BROADWIND, INC. - Quarter Report: 2011 June (Form 10-Q)

Table of Contents

 

 

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 June 30, 2011

 

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 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.:

 

 

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 July 28, 2011: 107,305,444.

 

 

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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	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Removed and Reserved	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27

 

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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)

 

		June 30,			December 31,
		2011			2010
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	10,204		$	15,331
Short-term investments		103			—
Restricted cash		170			170
Accounts receivable, net of allowance for doubtful accounts of $829 and $489 as of June 30, 2011 and December 31, 2010, respectively		27,240			21,427
Inventories, net		22,443			17,739
Prepaid expenses and other current assets		3,510			3,476
Assets held for sale		—			6,847
Total current assets		63,670			64,990
Property and equipment, net		102,421			106,317
Intangible assets, net		9,643			10,073
Other assets		1,111			2,126
TOTAL ASSETS		$	176,845		$	183,506
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Lines of credit and notes payable		$	1,463		$	140
Current maturities of long-term debt		1,455			1,437
Current portions of capital lease obligations		1,012			966
Accounts payable		18,383			22,342
Accrued liabilities		6,050			6,515
Customer deposits		21,038			8,881
Liabilities held for sale		—			4,221
Total current liabilities		49,401			44,502
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		7,664			9,671
Long-term capital lease obligations, net of current portions		1,332			1,802
Other		1,049			1,335
Total long-term liabilities		10,045			12,808
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; 107,173,576 and 107,112,817 shares issued and outstanding as of June 30, 2011 and December 31, 2010, respectively		107			107
Additional paid-in capital		357,386			356,545
Accumulated deficit		(240,094		)	(230,456		)
Total stockholders’ equity		117,399			126,196
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	176,845		$	183,506

 

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 June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
Revenues		$	39,332		$	33,580		$	82,862		$	55,323
Cost of sales		36,400			33,366			77,351			58,605
Gross profit (loss)		2,932			214			5,511			(3,282		)
OPERATING EXPENSES:
Selling, general and administrative		7,028			6,996			13,365			14,712
Impairment charges		—			4,561			—			4,561
Intangible amortization		215			855			430			1,709
Total operating expenses		7,243			12,412			13,795			20,982
Operating loss		(4,311		)	(12,198		)	(8,284		)	(24,264		)
OTHER (EXPENSE) INCOME, net:
Interest expense, net		(296		)	(280		)	(569		)	(562		)
Other, net		222			(396		)	432			(267		)
Total other (expense) income, net		(74		)	(676		)	(137		)	(829		)
Net loss from continuing operations before provision for income taxes		(4,385		)	(12,874		)	(8,421		)	(25,093		)
Provision for income taxes		16			326			33			98
LOSS FROM CONTINUING OPERATIONS		(4,401		)	(13,200		)	(8,454		)	(25,191		)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX		(57		)	(981		)	(1,184		)	(3,114		)
NET LOSS		$	(4,458	)	$	(14,181	)	$	(9,638	)	$	(28,305	)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Loss from continuing operations		$	(0.04	)	$	(0.12	)	$	(0.08	)	$	(0.24	)
Loss from discontinued operations		(0.00		)	(0.01		)	(0.01		)	(0.03		)
Net loss		$	(0.04	)	$	(0.13	)	$	(0.09	)	$	(0.27	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted		107,153			106,782			107,131			105,571

 

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)

 

		Six Months Ended June 30,
		2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(9,638	)	$	(28,305	)
Loss from discontinued operations		1,184			3,114
Loss from continuing operations		(8,454		)	(25,191		)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization expense		7,263			8,359
Impairment charges		—			4,561
Change in fair value of interest rate swap agreements		—			(253		)
Deferred income taxes		—			(580		)
Stock-based compensation		830			1,069
Loss on disposal of assets		139			75
Changes in operating assets and liabilities:
Accounts receivable		(5,813		)	11
Inventories		(4,704		)	(3,441		)
Prepaid expenses and other current assets		645			1,618
Accounts payable		(3,959		)	801
Accrued liabilities		(438		)	(2,067		)
Customer deposits		12,156			(5,761		)
Other non-current assets and liabilities		319			1,028
Net cash used in operating activities of continued operations		(2,016		)	(19,771		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of logistics business		761			—
Purchases of available for sale securities		(103		)	(1,683		)
Purchases of property and equipment		(2,850		)	(3,922		)
Proceeds from disposals of property and equipment		404			9
Decrease in restricted cash		—			2,010
Net cash used in investing activities of continued operations		(1,788		)	(3,586		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock		—			53,341
Common stock issued under defined contribution 401(k) plan		150			341
Payments on lines of credit and notes payable		(709		)	(20,461		)
Proceeds from lines of credit and notes payable		43
Principal payments on capital leases		(425		)	(431		)
Net cash (used in) provided by financing activities of continued operations		(941		)	32,790
DISCONTINUED OPERATIONS:
Operating cash flows		(829		)	(1,941		)
Investing cash flows		—			(31		)
Financing cash flows		(83		)	(711		)
Net cash used in discontinued operations		(912		)	(2,683		)
Add: Cash balance of discontinued operations, beginning of period		530			127
Less: Cash balance of discontinued operations, end of period		—			190
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(5,127		)	6,687
CASH AND CASH EQUIVALENTS, beginning of the period		15,331			4,701
CASH AND CASH EQUIVALENTS, end of the period		$	10,204		$	11,388
Supplemental cash flow information:
Interest paid, net of capitalized interest		$	457		$	568
Income taxes paid		$	34		$	38
Non-cash investing and financing activities:
Issuance of restricted stock grants		$	365		$	463
Common stock issued under defined contribution 401(k) plan		$	150		$	341

 

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 six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2011. The December 31, 2010 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, 2010.

 

The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

There have been no material changes in the Company’s significant accounting policies during the six months ended June 30, 2011 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

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 provides technologically advanced high-value products and services to energy, mining and infrastructure sector customers, primarily in the United States. The Company’s most significant presence is within the United States wind industry, where the Company believes it is the only independent company that offers its breadth of products and services to the market. 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 component and service offerings. Outside of the wind market, the Company provides precision gearing and specialty weldments to industrial customers, particularly in the energy, mining and infrastructure sectors.

 

Liquidity

 

The Company has a limited history of operations and has incurred operating losses since inception. The Company anticipates that current cash resources and cash to be generated from operations over the next twelve months will be adequate to meet the Company’s liquidity needs for at least the next twelve months. As discussed further in Note 8, “Debt and Credit Agreements” of these consolidated financial statements, the Company is obligated to make principal payments on outstanding debt totaling $2,918 during the next twelve months, and is obligated to make purchases of $1,021 under purchase commitments described in Note 15, “Commitments and Contingencies” of these consolidated financial statements. If sales and subsequent collections from several of the Company’s large customers, as well as revenues generated from new customer orders, are not materially consistent with management’s expectations, the Company may encounter cash flow and liquidity issues. Additional funding may not be available when needed or on terms acceptable to the Company, which could affect its overall operations. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, will likely require financial covenants or other restrictions on the Company. While the Company believes that it will continue to have sufficient cash flows to operate its businesses and meet its financial debt covenants, there can be no assurances that its operations will generate sufficient cash or that credit facilities will be available in an amount sufficient to enable it to pay its indebtedness or to fund its other liquidity needs.

 

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NOTE 2 — EARNINGS PER SHARE

 

The following table presents a reconciliation of basic and diluted earnings per share for the three and six months ended June 30, 2011 and 2010, as follows:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Basic earnings per share calculation:
Net loss to common stockholders		$	(4,458	)	$	(14,181	)	$	(9,638	)	$	(28,305	)
Weighted average number of common shares outstanding		107,153,229			106,782,014			107,130,775			105,571,347
Basic net loss per share		$	(0.04	)	$	(0.13	)	$	(0.09	)	$	(0.27	)
Diluted earnings per share calculation:
Net loss to common stockholders		$	(4,458	)	$	(14,181	)	$	(9,638	)	$	(28,305	)
Weighted average number of common shares outstanding		107,153,229			106,782,014			107,130,775			105,571,347
Common stock equivalents:
Stock options and unvested restricted stock units (1)		—			—			—			—
Weighted average number of common shares outstanding		107,153,229			106,782,014			107,130,775			105,571,347
Diluted net loss per share		$	(0.04	)	$	(0.13	)	$	(0.09	)	$	(0.27	)

 

(1)          Stock options and unvested restricted stock units granted and outstanding of 2,380,438 and 1,694,136 as of June 30, 2011 and 2010, 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 — DISCONTINUED OPERATIONS

 

In March 2011, the Company completed the sale of its logistics business, through the sale of its wholly owned subsidiary Badger Transport, Inc. (“Badger”) to BTI Logistics, LLC (“BTI Logistics”). Proceeds from the sale included approximately $800 in cash, a $1,500 secured promissory note payable in quarterly installments of $125 beginning September 30, 2011 and 100,000 shares of Broadwind common stock held by the buyer. The purchase price is subject to final working capital adjustments and certain contingencies and indemnifications. In addition, BTI Logistics assumed approximately $2,600 of debt and capital leases, plus approximately $1,600 of operating lease obligations.

 

Results of operations for Badger, which are reflected as discontinued operations in the Company’s consolidated statements of income for the three and six months ended June 30, 2011 and 2010, were as follows:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2011			2010			2011			2010
Revenues		$	—		$	3,049		$	435		$	3,476
Loss before benefit for income taxes		(57		)	(1,379		)	(1,182		)	(3,162		)
Income tax provision (benefit)		—			(398		)	2			(48		)
Loss from discontinued operations		$	(57	)	$	(981	)	$	(1,184	)	$	(3,114	)

 

NOTE 4 — 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 June 30, 2011 and December 31, 2010, cash and cash equivalents totaled $10,204 and $15,331, respectively. These amounts consisted of cash balances and investments in municipal bonds with original maturities of three months or less.

 

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As of June 30, 2011, the Company had $103 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 June 30, 2011. As of June 30, 2011, the Company also had $170 in restricted cash related to certain vendor agreements.

 

Cash and cash equivalents and short-term investments consisted of the following as of June 30, 2011 and December 31, 2010:

 

		June 30, 2011
					Gross Unrealized
		Cost			Gain			(Loss)			Fair Value
Cash and cash equivalents:
Cash		$	2,084		$	—		$	—		$	2,084
Certificates of deposits		702			—			—			702
Municipal bonds		7,418			—			—			7,418
Total cash and cash equivalents		10,204			—			—			10,204
Short-term investments (available-for-sale):
Municipal bonds		103			—			—			103
Total cash and cash equivalents and short-term investments		$	10,307		$	—		$	—		$	10,307

 

		December 31, 2010
					Gross Unrealized
		Cost			Gain			(Loss)			Fair Value
Cash and cash equivalents:
Cash		$	12,816		$	—		$	—		$	12,816
Municipal bonds		2,515			—			—			2,515
Total cash and cash equivalents		$	15,331		$	—		$	—		$	15,331

 

NOTE 5 — INVENTORIES

 

The components of inventories as of June 30, 2011 and December 31, 2010 are summarized as follows:

 

		June 30,			December 31,
		2011			2010
Raw materials		$	13,277		$	9,359
Work-in-process		7,375			5,869
Finished goods		2,942			3,481
		23,594			18,709
Less: Reserve for excess and obsolete inventory		(1,151		)	(970		)
Net inventories		$	22,443		$	17,739

 

NOTE 6 — INTANGIBLE ASSETS

 

Intangible assets represent the fair value assigned to definite-lived assets such as trade names and customer relationships 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 8 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. During the second quarter of 2011, the Company identified triggering events associated with the Company’s current period operating loss combined with its history of continued operating losses. As a result, the Company evaluated the recoverability of certain of its identifiable intangible assets. Based upon the Company’s assessment, no additional impairment to these assets was identified as of June 30, 2011.

 

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As of June 30, 2011 and December 31, 2010, the cost basis, accumulated amortization, impairment charge and net book value of intangible assets were as follows:

 

		June 30, 2011												December 31, 2010
											Net												Net
		Cost			Accumulated			Impairment			Book			Cost			Accumulated			Impairment			Book
		Basis			Amortization			Charge			Value			Basis			Amortization			Charge			Value
Intangible assets:
Customer relationships		$	3,979		$	(854	)	$	—		$	3,125		$	28,679		$	(7,529	)	$	(17,796	)	$	3,354
Trade names		7,999			(1,481		)	—			6,518			9,789			(1,530		)	(1,540		)	6,719
Intangible assets		$	11,978		$	(2,335	)	$	—		$	9,643		$	38,468		$	(9,059	)	$	(19,336	)	$	10,073

 

As of June 30, 2011, estimated future amortization expense is as follows:

 

2011		$	429
2012		859
2013		859
2014		859
2015		859
2016 and thereafter		5,778
Total		$	9,643

 

NOTE 7 — ACCRUED LIABILITIES

 

Accrued liabilities as of June 30, 2011 and December 31, 2010 consisted of the following:

 

		June 30,			December 31,
		2011			2010
Accrued payroll and benefits		$	2,471		$	2,845
Accrued property taxes		320			387
Income taxes payable		386			401
Accrued professional fees		1,036			211
Accrued warranty liability		897			1,071
Accrued environmental reserve		—			675
Accrued other		940			925
Total accrued liabilities		$	6,050		$	6,515

 

NOTE 8 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of June 30, 2011 and December 31, 2010 consisted of the following:

 

		June 30,			December 31,
		2011			2010
Term loans and notes payable		$	10,582		$	11,248
Less: Current maturities		(2,918		)	(1,577		)
Long-term debt, net of current maturities		$	7,664		$	9,671

 

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Credit Facilities

 

Broadwind Towers

 

Investors Community Bank Notes

 

On April 7, 2008, the Company’s wholly owned subsidiary R.B.A. Inc. (“RBA”) executed four (4) promissory notes (the “ICB Notes”) with Investors Community Bank (“ICB”) 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 the London Interbank Offered Rate (“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 the Company’s wholly owned subsidiary Broadwind Towers, Inc. (f/k/a Tower Tech Systems Inc.) (“Broadwind Towers”) on December 31, 2009, Broadwind Towers became the successor by merger to RBA’s interest in the loans from ICB to RBA evidenced by the ICB Notes (other than the Line of Credit Note, which was repaid in full in January 2010). Pursuant to a Master Amendment dated as of December 30, 2009 among ICB, Broadwind Towers and the Company (as guarantor) (the “Master Amendment”), Broadwind Towers agreed to maintain a minimum debt service coverage ratio, in addition to certain other requirements. The Master Amendment was amended as of December 30, 2010, (i) to delete the requirements that Broadwind Towers maintain a collateral account as security for the obligations under the ICB Notes and that no additional loans or leases would be entered into by Broadwind Towers without the prior approval of ICB, and (ii) to replace the requirement that Broadwind Towers maintain its primary deposit accounts with ICB with the requirement that Broadwind Towers maintain with ICB a depository relationship of not less than $700. The Master Amendment was further amended as of May 31, 2011, to delete the covenant related to loans from affiliates and intercompany loan balances. As of June 30, 2011, (i) the total amount of outstanding indebtedness under the remaining ICB Notes was $1,238, (ii) the effective per annum interest rate under the remaining ICB Notes was 5.78%, and (iii) Broadwind Towers was in compliance with all covenants under its credit facilities with ICB.

 

Great Western Bank Loan

 

On April 28, 2009, Broadwind Towers entered into a Construction Loan Agreement with Great Western Bank (“GWB”), pursuant to which GWB agreed to provide up to $10,000 in financing (the “Construction Loan”) to fund construction of Broadwind Towers’ wind tower manufacturing facility in Brandon, South Dakota (the “Facility”). Pursuant to a Change in Terms Agreement dated April 5, 2010 between GWB and Broadwind Towers, 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%. Broadwind Towers 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 Broadwind Towers and GWB, and by a Commercial Guaranty from the Company. In addition, the Company has agreed to subordinate all intercompany debt with Broadwind Towers 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 June 30, 2011, the total outstanding indebtedness under the Great Western Term Loan was $5,333.

 

Wells Fargo Asset Purchase Agreements

 

On September 29, 2010, the Company’s domestic subsidiaries (the “Subsidiaries”) entered into account purchase agreements (the “AP Agreements”) with Wells Fargo Business Credit, a division of Wells Fargo Bank, N.A. (“Wells Fargo”). Under the AP Agreements, when requested by the Company, Wells Fargo will advance funds against certain receivables arising from sales of the Subsidiaries’ products and services. In connection with the entry into the AP Agreements, the Company and each Subsidiary 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.

 

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Under the terms of the AP Agreements, when requested by the Company, 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 that date, an early termination fee of up to 3% of the aggregate facility limit may apply. At June 30, 2011, 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.

 

In connection with the sale of Badger to BTI Logistics on March 4, 2011, the AP Agreement between Badger and Wells Fargo and the guaranty provided by Badger to Wells Fargo with respect to the other AP Agreements were each terminated, pursuant to an Omnibus Amendment to Account Purchase Agreements and Guaranties dated as of March 4, 2011, by and among the Company, the Subsidiaries and Wells Fargo.

 

Selling Shareholder Notes

 

On May 26, 2009, the Company entered into a settlement agreement (the “Settlement Agreement”) with the former owners of the Company’s wholly-owned subsidiary Brad Foote Gear Works, Inc. (“Brad Foote”), including J. Cameron Drecoll, who served as the Company’s Chief Executive Officer and a member of its Board of Directors until December 1, 2010. The Settlement Agreement 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 former owners in the aggregate principal amount of $3,000 (the “Selling Shareholder Notes”). The Selling Shareholder Notes issued to the former owners other than Mr. Drecoll 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 pursuant to the terms of the Settlement Agreement (the “Drecoll Note”) also was originally scheduled to mature on May 28, 2012 and bore interest at a rate of 7% per annum, with interest payments due quarterly; however, effective as of July 1, 2011, the Drecoll Note was amended and restated to effect the following modifications:  (i) the maturity date was changed to January 10, 2014; (ii) the interest rate was changed to 9% per annum; and (iii) the payment schedule was changed to quarterly payments of principal and interest, such that the Drecoll Note is now self-amortizing. The Company agreed to pay Mr. Drecoll a restructuring fee in the amount of $10 in connection with the restructuring of the Drecoll Note. As of June 30, 2011, principal of $3,000 and accrued interest of $52 were outstanding under the Selling Shareholder Notes.

 

NOTE 9 — 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. Financial instruments are assessed quarterly to determine the appropriate classification within the fair value hierarchy. Transfers between fair value classifications are made based upon the nature and type of the observable inputs. 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, accounts payable 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 June 30, 2011, the Company held short-term investments in municipal bonds, which are required to be measured at fair value. The fair market value of these assets is recorded as short-term investments in the Company’s consolidated balance sheets.

 

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The corresponding gain or loss is immaterial and is recognized as other income (expense) in the Company’s consolidated statements of operations. There were no short-term investments at December, 31, 2010. The following table presents the Company’s fair value measurements valued on a consistent basis as of June 30, 2011:

 

		Level 1			Level 2			Level 3			Total
Municipal bonds		$	103		$	—		$	—		$	103
Total		$	103		$	—		$	—		$	103

 

Assets measured at fair value on a nonrecurring basis

 

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 a market-based approach based on the Company’s market capitalization, and other subjective assumptions. During the second quarter of 2011, the Company identified triggering events associated with the Company’s current period operating loss combined with its history of continued operating losses. As a result, the Company evaluated the recoverability of certain of its identifiable intangible assets and certain property and equipment assets. Based upon the Company’s assessment, no additional impairment to these assets was identified as of June 30, 2011.

 

NOTE 10 — INCOME TAXES

 

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 June 30, 2011, the Company had no net deferred income taxes due to the full recorded valuation allowance. During the three months ended June 30, 2011, the Company recorded a provision for income taxes of $16 from continuing operations compared to a provision for income taxes of $326 from continuing operations during the three months ended June 30, 2010. The decrease in income tax provision during the three months ended June 30, 2011 was primarily attributable to the reforecast of full year projected income that occurred in the second quarter of 2010 which reduced the tax benefits the Company previously expected to recognize and the accrual of deferred income tax liabilities associated with indefinite-lived assets in 2010.  During the six months ended June 30, 2011, the Company recorded a provision for income taxes of $33 from continuing operations compared to a provision for income taxes of $98 from continuing operations during the six months ended June 30, 2010. The decrease in income tax provision during the six months ended June 30, 2011 was primarily attributable to the reduction in state taxes based upon minimum payments and gross income as well as the nonexistence of deferred tax liabilities associated with indefinite-lived assets in 2011.

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of June 30, 2011, 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 June 30, 2011.

 

The Company does not anticipate that there will be a material change in the total amount of unrecognized tax benefits within the next 12 months. However, the Company is currently under audit for its federal income tax returns for the periods ended December 31, 2008 and 2009.  The Company believes that it has appropriate support for the positions taken on its tax returns and its annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, may differ significantly from the amounts currently accrued.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2011 and December 31, 2010, the Company had accrued interest or penalties related to uncertain tax positions totaling $17 and $32, respectively.

 

NOTE 11 — 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 has been amended periodically since its original approval. Specifically, the EIP was amended by the Company’s stockholders in June 2009 to increase the number of shares of common stock authorized for issuance under the EIP, and the EIP was further amended in March 2011 by the Company’s Board of Directors to limit share recycling under the EIP, to

 

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include a minimum vesting period for time-vesting restricted stock awards and restricted stock units and to add a clawback provision. As amended, the EIP reserves 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 June 30, 2011, the Company had reserved 1,288,315 shares for the exercise of stock options outstanding, 1,092,123 shares for restricted stock unit awards outstanding and 2,708,716 additional shares for future stock awards under the EIP. As of June 30, 2011, 410,846 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. 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 six months ended June 30, 2011 under the EIP, as follows:

 

		Options		Weighted Average Exercise Price
Outstanding as of December 31, 2010		917,193		$	8.75
Granted		447,255		$	1.36
Exercised		—		$	—
Forfeited		(76,133	)	$	10.92
Expired		—		$	—
Outstanding as of June 30, 2011		1,288,315		$	6.06
Exercisable as of June 30, 2011		284,046		$	11.12

 

The following table summarizes restricted stock unit activity during the six months ended June 30, 2011 under the EIP, as follows:

 

		Number of Units		Weighted Average Grant-Date Fair Value Per Unit
Outstanding as of December 31, 2010		712,902		$	4.09
Granted		511,244		$	1.44
Vested		(62,531	)	$	4.91
Forfeited		(69,492	)	$	5.23
Outstanding as of June 30, 2011		1,092,123		$	2.74

 

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 six months ended June 30, 2011 and 2010, and assumptions used to value the stock options, are as follows:

 

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		Six Months Ended June 30,
		2011			2010
Dividend yield		—			—
Risk-free interest rate		2.6		%	3.1		%
Weighted average volatility		96.1		%	85.0		%
Expected life (in years)		6.3			6.5
Weighted average grant date fair value per share of options granted		$	1.07		$	3.96

 

Dividend yield is zero as the Company currently does not pay a dividend.

 

Risk-free rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life of the award.

 

During the six months ended June 30, 2011 and 2010, the Company utilized a standard volatility assumption of 96.1% and 85.0%, respectively, for estimating the fair value of stock options awarded based on comparable volatility averages for the energy-related sector.

 

The expected life of each stock option award granted is derived using the “simplified method” for estimating the expected term of a “vanilla-option” in accordance with Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” as amended by SAB No. 110, “Share-Based Payment.” The fair value of each unit of restricted stock is equal to the fair market value of the Company’s common stock as of the date of grant.

 

During the six months ended June 30, 2011 and 2010, the Company utilized a forfeiture rate of 25% for estimating the forfeitures of stock options granted.

 

The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the six months ended June 30, 2011 and 2010, as follows:

 

		Six Months Ended June 30,
		2011			2010
Share-based compensation expense:
Selling, general and administrative		$	830		$	1,028
Income tax benefit (1)		—			—
Net effect of share-based compensation expense on net loss		$	830		$	1,028
Reduction in earnings per share:
Basic and diluted earnings per share (2)		$	0.01		$	0.01

 

(1) Income tax benefit is not illustrated because the Company is currently operating at a loss and an actual income tax benefit was not realized for the six months ended June 30, 2011 and 2010. The result of the loss situation creates a timing difference, resulting in a deferred tax asset, which is fully reserved for in the Company’s valuation allowance.

 

(2) Diluted earnings per share for the six months ended June 30, 2011 and 2010 does not include common stock equivalents due to their anti-dilutive nature as a result of the Company’s net losses for these respective periods. Accordingly, basic earnings per share and diluted earnings per share are identical for all periods presented.

 

As of June 30, 2011, the Company estimates that pre-tax compensation expense for all unvested share-based awards, including both stock options and restricted stock units, in the amount of approximately $3,775 will be recognized through the year 2015. The Company expects to satisfy the exercise of stock options and future distribution of shares of restricted stock by issuing new shares of common stock.

 

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NOTE 12 — LEGAL PROCEEDINGS

 

Shareholder Lawsuits

 

On February 11, 2011, a putative class action was filed in the United States District Court for the Northern District of Illinois, Eastern Division, against Broadwind and certain of its current or former officers and directors. The lawsuit is purportedly brought on behalf of purchasers of the Company’s common stock between March 17, 2009 and August 9, 2010. The complaint seeks to allege that the defendants violated Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act by issuing a series of allegedly false and/or misleading statements concerning the Company’s financial results, operations, and prospects, including with respect to the January 2010 secondary public offering of Broadwind common stock. On July 7, 2011, the Court appointed a Lead Plaintiff and Lead Counsel.  The amended complaint is due by August 25, 2011. Between February 15, 2011 and March 30, 2011, three putative shareholder derivative lawsuits were filed in the United States District Court for the Northern District of Illinois, Eastern Division, against certain of the Company’s current and former officers and directors, and certain Tontine entities (Tontine Capital Management, L.L.C., a Delaware limited liability company (“TCM”); Tontine Capital Overseas GP, L.L.C., a Delaware limited liability company (“TCO”); Tontine Management, L.L.C., a Delaware limited liability company (“TM”); Tontine Overseas Associates, L.L.C., a Delaware limited liability company (“TOA”); Tontine Capital Overseas Master Fund II, L.P., a Cayman Islands limited partnership (“TCP 2”); Tontine Asset Associates, L.L.C., a Delaware limited liability company (“TAA”); Tontine Power Partners, L.P., a Delaware limited partnership (“TPP”); and Tontine Associates, L.L.C., a Delaware limited liability company (“TA,” and collectively with TCM, TCO, TM, TOA, TCP 2, TAA and TPP and their affiliates, “Tontine”)), seeking to challenge alleged breaches of fiduciary duty, waste of corporate assets, and unjust enrichment, including in connection with the January 2010 secondary public offering of Broadwind common stock. One of the lawsuits also alleges that certain directors violated Section 14(a) of the Exchange Act in connection with the Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders. Two of the federal derivative lawsuits have been consolidated (the “Mitchell action”) and the other remains separate.  An amended complaint was filed in the Mitchell action on July 21, 2011. Between March 9, 2011 and March 30, 2011, four putative shareholder derivative lawsuits were filed in the Circuit Court of Cook County, Illinois, Chancery Division, against certain of the Company’s current and former officers and directors and Tontine, making substantially the same claims as the federal derivative suits. The state derivative suits have been consolidated and the Company and individual defendants have moved to dismiss the state action as duplicative of the prior-pending federal actions. That motion remains pending. The Company has received a request from the Tontine defendants for indemnification in the derivative suits pursuant to various agreements related to shares owned by Tontine. Because of the preliminary nature of these lawsuits, the Company is not able to estimate a loss or range of loss at this time.

 

Environmental

 

The Company is aware of an investigation commenced by the United States Attorney’s Office, Northern District of Illinois, for potential violation of federal environmental laws. On February 15, 2011, officials from the United States Environmental Protection Agency conducted a search of one of the Company’s facilities in Cicero, Illinois. During the search, officials interviewed a number of the Company’s employees and seized documents relating to the facility’s compliance with certain environmental laws and regulations. Also on February 15, 2011, the Company received two subpoenas requesting production of certain documents relating to the facility’s compliance with certain environmental regulations relating to the generation, discharge and disposal of wastewater from certain of the Company’s processes from 2004 to the present. On February 23, 2011, the Company received a third subpoena requesting production of certain documents relating to certain of the Company’s employees and environmental and manufacturing processes. The Company timely responded to these subpoenas by producing its first installment of documents on March 24, 2011. The Company has produced additional installments of documents in response to these subpoenas, and is continuing to review and produce documents on a rolling basis. The Company does not currently have information as to when the investigation may be concluded, and is also conducting an internal investigation of any possible noncompliance. At this time, the Company has not been formally notified that it is a subject or target of the investigation and no fines or penalties have been suggested. The Company had recorded a liability of $675 at December 31, 2010, which represented the low end of its estimate of remediation-related costs and expenses; as of June 30, 2011 those initial costs have been incurred and no additional remediation related expenses have been accrued. There can be no assurances that the conclusion of the investigation will not result in a determination that the Company has violated applicable laws. If the Company is found to have violated such laws, it could be subject to fines, civil penalties and criminal penalties. Due to the preliminary nature of the investigation, it is reasonably possible that the Company’s estimate of the obligation may change in the near term.

 

The Company is also a party to additional claims and legal proceedings arising in the ordinary course of business. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s results of operations, financial position or liquidity. It is possible that if one or more of the matters described above were decided against the Company, the effects could be material to the Company’s results of operations in the period in which the Company would be required to record or adjust the related liability and could also be material to the Company’s cash flows in the periods in which the Company would be required to pay such liability.

 

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