BROADWIND, INC. - Quarter Report: 2010 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

OR

 

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

 

For the transition period from           to          

 

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 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 o   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.:

 

 

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

 

Number of shares of registrant’s common stock, par value $0.001, outstanding as of November 1, 2010: 107,017,316

 

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

 

INDEX

 

			Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		1
	Condensed Consolidated Balance Sheets		1
	Condensed Consolidated Statements of Operations		2
	Condensed Consolidated Statements of Cash Flows		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 3.	Defaults Upon Senior Securities		31
Item 4.	Removed and Reserved		31
Item 5.	Other Information		31
Item 6.	Exhibits		31
Signatures			32

 

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PART I.        FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

		September 30,			December 31,
		2010			2009
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	9,425		$	4,829
Short-term investments		922			—
Restricted cash		—			2,010
Accounts receivable, net of allowance for doubtful accounts of $618 and $1,641 as of September 30, 2010 and December 31, 2009, respectively		23,938			21,920
Inventories, net		16,260			9,039
Prepaid expenses and other current assets		4,714			5,688
Total current assets		55,259			43,486
Property and equipment, net		129,396			136,249
Goodwill		5,154			9,715
Intangible assets, net		34,024			37,248
Deferred income tax assets		6			—
Other assets		2,126			3,338
TOTAL ASSETS		$	225,965		$	230,036
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Lines of credit and notes payable		$	—		$	10,717
Current maturities of long-term debt		2,649			9,021
Current portions of capital lease obligations		1,172			1,130
Accounts payable		18,652			14,710
Accrued liabilities		6,987			6,965
Deferred revenue		7,399			10,199
Total current liabilities		36,859			52,742
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		11,044			15,778
Long-term capital lease obligations, net of current portions		2,453			3,286
Interest rate swap agreements		—			253
Deferred income tax liabilities		—			403
Other		1,524			1,979
Total long-term liabilities		15,021			21,699
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value; 150,000,000 shares authorized; 107,007,228 and 96,701,127 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively		107			97
Additional paid-in capital		355,861			300,779
Accumulated other comprehensive income		2			—
Accumulated deficit		(181,885		)	(145,281		)
Total stockholders’ equity		174,085			155,595
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	225,965		$	230,036

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Revenues		$	38,197		$	59,507		$	96,996		$	164,882
Cost of sales		38,655			52,925			102,334			150,464
Gross (loss) profit		(458		)	6,582			(5,338		)	14,418
OPERATING EXPENSES:
Selling, general and administrative		7,314			8,247			22,995			27,688
Goodwill impairment		—			—			4,561			—
Intangible amortization		1,075			2,906			3,224			8,718
Total operating expenses		8,389			11,153			30,780			36,406
Operating loss		(8,847		)	(4,571		)	(36,118		)	(21,988		)
OTHER (EXPENSE) INCOME, net:
Interest expense, net		(345		)	(732		)	(1,068		)	(1,831		)
Other, net		380			243			118			5,910
Total other income (expense), net		35			(489		)	(950		)	4,079
Net loss before benefit for income taxes		(8,812		)	(5,060		)	(37,068		)	(17,909		)
BENEFIT FOR INCOME TAXES		(513		)	(116		)	(464		)	(389		)
NET LOSS		$	(8,299	)	$	(4,944	)	$	(36,604	)	$	(17,520	)
NET LOSS PER COMMON SHARE - Basic and diluted		$	(0.08	)	$	(0.05	)	$	(0.35	)	$	(0.18	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted		106,900			96,609			106,019			96,550

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(In thousands)

 

		Nine Months Ended September 30,
		2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(36,604	)	$	(17,520	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization expense		14,550			20,131
Goodwill impairment		4,561			—
Change in fair value of interest rate swap agreements		(253		)	(262		)
Deferred income taxes		(409		)	83
Stock-based compensation		636			1,491
Allowance for doubtful accounts		(1,023		)	(1,032		)
Loss (gain) on disposal of assets		61			(78		)
Changes in operating assets and liabilities:
Accounts receivable		(995		)	11,067
Inventories		(7,221		)	26,972
Prepaid expenses and other current assets		974			(140		)
Accounts payable		4,915			(21,046		)
Accrued liabilities		(207		)	(4,116		)
Deferred revenue		(2,800		)	(11,070		)
Other non-current assets and liabilities, net		843			(1,627		)
Net cash (used in) provided by operating activities		(22,972		)	2,853
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(5,490		)	(9,761		)
Purchases of available-for-sale investments		(922		)	—
Proceeds from disposals of property and equipment		9			54
Decrease (increase) in restricted cash		2,010			(2,003		)
Net cash used in investing activities		(4,393		)	(11,710		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock		53,347			547
Common stock issued under defined contribution 401(k) plan		499			—
Payments on lines of credit and notes payable		(21,707		)	(8,312		)
Proceeds from lines of credit and notes payable		—			5,033
Proceeds from sale-leaseback transactions		—			3,686
Proceeds from deposits on equipment		—			665
Principal payments on capital leases		(791		)	(906		)
Issuance of restricted stock grants		611			551
Net cash provided by financing activities		31,959			1,264
Effect of foreign exchange rates		2			—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		4,596			(7,593		)
CASH AND CASH EQUIVALENTS, beginning of the period		4,829			15,253
CASH AND CASH EQUIVALENTS, end of the period		$	9,425		$	7,660
Supplemental cash flow information:
Interest paid, net of capitalized interest		$	1,207		$	1,697
Income taxes paid		$	38		$	531
Non-cash financing activities:
Non-cash purchase accounting allocation charges		$	—		$	3,030
Common stock issued under defined contribution 401(k) plan		$	499		$	—
Issuance of restricted stock grants		$	611		$	551

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(In thousands, except share and per share data)

 

NOTE 1 — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2010. The December 31, 2009 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-K for the year ended December 31, 2009.

 

The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. and its wholly owned subsidiaries. As of September 30, 2010, the Company had five operating subsidiaries, which consisted of Brad Foote Gear Works, Inc. (“Brad Foote”), Tower Tech Systems Inc. (“Tower Tech”), Energy Maintenance Service, LLC (“EMS”), Badger Transport, Inc. (“Badger”), and Broadwind Energy Europe GmbH. All inter-company transactions and balances have been eliminated. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

Business Overview

 

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Broadwind,” and the “Company” refer to Broadwind Energy, Inc., a Delaware corporation headquartered in Naperville, Illinois, and its wholly owned subsidiaries. The Company is an independent, horizontally integrated supplier of customized products and services to the U.S. wind energy industry. The Company’s product and service portfolio provides its customers, including wind turbine manufacturers, wind farm developers and wind farm operators, with access to a broad array of wind component and service offerings. The Company manufactures gearing systems and wind towers for the wind industry, and provides technical service, precision repair and engineering and specialized logistics to the wind industry in the U.S.

 

In December 2009, the Company revised its reporting segment presentation into four reportable operating segments: Towers, Gearing, Technical and Engineering Services, and Logistics. Accordingly, all prior period financial results have been reclassified to reflect these changes. See Note 14, “Segment Reporting,” of the notes to these condensed consolidated financial statements for further discussion of the Company’s reportable segments.

 

Towers

 

The Company manufactures wind towers, specifically the larger and heavier wind towers that are designed for 2 megawatt (“MW”) and larger wind turbines. The Company’s production facilities are strategically located in close proximity to the primary U.S. wind resource regions, sited in Wisconsin and Texas, including a recently constructed third wind tower manufacturing facility in Brandon, South Dakota, which will become operational as business warrants and pending the installation of certain additional equipment. The Company also manufactures other specialty weldments and structures for industrial customers.

 

Gearing

 

The Company manufactures precision gearing systems for the wind industry and for industrial markets including mining and oilfield equipment.  The Company uses an integrated manufacturing process, which includes a machining process in Cicero, Illinois, a heat treatment process in Neville Island, Pennsylvania and a finishing process in the Company’s Cicero factory.

 

Technical and Engineering Services

 

The Company is an independent service provider of construction support and operations and maintenance services to the wind industry. The Company’s specialty services include oil change-out, up-tower tooling for gearing systems, drive-train and blade repairs and component replacement. The Company’s construction support capabilities include assembly of towers, nacelles, blades

 

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and other components. The Company also provides customer support, preventive maintenance and wind technician training. The Company’s technicians utilize regional service centers for storage and repair of parts as well as for training. Through its precision repair and engineering services, the Company repairs and refurbishes complex wind components, including control systems, gearboxes and blades. The Company also conducts warranty inspections, commissions turbines and provides technical assistance.

 

Logistics

 

The Company offers specialized transportation, permitting and logistics management to the wind industry for oversize and overweight machinery and equipment. The Company delivers complete turbines to the installation site, including blades, nacelles and tower sections for final erection. The Company focuses on the project management of the delivery of complete wind turbine farms.

 

Financing and Liquidity

 

As of September 30, 2010, the Company had cash, cash equivalents and short-term investments of $10,347. The Company’s management anticipates that the Company will be able to satisfy the cash requirements associated with, among other things, working capital needs, capital expenditures and debt and lease commitments through at least the next 12 months primarily with current cash on hand, receipts of deposits from customers to fund steel purchases and cash generated by operations or other financing arrangements.

 

On September 29, 2010, Tower Tech, Brad Foote, EMS and Badger (each individually, a “Subsidiary” and collectively, the “Subsidiaries”) each entered into an individual Account Purchase Agreement (collectively, the “AP Agreements”) with Wells Fargo Business Credit, a division of Wells Fargo Bank, N.A. (“Wells Fargo”). The aggregate facility limit of the AP Agreements is $10,000. At September 30, 2010, no amounts were drawn under the AP Agreements, and the Company had the ability to borrow up to $10,000, subject to maintaining a month-end minimum total cash balance of $5,000.

 

NOTE 2 — EARNINGS PER SHARE

 

The following table presents a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2010 and 2009 as follows:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2010			2009			2010			2009
Basic earnings per share calculation:
Net loss to common stockholders		$	(8,299	)	$	(4,944	)	$	(36,604	)	$	(17,520	)
Weighted average number of common shares outstanding		106,900,143			96,608,575			106,019,147			96,549,710
Basic net loss per share		$	(0.08	)	$	(0.05	)	$	(0.35	)	$	(0.18	)
Diluted earnings per share calculation:
Net loss to common stockholders		$	(8,299	)	$	(4,944	)	$	(36,604	)	$	(17,520	)
Weighted average number of common shares outstanding		106,900,143			96,608,575			106,019,147			96,549,710
Common stock equivalents:
Stock options and unvested restricted stock units (1)		—			—			—			—
Weighted average number of common shares outstanding		106,900,143			96,608,575			106,019,147			96,549,710
Diluted net loss per share		$	(0.08	)	$	(0.05	)	$	(0.35	)	$	(0.18	)

 

(1) Stock options and unvested restricted stock units granted and outstanding of 1,462,500 and 1,877,745 as of September 30, 2010 and 2009, respectively, are excluded from the computation of diluted earnings per share due to the anti-dilutive effect as a result of the Company’s net loss for these respective periods.

 

NOTE 3 — INVENTORIES

 

Inventories are stated at the lower of cost or market value and primarily consist of raw material, work-in-process, and finished goods. Work-in-process consists of labor and overhead, processing costs, purchased subcomponents and materials purchased

 

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for specific customer orders. Finished goods consist of components purchased from third parties as well as components manufactured by the Company that will be used to produce final customer products.

 

The components of inventories as of September 30, 2010 and December 31, 2009 are summarized as follows:

 

		September 30,			December 31,
		2010			2009
Raw materials		$	10,849		$	4,957
Work-in-process		4,802			2,921
Finished goods		2,275			3,338
		17,926			11,216
Less: Reserve for excess and obsolete inventory		(1,666		)	(2,177		)
Net inventories		$	16,260		$	9,039

 

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

 

Goodwill represents the excess of cost over fair market value of identifiable net assets acquired through business purchases. The Company performs an annual impairment test through the application of a fair-value based test as of October 31 of each year, or more frequently when events or circumstances indicate that the carrying value of its assets may not be recoverable. The Company’s estimate of fair value for each of the Company’s operating segments is based primarily on projected future results, cash flows and other assumptions.

 

During the second quarter of 2010, the Company identified a triggering event associated with a continued deterioration in financial performance within its Technical and Engineering Services segment. This triggering event required a subsequent revision in the Company’s projection of future operating results and cash flows for this segment in light of the continued economic weakness in the wind energy industry. The Company’s analysis indicated that the projected fair value of the Technical and Engineering Services segment assets did not exceed the carrying value of these assets. The method used in determining the fair value was based upon the Company’s estimate of the projected future discounted cash flows of its reporting unit. As a result, the Company recorded a goodwill impairment charge of $4,561 during the second quarter and the impairment charge was recorded to operating expenses in its consolidated statement of operations.

 

During the third quarter of 2010, the Company identified triggering events associated with the Company’s current period operating loss combined with a history of continued operating losses, and during the third quarter the Company’s market capitalization was below the net book value of its total assets. As a result, the Company evaluated the recoverability of certain of its identifiable intangible assets and goodwill balances. Based upon the Company’s assessment, no impairment to these assets was identified as of September 30, 2010.

 

As of September 30, 2010, the carrying value of goodwill was as follows:

 

		Towers			Gearing			Technical and Engineering Services			Logistics			Total
Goodwill balance as of December 31, 2009		$	—		$	—		$	4,561		$	5,154		$	9,715
Impairment charge		—			—			(4,561		)	—			(4,561		)
Goodwill balance as of September 30, 2010		$	—		$	—		$	—		$	5,154		$	5,154

 

Intangible assets represent the fair value assigned to definite-lived assets such as trade names, customer relationships, and non-compete agreements as part of acquisitions completed by the Company during 2007 and 2008. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 3 to 20 years. The Company tests intangible assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. As a result of the triggering events noted above, the Company evaluated the recoverability of certain of its identifiable intangible assets. Based upon the Company’s assessment, no impairment to these assets was identified as of September 30, 2010.

 

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As of September 30, 2010 and December 31, 2009, the cost basis, accumulated amortization and net book value of intangible assets were as follows:

 

		September 30, 2010									December 31, 2009
								Net												Net
		Cost			Accumulated			Book			Cost			Accumulated			Impairment			Book
		Basis			Amortization			Value			Basis			Amortization			Charge			Value
Intangible assets:
Customer relationships		$	33,059		$	(8,059	)	$	25,000		$	106,638		$	(21,332	)	$	(57,835	)	$	27,471
Trade names		10,159			(1,466		)	8,693			10,279			(1,099		)	(107		)	9,073
Noncompete agreements		1,490			(1,159		)	331			1,490			(786		)	—			704
Intangible assets		$	44,708		$	(10,684	)	$	34,024		$	118,407		$	(23,217	)	$	(57,942	)	$	37,248

 

Intangible investments associated with customer relationships, trade names and non-compete agreements are amortized ratably over the estimated life of the related intangible assets. Amortization expense was $1,075 and $3,224 for the three and nine months ended September 30, 2010, respectively, compared to $2,906 and $8,718 for the three and nine months ended September 30, 2009, respectively.

 

NOTE 5 — ACCRUED LIABILITIES

 

Accrued liabilities as of September 30, 2010 and December 31, 2009 consisted of the following:

 

		September 30,			December 31,
		2010			2009
Accrued operating expenditures		$	487		$	954
Accrued payroll and benefits		3,254			2,295
Accrued professional fees		202			1,067
Accrued warranty		1,368			918
Accrued other		1,676			1,731
Total accrued liabilities		$	6,987		$	6,965

 

NOTE 6 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of September 30, 2010 and December 31, 2009 consisted of the following:

 

		September 30,			December 31,
		2010			2009
Lines of credit		$	—		$	10,601
Term loans and notes payable		11,373			22,595
Related party note		2,320			2,320
		13,693			35,516
Less - Current maturities		(2,649		)	(19,738		)
Long-term debt, net of current maturities		$	11,044		$	15,778

 

Credit Facilities

 

Brad Foote

 

In connection with the Company’s acquisition of Brad Foote in October 2007, the Company assumed outstanding debt and available lines of credit totaling approximately $25,500 under various secured debt facilities (the “BOA Debt Facilities”) with Bank of

 

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America.  On January 22, 2010, Brad Foote repaid all of the outstanding principal and interest under the BOA Debt Facilities in the aggregate amount of $16,076, and the BOA Debt Facilities were terminated.

 

Tower Tech

 

ICB Line

 

In October 2007, Tower Tech obtained a secured line of credit (the “ICB Line”) from Investors Community Bank in the amount of $2,500, which was subsequently increased to $5,500 on March 21, 2008. On March 13, 2009, Investors Community Bank agreed to extend the maturity date of the ICB Line to March 13, 2010. Pursuant to a Master Amendment dated as of December 30, 2009 among Investors Community Bank, Tower Tech and Broadwind (as guarantor), the amount of the ICB Line was increased to $6,500, subject to borrowing base availability. Tower Tech repaid all of the outstanding indebtedness under the ICB Line in the amount of $3,066 on January 26, 2010, and allowed the ICB Line to expire on March 13, 2010.

 

ICB Notes

 

On April 7, 2008, the Company’s wholly owned subsidiary R.B.A., Inc. (“RBA”) executed four (4) promissory notes with Investors Community Bank (the “ICB Notes”) in the aggregate principal amount of approximately $3,781, as follows: (i) a term note in the maximum principal amount of approximately $421, bearing interest at a per annum rate of 6.85%, with a maturity date of October 5, 2012; (ii) a term note in the maximum principal amount of $700, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; (iii) a term note in the maximum principal amount of $928, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; and (iv) a line of credit note in the maximum principal amount of $1,732, bearing interest at a per annum rate of 4.48% until May 1, 2008 and thereafter at LIBOR plus 1.75%, with a maturity date of April 5, 2009 (the “Line of Credit Note”). The Line of Credit Note was subsequently modified on March 13, 2009 to extend the maturity date to March 13, 2010 and to change the interest rate to the greater of (A) 5% or (B) prime. The ICB Notes provide for multiple advances, and were secured by substantially all of the assets of RBA.

 

Pursuant to the merger of RBA into Tower Tech on December 31, 2009, Tower Tech became the successor by merger to RBA’s interest in the loans from Investors Community Bank to RBA evidenced by the ICB Notes (other than the Line of Credit Note, which was repaid in full in January 2010). The ICB Notes contain certain standard and financial covenants.   Tower Tech agreed to a minimum debt service coverage ratio, to maintain its primary deposit accounts with ICB and that no additional loans or leases would be entered into by Tower Tech without the prior approval of Investors Community Bank.   At September 30, 2010, Tower Tech was in violation of its debt service coverage ratio and obtained a waiver for this violation from Investors Community Bank.  Any future noncompliance with the covenants under the ICB Notes could result in an event of default which would allow Investors Community Bank to accelerate the amounts due if Tower Tech is unable to obtain a waiver in respect of any such default. As of September 30, 2010, (i) the total amount of outstanding indebtedness under the remaining ICB Notes was $1,436, and (ii) the effective per annum interest rate of the remaining ICB Notes was 5.84%.

 

Great Western Loan

 

On April 28, 2009, Tower Tech entered into a Construction Loan Agreement with Great Western Bank, pursuant to which Great Western Bank agreed to provide up to $10,000 in financing (the “Construction Loan”) to fund construction of Tower Tech’s wind tower manufacturing facility in Brandon, South Dakota (the “Facility”).  Pursuant to a Change in Terms Agreement dated April 5, 2010 between Great Western Bank and Tower Tech, the Construction Loan was converted to a term loan (the “Great Western Term Loan”) providing for monthly payments of principal plus interest, extending the maturity date to November 5, 2016, reducing the principal amount to $6,500, and changing the per annum interest rate to 8.5%. Tower Tech was required to pay a 1.0% origination fee upon the conversion.

 

The Great Western Term Loan is secured by a first mortgage on the Facility and all fixtures and proceeds relating thereto, pursuant to a Mortgage and a Commercial Security Agreement, each between Tower Tech and Great Western Bank, and by a Commercial Guaranty from the Company. In addition, the Company has agreed to subordinate all intercompany debt with Tower Tech to the Great Western Term Loan. The Great Western Term Loan contains representations, warranties and covenants that are customary for a term financing arrangement and contains no financial covenants. As of September 30, 2010, the total outstanding indebtedness under the Great Western Term Loan was $6,000.

 

Badger

 

On March 13, 2009, Badger obtained a term loan (the “FNB Term Loan”) from First National Bank in the principal amount of $1,538. A portion of the proceeds from the FNB Term Loan was used to pay off Badger’s existing term loan and revolving line of credit with First National Bank, with the remainder available for working capital. The FNB Term Loan is secured by the inventory and certain equipment of Badger, and is guaranteed by the Company. The FNB Term Loan bears interest at a rate of 6.75% per annum,

 

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matures on March 13, 2013, and requires monthly payments of principal and interest. The FNB Term Loan contains no financial covenants. As of September 30, 2010, the total amount of outstanding indebtedness under the FNB Term Loan was $1,009.

 

On September 30, 2009, Badger obtained a term loan (the “GE Capital Term Loan”) from General Electric Capital Corporation in the principal amount of approximately $1,000. The GE Capital Term Loan is secured by certain equipment of Badger, and is guaranteed by the Company. The GE Capital Term Loan bears interest at a rate of 7.76% per annum, matures on September 30, 2014, and requires monthly payments of principal and interest. The GE Capital Term Loan contains no financial covenants. As of September 30, 2010, the total amount of outstanding indebtedness under the GE Capital Term Loan was $821.

 

AP Agreements

 

On September 29, 2010, the Subsidiaries entered into the AP Agreements with Wells Fargo. Under the AP Agreements, Wells Fargo will advance funds against certain receivables arising from the sales of the Subsidiaries’ products and services. In connection with the entry into the AP Agreements, the Company and each Subsidiary have executed guaranties (including cross-guaranties) in favor of Wells Fargo. With respect to the Subsidiaries, the AP Agreements contain provisions providing for cross-defaults and cross-collateralization. In addition, each Subsidiary has granted to Wells Fargo a security interest against all financed receivables and related collateral. Prior to entering into the AP Agreements, there was no material relationship between the Company, the Subsidiaries and Wells Fargo.

 

Under the terms of the AP Agreements, Wells Fargo will advance approximately 80% of the face value of eligible receivables to the Subsidiaries. Wells Fargo will have full recourse to the Subsidiaries for collection of the financed receivables. The aggregate facility limit of the AP Agreements is $10,000. For Wells Fargo’s services under the AP Agreements, the Subsidiaries have agreed to pay Wells Fargo (i) a floating discount fee of the then-prevailing LIBOR plus 3.75% per annum, (ii) an annual facility fee of 1% of the aggregate facility limit, and (iii) an annual unused line fee of 0.042% on the portion of the credit facility which is unused. The initial term of the AP Agreements ends on September 29, 2013. If the AP Agreements are terminated prior to this date, an early termination fee of up to 3% of the aggregate facility limit may apply. At September 30, 2010, no amounts were drawn under the AP Agreements, and the Subsidiaries had the ability to borrow up to $10,000, subject to maintaining a month-end minimum total cash balance of $5,000.

 

Selling Shareholder Notes

 

On May 26, 2009, the Company entered into a settlement agreement (the “Settlement Agreement”) with the former owners of Brad Foote (the “Selling Shareholders”), including J. Cameron Drecoll, the Company’s Chief Executive Officer and a member of its Board of Directors, related to the post-closing escrow established in connection with the Company’s acquisition of Brad Foote. Under the terms of the Settlement Agreement, among other terms, the Company issued three promissory notes to the Selling Shareholders in the aggregate principal amount of $3,000 (the “Selling Shareholder Notes”). The Selling Shareholder Notes mature on May 28, 2012 and bear interest at a rate of 7% per annum, with interest payments due quarterly. The Selling Shareholder Note issued to Mr. Drecoll in the principal amount of $2,320 and pursuant to the terms of the Settlement Agreement is deemed by the Company to be a related party transaction. As of September 30, 2010, principal of $3,000 and accrued interest of $53 were outstanding under the Selling Shareholder Notes. The Company has accounted for the Selling Shareholder Notes as long-term debt in its condensed consolidated balance sheets.

 

NOTE 7 — CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

 

Cash and cash equivalents comprise cash balances and readily marketable investments with original maturities of three months or less, such as money market funds, short-term government bonds, Treasury bills, marketable securities and commercial paper. The Company’s treasury policy is to invest excess cash in money market funds or other short-term investments, which are generally of a short-term duration based upon operating requirements. Income earned on these investments is recorded to interest income in the Company’s condensed consolidated statements of operations. As of September 30, 2010, cash and cash equivalents totaled $9,425 and consisted of cash balances and investments in municipal bonds with original maturities of three months or less, compared to cash and cash equivalents of $4,829 which consisted of cash and money market funds at December 31, 2009.

 

As of September 30, 2010, the Company had $922 in investments in municipal bonds with original maturities greater than three months, but less than one year. These financial instruments are categorized as available-for-sale securities and classified as short-term investments in the Company’s condensed consolidated balance sheet as of September 30, 2010.

 

Cash and cash equivalents and short-term investments consisted of the following as of September 30, 2010 and December 31, 2009:

 

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		September 30, 2010
					Gross Unrealized
		Cost			Gain			(Loss)			Fair Value
Cash and cash equivalents:
Cash		$	7,833		$	—		$	—		$	7,833
Municipal bonds		1,592			—			—			1,592
Total cash and cash equivalents		9,425			—			—			9,425
Short-term investments (available-for-sale):
Municipal bonds		922			—			—			922
Total cash and cash equivalents and short-term investments		$	10,347		$	—		$	—		$	10,347

 

		December 31, 2009
					Gross Unrealized
		Cost			Gain			(Loss)			Fair Value
Cash and cash equivalents:
Cash		$	4,240		$	—		$	—		$	4,240
Money market funds		589			—			—			589
Total cash and cash equivalents		$	4,829		$	—		$	—		$	4,829

 

NOTE 8 — FAIR VALUE MEASUREMENTS

 

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

 

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

 

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

 

Fair value of financial instruments

 

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities and customer deposits approximate their respective fair values due to the relatively short-term nature of these instruments. Based upon interest rates currently available to the Company for debt with similar terms, the carrying value of the Company’s long-term debt is approximately equal to its fair value. As of September 30, 2010, the Company held short-term investments in municipal bonds, which are required to be measured at fair value. As of September 30, 2010, the Company did not hold any interest rate swaps. The following table presents the Company’s fair value measurements valued on a recurring basis as of September 30, 2010:

 

		Level 1			Level 2			Level 3			Total
Municipal bonds		$	922		$	—		$	—		$	922
Total		$	922		$	—		$	—		$	922

 

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The following table represents the fair values of the Company’s financial liabilities as of December 31, 2009:

 

		Level 1			Level 2			Level 3			Total
Interest rate swaps		$	—		$	253		$	—		$	253
Total		$	—		$	253		$	—		$	253

 

Assets measured at fair value on a nonrecurring basis

 

The Company reviews its goodwill balances for impairment on at least an annual basis based on the carrying value of these assets as of October 31 or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. During the second quarter of 2010, the Company identified a triggering event associated with a continued deterioration in financial performance within its Technical and Engineering Services segment. This triggering event required a subsequent revision in the Company’s projections of future operating results and cash flows for this segment in light of the continued economic weakness in the wind energy industry. The Company’s analysis indicated that the projected fair value of the Technical and Engineering Services segment assets did not exceed the carrying value of these net assets. The method used in determining the fair value was based upon the Company’s estimate of the projected future discounted cash flows of its reporting unit. As a result, the Company recorded a goodwill impairment charge of $4,561 during the second quarter of 2010 to properly reflect the carrying value of these assets.

 

During the third quarter of 2010, the Company identified triggering events associated with the Company’s current period operating loss combined with a history of continued operating losses, and during the third quarter the Company’s market capitalization was below the net book value of its total assets. As a result, the Company evaluated the recoverability of certain of its identifiable intangible assets and goodwill balances. Based upon the Company’s assessment, no impairment to these assets was identified as of September 30, 2010.

 

The fair value measurement approach utilizes a number of significant unobservable inputs or Level 3 assumptions. These assumptions include, among others, projections of the Company’s future operating results, the implied fair value of these assets using an income approach by preparing a discounted cash flow analysis and other subjective assumptions.

 

NOTE 9 — TOTAL COMPREHENSIVE LOSS

 

The components of total comprehensive loss are net loss and the change in cumulative currency translation adjustments.  The following table sets forth the components of total comprehensive loss for the three and nine months ended September 30, 2010 and 2009:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Net loss		$	(8,299	)	$	(4,944	)	$	(36,604	)	$	(17,520	)
Other comprehensive income:
Foreign currency translation adjustments		4			—			2			—
Total comprehensive loss		$	(8,295	)	$	(4,944	)	$	(36,602	)	$	(17,520	)

 

In May 2010, the Company opened a sales office in Hamburg, Germany. The Euro is the functional currency in Germany. All related expenses have been translated into U.S. dollars using an average exchange rate for the period. The assets and liabilities for this location have been translated into U.S. dollars using the spot rate at the end of the period with a currency translation gain of $4 and $2 included in accumulated other comprehensive loss for three and nine months ended September 30, 2010, respectively.

 

NOTE 10 — STOCKHOLDERS’ EQUITY

 

On January 21, 2010, the Company completed a public offering of its common stock, par value $0.001 per share, at an offering price of $5.75 per share. In the offering, the Company sold 10,000,000 newly issued shares of its common stock for approximately $54,625 in proceeds after deducting underwriting discounts, but before deducting other offering related costs. In connection with the offering, the Company incurred $1,278 in costs associated with professional and other offering related expenses, which have been netted against the proceeds received in additional paid-in capital in the Company’s condensed consolidated balance

 

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sheet as of September 30, 2010.

 

During the three and nine months ended September 30, 2010, the Company issued 86,500 and 191,479 shares of its common stock for an aggregate fair value of $158 and $499, respectively, in connection with matching contributions made under its defined contribution 401(k) safe harbor plan.

 

NOTE 11 — INCOME TAXES

 

The Company accounts for income taxes based upon an asset and liability approach. 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 tax 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 tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of September 30, 2010 and December 31, 2009, the Company had accrued interest or penalties related to uncertain tax positions totaling $24 and $10, respectively.

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of September 30, 2010, open tax years in federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carryforwards. No changes in settled tax years have occurred through September 30, 2010. The Company does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next 12 months.

 

The following table presents the income tax benefit for the three and nine months ended September 30, 2010 and 2009 as follows:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2010			2009			2010			2009
Net loss before benefit for income taxes		$	(8,812	)	$	(5,060	)	$	(37,068	)	$	(17,909	)
Benefit for income taxes		(513		)	(116		)	(464		)	(389		)
Net loss		$	(8,299	)	$	(4,944	)	$	(36,604	)	$	(17,520	)

 

Effective tax rates differ from federal statutory income tax rates primarily due to changes in the Company’s valuation allowance, permanent differences and provisions for state and local income taxes. As of September 30, 2010, the Company had a net deferred income tax asset of $6 related to Badger’s state net operating losses which the Company reasonably expects to monetize in the near future. During the three months ended September 30, 2010, the Company recorded a benefit for income taxes of $513 compared to a benefit for income taxes of $116 during the three months ended September 30, 2009. The increase in income tax benefit during the three months ended September 30, 2010 was primarily attributable to the revised forecast of the current year projected net loss and recent legislative changes which allow for the five year carryback of net operating losses. During the nine months ended September 30, 2010, the Company recorded a benefit for income taxes of $464, compared to a benefit for income taxes of $389 during the nine months ended September 30, 2009. The increase in income tax benefit during the nine months ended September 30, 2010 related to the revised forecast of the current year projected net loss and recent legislative changes which allow for the five year carryback of net operating losses.

 

NOTE 12 — SHARE-BASED COMPENSATION

 

Overview of Share-Based Compensation Plan

 

The Company grants incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “EIP”), which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June 2008. The EIP was subsequently amended in August 2008 by the Company’s Board of Directors to include certain non-material amendments to clarify the terms and conditions of restricted stock awards and to provide that the administrator of the EIP has the authority to authorize future amendments to the EIP. The EIP was further amended by the Company’s stockholders in June 2009 to increase the number of shares of common stock authorized for issuance under the EIP. As amended, the EIP reserves

 

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5,500,000 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates will depend to a large degree. As of September 30, 2010, the Company had reserved 908,032 shares for the exercise of stock options outstanding, 554,468 shares for restricted stock unit awards outstanding and 3,693,723 additional shares for future stock awards under the EIP. As of September 30, 2010, 343,777 shares of common stock reserved for stock options and restricted stock unit awards under the EIP have been issued in the form of common stock.

 

Stock Options.    The exercise price of stock options granted under the EIP is equal to the closing price of the Company’s common stock on the date of grant. Stock options generally become exercisable on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. Additionally, stock options expire ten years after the date of grant. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to unvested stock option awards.

 

Restricted Stock Units.    The granting of restricted stock units is provided for under the EIP. Restricted stock units generally vest on the anniversary of the grant date, with vesting terms that range from immediate vesting to five years from the date of grant. The fair value of each unit granted is equal to the closing price of the Company’s common stock on the date of grant and is expensed ratably over the vesting term of the restricted stock award. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to any unvested portion of the restricted stock units.

 

The following table summarizes stock option activity during the nine months ended September 30, 2010 under the EIP as follows:

 

		Options		Weighted Average  Exercise Price
Outstanding as of December 31, 2009		1,402,163		$	11.08
Granted		244,828		$	5.34
Exercised		—		$	—
Forfeited		(647,766	)	$	9.37
Expired		(91,193	)	$	15.64
Outstanding as of September 30, 2010		908,032		$	10.29
Exercisable as of September 30, 2010		403,804		$	10.44

 

The following table summarizes restricted stock unit activity during the nine months ended September 30, 2010 under the EIP as follows:

 

		Number of Units		Weighted Average  Grant-Date Fair Value  Per Unit
Outstanding as of December 31, 2009		279,151		$	8.76
Granted		529,373		$	3.57
Vested		(129,485	)	$	5.20
Forfeited		(124,571	)	$	7.20
Outstanding as of September 30, 2010		554,468		$	4.99

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the expected life of the awards and actual and projected stock option exercise behavior. The weighted average fair value per share of stock option awards granted during the nine months ended September 30, 2010

 

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