of the Company’s common stock at a price per share of $8.48 and $522 of transaction-related acquisition costs.  The cash portion of the purchase price was financed by a private placement of Company common stock, as described in Note 10 below.

 

The following table summarizes the estimated fair values of the EMS assets acquired and liabilities assumed on the date of the acquisition:

 

 

The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions. Typical adjustments include outstanding professional fees and fixed asset valuations. Goodwill of $4,025, and other intangibles of $26,490 are expected to be deductible for income tax purposes over 15 years.

 

The Company does not have any contingent payments or commitments in relation to the acquisition of EMS, with the exception of certain stock options that were awarded as a result of the acquisition. Stock options are a share-based compensation expense and are subject to accounting treatment under SFAS No. 123(R) as discussed in Note 11.

 

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Brad Foote Gear Works, Inc.

 

As disclosed in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2007, on October 19, 2007, the Company acquired all of the outstanding capital stock of Brad Foote, an Illinois-based manufacturer of gearing systems for the wind turbine, oil and gas and energy-related industries. The aggregate consideration paid in connection with the Brad Foote acquisition, which included cash and unregistered shares of the Company’s common stock, was $133,179.

 

Pro Forma Financial Information

 

The following table represents the consolidated financial information for the Company on a pro forma basis, assuming the acquisitions of EMS, Brad Foote, and Badger had each occurred as of January 1, 2007. The Company is not including the pro-forma effect of RBA because the impact is not material to its results of operations for the three and six-month periods ended June 30, 2008 or 2007. The historical financial information has been adjusted to give effect to pro forma items that are directly attributable to the acquisitions and expected to have a continuing impact on the consolidated results. These items include adjustments to increase depreciation related to the stepped-up basis in machinery and equipment, adjust inventory to fair market value, record amortization of intangible assets, increase interest expense for certain long-term notes payable, and reclassify certain items to conform to the Company’s financial reporting presentation.

 

The table sets forth unaudited financial information, and has been compiled from historical financial statements and other information, but is not necessarily indicative of the results that actually would have been achieved had the transaction occurred on the dates indicated or that may be achieved in the future.

 

		Six Months Ended June 30,
		2008									2007
					Pro-forma									Pro-forma
		As reported			adjustments			Pro-forma			As reported			adjustments			Pro-forma
Revenues		$	75,994		$	4,646	(1)	$	80,640		$	4,862		$	53,495	(3)	$	58,357
Net income (loss)		$	(5,416	)	(1,060		)(2)	$	(6,476	)	$	660		$	6,052	(4)	$	6,712
Earnings (loss) per share
Basic and diluted		$	(0.07	)	$	(0.01	)	$	(0.08	)	$	0.02		$	0.13		$	0.15

(1)                  Represents revenue of EMS and Badger for the period from January 1, 2008 through the respective acquisition dates.

(2)                  Represents net loss of EMS and Badger for the period from January 1, 2008 through the respective acquisition dates. Adjustments to net loss include increases to depreciation related to the increase in fair market value of machinery and equipment to fair value, amortization of acquired intangible assets, and adjustments to interest income and interest expense relating to the Company’s assumption of certain short and long-term borrowings of EMS and Badger.

(3)                  Represents revenue of EMS, Brad Foote, and Badger for the period from January 1, 2007 through June 30, 2007.

(4)                  Represents net income of EMS, Brad Foote, and Badger for the period from January 1, 2007 through June 30, 2007. Adjustments to net income include increases to depreciation related to the stepped up basis in machinery and equipment to fair value, increases in cost of goods sold due to increasing inventory to fair market value, amortization of acquired intangible assets, and adjustments to interest income and interest expense relating to the Company’s assumption of certain short- and long-term borrowings of EMS, Brad Foote and Badger.

 

Pro-forma tables illustrate results which are unaudited and are based on an acquired company’s history.  As a result, pro-forma results shown above are subject to adjustment upon audits and other financially qualitative studies done by the Company.

 

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Note 4 — Goodwill and intangible assets

 

The changes in the gross carrying amount of intangible assets for the six months ended June 30, 2008, were as follows:

 

		Trade names			Customer relationships			Non-Compete			Total
Balance as of December 31, 2007		$	8,119		$	77,558		$	—		$	85,677
EMS acquisition		1,790			24,700			—			26,490
Badger acquisition		310			3,440			1,370			5,120
Adjustments		10			9			—			19
Balance as of June 30, 2008		$	10,229		$	105,707		$	1,370		$	117,306

 

Intangible assets subject to amortization are as follows as of June 30, 2008:

 

Intangible		Weighted Average Remaining Amortization Period (Years)		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Trade names		19.37		$	10,229		$	(409	)	$	9,820
Customer relationships		9.84		105,707			(6,549		)	99,158
Noncompete Agreements		2.92		1,370			(14		)	1,356
Total				$	117,306		$	(6,972	)	$	110,334

 

Amortization expense on trademarks, customer relationships and non-compete agreements, which is being recorded ratably over the estimated life of the related intangible assets, was $2,738 and $5,317, respectively, for the three and six months ended June 30, 2008. There was no such amortization expense for the three and six months ended June 30, 2007 as the underlying intangible assets were acquired subsequent to June 30, 2007.

 

The changes in the carrying amount of goodwill for the six months ended June 30, 2008, were as follows:

 

(1) Comprised of purchase price allocation adjustments recorded in connection with the Company’s acquisition of Brad Foote in the fourth quarter of 2007. The adjustments were to adjust certain machinery and equipment to fair value and record additional acquisition-related costs. The Company may adjust goodwill as necessary as it finalizes purchase price allocations for acquisitions.  Typical adjustments include outstanding professional fees and fixed asset valuations

 

The Company will review goodwill and other intangible assets for impairment annually, or more frequently, if circumstances indicate that the assets’ carrying amount may not be recovered. As of June 30, 2008, no such circumstances existed, and, accordingly, no impairment expense was recorded.

 

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Note 5 — Accrued liabilities

 

Accrued liabilities at June 30, 2008 and December 31, 2007 consisted of the following:

 

		June 30, 2008			December 31, 2007
Accrued operating expenditures		$	5,357		$	4,217
Reimbursements due under Brad Foote purchase agreement		1,519			5,171
Accrued payroll, employee benefits, and related taxes		2,524			1,894
Accrued rent		440			492
Accrued interest		23			560
Other		125			123
Total accrued liabilities		$	9,988		$	12,457

 

Note 6 — Lines of credit and notes payable

 

Lines of credit and notes payable at June 30, 2008 and December 31, 2007 consisted of the following:

 

		June 30, 2008			December 31, 2007
Third party
Line of credit (Libor + 1.75%)		$	6,125		$	—
Line of credit (8.50%)		468			—
Note payable (Prime + 0.50%)		84			—
Note payable (7.49%)		251
Bank note (6.85%)		—			440
Total third party lines of credit and notes payable		6,928			440
Related party
9.5% related party note, subject to conversion		—			25,000
Total related party notes payable		—			25,000
Total lines of credit and notes payable		$	6,928		$	25,440

 

On April 24, 2008, TMF, TP, and TOF each converted the full original principal amount of their respective 9.5% related party notes into shares of Company common stock. Upon conversion, an aggregate of 3,333,332 shares of the Company’s common stock were issued to TMF, TP and TOF.  Interest that had accumulated in the aggregate amount of $1,223 on the notes as of the conversation date was paid by the Company to TMF, TP, and TOF with cash.

 

In connection with its acquisition of EMS, on January 16, 2008 the Company issued a related-party note to Joseph A. Kolbach, a former member of EMS who remains employed by the Company as the president of EMS. The note was in the amount of $1,365 and related to a limited liability company tax payment.  In May 2008, the Company paid the note in full.

 

Note 7 — Long-term debt

 

Long-term debt at June 30, 2008 and December 31, 2007 consisted of the following:

 

		June 30, 2008			December 31, 2007
2007 equipment line note, due 2013		$	8,877		$	5,947
Revolving note, due 2008		8,500			7,887
2006 equipment line note, due 2012		8,433			9,533
2006 term note, due 2011		4,081			4,871
2008 term note, due 2013		1,902			2,075
5.65% fixed rate loan, due 2013		1,573			—
Fixed rate notes 4.75% to 17.00%, due 2008 to 2012		3,415			—
Variable rate loan (prime plus 1.50%), due 2008		1,491			—
Variable rate loan (prime plus 1.50%), due 2013		425			—
6.85% fixed rate loan, due 2012		400			—
Total long-term debt		39,097			30,313
Less current maturities		(17,176		)	(12,693		)
Total long-term debt, less current maturities		$	21,921		$	17,620

 

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Maturities of long-term debt for each of the five years following June 30, 2008 are as follows:

 

 

The Company was in compliance with all debt covenants as of June 30, 2008, with the exception of a debt coverage ratio related to an EMS note in the amount of $1,491 at June 30, 2008.  On August 8, 2008, the Company refinanced the note and received notice and a one-time waiver for the covenant violation from its lender.

 

Note 8 — Interest rate swaps

 

In 2007, the Company entered into two interest rate swap agreements to minimize the impact of interest rate fluctuations on its debt. Interest rate swap agreements involve exchanges of fixed or floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts.  Under the provisions of SFAS No. 133, all derivatives are measured at fair value and recognized as either assets or liabilities in the Company’s balance sheet. The accounting for changes in the fair value of a derivative is dependent upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in fair value must be recognized currently in earnings. The Company’s interest rate swaps do not qualify for hedge accounting under SFAS No. 133. Therefore, the Company is required to recognize the swap at its fair market value and record the fluctuations in the fair value of the swap in current earnings. The unrealized gain related to these fluctuations was approximately $241 and $11 for the three and six-month ended June 30, 2008, respectively, and is recognized within interest expense, net. The fair market value of the interest rate swaps of $377 and $388 is recorded as a long-term liability as of June 30, 2008 and December 31, 2007, respectively.

 

Note 9 — Capital leases

 

The Company leases equipment from various financing companies under capital leases with terms that extend to 2012. The economic substance of the leases is that the Company is financing the acquisition of the assets through the leases, and accordingly, they are recorded in the Company’s assets and liabilities. Amortization of the capital leases has been included in depreciation expense. The following is an analysis of the leased assets included in property and equipment as of June 30, 2008 and December 31, 2007.

 

		June 30, 2008				December 31, 2007
Machinery and equipment		$		3,732		$	1,589
Less accumulated depreciation		(150			)	(25		)
Net machinery and equipment		$	3,582			$	1,564

 

Gross capital lease assets obtained through the acquisition of Badger was $5,769.

 

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Future minimum rental payments due under capitalized leases:

 

 

Note 10 — Stockholders’ equity

 

On January 16, 2008, to finance the cash portion of the EMS acquisition, the Company sold an aggregate of 2,031,250 shares of unregistered common stock in a private placement to TP and T25 at $8.48 per share for a total purchase price of $17,225, pursuant to a previously disclosed Amended and Restated Securities Purchase Agreement with TCP, TP and T25.

 

In connection with the acquisition of EMS, on January 16, 2008, the Company issued 1,629,834 shares of unregistered common stock to the members of EMS, calculated at $8.48 per share, for total stock consideration of $13,821.  Upon consummation of the Company’s acquisition of EMS, 7,500 shares of restricted stock previously granted to certain Company executives vested; another 7,500 restricted shares remain unvested, and have a vesting date of January 16, 2009.

 

In the second quarter of 2008, the Company completed transactions resulting in the sale of an aggregate of $100,500 worth of its unregistered common stock, of which $500, or 62,814 shares, was purchased by a member of the Company’s Board of Directors at a price of $7.96 per share and an aggregate of $100,000 worth, or 12,562,814 shares, was purchased by TCP, TP, TOF, and T25 at a price of $7.96 per share.  Thomas Weisel Partners issued a fairness opinion in connection with the Tontine parties’ investment.

 

On April 24, 2008, TMF, TP, and TOF each converted the full original principal amount of their respective 9.5% related party notes into shares of Company common stock.  Upon conversion, an aggregate of 3,333,332 shares of the Company’s common stock were issued to TMF, TP and TOF.

 

On June 4, 2008, the Company acquired all of the outstanding capital stock of Badger for total purchase price of $11,881, exclusive of transaction-related acquisition costs.  A portion of the purchase price consisted of 581,959 unregistered shares of Broadwind’s common stock at a price per share of $10.31.

 

Note 11 — Stock-based compensation

 

The Company grants incentive stock options and other equity awards pursuant to the EIP which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June of 2008. On August 8, 2008, the Company’s Board of Directors approved certain non-material amendments to the EIP that clarify the terms and conditions of restricted stock grants under the EIP and provide that the administrator of the EIP has the authority to effect future amendments to the plan. The EIP reserves 3,500,000 shares of common stock for grants to officers, directors, and other key employees.  Total stock-based compensation expense included in the Company’s consolidated statements of operations for the three and six months ended June 30, 2008 is $403 and $784, respectively. There was no stock-based compensation expense for the three and six months ended June 30, 2007.  There were 2,042,000 shares available for grant under the EIP as of June 30, 2008.

 

Stock Options

 

Compensation expense for incentive stock option grants is recognized over the requisite service period for vesting of the award, or to an employee’s eligible retirement date, if earlier and applicable. As of June 30, 2008, the Company had $7,340 of unrecognized compensation expense related to the outstanding stock options, which will be recognized over a weighted-average period of 4.75 years.

 

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The fair value of each stock option grant was estimated as of the date of the grant using the Black-Scholes pricing model. The resulting compensation expense is amortized on a straight line basis over the vesting period of the grant. The expected term of stock options granted is determined utilizing a public company proxy with similar grants because the Company does not have sufficient stock option exercise history from its employees. Likewise, as the Company has only limited public trading history, the expected volatility rate used is also determined from a public company proxy in the same industry and business operations as the Company. The risk-free interest rate is based on US Treasury yield curve in effect at the time of the grant. A summary of these assumptions is included in the table below.

 

 

A summary of stock option activity as of June 30, 2008, and changes during the period then ended is presented below:

 

		Shares		Weighted- Average Exercise Price			Weighted- Average Remaining Contractual Term (Years)
Options Outstanding at January 1, 2008		950,000		$	7.92		9.56
Options Granted		533,000		$	15.00		9.67
Options Exercised		—		$	—		—
Options Forfeited		(40,000	)	$	10.90		10.00
Options Outstanding at June 30, 2008		1,443,000		$	10.45		9.60
Options Exercisable at June 30, 2008		—		$	—		—

 

The following table summarizes share-based compensation expense related to share-based awards subject to SFAS No. 123(R) recognized during the periods indicated:

 

		Six months ended June 30,
		2008			2007
Share-based compensation expense included in consolidated statement of operations:
Selling, general, and administrative		$	784		$	—
Income tax benefit (1)		—			—
Net effect of share-based compensation expense on net income (loss)		$	(784	)	$	—
Decrease in basic income (loss) per share		$	—		$	—
Decrease in diluted income (loss) per share		$	—		$	—

 

Aggregate intrinsic value of options outstanding as of June 30, 2008 was $12,823.

 

(1)          Income tax benefit is not illustrated because the Company is currently operating at a loss and actual income tax benefit will not be realized in the six month period ended June 30, 2008.  The result of the loss situation creates a timing difference, resulting in a deferred tax asset.

 

Restricted Stock

 

The EIP permits the Company to award restricted stock and restricted stock units subject to risks of forfeiture or vesting.  In the fourth quarter of 2007, the Company granted restricted stock units to three executives, with vesting of half of the shares based on completion of the Company’s EMS acquisition and time-based vesting for the remaining half of the shares. The Company fully recognizes compensation expense on vested restricted shares that have been granted and recognizes compensation expense pro-rata on unvested shares over the life of the vesting period.  The fair value of the vested and unvested shares is

 

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calculated by multiplying the number of shares by the weighted average price on the grant date.  For the six months ended June 30, 2008, the Company had $37 of stock-based compensation expense related to non-vested awards.

 

Restricted stock activity is summarized for the six months ended June 30, 2008

 

		Number of Shares Underlying Restricted Stock Units		Weighted Average Grant Date Fair Value
Restricted Stock Units Outstanding, December 31, 2007		15,000		$	10.90
Restricted Stock Units Granted		—		—
Restricted Stock Units Vested		7,500		10.90
Restricted Stock Units Cancelled		—		—
Restricted Stock Units Outstanding June 30, 2008		7,500		10.90

 

Total fair value of vested shares was $82 as of June 30, 2008.

 

Note 12 — Income taxes

 

The Company accounts for income taxes pursuant to SFAS No. 109, Accounting for Income Taxes, which provides for an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of the tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted.

 

The Company adopted the provision of Financial Standards Accounting Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes — An interpretation of FASB Statement No. 109 (“FIN 48”) on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no material adjustments in the liability for unrecognized income tax benefits.  There have been no significant changes in unrecognized income tax benefits during the first two quarters of 2008.

 

The Company recognizes interest and penalties related to uncertain tax position in income tax expense.  As of June 30, 2008, the Company had no accrued interest or penalties related to uncertain tax positions.

 

The Company files income tax returns in the U.S. federal and state jurisdictions.  As of June 30, 2008, open tax years in the federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carry forwards.  No changes in settled tax years have occurred through June, 2008.  The Company does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next 12 months.

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2007			2008			2007
Income (loss) before provision for income taxes		$	(1,961	)	$	479		$	(5,216	)	$	660
Provision for income taxes		12			—			200			—
Net Income		$	(1,973	)	$	479		$	(5,416	)	$	660

 

Effective tax rates differ from federal statutory income tax rates primarily due to change in valuation allowance and provisions for state and local income taxes.  Consistent with 2006 and 2007, the Company continues to maintain a full valuation allowance against net deferred tax assets exclusive of deferred tax liabilities associated with indefinite-lived assets.  As of June 30, 2008, after valuation allowance, the Company has a net deferred tax liability of $3,542 related entirely to temporary differences in indefinite-lived assets. These indefinite-lived assets consist of tax deductible goodwill from recent business acquisitions.  The income tax expense for the three and six months ended June 30, 2008 of $12 and $200, respectively relates to the current quarter temporary differences in these indefinite-lived assets.

 

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Note 13 — Employee benefit plans

 

On October 19, 2007, the Company began sponsoring a defined contribution savings plan for Brad Foote and Tower Tech that allows substantially all Brad Foote and Tower Tech employees to contribute a portion of their pre-tax and/or after-tax income up to statutory limits. The plan requires the Company to match 50% of the participants’ contributions up to 4% of the participants’ compensation.  The Company recognized $85 of matching expense during the six months ended June 30, 2008 related to the Brad Foote and Tower Tech plans.

 

Effective as of the date of the acquisition of RBA, the Company sponsors a defined contribution savings plan that allows RBA employees to contribute a portion of their pre-tax and/or after-tax income up to statutory limits. The plan requires the Company to match 100% of the participants’ contributions up to 3% of the participants’ compensation.  RBA recognized $18 of matching expense during the six months ended June 30, 2008.

 

Effective as of the date of the acquisition of EMS, the Company sponsors a defined contribution savings plan covering substantially all EMS employees. The Company can provide a discretionary match and/or profit sharing contribution each year.  EMS recognized $0 of matching expense during the six months ended June 30, 2008.

 

Effective as of the date of the acquisition of Badger, the Company sponsors a defined contribution savings plan covering substantially all Badger employees. The plan requires the Company to match 100% of the participants’ contributions up to 3% and an additional 50% up to 5% of the participants’ compensation.  Badger recognized $4 of matching expense since the acquisition date.

 

On October 24, 2007, the Company adopted its 2007 Deferred Compensation Plan, which provides incentives and rewards to certain key employees and non-employee directors of the Company who are selected by the Board of Directors to participate. As of June 30, 2008 and December 31, 2007, the Company had accrued $141 and $0, respectively, for amounts due under this plan.

 

As part of the collective bargaining agreement at Brad Foote, the Company maintains a life insurance policy for each member of the collective bargaining group who has retired.  For 2008, the collective premiums on the policy were less than $1.

 

In addition to the plans described, the Company participates in certain customary employee benefit plans, including those which provide health and life insurance benefits to employees.

 

Note 14 — Operating leases — related party

 

During 2007, the Company amended one of the operating leases under which the Company leases manufacturing and office space for its Products and Components segment from City Centre, LLC. In addition, the Company assumed a lease between RBA and City Centre, LLC upon its acquisition of RBA. City Centre, LLC is a limited liability company owned in part by two former directors of the Company, one of whom was also the Company’s former president, and each of whom were affiliates during 2007 and a portion of 2008. Neither of these individuals currently hold any position within the Company. The leases call for monthly rents of $42 and $8, and expire on December 31, 2014 and July 31, 2017, respectively. The lease ending December 31, 2014 grants the Company five options to renew, each for a five-year renewal term that begins at the end of the lease period just ended. The lease ending July 31, 2017 grants the Company two options to renew, each for a five-year renewal term that begins at the end of the lease period just ended.

 

In 2007, the Company entered into a 15-year lease with City Centre, LLC for a third building utilized for its Tower Tech and RBA operating facilities.  The lease period commenced in June 2008 with a monthly payment due of $19.

 

The Company’s Service, Transportation and Maintenance segment leases its primary administrative offices, a machine shop, a residential property, and storage facilities from a former member of EMS, who remains employed by the Company as the president of EMS. The agreement contains a one year lease term expiring on December 31, 2008 and requires a monthly payment of $10.

 

The president of EMS, through a separate entity, owns residential real estate for investment purposes, which is typically rented to third parties. Occasionally, the Company will enter into short-term lease agreements to rent apartments from this entity for use by Company personnel.  Rents approximate market rates and are recorded as rent expense in the Company’s statements of operations.

 

In April 2008, EMS purchased its Howard West facility from the former majority owner of EMS and its current president, and concurrently terminated its lease agreement, which required a monthly payment of $5. The future minimum lease payments associated with this lease have been excluded from the following table due to this subsequent purchase.

 

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Following is a schedule of future minimum rental payments required under the related-party leases as of June 30, 2008:

 

 

Related party rent expense for the three and six months ended June 30, 2008 and 2007 was $196 and $100, respectively, versus $379 and $200, respectively, for the corresponding periods in 2007.

 

Note 15 — Operating leases — third party

 

The Company leases various property, equipment and buildings under lease agreements of varying terms extending to 2012. Rental expense attributed to third party operating leases for the three and six months ended June 30, 2008 was $326 and $674, respectively.

 

Following is a schedule of future minimum rental payments required under the leases as of June 30, 2008:

 

 

Note 16 — Other related party transactions

 

Interest expense of $592 and $754 was incurred and paid on stockholder and related party notes during the three and six months ended June 30, 2008, respectively.

 

At June 30, 2008, and December 31, 2007, $282 and $282, respectively, relating to amounts due from stockholders is included within other current assets on the consolidated balance sheets. These amounts were paid by the Company on behalf of four stockholders in connection with the March 2007 sale of stock by each of the stockholders.

 

During the second quarter of 2008, the Company completed transactions resulting in the sale of an aggregate of $100,500 worth of its unregistered common stock, of which $500, or 62,814 shares, was purchased by a member of the Company’s Board of Directors at a price of $7.96 per share and an aggregate of $100,000 worth, or 12,562,814 shares, were purchased by TP, TCP, TOF, and T25 at a price of $7.96 per share.  Thomas Weisel Partners issued a fairness opinion in connection with the Tontine parties’ investment.

 

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Note 17 — Commitments and contingencies

 

Customer disputes

 

The Company is involved in a pricing dispute with one of its customers with total disputed amounts approximating $1,760 as of June 30, 2008.  The Company has provided in its allowance for uncollectible accounts the portion of the disputed amounts due that management estimates may be uncollectible.

 

Purchase commitments

 

The Company’s Brad Foote subsidiary has a purchase contract with a foreign vendor with total commitments outstanding of $19,367 with expected shipment through 2009.  During the three and six months ended June 30, 2008, the Company recorded net foreign currency losses in the statement of operations of $127 and $317, respectively, due to the decline in the value of the U.S. Dollar relative to the Euro.  This commitment price was converted from Euros to U.S. dollars during the quarter ended June 30, 2008, and no further foreign currency exposure exists with regard to this commitment.  Below is a summary of the estimated future amounts due on this commitment.

 

Period
For the remaining six months of the year ended:		2008		$	14,388
For the year ended:		2009		4,979
		Total commitment		$	19,367

 

Tower Tech has issued commitments for land, buildings, raw steel, and equipment associated with the expansion of the subsidiary’s operations to South Dakota and Texas.  As of June 30, 2008, Tower Tech had issued $29,458 worth of purchase commitment to vendors.

 

 Other

 

The Company is also subject to legal proceedings in the normal course of business. Management believes these proceedings will not have a material adverse effect on the consolidated financial statements.

 

The Company does not have any contingent payments or commitments in relation to the acquisition of EMS, with the exception of certain stock options that were awarded as a result of the acquisition.  Stock options are a share-based compensation expense and are subject to accounting treatment under SFAS No. 123(R).

 

In connection with the Badger acquisition, the Company was required to fund approximately $4,500 of equipment purchases that Badger had on order for expansion.  The Company has funded $3,933 of this commitment as of August 11, 2008.

 

Note 18 — Segment information

 

During the second quarter of 2008, management changed the Company’s reportable segments to reflect changes in the management reporting structure of the organization and the manner in which the chief operating decision maker regularly assesses information for decision-making purposes, including the allocation of resources. The revised reporting structure includes two segments: “Products and Components” and “Service, Transportation and Maintenance.” The Company’s segments and their product and service offerings are summarized below:

 

Products and Components

 

This segment’s products include the manufacturing of components for the wind industry, including: tower support structures; mining and other heavy equipment; and gearing systems.  The Products and Components segment combines previously reported segments of Towers and Fabrication and Gearing Systems.

 

Service, Transportation and Maintenance

 

The Service, Transportation and Maintenance segment was established upon acquisition of EMS in January 2008 and was supplemented by the Badger acquisition during the second quarter of 2008.  This segment includes construction, operations, support, maintenance, and component repairs for wind turbines and transportation services.

 

Other

 

The Company applies the provisions of EITF 04-10 for segment reporting. Under the provisions of EITF 04-10, any operating segments that do not individually meet the aggregation criteria or quantitative thresholds described in SFAS 131 may be combined with other operating segments that do not individually meet the aggregation criteria or quantitative thresholds to form a separate reportable segment. The Company has combined all operating segments that do not individually meet the aggregation criteria established in SFAS 131 to form the “Other” segment for segment reporting. The Other segment is comprised of activities of corporate and company administration activities. 

 

 

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