BROADWIND, INC. - Quarter Report: 2018 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2018

☐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 001-34278

BROADWIND ENERGY, INC.

(Exact name of registrant as specified in its charter)

Delaware		88-0409160
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3240 S. Central Avenue, Cicero, IL 60804

(Address of principal executive offices)

(708) 780-4800

(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 twelve 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 ☒ No ☐

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

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

Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☐ Emerging growth company ☐		Smaller reporting company ☒
(Do not check if a smaller reporting company)

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period to comply with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☐ No ☒

Number of shares of registrant’s common stock, par value $0.001, outstanding as of July 23, 2018: 15,470,708.

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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 Stockholders’ Equity	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	Mine Safety Disclosures	41
Item 5.	Other Information	41
Item 6.	Exhibits	41
Signatures		43

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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share data)


	June 30,		December 31,
	2018		2017

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	76	$	78
Accounts receivable, net of allowance for doubtful accounts of $200 and $225 as of June 30, 2018 and December 31, 2017, respectively		17,901		13,644
Inventories, net		20,730		19,279
Prepaid expenses and other current assets		1,752		1,798
Current assets held for sale		579		580
Total current assets		41,038		35,379
LONG-TERM ASSETS:
Property and equipment, net		52,295		55,693
Goodwill		—		4,993
Other intangible assets, net		15,136		16,078
Other assets		184		207
TOTAL ASSETS	$	108,653	$	112,350
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Line of credit, NMTC and other notes payable	$	18,024	$	14,138
Current maturities of long-term debt		—		114
Current portions of capital lease obligations		780		762
Accounts payable		15,661		11,756
Accrued liabilities		4,718		4,393
Customer deposits		8,652		9,791
Current liabilities held for sale		29		30
Total current liabilities		47,864		40,984
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		1,995		797
Long-term capital lease obligations, net of current portions		546		941
Other		2,303		3,557
Total long-term liabilities		4,844		5,295
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; 30,000,000 shares authorized; 15,744,645 and 15,480,299 shares issued as of June 30, 2018, and December 31, 2017, respectively		16		15
Treasury stock, at cost, 273,937 shares as of June 30, 2018 and December 31, 2017		(1,842)		(1,842)
Additional paid-in capital		380,832		380,005
Accumulated deficit		(323,061)		(312,107)
Total stockholders’ equity		55,945		66,071
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	108,653	$	112,350

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,
	2018		2017		2018		2017
Revenues	$	36,781	$	43,362	$	66,748	$	99,422
Cost of sales		34,442		39,490		64,426		89,176
Restructuring		116		—		231		—
Gross profit		2,223		3,872		2,091		10,246
OPERATING EXPENSES:
Selling, general and administrative		2,495		3,917		6,393		8,337
Impairment charges		4,993		—		4,993		—
Intangible amortization		471		471		942		822
Restructuring		—		—		36		—
Total operating expenses		7,959		4,388		12,364		9,159
Operating (loss) income		(5,736)		(516)		(10,273)		1,087
OTHER (EXPENSE) INCOME, net:
Interest expense, net		(352)		(217)		(650)		(356)
Other, net		(1)		29		(4)		29
Total other expense, net		(353)		(188)		(654)		(327)
Net (loss) income before benefit for income taxes		(6,089)		(704)		(10,927)		760
Benefit for income taxes		(6)		(16)		(33)		(5,034)
(LOSS) INCOME FROM CONTINUING OPERATIONS		(6,083)		(688)		(10,894)		5,794
LOSS FROM DISCONTINUED OPERATIONS		(33)		(92)		(60)		(247)
NET (LOSS) INCOME	$	(6,116)	$	(780)	$	(10,954)	$	5,547
NET (LOSS) INCOME PER COMMON SHARE—BASIC:
(Loss) income from continuing operations	$	(0.40)	$	(0.05)	$	(0.71)	$	0.39
Loss from discontinued operations		0.00		0.00		0.00		(0.02)
Net (loss) income	$	(0.40)	$	(0.05)	$	(0.71)	$	0.37
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC		15,421		15,014		15,339		14,972
NET (LOSS) INCOME PER COMMON SHARE—DILUTED:
(Loss) income from continuing operations	$	(0.40)	$	(0.05)	$	(0.71)	$	0.38
Loss from discontinued operations		0.00		0.00		0.00		(0.02)
Net (loss) income	$	(0.40)	$	(0.05)	$	(0.71)	$	0.36
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED		15,421		15,014		15,339		15,322

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 STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share data)


	Common Stock			Treasury Stock			Additional
	Shares	Issued			Issued		Paid-in		Accumulated
	Issued	Amount		Shares	Amount		Capital		Deficit		Total
BALANCE, December 31, 2016	15,175,767	$	15	(273,937)	$	(1,842)	$	378,876	$	(308,466)	$	68,583
Stock issued for restricted stock	190,482		—	—		—		—		—		—
Stock issued under defined contribution 401(k) retirement savings plan	114,050		—	—		—		316		—		316
Share-based compensation	—		—	—		—		813		—		813
Net loss	—		—	—		—		—		(3,641)		(3,641)
BALANCE, December 31, 2017	15,480,299	$	15	(273,937)	$	(1,842)	$	380,005	$	(312,107)	$	66,071
Stock issued for restricted stock	115,403		1	—		—		—		—		1
Stock issued under defined contribution 401(k) retirement savings plan	148,943		—	—		—		338		—		338
Share-based compensation	—		—	—		—		489		—		489
Net loss	—		—	—		—		—		(10,954)		(10,954)
BALANCE, June 30, 2018	15,744,645	$	16	(273,937)	$	(1,842)	$	380,832	$	(323,061)	$	55,945

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,
	2018		2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(10,954)	$	5,547
Loss from discontinued operations		(60)		(247)
(Loss) income from continuing operations		(10,894)		5,794
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization expense		4,706		4,304
Deferred income taxes		(42)		(5,034)
Impairment charges		4,993		—
Stock-based compensation		489		462
Allowance for doubtful accounts		(25)		5
Common stock issued under defined contribution 401(k) plan		338		—
Gain on disposal of assets		—		(12)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable		(4,232)		(6,846)
Inventories		(1,003)		4,586
Prepaid expenses and other current assets		49		829
Accounts payable		4,823		(2,609)
Accrued liabilities		325		(3,177)
Customer deposits		(1,141)		(12,833)
Other non-current assets and liabilities		(1,179)		28
Net cash used in operating activities of continuing operations		(2,793)		(14,503)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in acquisition		—		(16,449)
Sales of available for sale securities		—		2,221
Maturities of available for sale securities		—		950
Purchases of property and equipment		(1,676)		(4,304)
Proceeds from disposals of property and equipment		—		67
Net cash used in investing activities of continuing operations		(1,676)		(17,515)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit		66,985		96,565
Payments on line of credit		(63,200)		(82,852)
Proceeds from long-term debt		1,410		—
Payments on long-term debt		(313)		—
Principal payments on capital leases		(377)		(317)
Net cash provided by financing activities of continuing operations		4,505		13,396
DISCONTINUED OPERATIONS:
Operating cash flows		(38)		64
Net cash (used in) provided by discontinued operations		(38)		64
Add: Cash balance of discontinued operations, beginning of period		—		2
NET DECREASE IN CASH AND CASH EQUIVALENTS		(2)		(18,556)
CASH AND CASH EQUIVALENTS beginning of the period		78		18,738
CASH AND CASH EQUIVALENTS end of the period	$	76	$	182
Supplemental cash flow information:
Interest paid	$	537	$	217
Income taxes paid	$	84	$	22
Non-cash activities:
Issuance of restricted stock grants	$	489	$	462
Contingent consideration related to business acquisition	$	—	$	2,534
Red Wolf acquisition:
Assets acquired	$	—	$	26,491
Liabilities assumed	$	—	$	7,508

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 unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. (the “Company”) and its wholly-owned subsidiaries Broadwind Towers, Inc. (“Broadwind Towers”), Brad Foote Gear Works, Inc. (“Brad Foote”), and Red Wolf Company, LLC (“Red Wolf”). All intercompany transactions and balances have been eliminated.

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, 2018 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2018. The December 31, 2017 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

In February 2017, the Company acquired Red Wolf and formed the Process Systems segment. Consequently, the Company revised its segment presentation to include three reportable operating segments: Towers and Heavy Fabrications, Gearing and Process Systems. All current results have been presented to reflect this change. See Note 14, “Segment Reporting” of these condensed consolidated financial statements for further discussion of reportable segments.

There have been no material changes other than the adoption of Accounting Standards Updates (“ASU”) 2014-09 and 2015-14 described in Note 2 “Revenues” of these condensed consolidated financial statements, and ASU 2017-04 described in Note 13 “Recent Accounting Pronouncements” of these condensed consolidated financial statements in the Company’s significant accounting policies during the six months ended June 30, 2018 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Company Description

Through its subsidiaries, the Company provides technologically advanced high-value products to energy, mining and infrastructure sector customers, primarily in the United States of America (the “U.S.”). The Company’s most significant presence is within the U.S. wind energy industry, which accounted for 57% of the Company’s revenue during the first six months of 2018.

The Company has diversified its operations to provide precision gearing, specialty fabrications, kitting and assemblies of industrial systems to a broad range of industrial customers for oil and gas (“O&G”), mining, steel, and other industrial applications.

Please refer to Note 18, “Restructuring” of these condensed consolidated financial statements for the discussion of the restructuring plan which the Company initiated in the first quarter of 2018. The Company has incurred a total of approximately $267 of net costs in the first six months of 2018 to implement this restructuring plan.

Liquidity

The Company meets its short term liquidity needs through cash generated from operations, its available cash balances, the Credit Facility (as defined below), additional equipment financing, and access to the public or private debt equity markets, including the option to raise capital under the Company’s Form S-3 (as discussed below).

See Note 8, “Debt and Credit Agreements” of these condensed consolidated financial statements for a complete description of the Credit Facility and the Company’s other debt.

Total debt and capital lease obligations at June 30, 2018 totaled $21,345, which includes current outstanding debt and capital leases totaling $18,804. The current outstanding debt includes $14,516 outstanding under the Company’s revolving line of credit and $2,600 related to the New Markets Tax Credit Transaction (the “NMTC Transaction”). See Note 16 “New Markets Tax Credit Transaction” of these condensed consolidated financial statements for a complete description of the NMTC Transaction.

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On August 11, 2017, the Company filed a “shelf” registration statement on Form S-3, which was declared effective by the Securities and Exchange Commission (the “SEC”) on October 10, 2017. This shelf registration statement, which includes a base prospectus, allows the Company at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in the prospectus supplement accompanying the base prospectus, the Company would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes.

The Company anticipates that current cash resources, amounts available under the Credit Facility, cash to be generated from operations, and any potential proceeds from the sale of Company securities under the Form S-3 will be adequate to meet the Company’s liquidity needs for at least the next twelve months. If assumptions regarding the Company’s production, sales and subsequent collections from certain of the Company’s large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, the Company may in the future encounter cash flow and liquidity issues. If the Company’s operational performance deteriorates significantly, it may be unable to comply with existing financial covenants, and could lose access to the Credit Facility. This could limit the Company’s operational flexibility, require a delay in making planned investments and/or require the Company to seek additional equity or debt financing. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other restrictions on the Company. While the Company believes that it will continue to have sufficient cash available to operate its businesses and to meet its financial obligations and 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 the Company to meet these financial obligations.

Management’s Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reported period. Significant estimates, among others, include revenue recognition, future tax rates, future cash flows, inventory reserves, warranty reserves, impairment of long-lived assets, allowance for doubtful accounts, workers’ compensation reserves, and health insurance reserves. Although these estimates are based upon management’s best knowledge of current events and actions that the Company may undertake in the future, actual results could differ from these estimates.

NOTE 2 — REVENUES

On January 1, 2018, the Company adopted ASU 2014-09 and 2015-14, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606 while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. Based on the Company’s contract evaluation, the Company determined there was no need to record any changes to the opening retained earnings due to the impact of adopting Topic 606. The adoption of Topic 606 did not have a material impact on the Company’s condensed consolidated financial statements.

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The following table presents the Company’s revenues disaggregated by revenue source for the three and six months ended June 30, 2018 and 2017:


		Three Months Ended June 30,				Six Months Ended June 30,
		2018		2017 (1)		2018		2017 (1)
Towers and Heavy Fabrications	$	24,024	$	34,327	$	40,808	$	83,222
Process Systems		4,148		2,964		8,525		6,258
Gearing		8,632		6,071		17,438		9,942
Eliminations		(23)		-		(23)		-
Consolidated	$	36,781	$	43,362	$	66,748	$	99,422

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⁽¹⁾

As noted above, prior period amounts have not been adjusted under the modified retrospective method.

Revenue within the Company’s Gearing and Process Systems segments is recognized at a point in time, typically when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The Company measures revenue based on the consideration specified in the purchase order and revenue is recognized when the performance obligations are satisfied. If applicable, the transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.

In most instances within the Company’s Towers and Heavy Fabrications segment, products are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition. The Company recognizes revenue under these arrangements only when the buyer requests the arrangement, the ordered goods are segregated from inventory and not available to fill other orders, the goods must be currently ready for physical transfer to the customer, and the Company cannot have the ability to use the product or to direct it to another customer. Assuming these required revenue recognition criteria are met, revenue is recognized upon completion of product manufacture and customer acceptance.

The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses. Customer deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in the Company’s statement of operations.

The Company does not disclose the value of the unsatisfied performance obligations for contracts with an original expected length of one year or less.

NOTE 3 — 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, 2018 and 2017, as follows:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2018		2017		2018		2017
Basic earnings per share calculation:
Net (loss) income	$	(6,116)	$	(780)	$	(10,954)	$	5,547
Weighted average number of common shares outstanding		15,420,704		15,013,768		15,339,420		14,971,796
Basic net (loss) income per share	$	(0.40)	$	(0.05)	$	(0.71)	$	0.37
Diluted earnings per share calculation:
Net (loss) income	$	(6,116)	$	(780)	$	(10,954)	$	5,547
Weighted average number of common shares outstanding		15,420,704		15,013,768		15,339,420		14,971,796
Common stock equivalents:
Stock options and non-vested stock awards (1)		—		—		—		350,305
Weighted average number of common shares outstanding		15,420,704		15,013,768		15,339,420		15,322,101
Diluted net (loss) income per share	$	(0.40)	$	(0.05)	$	(0.71)	$	0.36

(1)

Stock options and restricted stock units granted and outstanding of 942,378 as of June 30, 2018 are excluded from the computation of diluted earnings due to the anti dilutive effect as a result of the Company’s net loss for the six months ended June 30, 2018.

NOTE 4 — DISCONTINUED OPERATIONS

The Company’s former Services segment had substantial continued operating losses for several years, due to operating issues and an increasingly competitive environment due in part to increased in-sourcing of service functions by customers. In July 2015, the Company’s Board of Directors (the “Board”) directed management to evaluate potential strategic alternatives with respect to the Services segment. In September 2015, the Board authorized management to sell substantially all of the assets of the Services segment to one or more third-party purchasers, and thereafter to liquidate or otherwise dispose of any such assets remaining unsold. The divestiture was substantially completed in December 2015.

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Results of Discontinued Operations

Results of operations for the Services segment, which are reflected as discontinued operations in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017, were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Revenues	$	—	$	60	$	1	$	128
Cost of sales		(32)		(91)		(58)		(156)
Selling, general and administrative		(1)		(51)		(3)		(58)
Impairment of held for sale assets and liabilities and gain on sale of assets		—		(10)		—		(161)
Loss from discontinued operations	$	(33)	$	(92)	$	(60)	$	(247)

Assets and Liabilities Held for Sale

Services assets and liabilities classified as held for sale in the Company’s condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017 include the following:


	June 30,		December 31,
	2018		2017
Assets:
Accounts receivable, net	$	10	$	11
Inventories, net		9		9
Total Assets Held For Sale Related To Discontinued Operations	$	19	$	20
Liabilities:
Accrued liabilities	$	27	$	27
Customer deposits and other current obligations		2		3
Total Liabilities Held For Sale Related To Discontinued Operations	$	29	$	30

NOTE 5 — INVENTORIES

The components of inventories as of June 30, 2018 and December 31, 2017 are summarized as follows:


	June 30,		December 31,
	2018		2017
Raw materials	$	12,985	$	11,945
Work-in-process		6,611		6,305
Finished goods		3,789		3,538
		23,385		21,788
Less: Reserve for excess and obsolete inventory		(2,655)		(2,509)
Net inventories	$	20,730	$	19,279

NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities. Goodwill is not amortized but is tested at least annually for impairment or more frequently whenever events or circumstances occur indicating that those assets might be impaired. The Company added $4,993 of goodwill as a result of the Red Wolf acquisition, which was included in the Process Systems segment. See Note 14, “Segment Reporting” of these condensed consolidated financial statements for further discussion of the Company’s segments.

During the second quarter of 2018, the Company identified triggering events associated with the release of Red Wolf’s final earn-out reserve, Red Wolf’s recent operating results, a reduction in their major customer’s performance and the delay of new initiatives being implemented. As a result, the Company evaluated the recoverability of the Red Wolf asset group. In accordance with GAAP, the Company compared the carrying value of the Red Wolf asset group to the forecast undiscounted cash flows associated with this asset group. Based on the analysis performed, the forecast undiscounted cash flows exceeded the carrying value and no impairment of this group was indicated or recorded.

The Company next assessed the fair value by comparing the carrying value of the Red Wolf reporting unit to the fair value of the Red Wolf reporting unit. The fair value was determined using significant unobservable inputs, or level 3 in the fair

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value hierarchy. The two main assumptions utilized in the forecast discounted cash flow analysis were the cash flows from operations and the weighted average cost of capital of 18.6%. Based on the analysis performed, the Company determined that the carrying amount of the reporting unit exceeded the fair value and recorded a $4,993 impairment charge in the second quarter. The Company utilized a third-party appraisal to validate the results of the analysis.

Other intangible assets represent the fair value assigned to definite-lived assets such as trade names and customer relationships as part of the Company’s acquisition of Brad Foote completed in 2007 as well as the noncompetition agreements, trade names and customer relationships that were part of the Company’s acquisition of Red Wolf in 2017. See Note 17, “Business Combinations” of these condensed consolidated financial statements for further discussion of the Red Wolf acquisition. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, with a remaining life range from 5 to 10 years. The Company tests other 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 2018, the Company continued to identify triggering events associated with the Gearing segment’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 long-lived assets associated with the Gearing segment. Based upon the Company’s most recent impairment assessments, the Company utilized third-party appraisals and other estimates of the fair value of the Gearing asset group. The Company assumed that the assets would be exchanged in an orderly transaction between market participants and would represent the highest and best use of these assets. Based on the analysis, the Company determined that no impairment to this asset group was indicated as of June 30, 2018 and December 31, 2017.

As of June 30, 2018 and December 31, 2017, the cost basis, accumulated amortization and net book value of intangible assets were as follows:


	June 30, 2018									December 31, 2017
									Remaining							Remaining
									Weighted							Weighted
							Net		Average					Net		Average
	Cost		Accumulated		Impairment		Book		Amortization	Cost		Accumulated		Book		Amortization
	Basis		Amortization		Charge		Value		Period	Basis		Amortization		Value		Period
Goodwill and other intangible assets:
Goodwill	$	4,993	$	—	$	(4,993)	$	—		$	4,993	$	—	$	4,993
Noncompete agreements		170		(40)		—		130	4.6		170		(26)		144	5.1
Customer relationships		15,979		(5,680)		—		10,299	7.5		15,979		(4,992)		10,987	8.0
Trade names		9,099		(4,392)		—		4,707	10.0		9,099		(4,152)		4,947	10.5
Other intangible assets	$	25,248	$	(10,112)	$	—	$	15,136	7.0	$	25,248	$	(9,170)	$	16,078	8.8

As of June 30, 2018, estimated future amortization expense is as follows:


2018	$	942
2019		1,884
2020		1,884
2021		1,884
2022		1,884
2023 and thereafter		6,658
Total	$	15,136

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NOTE 7 — ACCRUED LIABILITIES

Accrued liabilities as of June 30, 2018 and December 31, 2017 consisted of the following:


	June 30,		December 31,
	2018		2017
Accrued payroll and benefits	$	1,817	$	1,797
Accrued property taxes		471		144
Income taxes payable		3		77
Accrued professional fees		43		40
Accrued warranty liability		593		581
Accrued self-insurance reserve		493		812
Accrued other		1,298		942
Total accrued liabilities	$	4,718	$	4,393

NOTE 8 — DEBT AND CREDIT AGREEMENTS

The Company’s outstanding debt balances as of June 30, 2018 and December 31, 2017 consisted of the following:


	June 30,		December 31,
	2018		2017
Line of credit	$	14,516	$	10,733
NMTC note payable		2,600		2,600
Other notes payable		2,333		1,146
Long-term debt		570		570
Less: Current portion		(18,024)		(14,252)
Long-term debt, net of current maturities	$	1,995	$	797

Credit Facility

On October 26, 2016, the Company established a $20,000 three-year secured revolving line of credit (the “Credit Facility”) with CIBC Bank USA (“CIBC”), formerly known as The PrivateBank and Trust Company, which was subsequently increased to $25,000 in March of 2017 with a Second Amendment to Loan and Security Agreement and an Amended and Restated Revolving Note. Under the Credit Facility, CIBC advances funds when requested against a borrowing base consisting of up to 85% of the face value of eligible accounts receivable of the Company, up to 50% of the book value of eligible inventory of the Company and up to 50% of the appraised value of eligible machinery, equipment and certain real property up to $10,000. Borrowings under the Credit Facility bear interest at a per annum rate equal to the applicable London Interbank Offered Rate (“LIBOR”) plus a margin ranging from 2.25% to 3.00%, or the applicable base rate plus a margin ranging from 0.00% to 1.00%, both of which are based on the Company’s trailing twelve-month adjusted EBITDA (earnings before interest, taxes, depreciation, amortization, share-based payments, restructuring costs, and intangible impairments). The Company also pays an unused facility fee to CIBC equal to 0.50% per annum on the unused portion of the Credit Facility, along with other standard fees. The Credit Facility contains customary representations and warranties. It also contains a requirement that the Company, on a consolidated basis, maintain a minimum Fixed Charge Coverage Ratio Covenant, along with other customary restrictive covenants. The obligations under the Credit Facility are secured by, subject to certain exclusions, (i) a first priority security interest in all accounts receivable, inventory, equipment, cash and investment property of the Company, and (ii) a mortgage on the Company’s Abilene, Texas tower facility.

On January 29, 2018, the Company executed the Third Amendment to Loan and Security Agreement waiving the Company’s non-compliance with the Fixed Charge Coverage Ratio as of December 31, 2017 and, among other changes, added new minimum monthly EBITDA and capital expenditure covenants through June 30, 2018. The amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated commencing with the quarter ending June 30, 2018.

On May 3, 2018, the Company executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), waiving the Company’s non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amends the minimum EBITDA thresholds for the period ending June 30, 2018 and adjusts the definition of EBITDA to add back certain restructuring expenses.

As of June 30, 2018, there was $14,516 of outstanding indebtedness under the Credit Facility, with the ability to borrow an additional $9,634 under the Credit Facility.

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Other

Included in Line of Credit, NMTC (as defined below) and other notes payable line item of the Company’s consolidated financial statements is $2,600 associated with the NMTC Transaction described further in Note 16, “New Markets Tax Credit Transaction” of these condensed consolidated financial statements. Additionally, the Company has entered into a $570 loan agreement with the Development Corporation of Abilene which is included in Long-term debt, less current maturities. The loan is forgivable upon the Company meeting and maintaining specific employment thresholds. In addition, the Company has outstanding notes payable for capital expenditures in the amount of $2,333 and $1,146 as of June 30, 2018 and December 31, 2017, respectively, with $907 and $804 included in the Line of Credit, NMTC and other notes payable line item as of June 30, 2018 and December 31, 2017, respectively. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable have maturity dates of April 25, 2020, March 25, 2021, February 1, 2021 and May 25, 2021.

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. The Company used market negotiations to value the Gearing segment’s assets.

The following tables represent the fair values of the Company’s financial assets as of June 30, 2018 and December 31, 2017:


	June 30, 2018
	Level 1		Level 2		Level 3		Total
Assets measured on a nonrecurring basis:
Gearing Cicero Ave. facility		—		—		560		560
Services assets		—		—		19		19
Total assets at fair value	$	—	$	—	$	579	$	579


	December 31, 2017
	Level 1		Level 2		Level 3		Total
Assets measured on a nonrecurring basis:
Gearing Cicero Ave. facility		—		—		560		560
Services assets		—		—		20		20
Total assets at fair value	$	—	$	—	$	580	$	580

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.

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Assets Measured at Fair Value on a Nonrecurring Basis

The fair value measurement approach for long lived assets utilizes a number of significant unobservable inputs or Level 3 assumptions. To the extent assumptions used in the Company’s evaluations are not achieved, there may be a negative effect on the valuation of these assets.

The carrying value of the land and building comprising one of Brad Foote’s facilities located in Cicero, Illinois (the “Cicero Avenue Facility”) of $560 reflects the expected proceeds associated with selling this facility. During 2017, the Company reclassified the Cicero Avenue Facility as Assets Held for Sale upon completion of general site remediation activities. See Note 15, “Commitments and Contingencies” of these condensed consolidated financial statements for additional detail of the Cicero Avenue Facility.

Following the Board’s approval of a plan to divest the Company’s Services segment, the Company has been able to evaluate the value of the segment’s assets on the open market; therefore, the Company has utilized this measurement to determine the fair value of the Services segment assets.

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, 2018, the Company has a full valuation allowance recorded against deferred tax assets. During the six months ended June 30, 2018, the Company recorded a benefit for income taxes of $33, compared to a benefit for income taxes of $5,034 during the six months ended June 30, 2017. The income tax benefit during the six months ended June 30, 2017 included an income tax benefit of $5,060 from the partial release of the valuation allowance, net of Red Wolf’s current state taxes, resulting from the consolidation of the Company’s deferred tax assets with Red Wolf’s deferred tax liabilities upon acquisition.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. In connection with the Tax Act, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law.

The Company files income tax returns in U.S. federal and state jurisdictions. As of June 30, 2018, open tax years in federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carryforwards. As of December 31, 2017, the Company had net operating loss (“NOL”) carryforwards of $227,871 expiring in various years through 2037.

Since the Company has no unrecognized tax benefits, they will not have an impact on the condensed consolidated financial statements as a result of the expiration of the applicable statues of limitations within the next twelve months. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), generally imposes an annual limitation on the amount of NOL carryforwards and associated built-in losses that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. The Company’s ability to utilize NOL carryforwards and built-in losses may be limited, under IRC Section 382 or otherwise, by the Company’s issuance of common stock or by other changes in stock ownership. Upon completion of the Company’s analysis of IRC Section 382, the Company has determined that aggregate changes in stock ownership have triggered an annual limitation on NOL carryforwards and built-in losses available for utilization. To the extent the Company’s use of NOL carryforwards and associated built-in losses is significantly limited in the future due to additional changes in stock ownership, the Company’s income could be subject to U.S. corporate income tax earlier than it would be if the Company were able to use NOL carryforwards and built-in losses without such limitation, which could result in lower profits and the loss of benefits from these attributes.

In February 2013, the Board adopted a Stockholder Rights Plan, which was amended in February 2016 (as amended, the “Rights Plan”), designed to preserve the Company’s substantial tax assets associated with NOL carryforwards under IRC Section 382. The Rights Plan was subsequently ratified by the Company’s stockholders at the Company’s 2013 Annual Meeting of Stockholders. The Rights Plan was amended and extended for an additional three years on February 5, 2016, and such extension was subsequently ratified by the Company’s stockholders at the Company’s 2016 Annual Meeting of Stockholders.

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The Rights Plan is intended to act as a deterrent to any person or group, together with its affiliates and associates, becoming the beneficial owner of 4.9% or more of the Company’s common stock and thereby triggering a further limitation of the Company’s available NOL carryforwards. In connection with the adoption of the Rights Plan, the Board declared a non‑taxable dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock to the Company’s stockholders of record as of the close of business on February 22, 2013. Each Right entitles its holder to purchase from the Company one one‑thousandth of a share of the Company’s Series A Junior Participating Preferred Stock at an exercise price of $9.81 per Right, subject to adjustment. As a result of the Rights Plan, any person or group that acquires beneficial ownership of 4.9% or more of the Company’s common stock without the approval of the Board would be subject to significant dilution in the ownership interest of that person or group. Stockholders who owned 4.9% or more of the outstanding shares of the Company’s common stock as of February 12, 2013 will not trigger the preferred share purchase rights unless they acquire additional shares after that date.

As of June 30, 2018, the Company had no unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense. The Company had no accrued interest and penalties as of June 30, 2018.

NOTE 11 — SHARE-BASED COMPENSATION

Overview of Share-Based Compensation Plans

2007 Equity Incentive Plan

The Company has granted incentive stock options and other equity awards pursuant to the Amended and Restated Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “2007 EIP”), which was approved by the Board in October 2007 and by the Company’s stockholders in June 2008. The 2007 EIP has been amended periodically since its original approval.

The 2007 EIP reserved 691,051 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 depends to a large degree. As of June 30, 2018, the Company had reserved 25,233 shares for issuance upon the exercise of stock options outstanding and no shares for issuance upon the vesting of restricted stock unit (“RSU”) awards outstanding. As of June 30, 2018, 253,659 shares of common stock reserved for stock options and RSU awards under the 2007 EIP had been issued in the form of common stock.

2012 Equity Incentive Plan

The Company has granted incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2012 Equity Incentive Plan (the “2012 EIP”), which was approved by the Board in March 2012 and by the Company’s stockholders in May 2012.

The 2012 EIP reserved 1,200,000 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, 2018, the Company had reserved 37,205 shares for issuance upon the exercise of stock options outstanding and no shares for issuance upon the vesting of RSU awards outstanding. As of June 30, 2018, 635,089 shares of common stock reserved for stock options and RSU awards under the 2012 EIP had been issued in the form of common stock.

2015 Equity Incentive Plan

The Company has granted equity awards pursuant to the Broadwind Energy, Inc. 2015 Equity Incentive Plan (the “2015 EIP,” and together with the 2007 EIP and the 2012 EIP, the “Equity Incentive Plans”), which was approved by the Board in February 2015 and by the Company’s stockholders in April 2015. The purposes of the Equity Incentive Plans are to (a) align the interests of the Company’s stockholders and recipients of awards under the Equity Incentive Plans by increasing the proprietary interest of such recipients in the Company’s growth and success; (b) advance the interests of the Company by attracting and retaining officers, other employees, non-employee directors and independent contractors; and (c) motivate such persons to act in the long-term best interests of the Company and its stockholders. Under the Equity Incentive Plans, the Company may grant (i) non-qualified stock options; (ii) “incentive stock options” (within the meaning of IRC Section 422); (iii) stock appreciation rights; (iv) restricted stock and RSUs; and (v) performance awards.

The 2015 EIP reserves 1,100,000 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, 2018, the Company had reserved 879,940 shares for issuance upon the vesting of RSU awards outstanding. As of June 30, 2018, 302,360 shares of common stock reserved for RSU awards under the 2015 EIP had been issued in the form of common stock.

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Stock Options. The exercise price of stock options granted under the Equity Incentive Plans 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. The fair value of stock options granted is expensed ratably over their vesting term.

Restricted Stock Units (RSUs). The granting of RSUs is provided for under the Equity Incentive Plans. RSUs generally vest on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. The fair value of each RSU granted is equal to the closing price of the Company’s common stock on the date of grant and is generally expensed ratably over the vesting term of the RSU award.

The following table summarizes stock option activity during the six months ended June 30, 2018 under the Equity Incentive Plans, as follows:



		Weighted Average
	Options	Exercise Price
Outstanding as of December 31, 2017	67,188	$	24.65
Expired	(4,750)	$	111.42
Outstanding as of June 30, 2018	62,438	$	18.05
Exercisable as of June 30, 2018	62,438	$	18.05

The following table summarizes RSU activity during the six months ended June 30, 2018 under the Equity Incentive Plans, as follows:


		Weighted Average
	Number of	Grant-Date Fair Value
	Shares	Per Share
Unvested as of December 31, 2017	512,142	$	4.57
Granted	556,944	$	2.43
Vested	(141,231)	$	4.56
Forfeited	(47,915)	$	3.99
Unvested as of June 30, 2018	879,940	$	3.25

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 expected volatility of the price of the Company’s stock over the expected life of the awards and actual and projected stock option exercise behavior. No stock options were granted during the six months ended June 30, 2018.

The Company utilized a forfeiture rate of 25% during the six months ended June 30, 2018 and 2017 for estimating the forfeitures of equity compensation 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, 2018 and 2017, as follows:



	Six Months Ended June 30,
	2018		2017
Share-based compensation expense:
Cost of sales	$	61	$	60
Selling, general and administrative		428		402
Net effect of share-based compensation expense on net income	$	489	$	462
Reduction in earnings per share:
Basic earnings per share	$	0.03	$	0.03

Diluted earnings per share	$	0.03	$	0.03

As of June 30, 2018, the Company estimates that pre-tax compensation expense for all unvested share-based awards, including both stock options and RSUs, in the amount of approximately $1,640 will be recognized through 2020. 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

The Company is party to a variety of legal proceedings that arise in the normal course of its business. While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on the Company’s results of operations, financial condition or cash flows. 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 condition or cash flows. It is possible that if one or more of such matters 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 financial condition and cash flows in the periods the Company would be required to pay such liability.

NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS

The Company reviews new accounting standards as issued. Although some of the accounting standards issued or effective in the current fiscal year may be applicable to it, the Company believes that none of the new standards have a significant impact on its condensed consolidated financial statements, except as discussed below. The Company is currently evaluating the impact of the new standards on its condensed consolidated financial statements.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), which is intended to improve financial reporting about leasing transactions. This ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current guidance. In addition, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. This ASU will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which clarifies the definition of a business. The amendments in this ASU provide a screen to determine when a set (group of assets and activities) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. This ASU became effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this ASU had no material impact on the Company’s condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the test for goodwill impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2, which compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill, from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This ASU will be effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The Company early adopted this ASU during the second quarter of 2018 and recorded a $4,993 impairment charge as discussed in Note 6 “Goodwill and Other Intangible Assets” of the Company’s condensed consolidated financial statements.

NOTE 14 — SEGMENT REPORTING

The Company is organized into reporting segments based on the nature of the products offered and business activities from which it earns revenues and incurs expenses for which discrete financial information is available and regularly reviewed

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by the Company’s chief operating decision maker. The Company’s segments and their product and service offerings are summarized below:

Towers and Heavy Fabrications

The Company manufactures towers for wind turbines, specifically the large and heavier wind towers that are designed for multiple megawatt (“MW”) wind turbines, as well as heavy fabrications for mining and other industrial customers. Production facilities, located in Manitowoc, Wisconsin and Abilene, Texas, are situated in close proximity to the primary U.S. domestic wind energy and equipment manufacturing hubs. The two facilities have a combined annual tower production capacity of up to approximately 550 towers, sufficient to support turbines generating more than 1,100 MW of power.

Gearing

The Company engineers, builds and remanufactures precision gears and gearing systems for O&G, wind, mining, steel and other industrial applications. The Company uses an integrated manufacturing process, which includes machining and finishing processes in Cicero, Illinois, and heat treatment processes in Neville Island, Pennsylvania.

Process Systems

The Company acquired Red Wolf on February 1, 2017 and as a result, aggregated its Abilene compressed natural gas (“CNG”) and heavy fabrication business with Red Wolf to form the Process Systems reportable segment. This segment provides contract manufacturing services that include build-to-spec, kitting, fabrication and inventory management for customers throughout the U.S. and in foreign countries, primarily supporting the natural gas electrical generation market.

Corporate

“Corporate” includes the assets and selling, general and administrative expenses of the Company’s corporate office. “Eliminations” comprises adjustments to reconcile segment results to consolidated results.

Summary financial information by reportable segment for the three and six months ended June 30, 2018 and 2017 is as follows:



	Towers and				Process
	Heavy Fabrications		Gearing		Systems		Corporate		Eliminations		Consolidated
For the Three Months Ended June 30, 2018
Revenues from external customers	$	24,001	$	8,632	$	4,148	$	—	$	—	$	36,781
Intersegment revenues		23		—		—		—		(23)		—
Net revenues		24,024		8,632		4,148		—		(23)		36,781
Operating profit (loss)		724		(662)		(5,772)		(26)		—		(5,736)
Depreciation and amortization		1,280		586		423		60		—		2,349
Capital expenditures		1,198		247		—		2		—		1,447



	Towers and				Process
	Heavy Fabrications		Gearing		Systems		Corporate		Eliminations		Consolidated
For the Three Months Ended June 30, 2017
Revenues from external customers	$	34,327	$	6,071	$	2,964	$	—	$	—	$	43,362
Operating profit (loss)		2,801		(634)		(1,099)		(1,584)		—		(516)
Depreciation and amortization		1,070		612		468		53		—		2,203
Capital expenditures		729		132		138		44		—		1,043


	Towers and				Process
	Heavy Fabrications		Gearing		Systems		Corporate		Eliminations		Consolidated
For the Six Months Ended June 30, 2018
Revenues from external customers	$	40,785	$	17,438	$	8,525	$	—	$	—	$	66,748
Intersegment revenues		23		—		—		—		(23)		—
Net revenues		40,808		17,438		8,525		—		(23)		66,748
Operating (loss)		(780)		(1,288)		(6,664)		(1,541)		—		(10,273)
Depreciation and amortization		2,537		1,176		874		119		—		4,706
Capital expenditures		1,198		467		—		11		—		1,676

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	Towers and				Process
	Heavy Fabrications		Gearing		Systems		Corporate		Eliminations		Consolidated
For the Six Months Ended June 30, 2017
Revenues from external customers	$	83,222	$	9,942	$	6,258	$	—	$	—	$	99,422
Operating profit (loss)		8,649		(2,165)		(1,921)		(3,476)		—		1,087
Depreciation and amortization		2,161		1,238		801		104		—		4,304
Capital expenditures		3,389		332		410		173		—		4,304


	Total Assets as of
	June 30,		December 31,
Segments:	2018		2017
Towers and Heavy Fabrications	$	34,717	$	27,958
Gearing		34,870		37,456
Process Systems		21,201		26,442
Assets held for sale		579		580
Corporate		251,370		249,326
Eliminations		(234,084)		(229,412)
	$	108,653	$	112,350

NOTE 15 — COMMITMENTS AND CONTINGENCIES

Environmental Compliance and Remediation Liabilities

The Company’s operations and products are subject to a variety of environmental laws and regulations in the jurisdictions in which the Company operates and sells products governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous materials, soil and groundwater contamination, employee health and safety, and product content, performance and packaging. Certain environmental laws may impose the entire cost or a portion of the cost of investigating and cleaning up a contaminated site, regardless of fault, upon any one or more of a number of parties, including the current or previous owners or operators of the site. These environmental laws also impose liability on any person who arranges for the disposal or treatment of hazardous substances at a contaminated site. Third parties may also make claims against owners or operators of sites and users of disposal sites for personal injuries and property damage associated with releases of hazardous substances from those sites.

In connection with the Company’s previous restructuring initiatives, during the third quarter of 2012, the Company identified a liability associated with the planned sale of the Cicero Avenue Facility. The liability was associated with environmental remediation costs that were identified while preparing the site for sale. During 2013, the Company applied for and was accepted into the Illinois Environmental Protection Agency (the “IEPA”) voluntary site remediation program. In the first quarter of 2014, the Company completed a comprehensive review of remedial options for the Cicero Avenue Facility and selected a preferred remediation technology. As part of the voluntary site remediation program, the Company submitted a plan to the IEPA for approval to conduct a pilot study to test the effectiveness of the selected remediation technology. In the fourth quarter of 2017, the Company remediated the Cicero Avenue Facility to a point that requires the known future use to complete the final remediation steps and is currently in active negotiations to dispose of the property.

Warranty Liability

The Company provides warranty terms that range from one to five years for various products supplied by the Company. In certain contracts, the Company has recourse provisions for items that would enable recovery from third parties for amounts paid to customers under warranty provisions. As of June 30, 2018 and 2017, estimated product warranty liability was $593 and $592, respectively, and is recorded within accrued liabilities in the Company’s condensed consolidated balance sheets.

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The changes in the carrying amount of the Company’s total product warranty liability for the six months ended June 30, 2018 and 2017 were as follows:


	For the Six Months Ended June 30,
	2018		2017
Balance, beginning of period	$	581	$	671
Addition to (reduction of) warranty reserve		15		(89)
Warranty claims		(3)		10
Balance, end of period	$	593	$	592

Allowance for Doubtful Accounts

Based upon past experience and judgment, the Company establishes an allowance for doubtful accounts with respect to accounts receivable. The Company’s standard allowance estimation methodology considers a number of factors that, based on its collections experience, the Company believes will have an impact on its credit risk and the collectability of its accounts receivable. These factors include individual customer circumstances, history with the Company, the length of the time period during which the account receivable has been past due and other relevant criteria.

The Company monitors its collections and write-off experience to assess whether or not adjustments to its allowance estimates are necessary. Changes in trends in any of the factors that the Company believes may impact the collectability of its accounts receivable, as noted above, or modifications to its credit standards, collection practices and other related policies may impact the Company’s allowance for doubtful accounts and its financial results. The activity in the accounts receivable allowance liability for the six months ended June 30, 2018 and 2017 consisted of the following:



	For the Six Months Ended June 30,
	2018		2017
Balance at beginning of period	$	225	$	145
(Recoveries) bad debt expense		(12)		48
Write-offs		(13)		—
Balance at end of period	$	200	$	193

Collateral

In select instances, the Company has pledged specific inventory and machinery and equipment assets to serve as collateral on related payable or financing obligations.

Liquidated Damages

In certain customer contracts, the Company has agreed to pay liquidated damages in the event of qualifying delivery or production delays. These damages are typically limited to a specific percentage of the value of the product in question and/or are dependent on actual losses sustained by the customer. The Company does not believe that this potential exposure will have a material adverse effect on the Company’s consolidated financial position or results of operations. There was no reserve for liquidated damages as of June 30, 2018 or December 31, 2017.

Workers’ Compensation Reserves

At the beginning of the third quarter of 2013, the Company began to self-insure for its workers’ compensation liabilities, including reserves for self-retained losses. Historical loss experience combined with actuarial evaluation methods and the application of risk transfer programs are used to determine required workers’ compensation reserves. The Company takes into account claims incurred but not reported when determining its workers’ compensation reserves. Although the ultimate outcome of these matters may exceed the amounts recorded and additional losses may be incurred, the Company does not believe that any additional potential exposure for such liabilities will have a material adverse effect on the Company’s consolidated financial position or results of operations. Although the Company entered into a guaranteed cost program at the beginning of the third quarter of 2016, the Company maintained a liability for the trailing claims from the self-insured policy. As of June 30, 2018 and December 31, 2017, the Company had $493 and $812, respectively, accrued for self-insured workers’ compensation liabilities.

Other

As of December 31, 2017, approximately 24% of the Company’s employees were covered by two collective bargaining agreements with local unions at Brad Foote’s Cicero, Illinois and Neville Island, Pennsylvania locations. The

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current three-year collective bargaining agreement with the Neville Island union is expected to remain in effect through October 2022. The collective bargaining agreement with the Cicero union expired in February 2018; the parties are currently negotiating a new collective bargaining agreement.

See Note 16, “New Markets Tax Credit Transaction” of these condensed consolidated financial statements for a discussion of a strategic financing transaction, the NMTC Transaction, which originally related to the Company’s drivetrain service center in Abilene, Texas (the “Abilene Gearbox Facility”), and was amended in August 2015 to also include the activities of the Company’s heavy industries business conducted at the same location in Abilene, Texas (the “Abilene Heavy Industries Facility”). The Abilene Gearbox Facility focused on servicing the growing installed base of MW wind turbines as they come off warranty and, to a limited extent, industrial gearboxes requiring precision repair and testing. The Abilene Heavy Industries Facility focuses on heavy fabrications and assembly for industries including those related to compressed natural gas distribution. Pursuant to the NMTC Transaction, the gross loan and investment in the Abilene Heavy Industries Facility and the Abilene Gearbox Facility of $10,000 is expected to generate $3,900 in tax credits over a period of seven years, which the NMTC Transaction makes available to Capital One, National Association (“Capital One”). The Abilene Heavy Industries Facility and/or the Abilene Gearbox Facility must operate and remain in compliance with the terms and conditions of the NMTC Transaction during the seven-year compliance period ending in the third quarter of 2018, or the Company may be liable for the recapture of $3,900 in tax credits to which Capital One is otherwise entitled. The Company does not anticipate any credit recaptures will be required in connection with the NMTC Transaction. The NMTC Transaction was forgiven subsequent to June 30, 2018.

NOTE 16 — NEW MARKETS TAX CREDIT TRANSACTION

On July 20, 2011, the Company executed the NMTC Transaction, which was amended on August 24, 2015, involving the following third parties: AMCREF Fund VII, LLC (“AMCREF”), a registered community development entity; COCRF Investor VIII, LLC (“COCRF”); and Capital One. The NMTC Transaction allows the Company to receive below market interest rate funds through the federal New Markets Tax Credit (“NMTC”) program. The Company received $2,280 in proceeds from the NMTC Transaction. The NMTC Transaction qualifies under the NMTC program and includes a gross loan from AMCREF to the Company’s wholly-owned subsidiary Broadwind Services, LLC in the principal amount of $10,000, with a term of fifteen years and interest payable at the rate of 1.4% per annum, largely offset by a gross loan in the principal amount of $7,720 from the Company to COCRF, with a term of fifteen years and interest payable at the rate of 2.5% per annum. The August 2015 amendment did not change the financial terms of the NMTC Transaction, but did add the activities and assets of the Abilene Heavy Industries Facility to the NMTC Transaction and allow for the possible sale of the Abilene Gearbox Facility assets, provided that the proceeds of such sale are re-invested in the Abilene Heavy Industries Facility.

The NMTC regulations permit taxpayers to claim credits against their federal income taxes for qualified investments in the equity of community development entities. The NMTC Transaction could generate $3,900 in tax credits, which the Company has made available under the structure by passing them through to Capital One. The proceeds have been applied to the Company’s investment in the Abilene Gearbox Facility assets and associated operating costs and in the assets of the Abilene Heavy Industries Facility, as permitted under the amended NMTC Transaction.

The Abilene Heavy Industries Facility and/or the Abilene Gearbox Facility must operate and remain in compliance with various regulations and restrictions through the third quarter of 2018, the end of the seven year compliance period, to comply with the terms of the NMTC Transaction, or the Company may be liable under its indemnification agreement with Capital One for the recapture of tax credits. In the event the Company does not comply with these regulations and restrictions, the NMTC program tax credits may be subject to 100% recapture for a period of seven years as provided in the IRC. The Company does not anticipate that any tax credit recapture events will occur or that it will be required to make any payments to Capital One under the indemnification agreement.

The Capital One contribution, including a loan origination payment of $320, has been included as other assets in the Company’s condensed consolidated balance sheet as of June 30, 2018. The NMTC Transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase Capital One’s interest in the third quarter of 2018. Capital One may exercise an option to put its investment to the Company and receive $130 from the Company at that time. If Capital One does not exercise its put option, the Company can exercise a call option at the then fair market value of the call. The Company expects that Capital One will exercise the put option at the end of the tax credit recapture period. The Capital One contribution, other than the amount allocated to the put obligation, will be recognized as income only after the put/call is exercised and when Capital One has no ongoing interest. However, there is no legal obligation for Capital One to exercise the put, and the Company has attributed only an insignificant value to the put option included in this transaction structure.

The Company has determined that two pass‑through financing entities created under the NMTC Transaction structure are variable interest entities (“VIEs”). The ongoing activities of the VIEs—collecting and remitting interest and fees and

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complying with NMTC program requirements—were considered in the initial design of the NMTC Transaction and are not expected to significantly affect economic performance throughout the life of the VIEs. In making this determination, management also considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees under the NMTC Transaction structure, Capital One’s lack of a material interest in the underlying economics of the project, and the fact that the Company is obligated to absorb losses of the VIEs. The Company has concluded that it is required to consolidate the VIEs because the Company has both (i) the power to direct those matters that most significantly impact the activities of each VIE, and (ii) the obligation to absorb losses or the right to receive benefits of each VIE.

The $262 of issue costs paid to third parties in connection with the NMTC Transaction are recorded as prepaid expenses, and are being amortized over the expected seven year term of the NMTC arrangement. Capital One’s net contribution of $2,600 is included in Line of Credit, NMTC and other notes payable in the condensed consolidated balance sheet. Incremental costs to maintain the transaction structure during the compliance period are recognized as they are incurred. The NMTC Transaction was forgiven subsequent to June 30, 2018.

NOTE 17 — BUSINESS COMBINATIONS

Overview

On January 30, 2017, the Company announced that it had agreed upon the material terms to acquire Red Wolf, a Sanford, North Carolina-based, privately held fabricator, kitter and assembler of industrial systems primarily supporting the global gas turbine market, for approximately $18,983, subject to certain adjustments. The transaction closed on February 1, 2017, and Red Wolf is being operated as a wholly-owned subsidiary of the Company.

Accounting for the Transaction

The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill. Red Wolf’s results are included in the Company’s results from the acquisition date of February 1, 2017.

The purchase price of the transaction totaled $18,983 net of working capital adjustments that occurred after the acquisition date. The purchase price includes $16,449 which was paid in cash and $2,534 which was the expected value of contingent future earn-out payments. The contingent consideration arrangement requires the Company to pay the former owners of Red Wolf a payout if Red Wolf achieves a targeted profitability benchmark. The potential undiscounted amount of all future payments that the Company could have been required to make under the contingent consideration arrangement was between $0 and $9,900. Annual earn-out payments may not exceed $4,950. The fair value of the contingent consideration arrangement of $2,534 was estimated by using a Monte Carlo simulation. Key assumptions include a short-term weighted average cost of capital of 15% and historical volatility of public company comparables. The fair value of the contingent consideration arrangement was determined using significant unobservable inputs, or level 3 in the fair value hierarchy.

During the third quarter of 2017, the Company released $1,394 of this contingency into operating income because management determined that Red Wolf’s full-year financial performance during the first year of ownership by the Company was unlikely to meet the threshold required to pay the first installment of the contingent earn-out. During the second quarter of 2018, the Company released the final contingent earn-out liability of $1,140 into operating income as the Company does not expect Red Wolf to achieve the targeted profitability benchmark for the second year of ownership. The release of the earn-out is reflected in the selling, general, and administrative line item of these condensed consolidated statements of operations.

The Company’s allocation of the $18,983 purchase price to Red Wolf’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of February 1, 2017, is included in the table below. Goodwill is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax purposes. The measurement period adjustments were a result of changes in the fair value of the contingent consideration arrangement and adjustments to working capital accounts. The purchase price allocation was finalized

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at December 31, 2017. The decrease in goodwill from March 31, 2017 is due to opening balance sheet changes noted in the table below.

The purchase price allocation as of March 31, 2017 and December 31, 2017 is as follows (in thousands):


		Allocation as of 3/31/2017		Measurement Period Adjustments		Allocation as of 12/31/2017
Assets acquired and liabilities assumed:
Cash and cash equivalents	$	63	$	(63)	$	-
Receivables		2,796		(96)		2,700
Inventories		4,998		179		5,177
Property and equipment		462		-		462
Noncompete agreements		170		-		170
Customer relationships		12,000		-		12,000
Trade names		1,100		-		1,100
Goodwill		5,568		(575)		4,993
Accounts payable		(1,354)		2		(1,352)
Accrued expenses		(809)		(67)		(876)
Deferred tax liabilities		(5,391)		-		(5,391)
Total purchase price	$	19,603	$	(620)	$	18,983

The allocation of the purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date. The acquired noncompete agreements, customer relationships, and trade names have weighted average amortization periods of 6.0 years, 9.0 years, and 14.0 years, respectively, and the total weighted average life of the acquired intangible assets is 9.4 years. Goodwill from this transaction has been allocated to the Company’s Process Systems segment.

NOTE 18 — RESTRUCTURING

During the first quarter of 2018, the Company conducted a review of its business strategies and product plans given the outlook of the industries it serves and its business environment. As a result, the Company began to execute a restructuring plan to rationalize its facility capacity and management structure, and to consolidate and increase the efficiencies of its Abilene operations. Management has decided to exit the CNG and Fabrication Manufacturing location in Abilene as soon as it fully complies with the requirements established as part of the NMTC Transaction agreement and consolidate these manufacturing activities into other locations. The NMTC Transaction agreement requires operations to remain at that facility until at least July

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2018 and the Company expects to vacate the facility by the end of 2018. All remaining costs associated with this facility will be recorded as restructuring expenses going forward. All costs will be incurred solely within the Process Systems segment.

The Company expects to incur restructuring costs associated with the restructuring plan totaling an estimated $738, of which $267 has been incurred to date. The Company anticipates annual cost savings going forward of approximately $575 in facility expenses related to the restructuring.

The Company’s total net restructuring charges for the six months ended June 30, 2018, in addition to the total projected restructuring costs, consist of the following:


	Three Months Ended		Six Months Ended		Total
	June 30, 2018		June 30, 2018		Projected
Cost of sales:
Facility costs	$	64	$	146	$	270
Moving and remediation		1		1		176
Salary and severance		—		17		17
Depreciation		51		67		239
Total cost of sales		116		231		702
Selling, general, and administrative expenses:
Salary and severance		—		36		36
Total selling, general, and administrative expenses		—		36		36
Grand Total	$	116	$	267	$	738

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto in Item 1, “Financial Statements,” of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2017. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances including, but not limited to, those identified in “Cautionary Note Regarding Forward-Looking Statements” at the end of Item 2. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties. As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” and the “Company” refer to Broadwind Energy, Inc., a Delaware corporation headquartered in Cicero, Illinois, and its subsidiaries.

(Dollars are presented in thousands except per share data or unless otherwise stated)

OUR BUSINESS

Second Quarter Overview

We booked $18,602 in new orders in the second quarter of 2018, up 6% from $17,566 in the second quarter of 2017. The increase in orders was driven by increased towers orders, which vary quarter to quarter, partially offset by decreased Gearing and Process Systems orders. Gearing orders decreased by $5,496 to $6,148 in orders as a result of certain oil and gas (“O&G”) customers ordering ahead in the first quarter of 2018 to secure production slots for late 2018 in response to increasing input costs and extending material lead times. Our Process Systems segment had $2,983 in orders in the second quarter of 2018, a decrease of $1,461 over the second quarter of 2017 primarily due to lower customer demand for natural gas turbine content.

We recognized revenue of $36,781 in the second quarter of 2018, down from revenue of $43,362 in the second quarter of 2017. The Towers and Heavy Fabrications segment revenues decrease was due to a 24% decrease in tower sections sold and a lower average sales price on the product mix sold. Gearing segment revenues were up $2,561 or 42%, as a result of the recovery in the O&G market. The Process Systems segment recognized revenue of $4,148 as compared to $2,964 in the prior quarter period due primarily to increased activity levels within mining and industrial markets.

We reported a net loss of $6,116 or $0.40 per share in the second quarter of 2018, compared to a net loss of $780 or $0.05 per share in the second quarter of 2017. The change in earnings was due primarily to the $4,993 goodwill impairment

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loss, lower tower sections sold, and lower average sales price on the product mix sold partially offset by productivity improvements in Towers and Heavy Fabrications and a $1,140 reversal of the final Red Wolf earn-out reserve.

During the first quarter of 2018, we conducted a review of our business strategies and product plans given the outlook of the industries we serve and our business environment. As a result, we executed a restructuring plan to rationalize our facility capacity and management structure, and to consolidate and increase the efficiencies in our Abilene operations. We have decided to exit the market for natural gas compression units and transfer remaining operations from a leased facility into other production locations. We expect to vacate the facility by the end of 2018 (following the expiration of the New Markets Tax Credit Transaction compliance period). All remaining costs associated with this facility will be recorded as restructuring expenses going forward. All costs will be incurred solely within the Process Systems segment. We expect to incur restructuring costs associated with the restructuring plan totaling an estimated $738, of which $267 has been incurred to date. We anticipate annual cost savings going forward of approximately $575 in facility expenses related to the restructuring.

RESULTS OF OPERATIONS

Three months ended June 30, 2018, Compared to Three months ended June 30, 2017

The Condensed Consolidated Statement of Operations table below should be read in connection with a review of the following discussion of our results of operations for the three months ended June 30, 2018, compared to the three months ended June 30, 2017.


	Three Months Ended June 30,								2018 vs. 2017
			% of Total				% of Total
	2018		Revenue		2017		Revenue		$ Change		% Change
Revenues	$	36,781	100.0	%	$	43,362	100.0	%	$	(6,581)	(15.2)	%
Cost of sales		34,442	93.6	%		39,490	91.1	%		(5,048)	(12.8)	%
Restructuring		116	0.3	%		—	—	%		116	100.0	%
Gross profit		2,223	6.0	%		3,872	8.9	%		(1,649)	(42.6)	%
Operating expenses
Selling, general and administrative expenses		2,495	6.8	%		3,917	9.0	%		(1,422)	(36.3)	%
Impairment charges		4,993	13.6	%		—	—	%		4,993	100.0	%
Intangible amortization		471	1.3	%		471	1.1	%		—	—	%
Total operating expenses		7,959	21.6	%		4,388	10.1	%		3,571	81.4	%
Operating loss		(5,736)	(15.6)	%		(516)	(1.2)	%		(5,220)	(1,011.6)	%
Other expense
Interest expense, net		(352)	(1.0)	%		(217)	(0.5)	%		(135)	(62.2)	%
Other, net		(1)	(0.0)	%		29	0.1	%		(30)	(103.4)	%
Total other expense, net		(353)	(1.0)	%		(188)	(0.4)	%		(165)	(87.8)	%
Net loss before benefit for income taxes		(6,089)	(16.6)	%		(704)	(1.6)	%		(5,385)	(764.9)	%
Benefit for income taxes		(6)	(0.0)	%		(16)	(0.0)	%		10	62.5	%
Loss from continuing operations		(6,083)	(16.5)	%		(688)	(1.6)	%		(5,395)	(784.2)	%
Loss from discontinued operations		(33)	(0.1)	%		(92)	(0.2)	%		59	64.1	%
Net loss	$	(6,116)	(16.6)	%	$	(780)	(1.8)	%	$	(5,336)	(684.1)	%

Consolidated

Revenues decreased from $43,362 during the three months ended June 30, 2017, to $36,781 during the three months ended June 30, 2018. Lower sales in our Towers and Heavy Fabrications segment of $10,303 were partially offset by the higher sales in the Gearing segment of $2,561 and higher sales in the Process Systems segment of $1,184. The Towers and Heavy Fabrications segment revenue decrease was due primarily to a 24% decrease in towers sections sold. Gearing segment revenues increased due to improved order intake in the second half of 2017, primarily resulting from the recovery in demand from O&G customers.

Gross profit decreased by $1,649, from $3,872 during the three months ended June 30, 2017, to $2,223 during the three months ended June 30, 2018. Gross margin decreased from 8.9% during the three months ended June 30, 2017, to 6.0% during the three months ended June 30, 2018. The decrease in gross profit was primarily attributable to a 24% reduction in towers sections sold and lower capacity utilization partially offset by productivity improvements and a recovery in mining and industrial markets.

Operating expenses increased from $4,388 during the three months ended June 30, 2017, to $7,959 during the three months ended June 30, 2018. The increase was attributable primarily due to the impairment charge of $4,993 and higher

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commission expenses associated with higher Gearing revenue, partially offset by the $1,140 reversal of the Red Wolf earn-out reserve, and a reduction in selling, general, and administrative (“SG&A”) salaries and benefits of $518 in response to lower revenue levels. Operating expenses as a percentage of sales increased from 10.1% in the prior-year quarter to 21.6% in the current-year quarter.

Loss from continuing operations increased from $688 during the three months ended June 30, 2017, to $6,083 during the three months ended June 30, 2018, as a result of the $4,993 non-cash impairment charge and the other factors described above.

Net loss increased from $780 during the three months ended June 30, 2017, to $6,116 during the three months ended June 30, 2018, as a result of the factors described above.

Towers and Heavy Fabrications Segment

The following table summarizes the Towers and Heavy Fabrications segment operating results for the three months ended June 30, 2018 and 2017:


	Three Months Ended
	June 30,
	2018			2017
Orders	$	9,471		$	1,478
Revenues		24,024			34,327
Operating income		724			2,801
Operating margin		3.0	%		8.2	%

Towers and Heavy Fabrications segment orders were higher than the prior year quarter due to an increase in mining and industrial demand and the absence of any significant towers orders in the prior year. Towers and Heavy Fabrications segment revenues decreased by $10,303, from $34,327 during the three months ended June 30, 2017 due to a 24% reduction in towers sections sold and a lower average sales price on the product mix sold.

Towers and Heavy Fabrications segment operating income decreased by $2,077, from $2,801 during the three months ended June 30, 2017, to $724 during the three months ended June 30, 2018. The decrease was primarily attributable to lower tower production volumes and a lower average sales price based on the product mix sold. This decrease was partially offset by productivity improvements in both plants, as well as a reduction of $984 of manufacturing overhead and operating expenses in response to lower production levels. The operating margin decreased from 8.2% during the three months ended June 30, 2017, to 3.0% during the three months ended June 30, 2018.

Gearing Segment

The following table summarizes the Gearing segment operating results for the three months ended June 30, 2018 and 2017:


	Three Months Ended
	June 30,
	2018			2017
Orders	$	6,148		$	11,644
Revenues		8,632			6,071
Operating loss		(662)			(634)
Operating margin		(7.7)	%		(10.4)	%

Gearing segment orders decreased $5,496 due in part to higher order levels in the prior year quarter as O&G demand rapidly increased and as a result of increased orders in the first quarter of 2018, as certain customers secured production slots and material pricing in response to increasing input costs and extending material lead times. As a result of the O&G market recovery, revenue increased from $6,071 during the three months ended June 30, 2017, to $8,632 during the three months ended June 30, 2018.

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The Gearing segment operating loss increased by $28, from $634 during the three months ended June 30, 2017, to $662 during the three months ended June 30, 2018. The operating loss increased despite the impact of increased volumes as a result of general manufacturing inefficiencies and higher commission expenses. The operating margin decreased based on the above items from (10.4%) during the three months ended June 30, 2017, to (7.7%) during the three months ended June 30, 2018.

Process Systems Segment

The following table summarizes the Process Systems segment operating results for the three months ended June 30, 2018:


	Three Months Ended
	June 30,
	2018				2017
Orders	$	2,983		$	4,444
Revenues		4,148			2,964
Impairment charges		4,993			-
Operating loss		(5,772)			(1,099)
Operating margin		(139.2)	%		(37.1)	%

Process Systems segment orders decreased $1,461, from $4,444 during the three months ended June 30, 2017, to $2,983 during the three months ended June 30, 2018. The decrease in orders is due to lower customer demand for natural gas turbine content.

Process Systems segment revenues increased by $1,184, from $2,964 during the three months ended June 30, 2017, to $4,148 during the three months ended June 30, 2018 primarily due to increased sales within mining and industrial markets.

The Process Systems segment operating loss increased by $4,673, from $1,099 during the three months ended June 30, 2017, to $5,772 during the three months ended June 30, 2018 primarily due to the $4,993 impairment charge resulting from the write-off of goodwill. Partially offsetting the impairment loss was the increase in mining and other industrial activity. The operating margin decreased from (37.1%) during the three months ended June 30, 2017, to (139.2%) during the three months ended June 30, 2018.

Corporate and Other

Corporate and Other expenses decreased by $1,558, from $1,584 during the three months ended June 30, 2017, to $26 during the three months ended June 30, 2018. The decrease was primarily attributable to the reversal of the accrued Red Wolf earn-out reserve of $1,140, a reduction in professional expenses of $121, and salaries and benefits expense being $219 lower.

Six months ended June 30, 2018, Compared to Six months ended June 30, 2017

The Condensed Consolidated Statement of Operations table below should be read in connection with a review of the following discussion of our results of operations for the six months ended June 30, 2018, compared to the six months ended June 30, 2017.


	Six Months Ended June 30,								2018 vs. 2017
			% of Total				% of Total
	2018		Revenue		2017		Revenue		$ Change		% Change
Revenues	$	66,748	100.0	%	$	99,422	100.0	%	$	(32,674)	(32.9)	%
Cost of sales		64,426	96.5	%		89,176	89.7	%		(24,750)	(27.8)	%
Restructuring		231	0.3	%		—	—	%		231	100.0	%
Gross profit		2,091	3.1	%		10,246	10.3	%		(8,155)	(79.6)	%
Operating expenses
Selling, general and administrative expenses		6,393	9.6	%		8,337	8.4	%		(1,944)	(23.3)	%
Impairment charges		4,993	7.5	%		—	—	%		4,993	100.0	%
Intangible amortization		942	1.4	%		822	0.8	%		120	14.6	%
Restructuring		36	0.1	%		—	—	%		36	100.0	%
Total operating expenses		12,364	18.5	%		9,159	9.2	%		3,205	35.0	%
Operating (loss) income		(10,273)	(15.4)	%		1,087	1.1	%		(11,360)	(1,045.1)	%
Other (expense) income
Interest expense, net		(650)	(1.0)	%		(356)	(0.4)	%		(294)	(82.6)	%
Other, net		(4)	(0.0)	%		29	0.0	%		(33)	(113.8)	%
Total other expense, net		(654)	(1.0)	%		(327)	(0.3)	%		(327)	(100.0)	%

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Net (loss) income before benefit for income taxes		(10,927)	(16.4)	%		760	0.8	%		(11,687)	(1,537.8)	%
Benefit for income taxes		(33)	(0.0)	%		(5,034)	(5.1)	%		5,001	99.3	%
Income (loss) from continuing operations		(10,894)	(16.3)	%		5,794	5.8	%		(16,688)	(288.0)	%
Loss from discontinued operations, net of tax		(60)	(0.1)	%		(247)	(0.2)	%		187	75.7	%
Net (loss) income	$	(10,954)	(16.4)	%	$	5,547	5.6	%	$	(16,501)	(297.5)	%

Consolidated

Revenues decreased from $99,422 during the six months ended June 30, 2017, to $66,748 during the six months ended June 30, 2018. Lower sales in our Towers and Heavy Fabrications segment of $42,414 were partially offset by the higher sales in the Gearing segment of $7,496 and higher sales in the Process Systems segment of $2,267. The Towers and Heavy Fabrications segment revenue decrease was due primarily to a 48% decrease in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the decrease in towers sections sold was an increase in the volume of Heavy Fabrications due primarily to the recovery in mining and other industrial markets. Gearing segment revenues increased due to improved order intake in the second half of 2017, primarily resulting from the recovery in demand from O&G customers.

Gross profit decreased by $8,155, from $10,246 during the six months ended June 30, 2017, to $2,091 during the six months ended June 30, 2018. Gross margin decreased from 10.3% during the six months ended June 30, 2017, to 3.1% during the six months ended June 30, 2018. The decrease in gross profit was primarily attributable to low capacity utilization in the tower plants following a near shutdown at year end 2017 as our major customer rebalanced inventories. This decrease was partially offset by a $978 improvement in gross profit in our Gearing segment due to higher revenues.

Operating expenses increased from $9,159 during the six months ended June 30, 2017, to $12,364 during the six months ended June 30, 2018. The increase was primarily attributable to the $4,993 impairment charge recognized during the second quarter of 2018 and $302 of higher commission expenses associated with higher Gearing revenue. This was partially offset by the reversal of the Red Wolf earn-out reserve of $1,140 as well as a reduction in SG&A salaries and benefits of $743 in response to lower activity levels compared to the prior year period. Operating expenses as a percentage of sales increased from 9.2% in the first two quarters of 2017 to 18.5% in the first two quarters of 2018.

Income from continuing operations decreased from income of $5,794 during the six months ended June 30, 2017, to a loss of $10,894 during the six months ended June 30, 2018, as a result of the factors described above.

Net income decreased from $5,547 during the six months ended June 30, 2017, to a net loss of $10,954 during the six months ended June 30, 2018, as a result of the factors described above, and the absence of a $5,018 benefit from income taxes in the prior year due to the release of a portion of the tax provision related to the acquisition of Red Wolf.

Towers and Heavy Fabrications Segment

The following table summarizes the Towers and Heavy Fabrications segment operating results for the six months ended June 30, 2018 and 2017:


	Six Months Ended
	June 30,
	2018			2017
Orders	$	17,313		$	30,567
Revenues		40,808			83,222
Operating (loss) income		(780)			8,649
Operating margin		(1.9)	%		10.4	%

Towers and Heavy Fabrications segment orders were significantly below the first two quarters in 2017 but included the first significant orders placed since the beginning of the inventory correction by our largest customer that commenced in the second quarter of 2017. Towers and Heavy Fabrications segment revenues decreased by $42,414, from $83,222 during the six months ended June 30, 2017 due to a 48% reduction in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the decrease in towers sections sold was an increase in the volume of Heavy Fabrications due primarily to the recovery in mining and other industrial markets and management’s focus on diversification of customers and product.

Towers and Heavy Fabrications segment operating income decreased by $9,429, from income of $8,649 during the six months ended June 30, 2017, to a loss of $780 during the six months ended June 30, 2018. The decrease was primarily attributable to lower tower production volumes, a less favorable product mix and start-up costs associated with increased

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production levels as we ramped up activity during the first quarter following a near shutdown in late 2017. This was partially offset by a reduction in manufacturing overhead and productivity improvements. The operating margin decreased from 10.4% during the six months ended June 30, 2017, to a loss of 1.9% during the six months ended June 30, 2018.

Gearing Segment

The following table summarizes the Gearing segment operating results for the six months ended June 30, 2018 and 2017:


	Six Months Ended
	June 30,
	2018			2017
Orders	$	21,514		$	18,963
Revenues		17,438			9,942
Operating loss		(1,288)			(2,165)
Operating margin		(7.4)	%		(21.8)	%

Gearing segment orders increased $2,551 from the six months ended June 30, 2017, primarily due to the recovery in demand from O&G and mining customers. As a result of the recovery in order intake that began in the prior year, revenue increased from $9,942 during the six months ended June 30, 2017, to $17,438 during the six months ended June 30, 2018.

The Gearing segment operating loss improved by $877, from $2,165 during the six months ended June 30, 2017, to $1,288 during the six months ended June 30, 2018. The operating loss narrowed as a result of the revenue increase, which was partially offset by supply chain disruptions and general manufacturing inefficiencies and increased commissions to support higher volumes. The operating margin improved based on the above items from (21.8%) during the six months ended June 30, 2017, to (7.4%) during the six months ended June 30, 2018.

Process Systems Segment

The following table summarizes the Process Systems segment operating results for the six months ended June 30, 2018 and 2017:


	Six Months Ended
	June 30,
	2018			2017
Orders	$	7,916		$	8,058
Revenues		8,525			6,258
Impairment charges		4,993			-
Operating loss		(6,664)			(1,921)
Operating margin		(78.2)	%		(30.7)

Process Systems segment orders decreased $142 from $8,058 during the six months ended June 30, 2017, to $7,916 during the six months ended June 30, 2018 due to weaker natural gas turbine component demand, partially offset by higher demand for mining and oil and gas fabrications. Process Systems segment revenues increased by $2,267, from $6,258 during the six months ended June 30, 2017, to $8,525 during the six months ended June 30, 2018 primarily due to the recovery in mining and other industrial markets.

The Process Systems segment operating loss increased by $4,743, from $1,921 during the six months ended June 30, 2017, to $6,664 during the six months ended June 30, 2018 primarily due to the $4,993 impairment charge resulting from the write-off of goodwill. The operating margin decreased from (30.7%) during the six months ended June 30, 2017, to (78.2%) during the six months ended June 30, 2018.

Corporate and Other

Corporate and Other expenses decreased by $1,935, from $3,476 during the six months ended June 30, 2017, to $1,541 during the six months ended June 30, 2018. The decrease was primarily attributable to the reversal of the accrued Red Wolf earn-out reserve of $1,140 and salaries and benefits expense being $356 lower.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of June 30, 2018, cash and cash equivalents totaled $76, in line with the $78 balance as of December 31, 2017. Cash balances remain minimal as operating receipts and disbursements flow through our Credit Facility, which is in a drawn position. Total debt and capital lease obligations at June 30, 2018 totaled $21,345, including the $2,600 related to the New

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Markets Tax Credit Transaction, which was forgiven subsequent to June 30, 2018. We had the ability to borrow up to an additional $9,634 under the Credit Facility (as defined in Note 8 “Debt and Credit Agreements” in the notes to our condensed consolidated financial statements). We anticipate that we will be able to satisfy the cash requirements associated with, among other things, working capital needs, capital expenditures and lease commitments through at least the next twelve months primarily through cash generated from operations, available cash balances, the Credit Facility, additional equipment financing, and access to the public or private debt equity markets, including the option to raise capital from the sale of our securities under the Form S-3.

On January 29, 2018, we executed the Third Amendment to Loan and Security Agreement which waived the Fixed Charge Coverage Ratio Covenant as of December 31, 2017 and added new minimum earnings before interest, taxes, depreciation, amortization, share-based payments, restructuring costs, and intangible impairments (“EBITDA”) and capital expenditure covenants through June 30, 2018. Among other changes, the amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated commencing with the quarter ending June 30, 2018.

On May 3, 2018, we executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), waiving our non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amends the minimum EBITDA thresholds through the period ending June 30, 2018 and adjusts the definition of EBITDA to add back certain restructuring expenses. We are in compliance with all debt covenants at June 30, 2018.

We anticipate that current cash resources, amounts available under the Credit Facility, cash to be generated from operations, and any potential proceeds from the sale of our securities under the Form S-3 or other private raised funds will be adequate to meet our liquidity needs for at least the next twelve months. If assumptions regarding our production, sales and subsequent collections from certain of our large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, we may encounter cash flow and liquidity issues. Additionally new or existing customers may request acceleration of production or we may accept new orders or modify existing orders to purchase steel opportunistically or to build products without deposits, which will reduce our liquidity. Further in advance of anticipated cash needs, we may also issue debt or sell equity or equity linked securities.

If our operational performance does not improve, we may be unable to comply with existing financial covenants, and could lose access to the Credit Facility. This could limit our operational flexibility, require a delay in making planned investments and/or require us to seek additional equity or debt financing. Any attempt to raise equity through the public markets could have a negative effect on our stock price, making an equity raise more difficult or more dilutive. Any additional equity financing or equity linked financing, if available, will be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other operating and financial restrictions on us. While we believe that we will continue to have sufficient cash available to operate our businesses and to meet our financial obligations and debt covenants, there can be no assurances that our operations will generate sufficient cash or that existing or new credit facilities or equity or equity linked financings will be available in an amount sufficient to enable us to meet these financial obligations.

Sources and Uses of Cash

Operating Cash Flows

During the six months ended June 30, 2018, net cash used in operating activities totaled $2,793, compared to net cash used in operating activities of $14,503 for the six months ended June 30, 2017. The operating cash outflow improved versus the prior year despite lower operating income because in 2017 accounts receivable rose and customer deposits declined as our largest tower customer slowed orders in order to correct inventories during the second half of 2017. During the current year, operational working capital remained relatively unchanged as increased receivables and inventories were largely offset by increases in accounts payable and other current liabilities.

Investing Cash Flows

During the six months ended June 30, 2018, net cash used in investing activities totaled $1,676, compared to net cash used in investing activities of $17,515 during the six months ended June 30, 2017. The decrease in net cash used in investing activities as compared to the prior-year period was primarily due to the $16,449 cash paid for the Red Wolf acquisition and a $2,628 decrease in investments in property and equipment partially offset by the $3,171 liquidation of available-for-sale securities in 2017.

Financing Cash Flows

During the six months ended June 30, 2018, net cash provided by financing activities totaled $4,505, compared to net cash provided by financing activities of $13,396 for the six months ended June 30, 2017. The decrease in net cash provided by

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financing activities as compared to the prior-year period was primarily due to the decrease of $9,928 borrowings from the Credit Facility during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 partially offset by proceeds of long-term debt of $1,410 during the six months ended June 30, 2018.

Other

Included in Line of Credit, NMTC and other notes payable line item of our consolidated financial statements is $2,600 associated with the New Markets Tax Credit transaction described further in Note 16, “New Markets Tax Credit Transaction” in the notes to our condensed consolidated financial statements. Additionally we entered into a $570 loan agreement with the Development Corporation of Abilene which is included in Long-term debt, less current maturities. The loan is forgivable upon meeting and maintaining specific employment thresholds. In addition, we have outstanding notes payable for capital expenditures in the amount of $2,333 and $1,146 as of June 30, 2018 and December 31, 2017, respectively, with $907 and $804 included in the Line of Credit, NMTC and other notes payable line item as of June 30, 2018 and December 31, 2017, respectively. The outstanding notes payable have maturity dates of April 25, 2020, March 25, 2021, February 1, 2021 and May 25, 2021.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The preceding discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2017. Portions of this Quarterly Report on Form 10-Q, including the discussion and analysis in this Item 2, contain “forward looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Forward looking statements include any statement that does not directly relate to a current or historical fact. Our forward-looking statements may include or relate to our beliefs, expectations, plans and/or assumptions with respect to the following: (i) state, local and federal regulatory frameworks affecting the industries in which we compete, including the wind energy industry, and the related extension, continuation or renewal of federal tax incentives and grants and state renewable portfolio standards; (ii) our customer relationships and our substantial dependency on a few significant customers and our efforts to diversify our customer base and sector focus and leverage relationships across business units; (iii) our ability to continue to grow our business organically and through acquisitions; (iv) our production, sales, collections, customer deposits and revenues generated by new customer orders and the resulting cash flows; (v) the sufficiency of our liquidity and alternate sources of funding, if necessary; (vi) our ability to realize revenue from customer orders and backlog; (vii) our ability to operate our business efficiently, manage capital expenditures and costs effectively, and generate cash flow; (viii) the economy and the potential impact it may have on our business, including our customers; (ix) the state of the wind energy market and other energy and industrial markets generally and the impact of competition and economic volatility in those markets; (x) the effects of market disruptions and regular market volatility, including fluctuations in the price of oil, gas and other commodities; (xi) the effects of the change of administrations in the U.S. federal government; (xii) our ability to successfully integrate and operate the business of Red Wolf Company, LLC and to identify, negotiate and execute future acquisitions; and (xiii) the potential loss of tax benefits if we experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended; and (xiv) the impact of future sales of our common stock or securities convertible into our common stock on our stock price. These statements are based on information currently available to us and are subject to various risks, uncertainties and other factors that could cause our actual results to be materially different from the forward-looking statements including, but not limited to, those set forth under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 and in subsequent filings, including the amended and restated risk factors set forth under the caption “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q. We are under no duty to update any of these statements. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties or other factors that could cause our current beliefs, expectations, plans and/or assumptions to change.

Item 3.Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this Item.

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We seek to maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This

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information is also accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal quarter reported on herein. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

The information required by this item is incorporated herein by reference to Note 12, “Legal Proceedings” of the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Item 1A.Risk Factors

There have been material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017, which risk factors have been amended and restated as follows:

Our financial and operating performance is subject to certain factors out of our control, including the state of the wind energy market in North America.

As a supplier of products to wind turbine manufacturers and owners and operators of wind energy generation facilities, our results of operations (like those of our customers) are subject to general economic conditions, and specifically to the state of the wind energy market. In addition to the state and federal government policies supporting renewable energy described above, the growth and development of the larger wind energy market in North America is subject to a number of factors, including, among other things:

the availability and cost of financing for the estimated pipeline of wind energy development projects;

the cost of electricity, which may be affected by a number of factors, including government regulation, power transmission, seasonality, fluctuations in demand, and the cost and availability of fuel and particularly natural gas;

the general demand for electricity or “load growth”

the costs of competing power sources, including natural gas, nuclear power, solar power and other power sources;

the development of new power generating technology or advances in existing technology or discovery of power generating natural resources;

the development of electrical transmission infrastructure;

state and federal laws and regulations regarding avian protection plans and noise or turbine setback requirements;

state and federal laws and regulations, particularly those favoring low carbon energy generation alternatives;

administrative and legal challenges to proposed wind energy development projects;

the improvement in efficiency and cost of wind energy, as influenced by advances in turbine design and operating efficiencies; and

public perception and localized community responses to wind energy projects.

In addition, while some of the factors listed above may only affect individual wind energy project developments or portions of the market, in the aggregate they may have a significant effect on the successful development of the wind energy market as a whole, and thus affect our operating and financial results.

We may have difficulty maintaining our current financing arrangements or obtaining additional financing when needed or on acceptable terms, and there can be no assurance that our operations will generate cash flows in an amount sufficient to enable us to pay our indebtedness.

We rely on banks and capital markets as a source of liquidity for capital requirements not satisfied by cash flows from operations or asset sales. We have experienced operating losses for most periods during which we have operated, and our committed sources of liquidity may be inadequate to satisfy our operational needs. There can be no assurances that even if we were to achieve in part any or all of our strategic objectives that we would be successful in obtaining and improving profitability. If we are not able to access capital at competitive rates, the ability to implement our business plans may be adversely affected. In the absence of access to capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations at times when the prices for such assets or operations are depressed. In such event, we may not be able to consummate those dispositions. Furthermore, the proceeds of any such dispositions may not be adequate to meet our debt service obligations when due.

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Additionally, our ability to comply with the restrictive covenants contained in our debt instruments, to make scheduled payments on our existing or future debt obligations, and to fund our operations will depend on our future financial and operating performance. Such performance is, to a significant extent, subject to general economic, financial, competitive and other factors that are beyond our control. If assumptions regarding our production, sales and subsequent collections from certain of our large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, we may encounter cash flow and liquidity issues. Additionally, new or existing customers may request acceleration of production or we may accept new orders or modify existing orders to purchase steel opportunistically or to build products with deposits, which will reduce our liquidity. There can be no assurances that our operations will generate sufficient cash flows to enable us to maintain compliance with the restrictive covenants contained in our debt instruments, pay our remaining indebtedness or to fund our other liquidity needs. If we cannot make scheduled payments on our debt, we will be in default and, as a result, among other things, our debt holders could declare all outstanding principal and interest to be due and payable which could force us to liquidate certain assets or alter our business operations or debt obligations, and we could be forced into a restructuring, bankruptcy or liquidation. We cannot assure you that we will be able to do any of the foregoing on commercially reasonable terms or at all, or on terms that would be advantageous to our stockholders. In addition, raising capital in the equity capital markets could result in limitations on our ability to use our net operating loss carryforwards.

We are substantially dependent on a few significant customers.

Historically, the majority of our revenues are highly concentrated with a limited number of customers. In 2017, one customer, Siemens Gamesa Renewable Energy (“SGRE”), accounted for more than 10% of our consolidated revenues, and our five largest customers accounted for 85% of our consolidated revenues. Certain of our customers periodically have expressed their intent to scale back, delay or restructure existing customer agreements, which has led to reduced revenues from these customers. It is possible that this may occur again in the future. As a result, our operating profits and gross margins have historically been negatively affected by significant variability in production levels, which has created production volume inefficiencies in our operations and cost structures.

The U.S. wind energy industry is significantly impacted by tax and other economic incentives and political and governmental policies. A significant change in these incentives and policies could significantly impact our results of operations and growth.

We supply products to wind turbine manufacturers and owners and operators of wind energy generation facilities. The U.S. wind energy industry is significantly impacted by federal tax incentives and state Renewable Portfolio Standards (“RPS’s”). Despite recent reductions in the cost of wind energy, due to variability in wind quality and consistency, and other regional differences, wind energy may not be economically viable in certain parts of the country absent such incentives. These programs have provided material incentives to develop wind energy generation facilities and thereby impact the demand for our products. The increased demand for our products that generally results from the credits and incentives could be impacted by the expiration or curtailment of these programs.

One such federal government program, the Production Tax Credit (the “PTC”), provides economic incentives to the owners of wind energy facilities in the form of a tax credit. The PTC has been extended several times since its initial introduction in 1992. The FY16 Omnibus Appropriations Bill, passed on December 18, 2015, included a five-year extension and phase-down of the PTC, as well as providing the option to elect the ITC for wind energy projects. As a result, the PTC has been extended at full value for projects commenced in 2015 and 2016, and will continue at 80% of full value for projects commenced in 2017, 60% for projects commended in 2018, and 40% for projects commenced in 2019. Similarly, for the ITC election, projects that started construction in 2015 and 2016 are eligible for a full 30% ITC, and projects that start construction in 2017, 2018 and 2019 are eligible for an ITC of 24%, 18% and 12%, respectively. As before, the rules allow wind energy projects to qualify so long as construction is started before the end of the respective period.

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RPSs generally require or encourage state regulated electric utilities to supply a certain proportion of electricity from renewable energy sources or to devote a certain portion of their plant capacity to renewable energy generation. Typically, utilities comply with such standards by qualifying for renewable energy credits evidencing the share of electricity that was produced from renewable sources. Under many state standards, these renewable energy credits can be unbundled from their associated energy and traded in a market system, allowing generators with insufficient credits to meet their applicable state mandate. These standards have spurred significant growth in the wind energy industry and a corresponding increase in the demand for our products. Currently, the majority of states have RPS’s in place and certain states have voluntary utility commitments to supply a specific percentage of their electricity from renewable sources. The enactment of RPS’s in additional states or any changes to existing RPS’s (including changes due to the failure to extend or renew the federal incentives described above), or the enactment of a federal RPS or imposition of other greenhouse gas regulations, may impact the demand for our products. We cannot assure that government support for renewable energy will continue. The elimination of, or reduction in, state or federal government policies that support renewable energy could have a material adverse impact on our business, results of operations, financial performance and future development efforts.

New tariffs have resulted in increased prices and could adversely affect our consolidated results of operations, financial position and cash flows. Recently, the Trump Administration imposed Section 232 tariffs on certain steel products imported into the U.S. which have increased the prices of these inputs. Increased prices for imported steel products have lead domestic sellers to respond with market-based increases to prices for such inputs as well. Additional tariffs have been announced that may be imposed on goods imported from China in the future. The new tariffs, along with any additional tariffs or trade restrictions that may be implemented by the U.S. or other countries, could result in further increased prices and a decreased available supply of steel as well as additional imported components and inputs. We may not be able to pass price increases on to our customers and may not be able to secure adequate alternative sources of steel on a timely basis. While retaliatory tariffs imposed by other countries on U.S. goods have not yet had a significant impact, we cannot predict further developments.

U.S. tariffs have been imposed on imported steel, but have not been applied to fabricated wind towers, which could adversely impact our cost structure and competitiveness relative to imported towers. The tariffs could adversely affect the operating profits for certain of our businesses and customer demand for certain of our products which could have a material adverse effect on our consolidated results of operations, financial position and cash flows.

The existence of government subsidies available to our competitors in certain countries may affect our ability to compete on a price basis.

In 2013, the U.S. International Trade Commission (“USITC”) determined that wind towers from China and Vietnam were being sold in the U.S. at less than fair value. As a result of that determination, the U.S. Department of Commerce (“USDOC”) issued antidumping and countervailing duty orders on imports of wind towers from China and an antidumping duty order on imports of towers from Vietnam. Since that time, imports of wind towers from those countries have substantially ceased. Those orders expire in 2018, however, and there can be no assurance that they will be renewed or extended. Additionally, producers in other countries not subject to those orders may benefit from government subsidies (particularly with respect to the price of steel, the primary raw material used in the production of wind towers) which could lead to increased competition from those producers in the U.S. market, causing us to lose market share and/or reducing our margins.

Our customers may be significantly affected by disruptions and volatility in the economy and in the wind energy market.

Market disruptions and regular market volatility, including decreases in oil and commodity prices, may adversely impact our customers’ ability to pay amounts due to us and could cause related increases in our working capital or borrowing needs. In addition, our customers have in the past attempted and may attempt in the future to renegotiate the terms of contracts or reduce the size of orders with us as a result of disruptions and volatility in the markets. We cannot predict with certainty the amount of our backlog that we will ultimately ship to our customers.

Market disruptions and regular market volatility may also result in an increased likelihood of our customers asserting warranty or remediation claims in connection with our products that they would not ordinarily assert in a more stable economic environment. In the event of such a claim, we may incur costs if we decide to compensate the affected customer or to engage in litigation with the affected customer regarding the claim. We maintain product liability insurance, but there can be no guarantee that such insurance will be available or adequate to protect against such claims. A successful claim against us could have a material adverse effect on our business.

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Consolidation among wind turbine manufacturers could increase our customer concentration and/or disrupt our supply chain relationships.

Wind turbine manufacturers are among our primary customers. There has been consolidation among these manufacturers, and more consolidation may occur in the future. For example, both Siemens and Gamesa were customers for our tower business until their business combination in early 2017, at which time SGRE became our largest customer. Customer consolidation may result in pricing pressures, to which we are subject, leading to downward pressure on our margins and profits, and may also disrupt our supply chain relationships.

We face competition from industry participants who may have greater resources than we do.

Our businesses are subject to risks associated with competition from new or existing industry participants who may have more resources and better access to capital. Certain of our competitors and potential competitors may have substantially greater financial resources, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Among other things, these industry participants compete with us based upon price, quality, location and available capacity. We cannot be sure that we will have the resources or expertise to compete successfully in the future. We also cannot be sure that we will be able to match cost reductions by our competitors or that we will be able to succeed in the face of current or future competition.

We face significant risks associated with uncertainties resulting from changes to policies and laws with the current U.S. administration.

The change of administration in the U.S. federal government may affect our business in a manner that currently cannot be reliably predicted, especially given the potentially significant changes to various laws and regulations that affect us. These uncertainties may include changes in laws and policies in areas such as corporate taxation, taxation on imports of internationally-sourced products, international trade including trade treaties such as the North American Free Trade Agreement, environmental protection and workplace safety laws, labor and employment law, immigration and health care, which individually or in the aggregate could materially and adversely affect our business, results of operations or financial condition.

Additionally, if our relationships with significant customers should change materially, it could be difficult for us to immediately and profitably replace lost sales in a market with such concentration, which could have a material adverse effect on our operating and financial results. We could be adversely impacted by decreased customer demand for our products due to (i) the impact of current or future economic conditions on our customers, (ii) our customers’ loss of market share to their competitors that do not use our products, and (iii) our loss of market share with our customers. We could lose market share with our customers to our competitors or to our customers themselves, should they decide to become more vertically integrated and produce the products that we currently provide.

In addition, even if our customers continue to do business with us, we could be adversely affected by a number of other potential developments with our customers. For example:

The inability or failure of our customers to meet their contractual obligations could have a material adverse effect on our business, financial position and results of operations.

Certain customer contracts provide the customer with the opportunity to cancel a substantial portion of its volume obligation by providing us with notice of such election prior to commencement of production. Such contracts generally require the customer to pay a sliding cancelation fee based on how far in advance of commencement of production such notice is provided.

If we are unable to deliver products to our customers in accordance with an agreed upon schedule we may become subject to liquidated damages provisions in certain supply agreements for the period of time we are unable to deliver finished products. Although the liquidated damages provisions are generally capped, they can become significant and may have a negative impact on our profit margins and financial results.

A material change in payment terms with a significant customer could have a material adverse effect on our short term cash flows.

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We rely on unionized labor, the loss of which could adversely affect our future success.

We depend on the services of unionized labor and have collective bargaining agreements with certain of our operations workforce at our Cicero, Illinois and Neville Island, Pennsylvania Gearing facilities. The loss of the services of these and other personnel, whether through terminations, attrition, labor strike or otherwise, or a material change in our collective bargaining agreements, could have a material adverse impact on us and our future profitability. In November 2017, a three-year collective bargaining agreement was ratified by the collective bargaining union in our Neville Island facility and is expected to remain in effect through October 2022. The collective bargaining agreement with the Cicero union expired in February 2018; the parties are currently negotiating a new collective bargaining agreement. As of June 30, 2018, these collective bargaining units represented approximately 16% of our workforce.

Our plans for growth and diversification may not be successful, and could result in poor financial performance.

We have made a strategic decision to diversify our business further into natural gas turbine (“NGT”) power generation, O&G, mining and other industries, particularly within our gearing and Heavy Fabrications businesses and through our 2017 acquisition of Red Wolf. While we have historically participated in most of these lines of business, there is no assurance that we will be able to grow our presence in these markets at a rate sufficient to compensate for a potentially weaker wind energy market. Moreover, our participation in these markets may require additional investments in personnel, equipment and operational infrastructure. If we are unable to further penetrate these markets, our plans to diversify our operations may not be successful and our anticipated future growth may be adversely affected.

We may also grow our business through increased production levels at existing facilities and through acquisitions. Such growth will require coordinated efforts across the Company and continued enhancements to our current operating infrastructure, including management and operations personnel, systems, equipment and property. Moreover, if our efforts do not adequately predict the demand of our customers and our potential customers, our future earnings may be adversely affected.

If our projections regarding the future market demand for our products are inaccurate, our operating results and our overall business may be adversely affected.

We have previously made significant capital investments in anticipation of rapid growth in the U.S. wind energy market. However, the growth in the U.S. wind energy market has not kept pace with our expectations when some of these capital investments were made, and there can be no assurance that the U.S. wind energy market will grow and develop in a manner consistent with our expectations, or that we will be able to fill our capacity through the further diversification of our operations. Our internal manufacturing capabilities have required significant upfront fixed costs. If market demand for our products does not increase at the pace we have anticipated and align with our manufacturing capacity, we may be unable to offset these costs and achieve economies of scale, and our operating results may continue to be adversely affected by high fixed costs, reduced margins and underutilization of capacity. In light of these considerations, we may be forced to reduce our labor force and production to minimum levels, as was done in 2017, temporarily idle existing capacity or sell to third parties manufacturing capacity that we cannot utilize in the near term, in addition to the steps that we have already taken to adjust our capacity more closely to demand. Alternatively, if we experience rapid increased demand for our products in excess of our estimates, or we reduce our manufacturing capacity, our installed capital equipment and existing workforce may be insufficient to support higher production volumes, which could adversely affect our customer relationships and overall reputation. In addition, we may not be able to expand our workforce and operations in a timely manner, procure adequate resources or locate suitable third party suppliers to respond effectively to changes in demand for our existing products or to the demand for new products requested by our customers, and our business could be adversely affected. Our ability to meet such excess customer demand could also depend on our ability to raise additional capital and effectively scale our manufacturing operations.

Our growth strategies could be ineffective due to the risks of acquisitions and risks relating to integration.

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Our growth strategy has included acquiring complementary businesses, such as Red Wolf, as more fully described in Note 17, “Business Combinations” in the notes to our condensed consolidated financial statements. In regards to Red Wolf, or any other future acquisitions, we could fail to identify, finance or complete suitable acquisitions on acceptable terms and prices. Acquisitions and the related integration processes could increase a number of risks, including diversion of operations personnel, financial personnel and management’s attention, difficulties in integrating systems and operations, potential loss of key employees and customers of the acquired companies and exposure to unanticipated liabilities. The price we pay for a business may exceed the value realized and we cannot provide any assurance that we will realize the expected synergies and benefits of any acquisition, including Red Wolf. Our discovery of, or failure to discover, material issues during due diligence investigations of acquisition targets, either before closing with regard to potential risks of the acquired operations, or after closing with regard to the timely discovery of breaches of representations or warranties, could materially harm our business. Our failure to meet the challenges involved in integrating a new business to realize the anticipated benefits of an acquisition could cause an interruption or loss of momentum in our existing activities and could adversely affect our profitability. Acquisitions also may result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial position and operating results.

Our diversification outside of the wind energy market exposes us to business risks associated with the NGT, O&G and mining industries, among others, which may slow our growth or penetration in these markets.

Although we have experience in the CNG and NGT market through the Process Systems segment, and experience in O&G and mining markets through our gearing and heavy fabrications businesses, these markets have not historically been our primary focus. In further diversifying our business to serve these markets, we face competitors who may have more resources, longer operating histories and more well established relationships than we do, and we may not be able to successfully or profitably generate additional business opportunities in these industries. Moreover, if we are able to successfully diversify into these markets, our businesses may be exposed to risks associated with these industries, which could adversely affect our future earnings and growth. These risks include, among other things:

the prices and relative demand for oil, gas, minerals and other commodities;

domestic and global political and economic conditions affecting the O&G and mining industries;

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changes in NGT, O&G and mining technology;

the price and availability of alternative fuels and energy sources, as well as changes in energy consumption or supply; and

federal, state and local regulations, including, among others, regulations relating to hydraulic fracturing and greenhouse gas emissions.

We have substantially generated net losses since our inception.

We have experienced operating losses since inception, except that we were profitable in 2016. We have incurred significant costs in connection with the development of our businesses, and because we have operated at low capacity utilization in certain facilities, there is no assurance that we will generate sufficient revenues to offset anticipated operating costs. Although we anticipate deriving revenues from the sale of our products, no assurance can be given that these products can be sold on a profitable basis. We cannot give any assurance that we will be able to sustain or increase profitability on a quarterly or annual basis in the future.

Current or future litigation and regulatory actions could have a material adverse impact on us.

From time to time, we are subject to litigation and other legal and regulatory proceedings relating to our business. No assurance can be given that the results of these matters will be favorable to us. An adverse resolution of lawsuits, investigations or arbitrations could have a material adverse effect on our business, financial condition and results of operations. Defending ourselves in these matters may be time consuming, expensive and disruptive to normal business operations and may result in significant expense and a diversion of management’s time and attention from the operation of our business, which could impede our ability to achieve our business objectives. Additionally, any amount that we may be required to pay to satisfy a judgment or settlement may not be covered by insurance. Under our charter and the indemnification agreements that we have entered into with our officers, directors and certain third parties, we are required to indemnify and advance expenses to them in connection with their participation in certain proceedings. There can be no assurance that any of these payments will not be material.

We may need to hire additional qualified personnel, including management personnel, and the loss of our key personnel could adversely affect our business.

Our future success will depend largely on the skills, efforts and motivation of our executive officers and other key personnel. Our success also depends, in large part, upon our ability to attract and retain highly qualified management and other key personnel throughout our organization. We face competition in the attraction and retention of personnel who possess the skill sets we seek. In addition, key personnel may leave us and subsequently compete against us. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our business, results of operations or financial condition.

We could incur substantial costs to comply with environmental, health and safety (“EHS”) laws and regulations and to address violations of or liabilities under these requirements.

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Our operations are subject to a variety of EHS laws and regulations in the jurisdictions in which we operate and sell products governing, among other things, health, safety, pollution and protection of the environment and natural resources, including the use, handling, transportation and disposal of non hazardous and hazardous materials and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, groundwater and soil, product content, performance and packaging. We cannot guarantee that we have been, or will at all times be in compliance with such laws and regulations. Changes in existing EHS laws and regulations, or their application, could cause us to incur additional or unexpected costs to achieve or maintain compliance. Failure to comply with these laws and regulations, obtain the necessary permits to operate our business, or comply with the terms and conditions of such permits may subject us to a variety of administrative, civil and criminal enforcement measures, including the imposition of civil and criminal sanctions, monetary fines and penalties, remedial obligations, and the issuance of compliance requirements limiting or preventing some or all of our operations. The assertion of claims relating to regulatory compliance, on or off site contamination, natural resource damage, the discovery of previously unknown environmental liabilities, the imposition of criminal or civil fines or penalties and/or other sanctions, or the obligation to undertake investigation, remediation or monitoring activities could result in potentially significant costs and expenditures to address contamination or resolve claims or liabilities. Such costs and expenditures could have a material adverse effect on our business, financial condition or results of operations. Under certain circumstances, violation of such EHS laws and regulations could result in us being disqualified from eligibility to receive federal government contracts or subcontracts under the federal government’s debarment and suspension system.

We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of currently and formerly owned, leased or operated properties, or properties to which hazardous substances or wastes were sent by current or former operators at our current or former facilities, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. Several of our facilities have a history of industrial operations, and contaminants have been detected at some of our facilities. The presence of contamination from hazardous substances or wastes could interfere with ongoing operations or adversely affect our ability to sell, lease or use our properties as collateral for financing. We also could be held liable under third party claims for property damage, natural resource damage or personal injury and for penalties and other damages under such environmental laws and regulations, which could have a material adverse effect on our business, financial condition and results of operations.

Our ability to comply with regulatory requirements is critical to our future success, and there can be no guarantee that our businesses are in full compliance with all such requirements.

As a manufacturer and distributor of wind and other energy industry products we are subject to the requirements of federal, state, local and foreign regulatory authorities. In addition, we are subject to a number of industry standard setting authorities, such as the American Gear Manufacturers Association and the American Welding Society. Changes in the standards and requirements imposed by such authorities could have a material adverse effect on us. In the event we are unable to meet any such standards when adopted, our businesses could be adversely affected. We may not be able to obtain all regulatory approvals, licenses and permits that may be required in the future, or any necessary modifications to existing regulatory approvals, licenses and permits, or maintain all required regulatory approvals, licenses and permits. There can be no guarantee that our businesses are fully compliant with such standards and requirements.

We may be unable to keep pace with rapidly changing technology in wind turbine and other industrial component manufacturing.

The global market for wind turbines, as well as for our other manufactured industrial components, is rapidly evolving technologically. Our component manufacturing equipment and technology may not be suited for future generations of products being developed by wind turbine companies. For example, some wind turbine manufacturers are using wind turbine towers made partially or fully from concrete instead of steel. Other wind turbine designs have reduced the use of gearing or eliminated the gearbox entirely through the use of direct or compact drive technologies. To maintain a successful business in our field, we must keep pace with technological developments and the changing standards of our customers and potential customers and meet their constantly evolving demands. If we fail to adequately respond to the technological changes in our industry, or are not suited to provide components for new types of wind turbines, our business, financial condition and operating results may be adversely affected.

Disruptions in the supply of parts and raw materials, or changes in supplier relations, may negatively impact our operating results.

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We are dependent upon the supply of certain raw materials used in our production process, and these raw materials are exposed to price fluctuations on the open market. Raw material costs for materials such as steel, our primary raw material, have fluctuated significantly and may continue to fluctuate. To reduce price risk caused by market fluctuations, we have generally tried to match raw material purchases to our sales contracts or incorporated price adjustment clauses in our contracts. However, limitations on availability of raw materials or increases in the cost of raw materials (including steel), energy, transportation and other necessary services may impact our operating results if our manufacturing businesses are not able to fully pass on the costs associated with such increases to their respective customers. Alternatively, we will not realize material improvements from declines in steel prices as the terms of our contracts generally require that we pass these cost savings through to our customers. In addition, we may encounter supplier constraints, be unable to maintain favorable supplier arrangements and relations or be affected by disruptions in the supply chain caused by events such as natural disasters, shipping delays, power outages and labor strikes. Additionally, our supply chain has become more global in nature and, thus, more complex from a shipping and logistics perspective. In the event of limitations on availability of raw materials or significant changes in the cost of raw materials, particularly steel, our margins and profitability could be negatively impacted.

If our estimates for warranty expenses differ materially from actual claims made, or if we are unable to reasonably estimate future warranty expense for our products, our business and financial results could be adversely affected.

We provide warranty terms generally ranging between one and five years to our customers depending upon the specific product and terms of the customer agreement. We reserve for warranty claims based on prior experience and estimates made by management based upon a percentage of our sales revenues related to such products. From time to time, customers have submitted warranty claims to us. However, we have a limited history on which to base our warranty estimates for certain of our manufactured products. Our assumptions could materially differ from the actual performance of our products in the future and could exceed the levels against which we have reserved. In some instances our customers have interpreted the scope and coverage of certain of our warranty provisions differently from our interpretation of such provisions. The expenses associated with remediation activities in the wind energy industry can be substantial, and if we are required to pay such costs in connection with a customer’s warranty claim, we could be subject to additional unplanned cash expenditures. If our estimates prove materially incorrect, or if we are required to cover remediation expenses in addition to our regular warranty coverage, we could be required to incur additional expenses and could face a material unplanned cash expenditure, which could adversely affect our business, financial condition and results of operations.

If we are unable to produce, maintain and disseminate relevant and/or reliable data and information pertaining to our business in an efficient, cost-effective, secure and well-controlled fashion and avoid security breaches affecting our information technology systems, such inability may have significant negative impacts on our confidentiality obligations, and proprietary needs and therefore on our future operations, profitability and competitive position.

Management relies on information technology infrastructure and architecture, including hardware, network, software, people and processes, to provide useful and confidential information to conduct our business in the ordinary course, including correspondence and commercial data and information interchange with customers, suppliers, consultants, advisors and governmental agencies, and to support assessments and conclusions about future plans and initiatives pertaining to market demands, operating performance and competitive positioning. In addition, any material failure, interruption of service, compromised data security or cybersecurity threat could adversely affect our relations with suppliers and customers, place us in violation of confidentiality and data protection laws, rules and regulations, and result in negative impacts to our market share, operations and profitability. Security breaches in our information technology could result in theft, destruction, loss, misappropriation or release of confidential data or intellectual property which could adversely impact our future results.

Future sales of our common stock or securities convertible into our common stock may depress our stock price.

Sales of a substantial number of shares of our common stock or securities convertible into our common stock in the public market, or the perception that these sales might occur, may reduce the prevailing market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities and may make it more difficult for our stockholders to sell their common stock at a time and price that they deem appropriate.

On August 11, 2017, we filed a registration statement on Form S-3 (File No. 333-219931), which was declared effective by the SEC on October 10, 2017, to register securities that we may choose to issue in the future (the “Broadwind Form S-3”). Under the registration statement, we have the option to offer and sell up to $50,000 in the aggregate of securities in one or more offerings.

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Limitations on our ability to utilize our net operating losses (“NOLs”) may negatively affect our financial results.

We may not be able to utilize all of our NOLs. For financial statement presentation, all benefits associated with the NOL carryforwards have been reserved; therefore, this potential asset is not reflected on our balance sheet. To the extent available, we will use any NOL carryforwards to reduce the U.S. corporate income tax liability associated with our operations. However, if we do not achieve profitability prior to their expiration, we will not be able to fully utilize our NOLs to offset income. Section 382 of the IRC (“Section 382”) generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. Our ability to utilize NOL carryforwards and built in losses may be limited, under Section 382 or otherwise, by our issuance of common stock or by other changes in ownership of our stock. After analyzing Section 382 in 2010 we determined that aggregate changes in our stock ownership had triggered an annual limitation of NOL carryforwards and built in losses available for utilization to $14,284 per annum. Although this event limited the amount of pre ownership change date NOLs and built in losses we can utilize annually, it does not preclude us from fully utilizing our current NOL carryforwards prior to their expiration. However, subsequent changes in our stock ownership could further limit our ability to use our NOL carryforwards and our income could be subject to taxation earlier than it would if we were able to use NOL carryforwards and built in losses without an annual limitation, which could result in lower profits. To address these concerns, in February 2013 we adopted a Section 382 Stockholder Rights Plan, which was subsequently approved by our stockholders and extended in 2016 for an additional three-year period (as amended, the “Rights Plan”), designed to preserve our substantial tax assets associated with NOL carryforwards under Section 382. The Rights Plan is intended to deter any person or group from being or becoming the beneficial owner of 4.9% or more of our common stock and thereby triggering a further limitation of our available NOL carryforwards. See Note 10, “Income Taxes” of our condensed consolidated financial statements for further discussion of our Rights Plan. There can be no assurance that the Rights Plan will be effective in protecting our NOL carryforwards.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not Applicable

Item 5.Other Information

Not Applicable

Item 6.Exhibits

The exhibits listed on the Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.

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EXHIBIT INDEX

BROADWIND ENERGY, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2018

Exhibit Number		Exhibit
10.1		Broadwind Energy, Inc. 2015 Equity Incentive Plan Restricted Stock Unit Award Notice*
10.2		Fourth Amendment to Loan and Security Agreement, dated May 3, 2018 among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc., Red Wolf Company, LLC, and CIBC Bank USA (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018)
10.3		Severance and Non-Competition Agreement dated as of May 4, 2018 between the Company and Eric Blashford (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 3, 2018)
31.1		Rule 13a-14(a) Certification of Chief Executive Officer*
31.2		Rule 13a-14(a) Certification of Chief Financial Officer*
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer*
32.2		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer*
101		The following financial information from this Form 10-Q of Broadwind Energy, Inc. for the quarter ended June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.

*Filed herewith.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BROADWIND ENERGY, INC.


July 31, 2018	By:	/s/ Stephanie K. Kushner
		Stephanie K. Kushner
		President, Chief Executive Officer
		(Principal Executive Officer)
July 31, 2018	By:	/s/ Jason L. Bonfigt
		Jason L. Bonfigt
		Vice President, Chief Financial Officer (Principal Financial Officer)