Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

** **
| **x**                                                  | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                             | ** ** | ** **                                                                                              |
| **For the  quarterly period ended June 30, 2009** |
| ** **                                             | ** ** | ** **                                                                                              |
| **o**                                                  | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from              to             **

 

**Commissionfile number****0-****31313**

 

 

**BROADWIND ENERGY, INC.**

(Exact name of registrant as specified in itscharter)

 

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

 

**47 EastChicago Avenue, Suite 332, Naperville, IL 60540**

(Address of principal executive offices)

 

**(630)637-0315**

(Registrant’s telephone number, including areacode)

 

###### **Not applicable**

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

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such files). Yes o No o

 

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

 

| Large accelerated filer o                      |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a smaller  reporting company) |   |                              |

 

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

 

Number of shares of registrant’s common stock, parvalue $0.001, outstanding as of August 6, 2009: 96,601,782

 

 

 

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**BROADWIND ENERGY, INC. ANDSUBSIDIARIES**

 

**INDEX**

 
| ** ** | ** **                                                                                  | ** ** | **Page No.** |
|------------|---------------------------------------------------------------------------------------------|------------|-------------------|
|       |                                                                                        |       |              |
|       | **PART I. FINANCIAL INFORMATION**                                                      |       |              |
|       |                                                                                        |       |              |
| Item 1.    | Financial Statements                                                                        |       | 3                 |
|       | Condensed Consolidated Balance Sheets                                                       |       | 3                 |
|       | Condensed Consolidated Statements of Operations                                             |       | 4                 |
|       | Condensed Consolidated Statements of Cash Flows                                             |       | 5                 |
|       | Notes to Condensed Consolidated Financial Statements                                        |       | 6                 |
|       |                                                                                        |       |              |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 22                |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 36                |
| Item 4.    | Controls and  Procedures                                                                    |       | 36                |
|       |                                                                                        |       |              |
|       | **PART II.  OTHER INFORMATION**                                                        |       |              |
|       |                                                                                        |       |              |
| Item 1.    | Legal Proceedings                                                                           |       | 37                |
| Item 1A.   | Risk Factors                                                                                |       | 37                |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 37                |
| Item 3.    | Defaults  Upon Senior Securities                                                            |       | 37                |
| Item 4.    | Submission  of Matters to a Vote of Security Holders                                        |       | 38                |
| Item 5.    | Other Information                                                                           |       | 38                |
| Item 6.    | Exhibits                                                                                    |       | 38                |
| Signatures |                                                                                        | 39         |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.****          ****Financial Statements**

 

**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share data)**

 
| ** **                                                                                                                                                                                 | ** ** | **June 30** | ** **    | **December 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|---------------|----------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **2009**         | ** **    | **2008**             | ** ** |
| ** **                                                                                                                                                                                 | ** ** | **(Unaudited)**  | ** **    | ** **           | ** ** |
| **ASSETS**                                                                                                                                                                                 |       |             |          |                 |       |
| **CURRENT ASSETS:**                                                                                                                                                                        |       |             |          |                 |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                |  7,834   |                 | $          |  15,253 |   |
| Restricted cash                                                                                                                                                                            |       | 2,503            |          | 500                  |       |
| Accounts receivable, net of allowance for doubtful  accounts of $666 and $1,504 as of June 30, 2009 and December 31,  2008, respectively                                         |       | 26,716           |          | 36,709               |       |
| Inventories, net                                                                                                                                                                           |       | 35,274           |          | 41,895               |       |
| Prepaid expenses and other current assets                                                                                                                                                  |       | 2,604            |          | 3,862                |       |
| Total current assets                                                                                                                                                                       |       | 74,931           |          | 98,219               |       |
| Property and equipment, net                                                                                                                                                                |       | 141,651          |          | 144,707              |       |
| Goodwill                                                                                                                                                                                   |       | 33,984           |          | 30,954               |       |
| Intangible assets, net                                                                                                                                                                     |       | 99,781           |          | 105,593              |       |
| Other assets                                                                                                                                                                               |       | 1,597            |          | 275                  |       |
| **TOTAL ASSETS**                                                                                                                                                                           |       | $                |  351,944 |                 | $          |  379,748 |   |
|                                                                                                                                                                                       |       |             |          |                 |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |       |             |          |                 |       |
| **CURRENT LIABILITIES:**                                                                                                                                                                   |       |             |          |                 |       |
| Lines of credit and notes payable                                                                                                                                                          |       | $                |  12,522  |                 | $          |  3,340 |   |
| Current maturities of long-term debt                                                                                                                                                       |       | 8,814            |          | 9,711                |       |
| Current portions of capital lease obligations                                                                                                                                              |       | 1,037            |          | 978                  |       |
| Accounts payable                                                                                                                                                                           |       | 31,634           |          | 40,225               |       |
| Accrued liabilities                                                                                                                                                                        |       | 8,108            |          | 10,386               |       |
| Customer deposits                                                                                                                                                                          |       | 12,800           |          | 21,102               |       |
| Total current liabilities                                                                                                                                                                  |       | 74,915           |          | 85,742               |       |
|                                                                                                                                                                                       |       |             |          |                 |       |
| **LONG-TERM LIABILITIES:**                                                                                                                                                                 |       |             |          |                 |       |
| Long-term debt, net of current maturities                                                                                                                                                  |       | 19,481           |          | 25,792               |       |
| Long-term capital lease obligations, net of  current portions                                                                                                                              |       | 3,841            |          | 3,521                |       |
| Interest rate swap agreements                                                                                                                                                              |       | 384              |          | 582                  |       |
| Deferred income tax liabilities                                                                                                                                                            |       | 1,277            |          | 1,497                |       |
| Other                                                                                                                                                                                      |       | 654              |          | 458                  |       |
| Total long-term liabilities                                                                                                                                                                |       | 25,637           |          | 31,850               |       |
|                                                                                                                                                                                       |       |             |          |                 |       |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                                                                          |       |             |          |                 |       |
|                                                                                                                                                                                       |       |             |          |                 |       |
| **STOCKHOLDERS’ EQUITY:**                                                                                                                                                             |       |             |          |                 |       |
| Preferred stock, $0.001 par value; 10,000,000  shares authorized; no shares issued or outstanding                                                                                          |       | —           |          | —               |       |
| Common stock, $0.001 par value; 150,000,000 shares  authorized; 96,601,782 and 96,470,415 shares issued and outstanding as of  June 30, 2009 and December 31, 2008, respectively |       | 97               |          | 96                   |       |
| Additional paid-in capital                                                                                                                                                                 |       | 299,033          |          | 297,222              |       |
| Accumulated deficit                                                                                                                                                                        |       | (47,738          | )             | (35,162              | )          |
| Total stockholders’ equity                                                                                                                                                            |       | 251,392          |          | 262,156              |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                       |       | $                | 351,944       |                 | $          |  379,748 |   |

 

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

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(Inthousands, except per share data)**

 
| ** **                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                          | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Revenues                                                            |       | $                                    | 52,313     |                               | $          | 40,830 |   | $ | 105,375 |   | $ | 75,994 |   |
| Cost  of sales                                                      |       | 49,162                               |       | 30,739                             |       | 97,539 |   | 57,893 |   |
| Gross  margin                                                       |       | 3,151                                |       | 10,091                             |       | 7,836 |   | 18,101 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| **OPERATING EXPENSES:**                                             |       |                                 |       |                               |       |   |   |   |   |
| Selling,  general and administrative                                |       | 10,525                               |       | 8,995                              |       | 19,441 |   | 16,365 |   |
| Intangible  amortization                                            |       | 2,906                                |       | 2,738                              |       | 5,812 |   | 5,317 |   |
| Total  operating expenses                                           |       | 13,431                               |       | 11,733                             |       | 25,253 |   | 21,682 |   |
| Operating  loss                                                     |       | (10,280                              | )          | (1,642                             | )          | (17,417 | ) | (3,581 | ) |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| **OTHER INCOME (EXPENSE), net:**                                    |       |                                 |       |                               |       |   |   |   |   |
| Interest  income                                                    |       | 93                                   |       | 327                                |       | 104 |   | 447 |   |
| Interest  expense                                                   |       | (650                                 | )          | (1,121                             | )          | (1,203 | ) | (2,458 | ) |
| Other,  net                                                         |       | 5,574                                |       | 475                                |       | 5,667 |   | 376 |   |
| Total  other income (expense), net                                  |       | 5,017                                |       | (319                               | )          | 4,568 |   | (1,635 | ) |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Net  loss before provision (benefit) for income taxes               |       | (5,263                               | )          | (1,961                             | )          | (12,849 | ) | (5,216 | ) |
| **PROVISION (BENEFIT) FOR INCOME TAXES**                            |       | 163                                  |       | 12                                 |       | (273 | ) | 200 |   |
| **NET LOSS**                                                        |       | $                                    | (5,426     | )                                  | $          | (1,973 | ) | $ | (12,576 | ) | $ | (5,416 | ) |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| **NET LOSS PER COMMON SHARE - Basic and diluted**                   |       | $                                    | (0.06      | )                                  | $          | (0.02 | ) | $ | (0.13 | ) | $ | (0.07 | ) |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| **WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and  diluted** |       | 96,547                               |       | 86,822                             |       | 96,520 |   | 83,255 |   |

 

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

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

**(Inthousands)**

 
| ** **                                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                                                                     | ** ** | ** **                         | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                     |       |                               |       |   |   |
| Net loss                                                                                       |       | $                                  | (12,576    | ) | $ | (5,416 | ) |
| **Adjustments to reconcile net loss  to net cash provided by (used in) operating activities:** |       |                               |       |   |   |
| Depreciation and amortization expense                                                          |       | 13,433                             |       | 9,798 |   |
| Unrealized gain on derivatives                                                                 |       | (198                               | )          | (11 | ) |
| Deferred income taxes                                                                          |       | (220                               | )          | 200 |   |
| Stock-based compensation                                                                       |       | 979                                |       | 784 |   |
| Allowance for doubtful accounts                                                                |       | (798                               | )          | (1,708 | ) |
| (Gain) loss on disposal of assets                                                              |       | (46                                | )          | 22 |   |
| Changes in operating assets and liabilities:                                                   |       |                               |       |   |   |
| Accounts receivable                                                                            |       | 10,792                             |       | (10,472 | ) |
| Inventories                                                                                    |       | 6,621                              |       | (5,753 | ) |
| Prepaid expenses and other current assets                                                      |       | 1,252                              |       | 1,101 |   |
| Accounts payable                                                                               |       | (8,650                             | )          | (2,554 | ) |
| Accrued liabilities                                                                            |       | (2,166                             | )          | (3,709 | ) |
| Customer deposits                                                                              |       | (8,301                             | )          | 12,149 |   |
| Other non-current assets                                                                       |       | —                             |       | (865 | ) |
| Net cash provided by (used in) operating activities                                            |       | 122                                |       | (6,434 | ) |
|                                                                                           |       |                               |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                     |       |                               |       |   |   |
| Cash paid for acquisitions, net of cash received                                               |       | —                             |       | (24,955 | ) |
| Purchases of property and equipment                                                            |       | (9,064                             | )          | (20,465 | ) |
| Proceeds from disposals of property and equipment                                              |       | 29                                 |       | — |   |
| Increase in restricted cash                                                                    |       | (2,003                             | )          | (500 | ) |
| Net cash used in investing activities                                                          |       | (11,038                            | )          | (45,920 | ) |
|                                                                                           |       |                               |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                     |       |                               |       |   |   |
| Proceeds from issuance of stock                                                                |       | 445                                |       | 117,725 |   |
| Payments on lines of credit and notes payable                                                  |       | (7,134                             | )          | (1,385 | ) |
| Payments on related party notes payable                                                        |       | —                             |       | (1,365 | ) |
| Proceeds from lines of credit and notes payable                                                |       | 6,079                              |       | 14,835 |   |
| Proceeds from capital and sales-leaseback  transactions                                        |       | 3,641                              |       | — |   |
| Proceeds from deposits on equipment                                                            |       | 665                                |       | — |   |
| Principal payments on capital leases                                                           |       | (585                               | )          | (1,488 | ) |
| Issuance of restricted stock grants                                                            |       | 386                                |       | 119 |   |
| Net cash provided by financing activities                                                      |       | 3,497                              |       | 128,441 |   |
|                                                                                           |       |                               |       |   |   |
| **NET (DECREASE) INCREASE IN CASH  AND CASH EQUIVALENTS**                                      |       | (7,419                             | )          | 76,087 |   |
| **CASH AND CASH EQUIVALENTS,  beginning of period**                                            |       | 15,253                             |       | 5,782 |   |
| **CASH AND CASH EQUIVALENTS, end of  period**                                                  |       | $                                  | 7,834      |   | $ | 81,869 |   |
|                                                                                           |       |                               |       |   |   |
| **Supplemental cash flow  information:**                                                       |       |                               |       |   |   |
| Interest paid, net of capitalized interest                                                     |       | $                                  | 1,214      |   | $ | 2,175 |   |
| Income taxes paid                                                                              |       | $                                  | 535        |   | $ | — |   |
| **Non-cash investing and financing  activities:**                                              |       |                               |       |   |   |
| Common stock issued for acquisitions                                                           |       | $                                  | —     |   | $ | 19,821 |   |
| Non-cash purchase accounting allocation changes                                                |       | $                                  | 3,030      |   | $ | 2,758 |   |

 

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

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**(Inthousands, except share and per share data)**

 

**NOTE 1 — DESCRIPTION OF THE COMPANY**

 

As used in this Quarterly Report on Form 10-Q, the terms “we,”“us,” “our,” “Broadwind,” and the “Company,” refer to Broadwind Energy, Inc.,a Delaware incorporated company headquartered in Naperville, Illinois, and itswholly-owned subsidiaries.

 

**Business Overview**

 

We are a supplier of value-added products and services to the NorthAmerican wind energy sector as well as other energy-related industries. Weprovide our customers, such as leading wind turbine manufacturers anddevelopers, wind farm operators and service companies, with a broad range ofcomponent and service offerings. Since 2006, we have made significant investmentsin the growth of our business through a series of acquisitions and capitalinvestments. In doing so, we have developed a broad, U.S.-based supply chainfor wind energy development in North America. We are also pursuinginternational business opportunities so that we can better serve our customers,enhance our supply chain and develop synergies among our subsidiary companies.In addition, we plan to increase our efforts in developing new technologiesthat will further enhance the products and services we provide our customers inthe wind energy market. Our businesses are currently organized in two operatingsegments: *Products* and *Services*.

 

***Products***

 

The Products segment includes the operations of Brad Foote Gear Works, Inc.(“Brad Foote”), Tower Tech Systems Inc. (“Tower Tech”) and R.B.A., Inc.(“RBA”). This segment specializes in the manufacture and sale of products suchas high precision gears for wind turbines, custom-engineered gearing systemsfor the mining, energy, and industrial sectors, structural wind towers,internal tower components, and large fabricated and machined components for theconstruction and mining industries. Production processes include sophisticatedform grinding and finishing of gears and gear sets, steel plate processing,semi-automated heavy welding and custom corrosion protection of components. Ourprimary focus is on the wind energy industry; however, our Products segmentalso services mining, oil and gas, construction and other industrial energyapplications.

 

The following is a summary of the three subsidiaries that comprise ourProducts segment:

 

·                  **BradFoote,** founded in 1924 and acquired by us in October 2007, producesprecision and custom-engineered gearing systems for the wind power generation,oil production, mining, steel, and transportation industries. Brad Foote hastwo facilities in Cicero, Illinois and one facility in Neville Island,Pennsylvania, which we believe collectively represent the largest gear grindingand carburizing capacity of any single company in North America.

 

·                  **TowerTech,** founded in 2003 and acquired by us in February 2006, manufacturesutility-scale wind towers for wind energy development. Today, Tower Tech is aleading manufacturer of wind towers and specializes in delivering the largerand heavier “next generation” wind towers to our customers. Tower Tech hasfacilities in Manitowoc, Wisconsin and Abilene, Texas and a third wind towermanufacturing facility currently under construction in Brandon, South Dakota.

 

·                  **RBA,** founded in1985 and acquired by us in October 2007, specializes in heavy steelfabrication and performs specialty welding services. RBA refurbishes, assemblesand welds heavy equipment for the crane manufacturing, construction and miningindustries. RBA has facilities in Manitowoc, Wisconsin and Clintonville,Wisconsin.

 

***Services***

 

The Services segment was established upon our acquisition of EnergyMaintenance Service, LLC (“EMS”) in January 2008 and expanded with ouracquisition of Badger Transport, Inc. (“Badger”) in June 2008. Thissegment specializes in construction, operations and maintenance and componentrepair services for the wind energy industry as well as specialized heavy haultrucking services to installation sites. Services provided include constructionand technical support in the erection of wind turbine generators, scheduled andunscheduled maintenance, fiberglass blade repair, retrofit solutions, technicaltraining, and the transportation of oversize/overweight equipment and machinery.The Services segment has service hub locations in South Dakota, Texas andWisconsin and satellite field service centers in California, Colorado andIllinois.

 

The following is a summary of the two subsidiaries that comprise ourServices segment:

 

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·                  **EMS**, founded in 1998 andacquired by us in January 2008, provides construction, operations andmaintenance, and component repair services for the wind energy industry. EMSspecializes in wind turbine repair offerings, including major componentrefurbishing, wind turbine maintenance, construction support and engineeringand advisory services. The company’s customers include turbine and componentmanufacturers, wind farm owners and developers. EMS’s main office is in Gary,South Dakota and it has major repair hubs in Howard, South Dakota and Abilene,Texas as well as satellite field service centers in California, Colorado andIllinois.

 

·                  **Badger**, founded in 1982 andacquired by us in June 2008, is a provider of specialty transportationservices for oversize/overweight equipment and machinery, primarily to the windenergy industry. The company specializes in the transport of tower sections,blades, nacelles and other oversized equipment for large industrialapplications. Badger has been in business for over 25 years, with 15 years inspecialized heavy haul and more than 11 years serving the wind energy industry.Badger operates from its headquarters in Clintonville, Wisconsin.

 

We have a limitedhistory of operations and have incurred operating losses since inception. Weanticipate that the Company’s current cash resources and cash to be generatedfrom operations will be adequate to meet the Company’s liquidity needs for atleast the next twelve months. The Company has amended several of its primarydebt agreements during 2009, which have resulted in reducing debt obligationscoming due during the current year and obtained waivers for financial covenantviolations.  While we expect that we willbe in compliance with the amended and restated covenants contained in the loanagreements, there can be no certainty that we will be in compliance with suchcovenants for any future periods or that we will be able to attain a waiverfrom our lenders in the event of a violation of one or more suchcovenants.  As a result, among otherthings, our debt holders could declare all outstanding principal and interestto be due and payable.  In addition, ifsales and subsequent collections from several large customers, as well asrevenues generated from new customer orders, are not materially consistent withmanagement’s plans, we may encounter cash flow and liquidity issues. Additionalfunding may not be available when needed or on terms acceptable to us and wemay not be able to obtain financing under our current primary debt agreements.If we are unable to obtain additional capital or if our current sources offinancing are reduced or unavailable, we will likely be required to delay,reduce the scope of or eliminate our plans for expansion and growth and thiscould affect our overall operations. Any additional equity financing, ifavailable, may be dilutive to stockholders, and additional debt financing, ifavailable, will likely require covenants that restrict us and certain of suchcovenants may materially restrict us.

 

**NOTE 2 — BASIS OF PRESENTATION**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States (“GAAP”) for interim financial information and inaccordance with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, the financial statements do not include all of theinformation and notes required by GAAP for complete financial statements. Inthe opinion of management, all adjustments, including normal recurringaccruals, considered necessary for a fair presentation have been included.Operating results for the three and six months ended June 30, 2009 are notnecessarily indicative of the results that may be expected for the year ending December 31,2009. The December 31, 2008 condensed consolidated balance sheets werederived from audited financial statements, but do not include all disclosuresrequired by GAAP. This financial information should be read in conjunction withthe consolidated financial statements and notes included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2008.

 

The unaudited condensed consolidated financial statements presentedherein include the accounts of Broadwind Energy, Inc. and its wholly-ownedsubsidiaries. All intercompany transactions and balances have been eliminated.The results of operations of all acquired businesses have been consolidated forall periods subsequent to the date of acquisition. Additionally, certainreclassifications have been made to prior period financial statements toconform to the current period presentation.

 

**NOTE 3— INVENTORIES**

 

Inventories are stated at the lower of cost or market value andprimarily consist of raw material, work-in-process, and finished goods.Work-in-process consists of labor and overhead, processing costs and materialspurchased for specific customer orders. Finished goods consist of componentsmanufactured by the Company that will be used to produce final customerproducts.

 

The components of inventories as of June 30, 2009and December 31, 2008 are summarized as follows:

 
| ** **                                       | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2009**          | ** ** | **2008**              | ** ** |
|                                             |       |              |       |                  |       |
| Raw  materials                                   |       | $                 | 7,110      |                  | $          | 16,429 |   |
| Restricted  material (1)                         |       | 9,936             |       | 9,936                 |       |
| Work-in-process                                  |       | 11,391            |       | 16,226                |       |
| Finished  goods                                  |       | 8,952             |       | 401                   |       |
|                                             |       | 37,389            |       | 42,992                |       |
| Less:  Reserve for excess and obsolete inventory |       | (2,115            | )          | (1,097                | )          |
| Net  inventories                                 |       | $                 | 35,274     |                  | $          | 41,895 |   |

 

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(1) In December 2008, Tower Tech entered into an agreementpursuant to which it agreed to convey to a customer ownership of certain rawmaterials (the “Bailment Materials”) that Tower Tech had acquired for use inconstructing wind turbine towers for such customer, in exchange for the releaseof a down payment of $9,936 paid by the customer pursuant to the terms of apurchase order. In connection with the transaction, the customer caused therelease/cancellation of a letter of credit securing the down-payment (the“L/C”) in order for the cash being held by the L/C issuer as security for theL/C to be released to Tower Tech. The customer also granted Tower Tech asecurity interest in a portion of the Bailment Materials in the event thepurchase order is not fully performed by the customer for any reason other thanthe breach or default of Tower Tech. Tower Tech issued a new performance letterof credit in the amount of $500 as a guarantee of complete performance by TowerTech of its obligations under the purchase order. The Bailment Materialscontinue to be held by Tower Tech as a bailment for the sole and exclusivebenefit and use of the 

 

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customer, and are intended to be used by Tower Tech for construction ofthe wind turbine towers for such customer under the purchase order. As a resultof this transaction, $9,436 was released from restricted cash and madeavailable for other operating purposes.

 

**NOTE4 — BUSINESS ACQUISITIONS**

 

*Energy Maintenance Service, LLC*

 

On January 16, 2008, the Company acquired all of the outstandingmembership interests in EMS, a South Dakota-based company engaged inconstruction support, engineering and maintenance services for the wind energyindustry. The aggregate purchase price was $32,250, excluding $536 oftransaction-related costs. The purchase price consisted of $18,429 of cash and1,629,834 unregistered shares of the Company’s common stock at a price pershare of $8.48. The Company entered into a registration rights agreement withthe former owners of EMS that provides the former owners with demand andpiggyback registration rights. The cash portion of the purchase price wasfinanced by a private placement of the Company’s common stock.

 

*Badger Transport, Inc.*

 

OnJune 4, 2008, the Company acquired all of the outstanding shares ofBadger, a Wisconsin-based provider of transportation services foroversized/overweight equipment and machinery, primarily to the wind energyindustry, for an aggregate purchase price of $11,811, excluding $184 oftransaction-related costs. The purchase price consisted of $5,811 of cash and581,959 unregistered shares of the Company’s common stock at a price per shareof $10.31. The Company entered into a registration rights agreement with theformer owner of Badger that provides the former owner with limited piggybackregistration rights. The cash portion of the purchase price was financed withcash on hand.

 

*ProForma Financial Information*

 

The following tablerepresents the consolidated financial information for the Company on a proformabasis, assuming the acquisitions of EMS and Badger had each occurred as of January 1,2008. The historical financial information for EMS and Badger has been adjustedto give effect to proforma items that are directly attributable to theacquisitions and expected to have a continuing impact on the consolidatedresults. These items include adjustments to depreciation expense related to thefair value of machinery and equipment acquired and amortization expense relatedto intangible assets assigned as a result of these acquisitions.

 

The table sets forthunaudited financial information and has been compiled from historical financialstatements and other information, but is not necessarily indicative of theresults that actually would have been achieved had the transactions occurred onthe dates indicated or that may be achieved in the future.

 
| ** **         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **         | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **         | ** ** | **As  reported**                                    | ** ** | **As  reported**                                  | ** ** | **Pro-forma  adjustments  (Unaudited)** | ** ** | **Pro-forma  (Unaudited)** | ** ** | **As  reported** | ** ** | **As  reported** | ** ** | **Pro-forma  adjustments  (Unaudited)** | ** ** | **Pro-forma  (Unaudited)** | ** ** |
|               |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues           |       | $                                                   | 52,313     |                                              | $          | 40,830 |   | $ | 2,170 | (1) | $ | 43,000 |   | $ | 105,375 |   | $ | 75,994 |   | $ | 3,539 | (3) | $ | 79,533 |   |
| Net  loss          |       | (5,426                                              | )          | (1,973                                            | )          | (803 | )(2) | (2,776 | ) | (12,576 | ) | (5,416 | ) | (1,022 | )(4) | (6,438 | ) |
| Loss  per share    |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic  and diluted |       | $                                                   | (0.06      | )                                                 | $          | (0.02 | ) | $ | (0.01 | ) | $ | (0.03 | ) | $ | (0.13 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.08 | ) |

 

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(1)                  Represents revenue of Badger for theperiod of April 1, 2008 through June 3, 2008.

(2)                  Represents net loss of Badger for theperiod of April 1, 2008 through June 3, 2008. Adjustments to net lossinclude amortization of assigned intangible assets.

(3)                  Represents revenue of EMS for the periodof January 1, 2008 through January 15, 2008 and revenue of Badger forthe period of January 1, 2008 through June 3, 2008.

(4)                  Represents net loss of EMS for the periodof January 1, 2008 through January 15, 2008 and net loss of Badgerfor the period of January 1, 2008 through June 3, 2008. Adjustmentsto net loss include depreciation expense adjustments related to the fair valueof machinery and equipment acquired and amortization of assigned intangibleassets.

 

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**NOTE5 — GOODWILL AND INTANGIBLE ASSETS**

 

Changes in the carrying value of goodwill as of andduring the six months ended June 30, 2009 were as follows:

 
| ** **                                        | ** ** | **Products  segment** | ** ** | **Services  segment** | ** ** | **Total**  | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|------------|------------|
| ** **                                        | ** ** | ** **            | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Goodwill balance as of December 31, 2008** |       | $                     | 21,239     |                  | $          | 9,715      |       | $ | 30,954 |   |
| Purchase  accounting adjustments                  |       | 3,030                 |       | —                |       | 3,030      |       |
| **Goodwill balance as of June 30, 2009**     |       | $                     | 24,269     |                  | $          | 9,715      |       | $ | 33,984 |   |

 

In May 2009, the Company recorded purchase accounting adjustmentsof $3,030 in connection with an escrow settlement agreement with the formerowners of Brad Foote. These adjustments related to the final settlement of taxobligations as part of the purchase price of the Company’s acquisition of BradFoote.

 

Intangible assets represent the fair value assigned to definite-livedassets such as trade names, customer relationships and non-compete agreementsas part of acquisitions completed by the Company. Intangible assets areamortized on a straight-line basis over their estimated useful lives, whichrange from 3 to 20 years. In accordance with the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*(“SFAS 142”)*,*the Company tests intangible assets for impairment only when events orcircumstances indicate that the carrying value of these assets may not berecovered. During the three and six months ended June 30, 2009 and 2008,the Company did not record an impairment charge related to its intangibleassets.

 

A continued economicslowdown may result in impairment to our goodwill and intangible assets andcould result in changes to the Company’s expectations with respect to futurefinancial results and cash flows. These changes could indicate an unfavorablechange to management’s estimates of the fair value of the Company’s reportablesegments and could result in a review of our goodwill and intangible assets,which could indicate potential impairment to the carrying value of theCompany’s assets.

 

As of June 30, 2009 and December 31, 2008, the cost basis,accumulated amortization and net book value of intangible assets were asfollows:

 
| ** **              | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **              | ** ** | ** **             | ** ** | ** **                 | ** ** | **Net** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **              | ** ** | ** **             | ** ** | **Accumulated**            | ** ** | **Book** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Book** | ** ** |
| ** **              | ** ** | **Cost**               | ** ** | **Amortization**           | ** ** | **Value** | ** ** | **Cost** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Intangible  assets:     |       |                   |       |                       |       |   |   |   |   |   |   |   |   |
| Customer  relationships |       | $                      | 106,638    |                       | $          | (17,246 | ) | $ | 89,392 |   | $ | 106,638 |   | $ | (11,939 | ) | $ | 94,699 |   |
| Trade  names            |       | 10,279                 |       | (842                       | )          | 9,437 |   | 10,279 |   | (585 | ) | 9,694 |   |
| Non-compete  agreements |       | 1,490                  |       | (538                       | )          | 952 |   | 1,490 |   | (290 | ) | 1,200 |   |
| Intangible  assets      |       | $                      | 118,407    |                       | $          | (18,626 | ) | $ | 99,781 |   | $ | 118,407 |   | $ | (12,814 | ) | $ | 105,593 |   |

 

Amortizationexpense on customer relationships, trade names and non-compete agreements,which are being amortized ratably over the estimated life of the relatedintangible assets, was $2,906 and $5,812 for the three and six months ended June 30,2009, respectively, compared to $2,738 and $5,317 for the three and six monthsended June 30, 2008, respectively.

 

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**NOTE 6 — ACCRUED LIABILITIES**

 

Accrued liabilities as ofJune 30, 2009 and December 31, 2008 consisted of the following:

 
| ** **                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                      | ** ** | **2009**          | ** ** | **2008**              | ** ** |
|                            |       |              |       |                  |       |
| Accrued  operating expenditures |       | $                 | 445        |                  | $          | 1,110 |   |
| Accrued  payroll and benefits   |       | 3,061             |       | 3,631                 |       |
| Accrued  capital expenditures   |       | 502               |       | 2,204                 |       |
| Accrued  warranty               |       | 1,265             |       | 890                   |       |
| Accrued  professional fees      |       | 1,378             |       | 514                   |       |
| Accrued  other                  |       | 1,457             |       | 2,037                 |       |
| Total  accrued liabilities      |       | $                 | 8,108      |                  | $          | 10,386 |   |

 

**NOTE7 — RELATED PARTY TRANSACTIONS**

 

On May 26,2009, the Company entered into a settlement agreement (the “SettlementAgreement”) with the former owners of Brad Foote (the “Selling Shareholders”),including J. Cameron Drecoll, the Company’s current Chief Executive Officer,related to the post-closing escrow established in connection with the Company’sacquisition of Brad Foote. Under the terms of the Settlement Agreement, theCompany received the entire cash escrow balance of $5,000 plus accrued interestincome of $82, which was recorded as other income. In exchange, the Companyagreed to cause the release to the Selling Shareholders of 2,500,000 shares ofthe Company’s common stock held under the escrow agreement in proportion totheir ownership interest in Brad Foote prior to its acquisition by the Company.In addition, we agreed to make a cash payment of $30 to one Selling Shareholderand issued promissory notes to the three Selling Shareholders in the aggregateprincipal amount of $3,000 (each a “Selling Shareholder Note”, and collectivelythe “Selling Shareholder Notes”) in respect of certain tax reimbursementobligations arising in connection with our acquisition of Brad Foote, and whichwas recorded as an increase to the purchase price in goodwill as they relatedto tax settlements calculated in accordance with the purchase agreement. TheCompany also paid to Mr. Drecoll certain tax refunds in the aggregateamount of approximately $2,212 related to our acquisition of Brad Foote and taxpayments in respect of the period prior to the acquisition to which we believethe Selling Shareholders may be entitled (or to which we may be entitled ontheir behalf). The Selling Shareholder Notes mature on May 28, 2012 andbear interest at a rate of 7% per annum, with interest payments due quarterly.The Selling Shareholder Note issued to Mr. Drecoll in the principal amountof $2,320 and pursuant to the terms of the Settlement Agreement is deemed bythe Company to be a related party transaction. As of June 30, 2009,principal of $3,000 and accrued interest of $22 was outstanding under theSelling Shareholder Notes. The Company has accounted for the SellingShareholder Notes as long-term debt in our condensed consolidated balancesheets as of June 30, 2009.

 

**NOTE8 — DEBT AND CREDIT AGREEMENTS**

 

The Company’s outstanding debt balances as of June 30,2009 and December 31, 2008 consisted of the following:

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**          | ** ** | **2008**              | ** ** |
|                                       |       |              |       |                  |       |
| Lines  of credit                           |       | $                 | 7,090      |                  | $          | 10,831 |   |
| Related  party note                        |       | 2,320             |       | —                |       |
| Term  loans and notes payable              |       | 31,407            |       | 28,012                |       |
|                                       |       | 40,817            |       | 38,843                |       |
| Less  - Current portion                    |       | (21,336           | )          | (13,051               | )          |
| Long-term  debt, net of current maturities |       | $                 | 19,481     |                  | $          | 25,792 |   |

 

**Credit Facilities**

 

***Brad Foote***

 

Inconnection with our acquisition of Brad Foote in October 2007, we assumedoutstanding debt and available lines of credit totaling approximately $25,500under various debt facilities (the “Debt Facilities”) with Bank of America, assuccessor to LaSalle 

 

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Bank(“BOA”). The Debt Facilities are governed by a Loan and Security Agreementdated as of January 17, 1997 (as previously amended and/or restated, the“Loan Agreement”).

 

Followinga series of amendments to the Loan Agreement, as of June 30, 2009: (i) theinterest rate under each of the Debt Facilities was the greater of (A) theLondon Interbank Offered Rate (“LIBOR”) plus 5% and (B) 6%; (ii) thematurity dates for the Debt Facilities range from January 15, 2011 to December 31,2011; (iii) the total amount outstanding under the Debt Facilities isapproximately $19,631; and (iv) there were required principal payments ofapproximately $7,364 due over the next twelve (12) months, with additionalprincipal payments due thereafter.

 

BradFoote’s obligations under the Loan Agreement are secured by the following: (i) allof the assets of Brad Foote; (ii) all of the shares of stock of Brad Footeand all of Brad Foote’s indebtedness to us; (iii) an unconditionalguaranty from us and from the BF Subsidiaries (hereinafter defined); and (iv) mortgagesfrom the BF Subsidiaries and Brad Foote to BOA (“BF Subsidiaries” means thefollowing wholly-owned subsidiaries of Brad Foote that hold record title tocertain facilities used in Brad Foote’s operations: 1309 South Cicero Avenue,LLC and 5100 Neville Road, LLC).

 

Eachof the Debt Facilities becomes immediately due and payable upon breach of anycovenants or representations made by Brad Foote in the Loan Agreement and uponother customary events of default.

 

TheLoan Agreement requires Brad Foote to comply with standard covenants, includingcertain financial covenants, to provide monthly financial reporting and tosubmit the Company’s annual audited financial statements to BOA at the close ofeach fiscal year. Other covenants contained in the Loan Agreement includerestrictions on Brad Foote’s ability to make distributions or dividends, incurindebtedness or make subordinated debt payments, as well as limitations on BradFoote’s ability to make capital expenditures, any of which could ultimatelyaffect our ability to undertake additional debt or equity financing. Certain ofthese covenants have been amended and/or restated from time to time pursuant tovarious amendments to the Loan Agreement. In addition, BOA has waivedviolations of certain covenants in certain instances.

 

OnMay 8, 2009, Brad Foote and BOA entered into a further amendment to theLoan Agreement. Under this amendment, BOA waived (solely with respect tocertain specified time periods) Brad Foote’s violation of certain financialcovenants with respect to (i) senior debt to EBITDA ratio, (ii) cashflow coverage ratio, and (iii) minimum EBITDA ratio. BOA also waivedcertain covenants relating to the delivery of Brad Foote’s financial informationto BOA.

 

Inaddition, the May 8, 2009 amendment provided that certain of Brad Foote’sfinancial covenants be amended and restated, including requirements withrespect to maintenance of ratios of (i) senior debt to EBITDA, (ii) cashflow coverage, and (iii) minimum EBITDA. In connection with thisamendment, Brad Foote agreed to pay BOA a $25 amendment and waiver fee, as wellas all reasonable fees and expenses of BOA incurred in connection with theamendment.

 

On August 7, 2009, BradFoote, the BF Subsidiaries and BOA entered into a Third Omnibus AmendmentAgreement (the “Third Omnibus Amendment”), further amending the Loan Agreementand the documents evidencing the Debt Facilities. The Third Omnibus Amendmentalso provided that (i) BOA waive Brad Foote’s violation of the financialcovenants set forth in  the LoanAgreement (the senior debt to EBITDA and minimum EBITDA covenants) for thesecond quarter of 2009 and the calendar month of June 2009, respectively, (ii) amendingand restating the requirements with respect to maintenance of ratios for theremainder of 2009 relating to, senior debt to EBITDA, cash flow coverage, aminimum monthly revenue requirements, and starting in 2010 a minimum monthlyEBITDA requirements, (iii) BOA waive certain breaches or events of defaultunder the Loan Agreement relating to Brad Foote’s inventory record keeping, andreporting liens filed against certain of Brad Foote’s property (which havesubsequently been released by the lien holders), and the delivery of certainBrad Foote financial information, (iv) certain provisions pertaining toinsurance ownership of collateral and tax returns be amended to clarify thelanguage therein, (v) Brad Foote pay BOA a $35 amendment and waiver fee,as well as all accrued and unpaid fees and expenses under the Loan Agreement allreasonable fees and expenses of BOA incurred in connection with the ThirdOmnibus Amendment, (vi) the interest rate payable under each of the DebtFacilities shall be equal to the greater of (A) LIBOR plus five percent(5%) and (B) seven percent (7%), and (vii) Brad Foote may borrowfunds from Broadwind on a revolving basis, up to a maximum principal amount of$3,000, which shall be subordinated to indebtedness owed by Brad Foote to BOAand which shall not be subject to certain restrictions imposed on reporting andpayment of otherwise previously existing intercompany debt between Brad Footeand Broadwind.   Additionally, theCompany and the BF Subsidiaries entered into a Reaffirmation dated August 7,2009, reaffirming that each of the Loan Documents (as defined in the LoanAgreement) to which they are a party remains in full force and effect and isratified and confirmed.  We expect to be in compliance with the amended andrestated covenants contained in the loan agreement, and we believe the chanceof default is remote for the next twelve months.

 

***Tower Tech***

 

In October 2007, Tower Tech obtained a secured line of credit (the“ICB Line”) from Investors Community Bank (“ICB”) in the amount of $2,500,which was increased to $5,500 on March 21, 2008. The ICB Line is securedby substantially all of the assets of Tower Tech and RBA. Draws on the ICB Linebear interest at a variable rate equal to the greater of (A) 4.25% or (B) 1.75%above LIBOR. Pursuant to a Commercial Debt Modification Agreement dated as of October 22,2008, Tower Tech and ICB extended the maturity date of the ICB Line to April 22,2009. In connection with the extension, Broadwind provided re-executedguaranties to ICB 

 

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forall debt owed by each of Tower Tech and RBA to ICB. In addition, Tower Techre-executed its guaranty for debts owed by RBA to ICB, and RBA re-executed itsguaranty for debts owed to ICB by Tower Tech. We anticipated that each of TowerTech and RBA would be in violation of certain financial covenants relating tonet worth and debt to net worth ratio as of December 31, 2008. Tower Techand RBA each received waivers on December 29, 2008 from ICB for theanticipated violations. On March 13, 2009, ICB agreed to extend thematurity date of the ICB Line to March 13, 2010 (the “ICB Line ExtensionAgreement”). Pursuant to the ICB Line Extension Agreement, Tower Tech agreed toestablish new financial covenants with respect to minimum debt service coverageratio and minimum tangible net worth. Tower Tech also agreed to maintain itsprimary deposit accounts with ICB and that no additional loans or leases shallbe entered into by Tower Tech without the prior approval of ICB. As of June 30,2009, Tower Tech had $110****available foradditional borrowing under the ICB Line and was in compliance with all of itsfinancial covenants under the ICB Line.

 

OnApril 28, 2009 (the “Construction Loan Closing Date”), Tower Tech enteredinto a Construction Loan Agreement with Great Western Bank (“Great Western”),pursuant to which Great Western will provide up to $10,000 in financing (the“Construction Loan”) to fund construction of Tower Tech’s wind towermanufacturing facility in Brandon, South Dakota (the “Facility”). Also on theConstruction Loan Closing Date, Great Western agreed to advance $3,703,representing amounts previously paid by Tower Tech relating to construction ofthe Facility. Tower Tech anticipates making additional draws as needed untilcompletion of the Facility.

 

TheConstruction Loan bears interest at a rate of 7.5% per annum on all advances.Tower Tech is required to make monthly payments of accrued and unpaid interestbeginning June 5, 2009 and on the fifth day of each month thereafter, andmust pay the outstanding principal and all accrued and unpaid interest on thematurity date, which is January 5, 2010, unless the Construction Loan isconverted as described below. Tower Tech was also required to pay a $100origination fee on the Construction Loan Closing Date.

 

TheConstruction Loan is secured by a first mortgage on the Facility and allfixtures, accounts and proceeds relating thereto, pursuant to a Mortgage and aCommercial Security Agreement, each between Tower Tech and Great Western andentered into on the Construction Loan Closing Date. In addition, pursuant to anAssignment of Deposit Account entered into on the Construction Loan ClosingDate, Tower Tech granted Great Western a security interest in a $2,000 depositaccount. The Company also executed a Commercial Guaranty and entered into aSubordination Agreement in connection with the Construction Loan, under whichit has agreed to guarantee Tower Tech’s performance and to subordinate allintercompany debt with Tower Tech to the Construction Loan.

 

TheConstruction Loan may be accelerated under certain events of default (subjectto applicable notice and cure provisions), including but not limited to: (i) failureto make any payment on the Construction Loan when due; (ii) failure tocomply with or perform any covenants or conditions under the Construction Loan;(iii) failure to construct the Facility in accordance with the plans andspecifications approved by Great Western or in accordance with the constructioncontracts relating to the Facility; and (iv) cessation of construction ofthe Facility. The Construction Loan contains representations, warranties andcovenants that are customary to a construction financing arrangement.

 

Pursuantto a Letter Agreement dated as of the Construction Loan Closing Date amongGreat Western, Tower Tech and Broadwind (the “Letter Agreement”), Tower Techmay, any time prior to January 1, 2010, convert the Construction Loan intoa term loan for up to $6,500, with an interest rate not to exceed 8.5% perannum (the “Great Western Term Loan”). Tower Tech would be required to pay a1.0% origination fee upon the conversion, and would be required to make monthlypayments of principal and accrued interest over the life of the Great WesternTerm Loan, which would be not less than seventy-eight months. Following theconversion to the Great Western Term Loan, Great Western would retain itssecurity position in the collateral given as security for the ConstructionLoan, except for the deposit account assigned pursuant to the Assignment ofDeposit Account, which would be released upon conversion. All other customaryterms and conditions would be mutually agreed upon by Great Western and TowerTech at the time of conversion. As of June 30, 2009, Tower Tech hadreceived proceeds of approximately $3,808 under the Construction Loan.

 

***Badger***

 

On March 13, 2009, Badger obtained a term loan (the ‘‘FNB TermLoan’’) from First National Bank (“FNB”) in the amount of approximately $1,538.A portion of the proceeds from the FNB Term Loan was used to pay off Badger’sexisting term loan and revolving line of credit with FNB, with the remainderavailable for working capital. The FNB Term Loan is secured by the inventory,accounts receivable and certain equipment of Badger. The FNB Term Loan bearsinterest at a rate of 6.75% per annum, matures on March 13, 2013, and isguaranteed by the Company.

 

***RBA***

 

On April 7, 2008, RBAexecuted four (4) promissory notes in favor of ICB (the “ICB Notes”), inthe aggregate principal amount of approximately $3,781, as follows: (i) aterm note in the maximum principal amount of approximately $421, bearinginterest at a per annum rate of 6.85%, with a maturity date of October 5,2012; (ii) a term note in the maximum principal amount of $700, bearinginterest at a per annum rate of 5.65%, with a maturity date of April 25,2013; (iii) a term note in the maximum principal 

 

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amountof $928, bearing interest at a per annum rate of 5.65%, with a maturity date ofApril 25, 2013; and (iv) a line of credit note in the maximumprincipal amount of $1,732, bearing interest at a per annum rate of 4.48% untilMay 1, 2008 and thereafter at LIBOR, with a maturity date of April 5,2009 (the “Line of Credit Note”). The ICB Notes provide for multiple advances,and are secured by substantially all of the assets of RBA. As of June 30,2009, the total amount of indebtedness outstanding under the ICB Notes was$3,446.

 

On March 13, 2009, RBA and ICB extended the maturity date of theLine of Credit Note to March 13, 2010 (the “ICB Note ExtensionAgreement”). Pursuant to the ICB Note Extension Agreement, RBA established newfinancial covenants with respect to minimum debt service coverage ratio andminimum tangible net worth (these covenants were subsequently modified by theparties on April 22, 2009, effective as of March 31, 2009). RBA alsoagreed to maintain its primary deposit accounts with ICB and that no additionalloans or leases shall be entered into by RBA without the prior approval of ICB.As of June 30, 2009, RBA had $32 available for additional borrowing underthe Line of Credit Note and was in compliance with all of its financialcovenants under the Line of Credit Note.

 

**Related Party Note**

 

Asdescribed in Note 7 “Related Party Transactions,” in May 2009 the Companyentered into a settlement agreement with the Selling Shareholders, including Mr. Drecoll,the Company’s current Chief Executive Officer, related to the post-closingescrow established in connection with the Company’s acquisition of Brad Foote.Under the terms of the settlement agreement, among other terms, the Companyissued three Selling Shareholder Notes in the aggregate principal amount of$3,000. The Selling Shareholder Notes mature on May 28, 2012 and bearinterest at a rate of 7% per annum, with interest payments due quarterly. TheSelling Shareholder Note issued to Mr. Drecoll in the principal amount of$2,320 is deemed by the Company to be a related party transaction. As of June 30,2009, principal of $3,000 and accrued interest of $22 were outstanding underthe Selling Shareholder Notes. The Company has accounted for the SellingShareholder Notes as long-term debt in our condensed consolidated balancesheets as of June 30, 2009.

 

**NOTE9 — INTEREST RATE SWAP AGREEMENTS**

 

In March 2008, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities* (“SFAS 161”).SFAS 161 amends and expands the previous disclosure requirements of SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*(“SFAS 133”), to provide more qualitative andquantitative information on how and why an entity uses derivative instruments,how derivative instruments and related hedged items are accounted for underSFAS 133 and its related interpretations, and how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance and cash flows. The Company adopted the provisions of SFAS 161 on January 1,2009 on a prospective basis. The adoption had no impact on our condensedconsolidated financial statements or results of operations for the three andsix months ended June 30, 2009 except for the additional disclosurerequirements as required by the pronouncement.

 

As part of our acquisition of Brad Foote in October 2007, theCompany assumed two interest rate swap agreements. These swap agreements areintended to minimize the impact of interest rate fluctuations on certain debtinstruments. Interest rate swap agreements involve exchanges of fixed orfloating rate interest payments periodically over the life of the agreementwithout the exchange of the underlying principal amounts. In accordance withthe provisions of SFAS 133, all derivatives are measured at fair value andrecognized as either assets or liabilities on the Company’s balance sheet. Theaccounting for changes in the fair value of a derivative is dependent upon theuse of the derivative and its resulting designation. Unless specific hedgeaccounting criteria are met, changes in the fair value of the derivative mustbe recognized currently in earnings. The Company’s interest rate swaps do notqualify for hedge accounting under SFAS 133, and therefore, the Company isrequired to recognize the swap agreements at their fair market value and recordthe fluctuations in the fair value of the swap agreements in current earnings.During the three and six months ended June 30, 2009, the Company reportedan unrealized gain related to these fluctuations of approximately $113 and$198, respectively, compared to an unrealized gain of approximately $241 and$11, respectively, for the three and six months ended June 30, 2008. Thefair market value of the interest rate swaps of $384 and $582 is recorded as along-term liability in our condensed consolidated balance sheets as of June 30,2009 and December 31, 2008, respectively.

 

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The following table presentsthe fair values of derivative instruments included on our condensedconsolidated balance sheets as of June 30, 2009:

 
| ** **                                                              | ** ** | **Liability Derivatives**  | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                              | ** ** | **Balance Sheet Location** | ** ** | **Fair Value** | ** ** |
| **Derivatives not designated as hedging instruments under  SFAS 133**   |       |                       |       |   |   |
| Interest  rate contracts                                                |       | Long-term liabilities  (1) |       | $ | 384 |   |
| Total  derivatives not designated as hedging instruments under SFAS 133 |       |                       |       | $ | 384 |   |

 

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(1)          The Company’s interest ratecontracts are classified on a separate line item titled “Interest rate swapagreements” in the long-term liabilities section on our condensed consolidatedbalance sheets.

 

The following table presents the pretax amounts of interest ratecontracts affecting our condensed consolidated statements of operations for thethree and six months ended June 30, 2009:

 
| **Derivatives Not**       | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** **             | ** ** |
|---------------------------|------------|--------------------------------|------------|------------------------------|------------|------------------------|------------|
| **Designated as Hedging** | ** ** | **Location of Gain or (Loss)** | ** ** | **Amount of Gain or (Loss)** | ** ** |
| **Instruments under**     | ** ** | **Recognized in Income on**    | ** ** | **Recognized in Income on**  | ** ** |
| **SFAS 133**              | ** ** | **Derivative**                 | ** ** | **Derivative**               | ** ** |
| ** **                | ** ** | ** **                     | ** ** | **Three Months Ended**       | ** ** | **Six Months Ended**   | ** ** |
| ** **                | ** ** | ** **                     | ** ** | **June 30, 2009**       | ** ** | **June 30, 2009** | ** ** |
| Interest rate contracts   |       | Other  income (expense)        |       | $                            | 113        |                   | $          | 198 |   |
|                      |       |                           |       |                         |       |                   |       |
| Total                     |       |                           |       | $                            | 113        |                   | $          | 198 |   |

 

**NOTE10 — FAIR VALUE MEASUREMENTS**

 

The Company has implemented SFAS No. 157, *Fair Value Measurements* (“SFAS 157”),related to its financial assets and liabilities, which defines fair value,establishes a framework for its measurement and expands disclosures about fairvalue measurements. SFAS 157 defines fair value as the price that would bereceived to sell an asset or paid to transfer a liability (i.e., exit price) inan orderly transaction between market participants at the measurement date.SFAS 157 requires disclosures that categorize assets and liabilitiesmeasured at fair value into one of three different levels depending on theassumptions (i.e., inputs) used in the valuation. Level 1 provides themost reliable measure of fair value while Level 3 generally requiressignificant management judgment. Financial assets and liabilities areclassified in their entirety based on the lowest level of input significant tothe fair value measurement. The SFAS 157 fair value hierarchy is definedas follows:

 

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

 

Level 2—Valuations are based on quoted prices for similar assetsor liabilities in active markets, or quoted prices in markets that are notactive for which significant inputs are observable, either directly orindirectly.

 

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

 

The following table represents the fair values of the Company’sfinancial liabilities as of June 30, 2009:

 
| ** **                       | ** ** | **Level I** | ** ** | **Level II** | ** ** | **Level III** | ** ** | **Total** | ** ** |
|----------------------------------|------------|-------------|------------|--------------|------------|---------------|------------|-----------|------------|
| Liabilities:                     |       |        |       |         |       |          |       |      |       |
| Interest  rate swaps             |       | $           | —     |         | $          | 384           |       | $         | —     |   | $ | 384 |   |
| Total  liabilities at fair value |       | $           | —     |         | $          | 384           |       | $         | —     |   | $ | 384 |   |

 

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***Fair value of financial instruments***

 

The carrying amounts ofthe Company’s financial instruments, which include cash and cash equivalents,accounts receivable and accounts payable, approximate their respective fairvalues due to the relatively short-term nature of these instruments. Based uponinterest rates currently available to the Company for debt with similar terms,the carrying value of the Company’s long-term debt is approximately equal toits fair value.

 

**NOTE 11 — INCOME TAXES**

 

TheCompany accounts for income taxes pursuant to SFAS No. 109, *Accounting for Income Taxes*, whichprovides for an asset and liability approach to accounting for income taxes.Deferred tax assets and liabilities represent the future tax consequences ofthe differences between the financial statement carrying amounts of assets andliabilities versus the tax basis of assets and liabilities. Under this method,deferred tax assets are recognized for deductible temporary differences, andoperating loss and tax credit carryforwards. Deferred liabilities arerecognized for taxable temporary differences. Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan not that some portion or all of the deferred tax assets will not berealized. The impact of tax rate changes on deferred tax assets and liabilitiesis recognized in the year that the change is enacted.

 

TheCompany recognizes interest and penalties related to uncertain tax positions inincome tax expense. As of June 30, 2009, the Company had accrued interestor penalties related to uncertain tax positions totaling $53.

 

TheCompany files income tax returns in U.S. federal and state jurisdictions. As ofJune 30, 2009, open tax years in federal and some state jurisdictions dateback to 1996 due to the taxing authorities’ ability to adjust operating losscarry forwards. No changes in settled tax years have occurred through June 30,2009. The Company does not anticipate there will be a material change in thetotal amount of unrecognized tax benefits within the next 12 months.

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                        | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                        | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Loss  before provision (benefit) for income taxes |       | $                      | (5,263     | )                    | $          | (1,961 | ) | $ | (12,849 | ) | $ | (5,216 | ) |
| Provision  (benefit) for income taxes             |       | 163                    |       | 12                   |       | (273 | ) | 200 |   |
| Net  loss                                         |       | $                      | (5,426     | )                    | $          | (1,973 | ) | $ | (12,576 | ) | $ | (5,416 | ) |

 

Effective tax ratesdiffer from federal statutory income tax rates primarily due to changes invaluation allowance, permanent differences and provisions for state and localincome taxes. As of June 30, 2009, the Company had a net deferred taxliability of $1,277 primarily related to temporary differences in indefinite-livedassets. These indefinite-lived assets consist of tax deductible goodwill frombusiness acquisitions completed during 2007 and 2008. During the three and sixmonths ended June 30, 2009, the Company recorded a provision and benefitfor income taxes of $163 and $273, respectively, compared to a provision forincome taxes for the three and six months ended June 30, 2008 of $12 and$200, respectively. The decrease in income taxes was primarily attributable tohigher net losses during the six months ended June 30, 2009, a full income taxvaluation allowance for federal income tax reporting purposes as a result ofthe Company’s net operating loss carryforwards and a decrease in stateincome taxes and deferred state income tax liabilities resulting from a favorablechange in the state of Wisconsin’s method of calculating state income taxes ona prospective basis.

 

**NOTE12 — SHARE-BASED COMPENSATION**

 

The Company grants incentive stock options and other equity awardspursuant to the Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “EIP”),which was approved by the Company’s Board of Directors in October 2007 andby the Company’s stockholders in June 2008. The EIP was subsequentlyamended in August 2008 by the Company’s Board of Directors to includecertain non-material amendments to clarify the terms and conditions ofrestricted stock awards and to provide that the administrator of the EIP hasthe authority to authorize future amendments to the EIP. The EIP was furtheramended in June 2009 to increase the number of shares of common stockauthorized for issuance under the EIP. As amended, the EIP reserves 5,500,000shares of common stock for grants to officers, directors, employees,consultants and advisors upon whose efforts the success of the Company and its affiliateswill depend to a large degree. As of June 30, 2009, the Company hadreserved 1,654,193 shares for the exercise of stock options outstanding,232,052 shares for restricted stock unit awards outstanding and 3,474,888additional shares for future stock awards under the EIP. As of June 30,2009, 138,867 shares of common stock reserved for stock options and restrictedstock unit awards under the EIP have been issued in the form of common stock.

 

*Stock Options.* The exercise price of stockoptions granted under the EIP is equal to the closing price of our common stockon the date of grant. Stock options generally become exercisable on theanniversary of the grant date, with vesting terms that may 

 

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rangefrom one to five years from the date of grant. Additionally, stock optionsexpire ten years after the date of grant. If a plan participant’s employment isterminated during the vesting period, he or she forfeits the right to unvestedstock option awards.

 

Stock option activity during the six months ended June 30, 2009was as follows:

 
| ** **                                | ** ** | **Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|-------------------------------------------|------------|-------------|------------|--------------------------------------|------------|
| Outstanding  as of December 31, 2008 |       | 2,030,000   |       | $                                    | 11.60      |   |
| Granted                                   |       | 169,193     |       | 7.23                                 |       |
| Exercised                                 |       | (55,000     | )          | 8.10                                 |       |
| Forfeited                                 |       | (474,667    | )          | 10.43                                |       |
| Cancelled                                 |       | (15,333     | )          | 9.32                                 |       |
| Outstanding  as of June 30, 2009     |       | 1,654,193   |       | $                                    | 11.63      |   |
|                                      |       |        |       |                                 |       |
| Exercisable  as of June 30, 2009     |       | 208,100     |       | $                                    | 10.40      |   |

 

*Restricted Stock.* The granting of restrictedstock units is provided for under the EIP. Restricted stock units generallyvest on the anniversary date of the grant date; vesting terms range fromimmediate vesting to five years from the date of grant. The fair value of eachunit granted is equal to the closing price of our common stock on the date ofgrant and is expensed ratably over the vesting term of the restricted stockaward. If a plan participant’s employment is terminated during the vestingperiod, he or she forfeits the right to any unvested portion of the restrictedstock units.

 

Activity related to restricted stock unit awards during the six monthsended June 30, 2009 was as follows:

 
| ** **                                | ** ** | **Number of Units** | ** ** | **Weighted Average  Grant-Date Fair Value  Per Unit** | ** ** |
|-------------------------------------------|------------|---------------------|------------|-------------------------------------------------------|------------|
| Outstanding  as of December 31, 2008 |       | 127,500             |       | $                                                     | 10.71      |   |
| Granted                                   |       | 180,919             |       | 5.84                                                  |       |
| Vested                                    |       | (76,367             | )          | 3.31                                                  |       |
| Forfeited                                 |       | —              |       | —                                                |       |
| Outstanding  as of June 30, 2009     |       | 232,052             |       | $                                                     | 9.16       |   |

 

In accordance with the pronouncement provisions of SFAS No. 123R(revised), *Share-Based Payment*, the fair value ofeach stock option award is estimated on the date of grant using theBlack-Scholes option pricing model. Our determination of the fair value of eachstock option is affected by our stock price on the date of grant, as well asassumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to, our expected stock pricevolatility over the expected life of the awards and projected stock optionexercise behavior. The weighted average fair value per share of stock optionawards granted during the six months ended June 30, 2009 and 2008, andassumptions used to value stock options, are as follows:

 
| ** **                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                           | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Dividend  yield                                                      |       | —                             |       | — |   |
| Risk-free  interest rate                                             |       | 2.6                                | %          | 3.1 | % |
| Weighted  average volatility                                         |       | 85.0                               | %          | 60.0 | % |
| Expected  life (in years)                                            |       | 6.5                                |       | 6.5 |   |
| Weighted  average grant date fair value per share of options granted |       | $                                  | 5.31       |   | $ | 5.61 |   |
|                                                                      |            |                                    |            |  |  |  |  |

 

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

 

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

 

Volatility is estimated based on comparable volatility averages for theenergy related sector at the time of grant.

 

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The expected life of each stock option award granted during the sixmonths ended June 30, 2009 was derived using the “simplified method” forestimating the expected term of a “vanilla-option” in accordance with StaffAccounting Bulletin (“SAB”) No. 107, *Share-BasedPayment,* as amended by SAB No. 110, *Share-Based Payment.* The expected life of each stock optionaward granted during the six months ended June 30, 2008 was estimatedbased on the service period of the stock option award.

 

The fair value of each unit of restricted stock is equal to the fairmarket value of our common stock as of the date of grant.

 

Thefollowing table summarizes share-based compensation expense included in ourcondensed consolidated statements of operations for the six months ended June 30,2009 and 2008:

 
| ** **                                                  | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                  | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **Share-based compensation expense:**                       |       |                               |       |   |   |
| Selling,  general and administrative                        |       | $                                  | 1,365      |   | $ | 903 |   |
| Income  tax benefit (1)                                     |       | —                             |       | — |   |
| Net  effect of share-based compensation expense on net loss |       | $                                  | 1,365      |   | $ | 903 |   |
|                                                        |       |                               |       |   |   |
| **Reduction in earnings per share:**                        |       |                               |       |   |   |
| Basic  and diluted earnings per share (2)                   |       | $                                  | 0.01       |   | $ | 0.01 |   |

 

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| (1)    |   | Income tax benefit is not  illustrated because the Company is currently operating at a loss and an  actual income tax benefit may not be realized for the six months ended  June 30, 2009 and 2008, respectively. The result of the loss situation  creates a timing difference, resulting in a deferred tax asset, which is  reserved for in the valuation allowance. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| (2)    |   | Diluted  earnings per share for the six months ended June 30, 2009 and 2008 does  not include common stock equivalents due to its anti-dilutive nature as a  result of the Company’s net losses for these respective periods. Accordingly,  basic earnings per share and diluted earnings per share are identical for all  periods presented.                     |

 

As of June 30, 2009, we estimate that pre-tax compensation expensefor all unvested share-based awards, including both stock options andrestricted stock units, in the amount of approximately $10,320 will berecognized through the year 2014. We expect that the exercising of stockoptions and future vesting of restricted stock units will be satisfied byissuing new shares of our common stock.

 

**NOTE13 — RECENT ACCOUNTING PRONOUNCEMENTS**

 

InApril 2008, FASB issued FASB Staff Position (“FSP”) 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP FAS 142-3”), which amends the list of factors an entity should considerin developing renewal or extension assumptions in determining the useful lifeof recognized intangible assets under FAS No. 142, *Goodwill and Other Intangible Assets*. Thenew guidance applies to (1) intangible assets that are acquiredindividually or with a group of other assets and (2) intangible assetsacquired in both business combinations and asset acquisitions. Under FSP FAS142-3, entities estimating the useful life of a recognized intangible assetmust consider their historical experience in renewing or extending similararrangements or, in the absence of historical experience, must considerassumptions that market participants would use about renewal or extension. FSPFAS 142-3 will require certain additional disclosures beginning October 1,2009 and prospective application to useful life estimates prospectively forintangible assets acquired after September 30, 2009. The Company is in theprocess of evaluating the impact that the adoption of FSP FAS 142-3 may have onits financial statements and related disclosures.

 

In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2,*Recognitionand Presentation of Other-Than Temporary Impairments*. FSPFAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance fordebt securities to make the guidance more operational and to improve thepresentation and disclosure of other-than-temporary impairments on debt andequity securities in the financial statements. The adoption of FSP FAS 115-2and FAS 124-2 had no material impact on the Company’s financial position,results of operations or cash flows.

 

InApril 2009, FASB issued FSP FAS 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are not Orderly*.FSP FAS 157-4 provides additional guidance for estimating fair value inaccordance with SFAS No. 157, *FairValue Measurements*, when the volume and level of activity for theasset or liability have significantly decreased. This FSP also includesguidance on identifying circumstances that indicate a transaction is notorderly. The adoption of this pronouncement did not have a material impact onthe Company’s financial position, results of operations or cash flows.

 

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In May 2009, FASB issued SFAS No 165, *Subsequent Events* (“SFAS 165”), whichestablishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued. SFAS 165 is effective for interim or annualfinancial periods ending after June 15, 2009. The adoption of thispronouncement did not have a material impact on the Company’s financialposition or results of operations.

 

InJune 2009, FASB issued SFAS No. 166 (“SFAS 166”), *Accounting for Transfers of Financial Assets — anamendment of FASB Statement No. 140.*SFAS 166 eliminates theconcept of a “qualifying special-purpose entity,” changes the requirements forderecognizing financial assets, and requires additional disclosures in order toenhance information reported to users of financial statements by providinggreater transparency about transfers of financial assets, includingsecuritization transactions, and an entity’s continuing involvement in andexposure to the risks related to transferred financial assets. SFAS 166 iseffective for fiscal years beginning after November 15, 2009. TheCompany is currently evaluating the impact SFAS 166 will have on theconsolidated results of the Company.

 

InJune 2009, FASB issued SFAS No. 167 (“SFAS 167”), *Amendments to FASB Interpretation No. 46(R).*Theamendments include: (1) the elimination of the exemption for qualifyingspecial purpose entities, (2) a new approach for determining who shouldconsolidate a variable-interest entity, and (3) changes to when it isnecessary to reassess who should consolidate a variable-interest entity. SFAS167 is effective for the first annual reporting period beginning after November 15,2009 and for interim periods within that first annual reporting period. The Companyis currently evaluating the impact SFAS 167 will have on the consolidatedresults of the Company.

 

In June 2009, FASB issued SFAS No 168, *The FASB Standards CodificationTM and the Hierarchy of GenerallyAccepted Accounting Principles* (“SFAS 168”), a replacement ofSFAS No 162, *The Hierarchy of Generally AcceptedAccounting Principles.*SFAS 168**will becomethe source of authoritative U.S. accounting and reporting standards recognizedby the FASB for use in preparation of financial statements of nongovernmentalentities that are presented in conformity with GAAP effective July 1,2009. Rules and authoritative releases of the Securities and ExchangeCommission (“SEC”) under authority of federal securities laws are also sourcesof authoritative GAAP for SEC registrants. SFAS 168 is effective forinterim or annual financial periods ending after September 15, 2009. Theadoption of this pronouncement is not anticipated to have a material impact onthe Company’s financial position or results of operations.

 

**NOTE 14— SEGMENT REPORTING**

 

During the secondquarter of 2008, management changed the Company’s reportable segments toreflect changes in the management reporting structure of the organization andthe manner in which our chief operating decision maker assesses information fordecision-making purposes, including the allocation of resources. The revisedreporting structure includes two reportable segments: “Products” (formerly “Productsand Components”) and “Services” (formerly “Service, Transportation and Maintenance”).Accordingly, all prior period segment information has been reclassified toproperly reflect our current reportable segments.

 

The Company’s segmentsand their product and service offerings are summarized below:

 

***Products***

 

The Products segment includes the operations of Brad Foote, Tower Techand RBA. This segment specializes in the manufacture and sale of products suchas high precision gears for wind turbines, custom-engineered gearing systemsfor the mining, energy, and industrial sectors, structural wind towers,internal tower components, and large fabricated and machined components for theconstruction and mining industries. Production processes include sophisticatedform grinding and finishing of gears and gear sets, steel plate processing, semi-automatedheavy welding and custom corrosion protection of components. Our primary focusis on the wind energy industry; however, our Products segment also servicesmining, oil and gas, construction and other industrial energy applications.

 

***Services***

 

The Services segment was established upon our acquisition of EMS in January 2008and expanded with our acquisition of Badger in June 2008. This segmentspecializes in construction, operations and maintenance and component repairservices for the wind energy industry as well as specialized heavy haultrucking services to installation sites. Services provided include constructionand technical support in the erection of wind turbine generators, scheduled andunscheduled maintenance, fiberglass blade repair, retrofit solutions, technicaltraining, and the transportation of oversize/overweight equipment andmachinery. The Services segment has service hub locations in South Dakota,Texas and Wisconsin and satellite field service centers in California, Coloradoand Illinois.

 

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***Corporate and Other***

 

The Companyapplies the provisions of Emerging Issues Task Force Issue No. 04-10 (“EITF04-10”) for segment reporting. Under the provisions of EITF 04-10, anyoperating segments that do not individually meet the aggregation criteria orquantitative thresholds described in SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information*(“SFAS 131”) may be combined with otheroperating segments that do not individually meet the aggregation criteria orquantitative thresholds to form a separate reportable segment. The Company hascombined all operating segments that do not individually meet the aggregationcriteria established in SFAS 131 to form the “Corporate and Other” segment forsegment reporting. The “Corporate and Other” segment is comprised of adjustments toreconcile segment results to consolidated results, which primarily includescorporate administrative expenses and intercompany eliminations.

 

Below is a summaryof segment operations as of June 30, 2009 and December 31, 2008 andfor the three and six months ended June 30, 2009 and 2008. Segmentinformation related to the three and six months ended June 30, 2008 hasbeen reclassified to conform to our current segment presentation.

 
| ** **               | ** ** | **Revenues**                         | ** **   | **Operating Profit (Loss)**          | ** ** |
|--------------------------|------------|--------------------------------------|--------------|--------------------------------------|------------|
| ** **               | ** ** | **Three Months Ended June 30,** | ** **   | **Three Months Ended June 30,** | ** ** |
| ** **               | ** ** | **2009**                             | ** **   | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Segments:**            |       |                                 |         |                                 |       |   |   |   |   |
| Products  segment        |       | $                                    | 39,892       |                                 | $          | 34,042 |   | $ | (5,697 | ) | $ | 2,421 |   |
| Services  segment        |       | 12,486                               |         | 6,788                                |       | 145 |   | (393 | ) |
| Corporate  and Other (1) |       | (65                                  | )            | —                               |       | (4,728 | ) | (3,670 | ) |
|                     |       | $                                    |  52,313 |                                 | $          | 40,830 |   | $ | (10,280 | ) | $ | (1,642 | ) |

 
| ** **               | ** ** | **Revenues**                       | ** **    | **Operating Profit (Loss)**        | ** ** |
|--------------------------|------------|------------------------------------|---------------|------------------------------------|------------|
| ** **               | ** ** | **Six Months Ended June 30,** | ** **    | **Six Months Ended June 30,** | ** ** |
| ** **               | ** ** | **2009**                           | ** **    | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Segments:**            |       |                               |          |                               |       |   |   |   |   |
| Products  segment        |       | $                                  | 83,026        |                               | $          | 64,290 |   | $ | (9,526 | ) | $ | 2,718 |   |
| Services  segment        |       | 22,714                             |          | 11,704                             |       | (783 | ) | (866 | ) |
| Corporate  and Other (1) |       | (365                               | )             | —                             |       | (7,108 | ) | (5,433 | ) |
|                     |       | $                                  |  105,375 |                               | $          | 75,994 |   | $ | (17,417 | ) | $ | (3,581 | ) |

 
| ** **               | ** ** | **Total Assets as of** | ** **    |
|--------------------------|------------|------------------------|---------------|
| ** **               | ** ** | **June 30,**      | ** **    | **December 31,** | ** ** |
| ** **               | ** ** | **2009**               | ** **    | **2008** | ** ** |
| **Segments:**            |       |                   |          |   |   |
| Products  segment        |       | $                      | 284,667       |   | $ | 308,044 |   |
| Services  segment        |       | 61,096                 |          | 65,795 |   |
| Corporate  and Other (2) |       | 6,181                  |          | 5,909 |   |
|                     |       | $                      |  351,944 |   | $ | 379,748 |   |

 

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| (1) | “Corporate  and Other” includes corporate selling, general and administrative expenses  and intercompany eliminations. Corporate selling, general and administrative  expenses includes corporate salaries and benefits, share-based compensation,  and professional fees. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | “Corporate  and Other” includes assets of the corporate headquarters and intercompany  eliminations.                                                                                                                                                                       |

 

**NOTE15 — COMMITMENTS AND CONTINGENCIES**

 

*Customer Disputes*

 

During 2008, the Company was involved in a pricing dispute with acustomer, which included accumulated unpaid accounts receivable balancestotaling approximately $2,249. In the fourth quarter of 2008, the Company andthe customer reached a tentative resolution on this matter, which is stillbeing finalized. Based on the discussions that occurred in 2008, the Companywrote-off accounts receivable balances in the amount of $2,249 during thefourth quarter of 2008.

 

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*Purchase Commitments*

 

Tower Tech has issued building and equipment purchase commitmentsassociated with the construction of a new wind tower manufacturing facilitylocated in Brandon, South Dakota totaling approximately $3,600 as of June 30,2009. These purchase commitments are scheduled to be completed in 2009.

 

During 2007, Brad Foote entered into a purchase contract for equipmentwith a foreign vendor, which was subsequently modified on December 31,2008. Under the terms of this amended purchase agreement, the Company agreed toequipment purchases totaling $3,674, of which $978 was paid as a down paymentand the remaining $2,784 in principal plus accrued interest at 6% per annum isto be paid in twelve equal monthly installments through December 2009. TheCompany has accounted for this purchase agreement as a promissory note and theoutstanding balance of $1,624 and $2,784, respectively, is included in lines ofcredit and notes payable in the current liabilities section of our condensedconsolidated balance sheets as of June 30, 2009 and December 31,2008.

 

*Legal Proceedings*

 

The Company is subject to legal proceedings in the normal course ofbusiness. We periodically evaluate the need to record liabilities in connectionwith loss contingencies, including, but not limited to, settlement of legalproceedings and regulatory compliance matters. In accordance with SFAS No. 5,*Accounting for Contingencies*, weaccrue for costs related to loss contingencies when such costs are probable andreasonably estimable.

 

*Environmental Compliance and Remediation Liabilities*

 

Our operations and products are subject to a variety of environmentallaws and regulations in the jurisdictions in which we operate and sell productsgoverning, among other things, air emissions, wastewater discharges, the use,handling and disposal of hazardous materials, soil and groundwatercontamination, employee health and safety, and product content, performance andpackaging. Also, certain environmental laws can impose the entire cost or aportion 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 thecurrent or previous owner or operator of the site. These environmental lawsalso impose liability on any person who arranges for the disposal or treatmentof hazardous substances at a contaminated site. Third parties may also makeclaims against owners or operators of sites and users of disposal sites for personalinjuries and property damage associated with releases of hazardous substancesfrom those sites.

 

As previously disclosed, in September 2007, Tower Tech received anotice of violation from the Wisconsin Department of Natural Resources (“WDNR”)stating that Tower Tech was in violation of several provisions of the state’sair pollution laws and regulations in connection with the construction andoperation of two new paint booths at its Manitowoc, Wisconsin facility. TowerTech and the WDNR subsequently agreed to resolve such violation with a paymentby Tower Tech of $95 to the WDNR and the installation of certain equipment thatcould result in the potential reduction of certain emissions related to paintsand thinners used by Tower Tech.

 

*Warranty Liability*

 

Within our Products segment, we provide warranty terms that generallyrange from two to seven years for various products relating to workmanship andmaterials supplied by the Company. We reserve for warranty claims based onindustry experience and estimates made by management. From time to time,customers may submit warranty claims against the Company. In certain contracts,we have recourse provisions for items that would enable recovery from thirdparties for amounts paid to customers under warranty provisions. As of June 30,2009 and December 31, 2008, our estimated product warranty liability was$1,265 and $890, respectively, and is recorded within accrued liabilities inour condensed consolidated balance sheets.

 

*Sale-Leaseback Transactions*

 

Certain subsidiaries ofthe Company have entered into sale-leaseback agreements whereby certain ownedequipment is sold to a third party financing company in exchange for cash andthe subsidiary enters into a lease agreement for the equipment with thepurchaser for a certain period of time. The primary purpose of thesearrangements is to provide additional liquidity to meet working capitalrequirements. Depending on the term of the lease agreement in relation to theremaining useful life of the equipment, the lease may be classified as anoperating lease or a capital lease in our results of operations. In addition,the sale of the assets may result in a gain or loss on disposition, which mustbe amortized to other income or loss in our statement of operations over thelife of the operating lease.  As ofJune 30, 2009 minimum rental payments due under these lease agreements was$98.

 

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*Other*

 

As of June 30, 2009, approximately 28% of our employees werecovered by two collective bargaining agreements with local unions. Theseagreements are scheduled to expire in October 2009 and February 2010.

 

**NOTE16 — EARNINGS PER SHARE**

 

The Companycomputes earnings per share in accordance with SFAS No. 128, *Earnings per Share*(“SFAS 128”). SFAS 128requires companies to compute earnings per share under two different methods,basic and diluted, and present per share data for all periods in whichstatements of operations are presented. Basic earnings per share is computed bydividing net income by the weighted average number of shares of common stockoutstanding. Diluted earnings per share is computed by dividing net income bythe weighted average number of shares of common stock and common stockequivalents outstanding.

 

The following tableprovides a reconciliation of the numerators and denominators used incalculating basic and diluted earnings per share for the three and six monthsended June 30, 2009 and 2008:

 
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Basic earnings per share  calculation:**            |       |                                 |       |                               |       |   |   |   |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Net  loss to common stockholders                      |       | $                                    | (5,426     | )                                  | $          | (1,973 | ) | $ | (12,576 | ) | $ | (5,416 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Weighted  average number of common shares outstanding |       | 96,547,386                           |       | 86,821,984                         |       | 96,520,211 |   | 83,255,004 |   |
| Basic  net loss per share                             |       | $                                    | (0.06      | )                                  | $          | (0.02 | ) | $ | (0.13 | ) | $ | (0.07 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| **Diluted earnings per share  calculation:**          |       |                                 |       |                               |       |   |   |   |   |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Net  loss to common stockholders                      |       | $                                    | (5,426     | )                                  | $          | (1,973 | ) | $ | (12,576 | ) | $ | (5,416 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Weighted  average number of common shares outstanding |       | 96,547,386                           |       | 86,821,984                         |       | 96,520,211 |   | 83,255,004 |   |
| Common  stock equivalents:                            |       |                                 |       |                               |       |   |   |   |   |
| Stock  options and restricted stock units (1)         |       | —                               |       | —                             |       | — |   | — |   |
| Weighted  average number of common shares outstanding |       | 96,547,386                           |       | 86,821,984                         |       | 96,520,211 |   | 83,255,004 |   |
| Diluted  net loss per share                           |       | $                                    | (0.06      | )                                  | $          | (0.02 | ) | $ | (0.13 | ) | $ | (0.07 | ) |

 

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(1) Stock options andrestricted stock units granted and outstanding of 1,886,245 and 1,450,500 as ofJune 30, 2009 and 2008, respectively, are excluded from the computation ofdiluted earnings due to the anti-dilutive effect as a result of the Company’snet loss for these respective periods.

 

**NOTE17 — SUBSEQUENT EVENTS**

 

OnAugust 7, 2009, Brad Foote, the BF Subsidiaries and BOA entered into aThird Omnibus Amendment Agreement (the “Third Omnibus Amendment”), furtheramending the Loan Agreement. Among other things, the Third Omnibus Amendmentfurther amended and restated certain financial covenants. The Third OmnibusAmendment also provided that (i) BOA waive Brad Foote’s violation of thefinancial covenants set forth in Sections 14.1(d) and (f) of the LoanAgreement (the senior debt to EBITDA and minimum EBITDA covenants) for thesecond quarter of 2009 and the calendar month of June 2009, respectively, (ii) BOAwaive certain breaches or events of default under the Loan Agreement relatingto Brad Foote’s inventory record keeping, liens filed against certain of BradFoote’s property (which have subsequently been released by the lien holders),and the delivery of certain Brad Foote financial information, (iii) BradFoote pay BOA a $35 amendment and waiver fee, as well as all reasonable feesand expenses of BOA incurred in connection with the Third Omnibus Amendment, (iv) theinterest rate payable under each of the Debt Facilities shall be equal to thegreater of (A) LIBOR plus five percent (5%) and (B) seven percent(7%) and (v) Brad Foote may borrow funds from Broadwind on a revolvingbasis, up to a maximum principal amount of $3,000, which shall be subordinatedto indebtedness owed by Brad Foote to BOA and which shall not be subject tocertain restrictions imposed on payment of otherwise previously existingintercompany debt between Brad Foote and Broadwind. Additionally, the Companyand the BF Subsidiaries entered into a Reaffirmation dated August 7, 2009,reaffirming that each of the Loan Documents (as defined in the Loan Agreement)to which they are a party remains in full force and effect and is ratified andconfirmed.

 

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**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our condensed consolidatedfinancial statements and related notes thereto in Item 1, “Financial Statements”of this Quarterly Report and the audited consolidated financial statements andrelated notes and Management’s Discussion and Analysis of Financial Conditionand Results of Operations contained in our Annual Report on Form 10-K forthe year ended December 31, 2008. The discussion below containsforward-looking statements that are based upon our current expectations and aresubject to uncertainty and changes in circumstances including, but not limitedto, those identified in “Cautionary Note Regarding Forward-Looking Statements”at the end of this Item 2 for further discussion. Actual results may differmaterially from these expectations due to inaccurate assumptions and known orunknown risks and uncertainties.*

 

***(Dollars are presented in thousands unless otherwise stated)***

 

**INTRODUCTION**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations (“MD&A”) is intended to assist the reader in betterunderstanding our business, results of operations, financial condition, changesin financial condition, critical accounting policies and estimates, andsignificant developments. MD&A is provided as a supplement to, and shouldbe read in conjunction with our condensed consolidated financial statements andthe accompanying notes thereto appearing elsewhere herein. This section isorganized as follows:

 

·                  ***Our Business***— an overview of ourbusiness, a discussion of current business and industry opportunities,challenges, and risks, and a discussion of significant developments affectingour business.

 

·                  ***Results of Operations***— an analysisand comparison of our condensed consolidated results of operations for thethree and six months ended June 30, 2009 and 2008, as reflected in ourcondensed consolidated statements of operations.

 

·                  ***Summary of Critical Accounting Policies and Estimates***— a discussionof accounting policies and estimates that we believe require management’s mostsubjective or complex judgments.

 

·                  ***Liquidity, Financial Position and Capital Resources***— a discussionof our primary sources and uses of cash for the three and six months ended June 30,2009 and 2008, a discussion of selected changes in our financial position, andany changes to our future contractual obligations.

 

**OUR BUSINESS**

 

**Business Overview**

 

We are a supplier of value-added products and services to the NorthAmerican wind energy sector as well as other energy-related industries. Weprovide our customers, such as leading wind turbine manufacturers anddevelopers, wind farm operators and service companies, with a broad range ofcomponent and service offerings. Since 2006, we have made significantinvestments in the growth of our business through a series of acquisitions andcapital investments. In doing so, we have developed a broad, U.S.-based supplychain for wind energy development in North America. We are also pursuinginternational business opportunities so that we can better serve our customers,enhance our supply chain and develop synergies among our subsidiary companies.In addition, we plan to increase our efforts in developing new technologiesthat will further enhance the products and services we provide our customers inthe wind energy market. Our businesses are currently organized in two operatingsegments: *Products* and *Services*.

 

***Products***

 

The Products segment includes the operations of Brad Foote Gear Works, Inc.(“Brad Foote”), Tower Tech Systems Inc. (“Tower Tech”) and R.B.A., Inc. (“RBA”).This segment specializes in the manufacture and sale of products such as highprecision gears for wind turbines, custom-engineered gearing systems for themining, energy, and industrial sectors, structural wind towers, internal towercomponents, and large fabricated and machined components for the constructionand mining industries. Production processes include sophisticated form grindingand finishing of gears and gear sets, steel plate processing, semi-automatedheavy welding and custom corrosion protection of components. Our primary focusis on the wind energy industry; however, our Products segment also servicesmining, oil and gas, construction and other industrial energy applications.

 

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***Services***

 

The Services segment was established upon our acquisition of EnergyMaintenance Service, LLC (“EMS”) in January 2008 and expanded with ouracquisition of Badger Transport, Inc. (“Badger”) in June 2008. Thissegment specializes in construction, operations and maintenance and componentrepair services for the wind energy industry as well as specialized heavy haultrucking services to installation sites. Services provided include constructionand technical support in the erection of wind turbine generators, scheduled andunscheduled maintenance, fiberglass blade repair, retrofit solutions, technicaltraining, and the transportation of oversize/overweight equipment andmachinery. The Services segment has service hub locations in South Dakota,Texas and Wisconsin and satellite field service centers in California, Coloradoand Illinois.

 

***Second Quarter Overview***

 

During the second quarterof 2009, the Company continued to be affected by the global economic downturn,particularly with respect to the economic impact that it continues to have onour customers. Historically, the majority of our revenues are highlyconcentrated with a limited number of customers. During the first half of 2009,several of our customers within our Products segment have expressed theirintent to scale back, delay or restructure existing customer agreements. As aresult, our operating profits and gross margins have been negatively affected bya decline in production levels, which have created production volumeinefficiencies in our operations and cost structures. Accordingly, the Companyhas taken initiatives to mitigate the effects of this decline in productionvolume through cost cutting measures throughout our operations as well asreducing our capital spending. While our Products segment continues to beaffected by the current economic downturn, our Services segment has continuedto grow as a result of an increase in service contracts entered into during thecurrent year in addition to the inclusion of Badger in our results ofoperations.

 

The Company continues tofocus efforts on maintaining adequate liquidity and cash balances for futureoperating needs, which have included, among others, restructuring existing debtand credit agreements, entering into new debt obligations and throughadditional sales-leaseback transactions. While we anticipate beingable to maintain adequate liquidity, there can be no assurance that our cashbalances and cash flows will be adequate, and unfavorable changes to ourrevenues, customer collections or other events that may arise may have anadverse impact on our cash flows and liquidity.

 

In May, we announced thatStephen Graham was appointed as our Interim Chief Financial Officer. Mr. Grahamreplaced Matthew Gadow, who resigned from his positions as our Executive VicePresident and Chief Financial Officer on April 30, 2009. On June 5,2009, Mr. Graham notified us that he was resigning from his position asInterim Chief Financial Officer of the Company, effective June 19, 2009,in order to accept a permanent position of employment closer to his residence.On July 13, 2009, we appointed Kevin Johnson, our Director of Compliance,as our Interim Chief Financial Officer, to fill the vacancy created by Mr. Graham’sresignation. In August, we announced that Stephanie Kushner was appointed asour permanent Chief Financial Officer, effective August 15, 2009. Ms. Kushnerhas over 30 years of accounting and financial experience, including the lastsix years serving as Chief Financial Officer at Federal Signal Corporation. Aspart of this appointment, Mr. Johnson will assume the role of CorporateController and Chief Accounting Officer for the Company.

 

In June, we announced therealignment of our operations management team to advance our businessdevelopment, international and technology efforts. The Company announced thatour Chief Operating Officer, Lars Moller, was named President, Technology andInternational, and resigned from his position as Chief Operating Officer. Inthis newly created role, Mr. Moller will focus his efforts on the Company’sdevelopment of new technologies, international expansion and managing keycustomers and other third-party relationships. As part of the realignment, JessCollins was appointed Group President for Tower Tech, RBA and Badger and DonaldNaab was appointed Group President for Brad Foote and EMS.

 

***Business and Operating Strategy***

 

Our business strategy is to capitalize on the anticipated growth ofwind and other energy sectors in the U.S. and Canada by providing the highestvalue-added components and services across the wind and other energy sectorsupply chains. We seek to expand our market share in the North American windenergy industry and other energy sectors and to be the leading provider of acomprehensive supply chain solution to our customers in North America. Therecent downturn in the economy and the effects of the disruptions in the globalcredit markets and financial systems have had a negative effect on new windfarm development and the global heavy manufacturing industry and have limitedour short term growth prospects. In light of these challenges and our beliefthat we have invested in enough infrastructure to meet our short term goals,our immediate focus is to concentrate on (i) achieving operationalexcellence within our existing businesses, (ii) continuing to expand ourNorth American market share and (iii) maintaining adequate liquidity andworking capital.

 

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Our strategic objectives include the following:

 

·                  Become the leading providerin the wind energy supply chain in North America by expanding our suite ofproducts and services;

·                  Leverage our success inNorth America to pursue international opportunities;

·                  Leverage our customerrelationships within the wind energy industry and related sectors to cross-sellour products and services;

·                  Continue to develop ourservice and maintenance businesses;

·                  Continue to improveproduction, technology, operational efficiency and enhance our cost structure;

·                  Utilize our capacity toincrease market share and satisfy our customers’ demand for our products andservices; and

·                  Recruit, train and retainhigh quality employees in our current and planned facilities.

 

***Risks Related to Market Conditions***

 

The recent disruption in the global credit markets,the repricing of credit risk and the deterioration of the financial and realestate markets generally, particularly in the U.S. and Europe, have allcontributed to a reduction in consumer spending and a decline in the overallU.S. economy. Although the recent disruptions were initially in the housing,financial and insurance sectors, this deterioration has further expanded to thegeneral economy and other sectors, including the wind energy sector. Tightcredit, increased unemployment and reduced consumer confidence have hadnegative effects on demand for development of alternative sources of energy andconsequently for our product and service offerings. The timing and pattern ofan economic recovery remain highly uncertain. A prolonged downturn in the U.S.or global economy could have a material adverse effect on our business in anumber of ways, including lower sales and renewal cycles if there is areduction in demand for wind energy and could have a material adverse effect onour liquidity, results of operations and financial condition.

 

If these conditions continue or worsen, they mayresult in reduced worldwide demand for energy and additional difficulties inobtaining financing, which may adversely affect our business. Risks we mightface include: potential declines in revenues in our business segments due toreduced orders or other factors caused by economic challenges faced by ourcustomers and prospective customers, potential adverse impacts on our abilityto access credit and other financing sources beyond the approved credit lineswe currently have, and increased costs associated with accessing further creditand financing sources. Further, if these conditions continue or worsen, ourability to finance future acquisitions or significant capital expendituresrelating to new projects and lines of business may be adversely affected.

 

Additionally, a continued economic slowdown mayresult in impairment to our fixed assets, goodwill and intangible assets. Weperform an annual goodwill impairment test during October of each year, ormore frequently when events or circumstances indicate that the carrying valueof the Company’s assets may not be recovered. The Company tests intangibleassets only when events or circumstances indicate that the carrying value ofthe Company’s assets may not be recovered. A continued economic slowdown couldresult in changes to the Company’s expectations of future financial results andcash flows. These changes could indicate an unfavorable change to management’sestimates of the fair value of the Company’s reportable segments and couldresult in a review of our goodwill and intangible assets, which could indicatepotential impairment to the carrying value of the Company’s assets.

 

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**RESULTS OF OPERATIONS**

 

**Three Months Ended June 30, 2009, Compared toThree Months Ended June 30, 2008**

 

Thesummary of selected financial data table below should be referenced inconnection with a review of the following discussion of our results ofoperations for the three months ended June 30, 2009 compared to the threemonths ended June 30, 2008.

 
| ** **                                    | ** ** | **Three Months Ended June 30,** | ** ** | **2009 vs. 2008**       | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **2009**                             | ** ** | **% of Total  Revenue** | ** ** | **2008** | ** ** | **% of Total  Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                          |       |                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues                                      |       | $                                    | 52,313     |                    | 100.0      | % | $ | 40,830 |   | 100.0 | % | $ | 11,483 |   | 28.1 | % |
| Cost  of sales                                |       | 49,162                               |       | 94.0                    | %          | 30,739 |   | 75.3 | % | 18,423 |   | 59.9 | % |
| Gross  margin                                 |       | 3,151                                |       | 6.0                     | %          | 10,091 |   | 24.7 | % | (6,940 | ) | -68.8 | % |
|                                          |       |                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  expenses                           |       |                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses |       | 10,525                               |       | 20.1                    | %          | 8,995 |   | 22.0 | % | 1,530 |   | 17.0 | % |
| Intangible  amortization                      |       | 2,906                                |       | 5.6                     | %          | 2,738 |   | 6.7 | % | 168 |   | 6.1 | % |
| Total  operating expenses                     |       | 13,431                               |       | 25.7                    | %          | 11,733 |   | 28.7 | % | 1,698 |   | 14.5 | % |
|                                          |       |                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  loss                               |       | (10,280                              | )          | -19.7                   | %          | (1,642 | ) | -4.0 | % | (8,638 | ) | 526.1 | % |
|                                          |       |                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Other  income (expense)                       |       |                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Interest  income                              |       | 93                                   |       | 0.2                     | %          | 327 |   | 0.8 | % | (234 | ) | -71.6 | % |
| Interest  expense                             |       | (650                                 | )          | -1.2                    | %          | (1,121 | ) | -2.7 | % | 471 |   | -42.0 | % |
| Other,  net                                   |       | 5,574                                |       | 10.6                    | %          | 475 |   | 1.1 | % | 5,099 |   | 1073.5 | % |
| Other  income (expense), net                  |       | 5,017                                |       | 9.6                     | %          | (319 | ) | -0.8 | % | 5,336 |   | -1672.7 | % |
|                                          |       |                                 |       |                    |       |   |   |   |   |   |   |   |   |
| Net  loss before provision for income taxes   |       | (5,263                               | )          | -10.1                   | %          | (1,961 | ) | -4.8 | % | (3,302 | ) | 168.4 | % |
| Provision  for income taxes                   |       | 163                                  |       | 0.3                     | %          | 12 |   | 0.0 | % | 151 |   | -1258.3 | % |
| Net  loss                                     |       | $                                    | (5,426     | )                       | -10.4      | % | $ | (1,973 | ) | -4.8 | % | $ | (3,453 | ) | 175.0 | % |

 

The following tables present our results of operations by reportablesegments for the three months ended June 30, 2009:

 
| ** **                                            | ** ** | **Three  Months Ended June 30, 2009** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **Products**                               | ** ** | **Services** | ** ** | **Corporate  and Other****(1)** | ** ** | **Total** | ** ** |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Revenues                                              |       | $                                          | 39,892     |   | $ | 12,486 |   | $ | (65 | ) | $ | 52,313 |   |
| Cost  of sales                                        |       | 39,897                                     |       | 9,330 |   | (65 | ) | 49,162 |   |
| Gross  margin                                         |       | (5                                         | )          | 3,156 |   | — |   | 3,151 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Operating  expenses                                   |       |                                       |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses         |       | 3,646                                      |       | 2,151 |   | 4,728 |   | 10,525 |   |
| Intangible  amortization                              |       | 2,046                                      |       | 860 |   | — |   | 2,906 |   |
| Total  operating expenses                             |       | 5,692                                      |       | 3,011 |   | 4,728 |   | 13,431 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Operating  (loss) income                              |       | (5,697                                     | )          | 145 |   | (4,728 | ) | (10,280 | ) |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Other  (expense) income, net                          |       | (1,113                                     | )          | (278 | ) | 6,408 |   | 5,017 |   |
|                                                  |       |                                       |       |   |   |   |   |   |   |
| Net  loss before (benefit) provision for income taxes |       | (6,810                                     | )          | (133 | ) | 1,680 |   | (5,263 | ) |
| (Benefit)  provision for income taxes                 |       | (558                                       | )          | (416 | ) | 1,137 |   | 163 |   |
| Net  (loss) income                                    |       | $                                          | (6,252     | ) | $ | 283 |   | $ | 543 |   | $ | (5,426 | ) |

 

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(1) “Corporate and Other”includes corporate selling, general and administrative expenses andintercompany eliminations. Corporate selling, general and administrativeexpenses includes corporate salaries and benefits, share-based compensation andprofessional fees.

 

Thefollowing tables present our results of operations by reportable segments forthe three months ended June 30, 2008:

 
| ** **                                           | ** ** | **Three Months Ended June 30, 2008** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Products**                              | ** ** | **Services****(1)** | ** ** | **Corporate  and Other****(2)** | ** ** | **Total** | ** ** |
|                                                 |       |                                      |       |   |   |   |   |   |   |
| Revenues                                             |       | $                                         | 34,042     |   | $ | 6,788 |   | $ | — |   | $ | 40,830 |   |
| Cost  of sales                                       |       | 27,228                                    |       | 3,511 |   | — |   | 30,739 |   |
| Gross  margin                                        |       | 6,814                                     |       | 3,277 |   | — |   | 10,091 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |
| Operating  expenses                                  |       |                                      |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses        |       | 2,294                                     |       | 3,031 |   | 3,670 |   | 8,995 |   |
| Intangible  amortization                             |       | 2,099                                     |       | 639 |   | — |   | 2,738 |   |
| Total  operating expenses                            |       | 4,393                                     |       | 3,670 |   | 3,670 |   | 11,733 |   |
|                                                 |       |                                      |       |   |   |   |   |   |   |
| Operating  income (loss)                             |       | 2,421                                     |       | (393 | ) | (3,670 | ) | (1,642 | ) |
|                                                 |       |                                      |       |   |   |   |   |   |   |
| Other  (expense) income, net                         |       | (560                                      | )          | (115 | ) | 356 |   | (319 | ) |
|                                                 |       |                                      |       |   |   |   |   |   |   |
| Net  income (loss) before provision for income taxes |       | 1,861                                     |       | (508 | ) | (3,314 | ) | (1,961 | ) |
| Provision  for income taxes                          |       | —                                    |       | — |   | 12 |   | 12 |   |
| Net  loss                                            |       | $                                         | 1,861      |   | $ | (508 | ) | $ | (3,326 | ) | $ | (1,973 | ) |

 

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(1) For the three monthsended June 30, 2008, the “Services” segment includes the results ofoperations of EMS and the results of operations of Badger for the period of June 4,2008 through June 30, 2008. Badger was acquired by the Company on June 4,2008.

(2) “Corporate and Other” includes corporate selling, general andadministrative expenses and intercompany eliminations. Corporate selling,general and administrative expenses includes corporate salaries and benefits,share-based compensation and professional fees.

 

***Revenues***

 

Total revenues increased$11,483, or 28% from $40,830 during the three months ended June 30, 2008,to $52,313 during the three months ended June 30, 2009.

 

Products segment revenuesincreased $5,850 from $34,042 during the three months ended June 30, 2008,to $39,892 during the three months ended June 30, 2009. The increase inrevenues within our Products segment is primarily attributable to an increasein wind tower units sold during the current quarter as a result of productionat our new wind tower manufacturing facility in Abilene, Texas and a higherpercentage of materialsin the selling price of certain of our wind towers. The increase in wind towerrevenues during the three months ended June 30, 2009 was partially offsetby a decrease in revenues at Brad Foote resulting from a decline in gearingorders and delays in the shipment of finished goods during the current quarter.

 

Services segment revenuesincreased $5,698 from $6,788 during the three months ended June 30, 2008,to $12,486 during the three months ended June 30, 2009. The increase inrevenues within our Services segment is primarily attributable to the inclusionof revenues from Badger, which was acquired by the Company in June 2008.In addition, revenues during the three months ended June 30, 2009increased at EMS as a result of an increase in service contracts completedduring the current quarter.

 

***Cost of Sales***

 

Total cost of salesincreased $18,423 from $30,739 during the three months ended June 30,2008, to $49,162 during the three months ended June 30, 2009.

 

Products segment cost ofsales increased from $27,228 during the three months ended June 30, 2008,to $39,897 during the three months ended June 30, 2009. The increase incost of sales within our Products segment is primarily attributable to higher 

 

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production costsassociated with a new customer order, start-up costs at our new wind towermanufacturing facility located in Abilene, Texas, the inclusion of materials inthe selling price of certain wind towers and under-absorption of fixedoperating costs at Brad Foote as a result of a decrease in production volumeduring the current quarter.

 

Services segment cost ofsales increased from $3,511 during the three months ended June 30, 2008,to $9,330 during the three months ended June 30, 2009. The increase incost of sales within our Services segment is primarily attributable to theinclusion of operating costs of Badger and incremental cost of sales at EMS asa result of an increase in service contracts completed during the currentquarter.

 

***Selling, General and AdministrativeExpenses***

 

Selling, general andadministrative expenses increased from $8,995 during the three months ended June 30,2008, to $10,525 during the three months ended June 30, 2009. The increasewas primarily attributable to higher administrative salary expense as a resultof staffing corporate legal, accounting and human resources functions duringthe second half of 2008. In addition, selling, general and administrativeexpenses increased as a result of several one-time expenses incurred during thethree months ended June 30, 2009. These one-time expenses wereattributable to severance payments made to a former executive, higherprofessional fees related to the filing of our registration statement with theSecurities and Exchange Commission (“SEC”) during the second quarter of 2009,professional fees and due diligence expenses associated with a potentialacquisition that the Company did not complete and professional fees related tothe finalization of audits related to acquisitions completed in prior years.

 

***Intangible Amortization***

 

Intangible amortizationexpense increased from $2,738 during the three months ended June 30, 2008,to $2,906 during the three months ended June 30, 2009. The increase wasprimarily attributable to an increase in intangible amortization expense relatedto customer relationships and trade name intangibles resulting from theacquisitions of EMS and Badger, which the Company acquired during January 2008and June 2008, respectively.

 

***Other Income (Expense), net***

 

Other expense, net was$319 during the three months ended June 30, 2008, compared to otherincome, net of $5,017 during the three months ended June 30, 2009. Theincrease was primarily attributable to the recognition of $5,082 in incomerelated to an escrow settlement agreement with the former owners of Brad Footeduring the three months ended June 30, 2009.

 

***Provision for Income Taxes***

 

During the three monthsended June 30, 2008, the Company reported a provision for income taxes of$12 compared to $163 during the three months ended June 30, 2009. Theincrease in income taxes is primarily attributable to a reduction in our incometax benefit due to a full income tax valuation allowance forfederal income tax reporting purposes as a result of the Company’s netoperating loss carryforwards as a result of higher net losses during thecurrent quarter and adecrease in state income taxes and deferred state tax liabilities resultingfrom a favorable change in the state of Wisconsin’s method of calculating stateincome on a prospective basis.

 

***Net Loss***

 

Net loss increased from$1,973 during the three months ended June 30, 2008, to $5,426 during thethree months ended June 30, 2009, primarily as a result of the factors asdescribed above.

 

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**Six Months Ended June 30, 2009, Compared to SixMonths Ended June 30, 2008**

 

Thesummary of selected financial data table below should be referenced inconnection with a review of the following discussion of our results ofoperations for the six months ended June 30, 2009 compared to the sixmonths ended June 30, 2008.

 
| ** **                                            | ** ** | **Six Months Ended June 30,** | ** ** | **2009 vs. 2008**       | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **2009**                           | ** ** | **% of Total  Revenue** | ** ** | **2008** | ** ** | **% of Total  Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                                  |       |                               |       |                    |       |   |   |   |   |   |   |   |   |
| Revenues                                              |       | $                                  | 105,375    |                    | 100.0      | % | $ | 75,994 |   | 100.0 | % | $ | 29,381 |   | 38.7 | % |
| Cost  of sales                                        |       | 97,539                             |       | 92.6                    | %          | 57,893 |   | 76.2 | % | 39,646 |   | 68.5 | % |
| Gross  margin                                         |       | 7,836                              |       | 7.4                     | %          | 18,101 |   | 23.8 | % | (10,265 | ) | -56.7 | % |
|                                                  |       |                               |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  expenses                                   |       |                               |       |                    |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative expenses         |       | 19,441                             |       | 18.4                    | %          | 16,365 |   | 21.5 | % | 3,076 |   | 18.8 | % |
| Intangible  amortization                              |       | 5,812                              |       | 5.5                     | %          | 5,317 |   | 7.0 | % | 495 |   | 9.3 | % |
| Total  operating expenses                             |       | 25,253                             |       | 23.9                    | %          | 21,682 |   | 28.5 | % | 3,571 |   | 16.5 | % |
|                                                  |       |                               |       |                    |       |   |   |   |   |   |   |   |   |
| Operating  loss                                       |       | (17,417                            | )          | -16.5                   | %          | (3,581 | ) | -4.7 | % | (13,836 | ) | 386.4 | % |
|                                                  |       |                               |       |                    |       |   |   |   |   |   |   |   |   |
| Other  income (expense)                               |       |                               |       |                    |       |   |   |   |   |   |   |   |   |
| Interest  income                                      |       | 104                                |       | 0.1                     | %          | 447 |   | 0.6 | % | (343 | ) | -76.7 | % |
| Interest  expense                                     |       | (1,203                             | )          | -1.1                    | %          | (2,458 | ) | -3.2 | % | 1,255 |   | -51.1 | % |
| Other,  net                                           |       | 5,667                              |       | 5.3                     | %          | 376 |   | 0.5 | % | 5,291 |   | 1407.2 | % |
| Other  income (expense), net                          |       | 4,568                              |       | 4.3                     | %          | (1,635 | ) | -2.1 | % | 6,203 |   | -379.4 | % |
|                                                  |       |                               |       |                    |       |   |   |   |   |   |   |   |   |
| Net  loss before (benefit) provision for income taxes |       | (12,849                            | )          | -12.2                   | %          | (5,216 | ) | -6.8 | % | (7,633 | ) | 146.3 | % |
| (Benefit)  provision for income taxes                 |       | (273                               | )          | -0.3                    | %          | 200 |   | 0.3 | % | (473 | ) | 236.5 | % |
| Net  loss                                             |       | $                                  | (12,576    | )                       | -11.9      | % | $ | (5,416 | ) | -7.1 | % | $ | (7,160 | ) | 132.2 | % |

 

The following tables present our results of operations by reportablesegments for the six months ended June 30, 2009:

 
| ** **                                            | ** ** | **Six Months Ended June 30, 2009** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **Products**                            | ** ** | **Services** | ** ** | **Corporate  and Other****(1)** | ** ** | **Total** | ** ** |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| Revenues                                              |       | $                                       | 83,026     |   | $ | 22,714 |   | $ | (365 | ) | $ | 105,375 |   |
| Cost  of sales                                        |       | 80,586                                  |       | 17,173 |   | (220 | ) | 97,539 |   |
| Gross  margin                                         |       | 2,440                                   |       | 5,541 |   | (145 | ) | 7,836 |   |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| Operating  expenses                                   |       |                                    |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses         |       | 7,874                                   |       | 4,604 |   | 6,963 |   | 19,441 |   |
| Intangible  amortization                              |       | 4,092                                   |       | 1,720 |   | — |   | 5,812 |   |
| Total  operating expenses                             |       | 11,966                                  |       | 6,324 |   | 6,963 |   | 25,253 |   |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| Operating  loss                                       |       | (9,526                                  | )          | (783 | ) | (7,108 | ) | (17,417 | ) |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| Other  (expense) income, net                          |       | (2,318                                  | )          | (469 | ) | 7,355 |   | 4,568 |   |
|                                                  |       |                                    |       |   |   |   |   |   |   |
| Net  loss before (benefit) provision for income taxes |       | (11,844                                 | )          | (1,252 | ) | 247 |   | (12,849 | ) |
| Provision  (benefit) for income taxes                 |       | (409                                    | )          | (616 | ) | 752 |   | (273 | ) |
| Net  loss                                             |       | $                                       | (11,435    | ) | $ | (636 | ) | $ | (505 | ) | $ | (12,576 | ) |

 

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(1) “Corporate and Other”includes corporate selling, general and administrative expenses andintercompany eliminations. Corporate selling, general and administrativeexpenses includes corporate salaries and benefits, share-based compensation andprofessional fees.

 

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Thefollowing tables present our results of operations by reportable segments forthe six months ended June 30, 2008:

 
| ** **                                           | ** ** | **Six Months Ended June 30, 2008** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                           | ** ** | **Products**                            | ** ** | **Services****(1)** | ** ** | **Corporate  and Other****(2)** | ** ** | **Total** | ** ** |
|                                                 |       |                                    |       |   |   |   |   |   |   |
| Revenues                                             |       | $                                       | 64,290     |   | $ | 11,704 |   | $ | — |   | $ | 75,994 |   |
| Cost  of sales                                       |       | 51,748                                  |       | 6,145 |   | — |   | 57,893 |   |
| Gross  margin                                        |       | 12,542                                  |       | 5,559 |   | — |   | 18,101 |   |
|                                                 |       |                                    |       |   |   |   |   |   |   |
| Operating  expenses                                  |       |                                    |       |   |   |   |   |   |   |
| Selling,  general and administrative expenses        |       | 5,732                                   |       | 5,200 |   | 5,433 |   | 16,365 |   |
| Intangible  amortization                             |       | 4,092                                   |       | 1,225 |   | — |   | 5,317 |   |
| Total  operating expenses                            |       | 9,824                                   |       | 6,425 |   | 5,433 |   | 21,682 |   |
|                                                 |       |                                    |       |   |   |   |   |   |   |
| Operating  income (loss)                             |       | 2,718                                   |       | (866 | ) | (5,433 | ) | (3,581 | ) |
|                                                 |       |                                    |       |   |   |   |   |   |   |
| Other  (expense) income, net                         |       | (942                                    | )          | 42 |   | (735 | ) | (1,635 | ) |
|                                                 |       |                                    |       |   |   |   |   |   |   |
| Net  income (loss) before provision for income taxes |       | 1,776                                   |       | (824 | ) | (6,168 | ) | (5,216 | ) |
| Provision  for income taxes                          |       | —                                  |       | — |   | 200 |   | 200 |   |
| Net  income (loss)                                   |       | $                                       | 1,776      |   | $ | (824 | ) | $ | (6,368 | ) | $ | (5,416 | ) |

 

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(1) For the six monthsended June 30, 2008, the “Services” segment includes the results ofoperations of EMS for the period of January 16, 2008 through June 30,2008 and results of operations of our Badger subsidiary for the period of June 4,2008 through June 30, 2008. Badger was acquired by the Company on June 4,2008.

(2) “Corporate and Other” includes corporate selling, general andadministrative expenses and intercompany eliminations. Corporate selling,general and administrative expenses includes corporate salaries and benefits,share-based compensation and professional fees.

 

***Revenues***

 

Total revenues increased$29,381, or 39% from $75,994 during the six months ended June 30, 2008, to$105,375 during the six months ended June 30, 2009.

 

Products segment revenuesincreased $18,736 from $64,290 during the six months ended June 30, 2008,to $83,026 during the six months ended June 30, 2009. The increase inrevenues within our Products segment is primarily attributable to the inclusionof materials in the selling price of certain wind towers and an increase inwind towers manufactured as compared to the prior year, offset by revenuedeclines at Brad Foote as a result of a decline in production orders.

 

Services segment revenuesincreased $11,010 from $11,704 during the six months ended June 30, 2008,to $22,714 during the six months ended June 30, 2009. The increase inrevenues within our Services segment is primarily attributable to six months ofoperating results at Badger as compared to the prior year in addition to higherrevenues at EMS as a result of the completion of an existing service contract.

 

***Cost of Sales***

 

Total cost of salesincreased $39,646 from $57,893 during the six months ended June 30, 2008,to $97,539 during the six months ended June 30, 2009.

 

Products segment cost ofsales increased from $51,748 during the six months ended June 30, 2008, to$80,586 during the six months ended June 30, 2009. The increase in cost ofsales within our Products segment is primarily attributable to higher operatingcosts as a result of our new wind tower manufacturing facility in Abilene,Texas, start-up delays and operating inefficiencies at our Manitowoc, Wisconsinwind tower manufacturing facility related to a new wind tower manufacturingcontract and the inclusion of materials in the selling price of certain windtowers. Additionally, our Products segment cost of sales increased as a resultof a higher inventory reserve provision for scrap and obsolete materials andvolume inefficiencies due to a decline in production volume at Brad Foote.

 

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Services segment cost ofsales increased from $6,145 during the six months ended June 30, 2008, to$17,173 during the six months ended June 30, 2009. The increase in cost ofsales within our Services segment is primarily attributable to the inclusion ofsix months of operating costs associated with the acquisition of Badger in June 2008.In addition, EMS incurred higher operating costs as a result of an increase inservice contracts entered into and completed during the first six months of2009.

 

***Selling, General and AdministrativeExpenses***

 

Selling, general andadministrative expenses increased from $16,365 during the six months ended June 30,2008, to $19,441 during the six months ended June 30, 2009. The increasewas primarily attributable to higher corporate and administrative expenses,which primarily related to the staffing of corporate and administrativefunctions during the second half of 2008, severance payments made to a formerexecutive, higher professional fees attributable to the finalization of auditsrelated to prior acquisitions and to the filing of our registration statementwith the SEC, professional fees and due diligence expenses associated with apotential acquisition that the Company did not complete and six months ofBadger’s selling, general and administrative expenses, which were not in thecomparable period in the prior year.

 

***Intangible Amortization***

 

Intangible amortizationexpense increased from $5,317 during the six months ended June 30, 2008,to $5,812 during the six months ended June 30, 2009. The increase wasprimarily attributable to an increase in intangible amortization expenserelated to customer relationships and trade name intangibles resulting from theacquisitions of EMS and Badger, which the Company acquired during January 2008and June 2008, respectively.

 

***Other Income (Expense), net***

 

Other expense, net was$1,635 during the six months ended June 30, 2008, compared to otherincome, net of $4,568 during the six months ended June 30, 2009. Theincrease was primarily attributable to the recognition of $5,082 in incomerelated to an escrow settlement agreement with the former owners of Brad Footeduring the second quarter of 2009.

 

***Provision for Income Taxes***

 

During the six monthsended June 30, 2008, the Company reported a provision for income taxes of$200 compared to a benefit for income taxes of $273 during the six months endedJune 30, 2009. The decrease in income tax was primarily attributable tohigher net losses during the six months ended June 30, 2009 as compared tothe prior year and adecrease in state income taxes and deferred state tax liabilities resultingfrom a favorable change in the State of Wisconsin’s method of calculating stateincome on a prospective basis.

 

***Net Loss***

 

Net loss increased from$5,416 during the six months ended June 30, 2008, to $12,576 during thesix months ended June 30, 2009, primarily as a result of the factors asdescribed above.

 

**SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

Themethods, estimates and judgments that we use in applying our criticalaccounting policies have a significant impact on the results that we report inour financial statements. Some of our accounting policies require us to makedifficult and subjective judgments, often as a result of the need to makeestimates regarding matters that are inherently uncertain. We also have otherpolicies that we consider key accounting policies, such as those for revenuerecognition, however, these policies typically do not require us to makeestimates or judgments that are difficult or subjective.

 

We have identified the accounting policies and estimates listed belowas those that we believe require management’s most subjective and complexjudgments in estimating the effect of inherent uncertainties. This sectionshould also be read in conjunction with Note 2 “Summary of SignificantAccounting Policies” in Part II, Item 8 of the notes to our consolidatedfinancial statements in our Annual Report on Form 10-K for the year ended December 31,2008, which includes a discussion of these and other significant accountingpolicies.

 

**Revenue Recognition**

 

We recognize revenue when the earnings process is complete and whenpersuasive evidence of an arrangement exists, transfer of title has occurred orservices have been rendered, the selling price is fixed or determinable,collectability is reasonably

 

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assured,and delivery has occurred per the terms of the contract. Customer deposits andother receipts are deferred and recognized when the revenue is realized andearned.

 

In some instances, products are sold under terms included in bill andhold sales arrangements that result in different timing for revenuerecognition. Assuming all other revenue criteria are met, revenue is recognizedupon completion of product manufacture and customer acceptance. The Company hasreviewed SEC Staff Accounting Bulletin No. 104 (“SAB 104”) and concludes thatits revenue recognition policy is in compliance with SAB 104.

 

**Warranty Liability**

 

Within our Products segment, we provide warranty terms that generallyrange from two to seven years for various products relating to workmanship andmaterials supplied by the Company. We reserve for warranty claims based onindustry experience and estimates made by management. From time to time, customersmay submit warranty claims against the Company. In certain contracts, we haverecourse provisions for items that would enable recovery from third parties foramounts paid to customers under warranty provisions. As of June 30, 2009 and December31, 2008, our estimated product warranty liability was $1,265 and $890,respectively, and is recorded within accrued liabilities in our condensedconsolidated balance sheets.

 

**Inventories**

 

Inventories are stated at the lower of cost or market. Any excess of costover market value is included in the Company’s inventory allowance. Marketvalue of inventory, and management’s judgment of the need for reserves,encompasses consideration of other business factors including physicalcondition, inventory holding period, contract terms, and usefulness.Inventories are valued based on an average cost method that approximates thefirst-in, first-out (FIFO) basis.

 

Inventories consist of raw materials, work-in-process, and finishedgoods. Raw materials consist of components and parts for general productionuse. Work-in-process consists of labor and overhead, processing costs andmaterials purchased for specific customer orders. Finished goods consist ofcomponents manufactured by the Company that will be used to produce finalcustomer products.

 

**Goodwill and Intangible Assets**

 

Goodwill represents the excess of cost over fair market value ofidentifiable net assets acquired through business purchases. In accordance withSFAS No. 142, *Goodwill and Other IntangibleAssets* (“SFAS 142”), we perform an annual goodwill impairment testduring October of each year, or more frequently when events or circumstancesindicate that the carrying value of the Company’s assets may not be recovered.The Company tests intangible assets for impairment only when events orcircumstances indicate that the carrying value of the Company’s assets may notbe recovered. In evaluating the recoverability of the carrying value ofgoodwill and other intangible assets, we must make assumptions regarding the fairvalue of our reporting units, as defined under SFAS 142. Our method ofdetermining the fair value was based upon our estimate of the projected futurediscounted cash flows of our reporting units. If our fair value estimates orrelated assumptions change in the future, we may be required to recordadditional impairment charges related to goodwill and intangible assets.

 

**Long-Lived Assets**

 

In accordance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*, we reviewproperty and equipment and other long-lived assets for impairment wheneverevents or circumstances indicate that carrying amounts may not be recoverable.If such events or changes in circumstances occur, we will recognize animpairment loss if the undiscounted future cash flows expected to be generatedby the asset are less than the carrying value of the related asset. Theimpairment loss would adjust the asset to its fair value.

 

In evaluating the recoverability of long-lived assets, we must makeassumptions regarding estimated future cash flows and other factors todetermine the fair value of such assets. If our fair value estimates or relatedassumptions change in the future, we may be required to record impairmentcharges related to property and equipment and long-lived assets.

 

**Income Taxes**

 

We account for income taxes in accordance with SFAS No. 109, *Accounting for Income Taxes* (“SFAS 109”).SFAS 109 requires the recognition of deferred income tax assets and liabilitiesbased upon the income tax consequences of temporary differences betweenfinancial reporting and income tax reporting by applying enacted statutoryincome tax rates applicable to future years to differences between thefinancial statement carrying amounts and the tax basis of existing assets andliabilities. SFAS 109 also

 

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requiresthat deferred income tax assets be reduced by a valuation allowance if it ismore likely than not that some portion of the deferred income tax asset willnot be realized.

 

In connection with the preparation of our consolidated financialstatements, we are required to estimate our income tax liability for each ofthe tax jurisdictions in which we operate. This process involves estimating ouractual current income tax expense and assessing temporary differences resultingfrom differing treatment of certain income or expense items for income taxreporting and financial reporting purposes. We also recognize as deferredincome tax assets the expected future income tax benefits of net operating losscarry forwards. In evaluating the realizability of deferred income tax assetsassociated with net operating loss carry forwards, we consider, among otherthings, expected future taxable income, the expected timing of the reversals ofexisting temporary reporting differences, and the expected impact of taxplanning strategies that may be implemented to prevent the potential loss offuture income tax benefits. Changes in, among other things, income taxlegislation, statutory income tax rates, or future taxable income levels couldmaterially impact our valuation of income tax assets and liabilities and couldcause our income tax provision to vary significantly among financial reportingperiods.

 

We adopted the provisions of the Financial Accounting Standards Board (“FASB”)Interpretation No. 48, *Accounting forUncertainty in Income Taxes* (“FIN 48”), which is an interpretationof SFAS 109. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an entity’s financial statements in accordance with SFAS 109 andprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in an income tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition.

 

**Recent Accounting Pronouncements**

 

The following is a summary of recent accounting pronouncements,including the expected dates of adoption and estimated effects, if any, on ourcondensed consolidated financial statements:

 

InApril 2008, FASB issued FASB Staff Position (“FSP”) 142-3, *Determination of the Useful Life of Intangible Assets*(“FSP FAS 142-3”), which amends the list of factors an entity should considerin developing renewal or extension assumptions in determining the useful lifeof recognized intangible assets under FAS No. 142, *Goodwill and Other Intangible Assets*. The new guidanceapplies to (1) intangible assets that are acquired individually or with a groupof other assets and (2) intangible assets acquired in both businesscombinations and asset acquisitions. Under FSP FAS 142-3, entities estimatingthe useful life of a recognized intangible asset must consider their historicalexperience in renewing or extending similar arrangements or, in the absence ofhistorical experience, must consider assumptions that market participants woulduse about renewal or extension. FSP FAS 142-3 will require certain additionaldisclosures beginning October 1, 2009 and prospective application to usefullife estimates prospectively for intangible assets acquired after September 30,2009. The Company is in the process of evaluating the impact that the adoptionof FSP FAS 142-3 may have on its financial statements and related disclosures.

 

In April 2009, FASB issued FSP FAS 115-2 and FAS 124-2,*Recognitionand Presentation of Other-Than Temporary Impairments*. FSPFAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance fordebt securities to make the guidance more operational and to improve thepresentation and disclosure of other-than-temporary impairments on debt andequity securities in the financial statements. The adoption of FSP FAS 115-2and FAS 124-2 had no material impact on the Company’s financial position,results of operations or cash flows.

 

InApril 2009, FASB issued FSP FAS 157-4, *DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are not Orderly*.FSP FAS 157-4 provides additional guidance for estimating fair value inaccordance with SFAS No. 157, *Fair ValueMeasurements*, when the volume and level of activity for the asset orliability have significantly decreased. This FSP also includes guidance onidentifying circumstances that indicate a transaction is not orderly. Theadoption of this pronouncement did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

 

In May 2009, FASB issued SFAS No 165, *Subsequent Events* (“SFAS 165”), whichestablishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued. SFAS 165 is effective for interim or annualfinancial periods ending after June 15, 2009. The adoption of thispronouncement did not have a material impact on the Company’s financialposition or results of operations.

 

InJune 2009, FASB issued SFAS No. 166 (“SFAS 166”), *Accounting for Transfers of Financial Assets — an amendment of FASBStatement No. 140.*SFAS 166 eliminates the concept of a “qualifyingspecial-purpose entity,” changes the requirements for derecognizing financialassets, and requires additional disclosures in order to enhance informationreported to users of financial statements by providing greater transparencyabout transfers of financial assets, including securitization transactions, andan entity’s 

 

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continuinginvolvement in and exposure to the risks related to transferred financialassets. SFAS 166 is effective for fiscal years beginning after November 15,2009. The Company is currently evaluating the impact SFAS 166 will have on theconsolidated results of the Company.

 

InJune 2009, FASB issued SFAS No. 167 (“SFAS 167”), *Amendments to FASB Interpretation No. 46(R).*The amendmentsinclude: (1) the elimination of the exemption for qualifying special purposeentities, (2) a new approach for determining who should consolidate avariable-interest entity, and (3) changes to when it is necessary to reassesswho should consolidate a variable-interest entity. SFAS 167 is effective forthe first annual reporting period beginning after November 15, 2009 and forinterim periods within that first annual reporting period. The Company iscurrently evaluating the impact SFAS 167 will have on the consolidated resultsof the Company.

 

In June 2009, FASB issued SFAS No 168, *The FASB Standards CodificationTM and the Hierarchy of GenerallyAccepted Accounting Principles* (“SFAS 168”), a replacement of SFASNo 162, *The Hierarchy of Generally Accepted AccountingPrinciples.*SFAS 168**will becomethe source of authoritative U.S. accounting and reporting standards recognizedby the FASB for use in preparation of financial statements of nongovernmentalentities that are presented in conformity with GAAP effective July 1, 2009. Rulesand authoritative releases of the Securities and Exchange Commission (“SEC”)under authority of federal securities laws are also sources of authoritativeGAAP for SEC registrants. SFAS 168 is effective for interim or annual financialperiods ending after September 15, 2009. The adoption of this pronouncement isnot anticipated to have a material impact on the Company’s financial positionor results of operations.

 

**LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES**

 

As of June30, 2009, cash and cash equivalents totaled $7,834. Our cash flows fromoperations and financing activities have been adequate to fulfill our liquidityrequirements. We anticipate that we will be able to satisfy the cashrequirements associated with, among other things, our working capital needs,capital expenditures, debt and lease commitments through at least the next 12months primarily with available cash balances, cash generated by operationsand through additional financing arrangements. While we anticipate being ableto maintain adequate liquidity, there can be no assurance that our cashbalances and cash flows will be adequate, and a reduction in our revenues orcustomer collections or other unfavorable events that may arise may have anadverse impact on our cash flows and liquidity.

 

We expect to improve uponour liquidity and financial position based on the following:

 

·                  Due to the current economic downturn andcontinued negative effects of the global credit markets, we have encountered achallenging environment for amending our existing debt and credit facilities orentering into new facilities. However, we were able to amend and extend ourdebt agreements with the primary lenders for Brad Foote and Tower Tech on March13, 2009. Brad Foote, RBA and Tower Tech are subject to certain covenants underthe terms of their respective debt agreements, and in light of the currenteconomic climate there can be no certainty that we will be able to meet ourobligations under these covenants. We plan to continue efforts to restructureour debt obligations and capital expenditure commitments to ensure that we haveadequate liquidity and the financial resources to fund working capitalrequirements, capital expenditures and business acquisitions.

 

·                  We experienced significant one-timecorporate and operating cash outflows as a result of integrating fouracquisitions during 2008 and 2009. We expect to see a reduction in these typesof cash outflows during the second half of 2009.

 

·                  Accounts receivable balances are monitored andreviewed on a monthly basis and customer account balances that are delinquentor nearing delinquency are vigorously pursued by our collection departments toestablish collectability or adequate reserves are made against questionableaccounts. Nevertheless, we are exposed to credit risk on our accountsreceivable balances. Historically, our accounts receivable balances are highlyconcentrated with a select number of customers. In the event that we are unableto collect on these accounts receivable balances, the Company may be exposed tosignificant credit risk associated with an increase in bad debt expenseresulting from the write-off of these uncollectible balances in addition to thecorresponding decrease in liquidity as a result of the inability to collectcash associated with these accounts receivables balances. 

 

·                  We made capital investments of $83,720during 2008. These investments resulted in significant capacity expansionacross all business lines. These major investments in 2008 serve to reduce ourexpected capital expenditure needs during 2009.

 

The Company has alsoentered into additional financing arrangements to improve its liquidity andcash balances. In April 2009, Tower Tech entered into a sale-leasebackagreement with Varilease Finance, Inc. (“Varilease”) pursuant to whichVarilease agreed to provide equipment financing in the amount of up to $3,000(the “Varilease Financing”). Proceeds from the Varilease Financing will be usedfor working capital and other general corporate operating needs. In addition,Tower Tech obtained construction

 

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financing from GreatWestern in the amount of up tos $10,000 pursuant to the Construction Loan.Proceeds from the Construction Loan will be used to complete construction ofTower Tech’s wind tower manufacturing facility in Brandon, South Dakota. TheCompany believes that by entering into these additional financing arrangements,it has strengthened its financial position and has provided additionalliquidity to meet current and future operating requirements.

 

On August 7, 2009, Brad Foote and Bank of America(“BOA”) entered into a Third Omnibus Amendment Agreement (the “Third OmnibusAmendment”), further amending our existing loan agreement originally datedJanuary 17, 1997 (“Loan Agreement”) and the documents evidencing the DebtFacilities. The Third Omnibus Amendment also provided that (i) BOA waive BradFoote’s violation of the financial covenants set forth in the Loan Agreement (thesenior debt to EBITDA and minimum EBITDA covenants) for the second quarter of2009 and the calendar month of June 2009, respectively, (ii) amending andrestating the requirements with respect to maintenance of ratios for theremainder of 2009 relating to, senior debt to EBITDA, cash flow coverage, aminimum monthly revenue requirements, and starting in 2010 a minimum monthlyEBITDA requirements, (iii) BOA waive certain breaches or events of defaultunder the Loan Agreement relating to Brad Foote’s inventory record keeping, andreporting liens filed against certain of Brad Foote’s property (which havesubsequently been released by the lien holders), and the delivery of certainBrad Foote financial information, (iv) certain provisions pertaining to insuranceownership of collateral and tax returns be amended to clarify the languagetherein, (v) Brad Foote pay BOA a $35 amendment and waiver fee, as well as allaccrued and un pain fees and expenses under the Loan Agreement all reasonablefees and expenses of BOA incurred in connection with the Third OmnibusAmendment, (vi) the interest rate payable under each of the Debt Facilitiesshall be equal to the greater of (A) LIBOR plus five percent (5%) and (B) sevenpercent (7%), and (vii) Brad Foote may borrow funds from Broadwind on arevolving basis, up to a maximum principal amount of $3,000, which shall besubordinated to indebtedness owed by Brad Foote to BOA and which shall not besubject to certain restrictions imposed on reporting and payment of otherwisepreviously existing intercompany debt between Brad Foote and Broadwind.   We expect that we will be in compliance withthe amended and restated covenants contained in the loan agreement, and webelieve the chance of default is remote for the next twelve months.   However, there can be no certainty that BradFoote will be in compliance with such covenants for any future periods or thatBrad Foote will be able to attain a waiver from Bank of America in the event ofa violation of one or more such covenants.

 

We also intend to enhance our ability to fulfill ourshort-term liquidity requirements through financing initiatives that mayinclude entering into additional sale-leaseback arrangements and securingadditional debt. Our ability to make scheduled payments on our debt and otherfinancial obligations will depend on our future financial and operatingperformance. While we believe that we will continue to have sufficient cashflows to operate our businesses, there can be no assurances that our operationswill generate sufficient cash flows or that credit facilities will be availableto us in an amount sufficient to enable us to pay our indebtedness or to fundour other liquidity needs. If we cannot make scheduled payments on our debt, wewill be in default and, as a result, among other things, our debt holders coulddeclare all outstanding principal and interest to be due and payable and wecould be forced into bankruptcy, liquidation or required to substantiallyrestructure or alter our business operations and debt obligations.

 

**Sources and Uses of Cash**

 

***Operating Cash Flows***

 

During the six months ended June 30, 2008, net cash used in operatingactivities was $6,434, compared to net cash provided by operating activities of$122 during the six months ended June 30, 2009. The increase in net cashprovided by operating activities was primarily attributable to highercollections of accounts receivable and a decrease in our inventory balances,which was partially offset by a decrease in customer deposits and higher cash outlaysfor operating expenditures. Changes in accounts receivable during the sixmonths ended June 30, 2009 relative to the six months ended June 30, 2008improved cash flows from operations by $21,264 as a result of cash collectionson accounts receivable at Brad Foote, EMS and RBA. Accounts receivable balancesat Tower Tech also decreased, but were largely offset by a decrease in customerdeposits. Changes in our inventories improved operating cash flows by $12,374during the six months ended June 30, 2009 as compared to the prior period,primarily as a result of the lower inventory balances at Brad Foote and TowerTech.

 

While our agreements withcustomers call for specified payments terms, the effects of the global economicdownturn may result in our customers modifying or attempting to modify theirpayment terms, which could adversely affect our liquidity position during 2009.As a result, the Company may be exposed to credit risk associated with thewrite-off of these uncollectible balances in addition to a reduction inliquidity. Although we anticipate that we will be able to satisfy cashrequirements for working capital needs, capital expenditures and commitmentsthrough at least the end of 2009 primarily with cash generated by ouroperations and existing cash balances, we will need to restructure our existingdebt and credit agreements or seek additional sources of capital to fundcapital commitments, business acquisitions and working capital requirements infuture years.

 

***Investing Cash Flows***

 

During the six months ended June 30, 2008, net cash used in investingactivities totaled $45,920, compared to $11,038 during the six months ended June30, 2009, which was primarily attributable to a reduction in capitalexpenditures and the fact that no acquisitions were completed during the sixmonths ended June 30, 2009. During the six months ended June 30, 2008, theCompany completed the acquisitions of EMS and Badger in January and June of2008, respectively for approximately $24,955, net of cash received. Capitalexpenditures were $20,465 during the six months ended June 30, 2008 primarilyas a result of equipment purchases at Brad Foote and construction and equipmentexpenditures for our new wind tower manufacturing facility in Abilene, Texas.During the six months ended June 30, 2009, capital expenditures were $9,064 andprimarily related to construction and equipment purchases as part of thecompletion in January of our wind tower manufacturing facility in Abilene,Texas. Additionally, restricted cash increased from $500 during the six monthsended June 30, 2008 to $2,003 during the six months ended June 30, 2009 as aresult of a collateral assignment of a $2,000 deposit account in connectionwith the Construction Loan.

 

Capital expenditures areanticipated to be significantly lower during 2009 as compared to 2008 as aresult of the completion of a significant number of capital projects during2008. These capital projects included, among other things, significantinvestments in capacity and infrastructure in addition to equipment, machineryand transport vehicle expenditures. As a result, the Company believes that ithas adequate capacity to meet current and foreseeable customer demand.

 

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***Financing Cash Flows***

 

During the six months ended June 30, 2008, net cash provided byfinancing activities totaled $128,441, compared to $3,497 during the six monthsended June 30, 2009. The decrease in net cash provided by financing activitiesas compared to the prior period was primarily attributable to the fact that theCompany did not complete any equity offerings during the six months ended June 30,2009. During the six months ended June 30, 2008, the Company completed two private equity placementsamong Tontine Partners, L.P. (“TP”), Tontine Overseas Fund Ltd., TontineCapital Partners L.P and Tontine 25 Overseas Master Fund L.P. (“TMF”) for anaggregate of $100,000 for 12,562,814 shares of unregistered common stock at$7.96 per share in addition to completing a private equity placement in theamount of $17,225 for 2,031,250 shares of unregistered common stock at $8.48per share to TP and TMF. Additionally, net cash provided by financingactivities during the six months ended June 30, 2009 decreased as a result ofhigher payments on lines of credit and notes payable and a reduction inproceeds received from debt as compared to the prior year. Payments on lines ofcredit and notes payable increased from $1,385 during the six months ended June30, 2008, to $7,134 during the six months ended June 30, 2009. This increasewas primarily attributable to higher debt payments made by Brad Foote on itsdebt facilities due to amendments to its debt facilities during 2009.

 

**Contractual Obligations**

 

As of June 30, 2009,there have been no significant changes to our contractual obligations aspreviously disclosed in Item 7 of our Annual Report on Form 10-K for the yearended December 31, 2008.

 

**Off-Balance Sheet Arrangements**

 

During April 2009, TowerTech entered into a sale-leaseback agreement with Varilease as described above,whereby Tower Tech sold certain equipment to Varilease in exchange for $2,935in cash and agreed to lease the equipment back from Varilease for a certainperiod of time. The primary purpose of this arrangement was to provideadditional liquidity for meeting working capital requirements. The leaseagreement is for a three-year period with rental payments due monthly of $85.In addition, the sale of the assets resulted in a gain on disposition of $40,which will be amortized to other income in our statement of operations over thelife of the operating lease.

 

**CautionaryNote Regarding Forward-Looking Statements**

 

The preceding discussionand analysis should be read in conjunction with our condensed consolidatedfinancial statements and related notes included in Item 1 of Part 1 of thisQuarterly Report on Form 10-Q and the audited consolidated financial statementsand related notes and Management’s Discussion and Analysis of FinancialCondition and Results of Operations contained in our Annual Report on Form 10-Kfor the year ended December 31, 2008. Portions of this Quarterly Report on Form10-Q, including the discussion and analysis in this Item 2, containforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended (the “Exchange Act”). Any statements contained herein that arenot historical fact may be deemed forward-looking statements. In some cases,forward-looking statements can be identified by words such as “believe,” “expect,”“anticipate,” “plan,” “potential,” “continue,” “intend” or similar expressions.Forward-looking statements also include the assumptions underlying or relatingto any of the foregoing statements. Such forward-looking statements are basedupon current expectations and beliefs and are subject to a number of factorsand uncertainties that could cause actual results to differ materially fromthose described in the forward-looking statements. Any forward-lookingstatements made herein are made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995. Our forward-lookingstatements include or relate to the following: (i) our plans to continue togrow our business through organic growth and integration of previous and futureacquisitions; (ii) our beliefs with respect to the sufficiency of our workingcapital and our plans to evaluate alternate sources of funding if necessary; (iii)our ability to comply with loan covenants; (iv) our expectations relating toconstruction of new facilities and expansion of existing facilities; (v) ourplans with respect to the use of proceeds from financing activities; (vi) ourbeliefs and expectations relating to the recent economic downturn and thepotential impact it may have on our business, including our customers; (vii) theanticipated benefits of our remediation efforts on the strength of our internalcontrol processes and our plans with respect to future remediation efforts; (viii)our beliefs regarding the state of the wind energy market generally; and (ix) thoserisks described from time to time in our reports to the Securities and ExchangeCommission (including in our Annual Report on Form 10-K). Forward-lookingstatements cannot be guaranteed and actual results may vary materially due tothe uncertainties and risks, known and unknown, associated with suchstatements. We caution investors that many important factors have affected, andin the future could affect our actual results of operations and cause suchresults to differ materially from those anticipated in forward-lookingstatements made in this report and elsewhere by us or on our behalf. It is notpossible to foresee or identify all factors that could cause actual results todiffer from expected or historic results. As such, investors should notconsider any list of such factors to be an exhaustive statement of all of the risks,uncertainties or potentially inaccurate assumptions that investors should takeinto account when making investment decisions. Stockholders and other readersare cautioned not to place undue reliance on 

 

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forward-lookingstatements, which speak only as of the date on which they are made. We do notintend to update publicly or revise any forward-looking statements.

 

**Item3.        Quantitative and QualitativeDisclosures About Market Risk**

 

There has been no significant change in our exposureto market risk during the first six months of 2009. For discussion of ourexposure to market risk, refer to Part II, Item 7A, “Quantitative andQualitative Disclosures About Market Risk,” contained in our Annual Report on Form10-K for the year ended December 31, 2008.

 

**Item 4.        Controls and Procedures**

 

**MaterialWeaknesses**

 

As discussed in Item 9Aof our Annual Report on Form 10-K for the year ended December 31, 2008, as of December31, 2008, we identified certain material weaknesses relating to:

 

***Inventory and Cost Accounting***

 

A material weaknessexists at our Brad Foote subsidiary relating to routine physical inventorycounts, the reconciliations of book to physical adjustments, the process formaintenance of perpetual inventory records and related accounting for scrap andcost of goods sold. Management is continuing to enhance the control structureto address these previously identified material weaknesses.

 

***IT Controls***

 

The Company did notmaintain effective internal control over information systems at its Brad Footesubsidiary. General computing controls were first implemented in the fourthquarter of 2008. Such timing did not allow the Company to obtain a sufficientsample size to test controls and as a result could not be assessed foroperating effectiveness. The lack of general computing controls combined withthe errors previously noted in inventory constitutes an aggregated materialweakness.

 

***Income Taxes***

 

In conjunction with ourfiling of Amendment No. 2 on Form 10-Q/A for the quarterly period ended September30, 2008, we identified a material weakness in income taxes. The Company didnot maintain effective controls over the completeness and accuracy of theincome tax provision and related balance sheet accounts. Specifically, theCompany’s controls over the processes and procedures related to thedetermination and review of the quarterly tax provisions were not adequate toensure that the income tax provision was prepared in accordance with GAAP.

 

***Non-routine Transactions***

 

In conjunction with ourfiling of Amendment No. 2 on Form 10-Q/A for the quarterly period ended September30, 2008, we identified a material weakness associated with the controls overnon-routine transactions, and the related accounting treatment of thosetransactions was appropriately reviewed to ensure compliance with GAAP.

 

***Remediation Activities***

 

Management has begunremediation efforts to reduce the risks presented by the existing materialweaknesses. Since year-end, we have added a cost accountant at our Brad Footesubsidiary responsible for the tracking of inventory and further enhancedmanagement’s review of the inventory process. Standard costs for inventoryparts are reviewed by the new cost accountant and by management on a quarterlybasis. In the third quarter of 2008, management began performing quarterlyphysical inventories at Brad Foote, a practice that management anticipates willbe performed throughout 2009.

 

Management will continueto work with the Company’s tax advisors to have more active and timely reviewof the tax provision. Management implemented additional controls overnon-routine transactions.

 

On June 4, 2008, theCompany completed the acquisition of Badger. This acquired business has beenexcluded from management’s assessment of internal controls as of and for theperiod ended December 31, 2008. Badger’s assets and liabilities acquired were$18,122 and $6,127, respectively. Badger was a mid-year acquisition that wasnot significant to the overall operations of the Company and was not includedin our evaluation of the effectiveness of disclosure controls and proceduresfor 2008. Though

 

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management did notperform a complete assessment, from the date of acquisition through our fiscalyear end, we have identified several items that represent material weaknessesor significant deficiencies in the internal control over financial reporting atBadger. These material weaknesses are related to internal financial expertise,accounting policies and procedures, information technology environment andsegregation of duties. The Company has begun remediation efforts to mitigatethe effects of these deficiencies.

 

The impact of theremediation efforts initiated by management will not be fully known until ourassessment of internal control over financial reporting as of December 31,2009.

 

**Evaluation of Disclosure Controls andProcedures**

 

Our Chief ExecutiveOfficer and Interim Chief Financial Officer evaluated the effectiveness of theCompany’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)and 15d-15(e)) as of the end of the period covered in this report. In light ofthe material weaknesses previously disclosed, which have not been completelyremediated as of the end of the period covered by this Quarterly Report, ourChief Executive Officer and Interim Chief Financial Officer concluded that ourdisclosure controls and procedures were not effective to provide reasonableassurance that information required to be disclosed by the Company in thereports that it files or submits under the Exchange Act was recorded,processed, summarized and reported within the time periods specified by the SEC’srules and forms and did not ensure that information required to be disclosed inthe reports that we file or submit under the Exchange Act was accumulated andcommunicated to our management, including our Chief Executive Officer andInterim Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosure. As a result of this conclusion, the financialstatements for the period covered by this report were prepared with particularattention to the material weaknesses previously disclosed.

 

We anticipate the actionsto be taken to remediate the material weaknesses and the resulting improvementin controls will generally strengthen our disclosure controls and procedures,as well as our internal control over financial reporting, and will, over time,address the material weaknesses that we identified in our internal control overfinancial reporting as of December 31, 2008. However, because many of theremediation actions we have undertaken are recent and because some of ourremediation actions will be designed to improve our internal control overannual measures, management will not be able to conclude that the material weaknesseshave been eliminated until such time as it is able to complete its assessmentof the effectiveness of internal control over financial reporting. Whilemanagement is exercising its best efforts to remediate material weaknesses andsignificant deficiencies identified and described above, it cannot provide anyassurance as to when such material weaknesses and significant deficiencies willbe remediated, and other material weaknesses or significant deficiencies mayarise.

 

**PART II.    OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

Occasionally, we are adefendant in litigation arising in the ordinary course of our business,including claims arising from personal injuries, contract claims, customerdisputes and employment-related claims. To date, none of these types oflitigation, most of which are typically covered by insurance, has had amaterial effect on the Company. We have insured and continue to insure againstmost of these types of claims. A judgment significantly in excess of ourinsurance coverage or involving punitive damages, which may not be covered byinsurance, could materially adversely affect our financial condition or resultsof operations.

 

**Item 1A. Risk Factors**

 

Therewere no material changes to our risk factors as previously disclosed in Item 1Aof our Annual Report on Form 10-K for the year ended December 31, 2008.

 

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

 

None

 

**Item 3.        Defaults Upon Senior Securities**

 

None

 

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**Item 4.        Submission of Matters to a Vote of Security Holders**

 

At the Annual Meeting ofStockholders held on June 9, 2009, we submitted to a vote of our stockholdersthe following matters, which received the indicated votes:

 

**1.****             **Election of Directors:

 
| ** **             | ** ** | ** ** | ** ** | **FOR**    | ** ** | **AGAINST** |   |
|------------------------|------------|------------|------------|------------|------------|-------------|--------|
| J.  Cameron Drecoll    |       |       |       | 87,195,889 |       | 439,608     |   |
| James  M. Lindstrom    |       |       |       | 87,340,513 |       | 294,984     |   |
| Charles  H. Beynon     |       |       |       | 86,133,597 |       | 1,501,900   |   |
| Terence  P. Fox        |       |       |       | 87,518,335 |       | 117,162     |   |
| David  P. Reiland      |       |       |       | 87,432,055 |       | 203,442     |   |
| William  T. Fejes, Jr. |       |       |       | 87,438,738 |       | 196,759     |   |

 

**2.**              Toapprove an amendment to the Broadwind Energy, Inc. 2007 Equity Incentive Planto increase the number of common shares authorized for issuance under the planto 5,500,000.

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NON-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------|------------|
| 73,604,439 |       | 516,447     |       | 59,074      |       | 13,455,537          |       |

 

**3.****             **To ratify the selection of Grant Thornton LLP as theCompany’s independent registered public accounting firm for 2009.

 
| **FOR**    | ** ** | **AGAINST** | ** ** | **ABSTAIN** | ** ** | **BROKER NON-VOTE** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------|------------|
| 87,420,704 |       | 46,701      |       | 168,092     |       | —              |       |

 

**Item 5.        Other Information**

 

None

 

**Item 6.        Exhibits**

 

See the Exhibit Indexfollowing the signature page to this report.

 

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**SIGNATURES**

 

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

 
|            | BROADWIND ENERGY, INC. |
|-----------------|------------------------|
|            |                   |   |
|            |                   |   |
| August 10, 2009 | By:                    | /s/ J. Cameron Drecoll |
|            |                   | J. Cameron Drecoll |
|            |                   | Chief Executive Officer |
|            |                   | (principal executive  officer) |
|            |                   |   |
| August 10, 2009 | By:                    | /s/ Kevin E. Johnson |
|            |                   | Kevin E. Johnson |
|            |                   | Interim Chief Financial  Officer |
|            |                   | (principal financial  officer) |

 

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EXHIBIT INDEX

BROADWIND ENERGY,INC.

FORM 10-Q FOR THEQUARTER ENDED JUNE 30, 2009

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                             |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Employment Agreement,  dated as of July 29, 2009, between the Company and Stephanie Kushner  (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on  Form 8-K filed August 3, 2009)                                         |
| 10.2                |       | Third Omnibus Amendment  Agreement, dated as of August 7, 2009, by and between Brad Foote Gear Works, Inc.,  1309 South Cicero Avenue, LLC, 5100 Neville Road, LLC and Bank of America,  N.A.*                                                          |
| 10.3                |       | Reaffirmation, dated  August 7, 2009, made by each of Broadwind Energy, Inc., 1309 South Cicero  Avenue, LLC and 5100 Neville Road, LLC, for the benefit of Bank of America,  N.A*                                                                      |
| 10.4                |       | Construction Loan  Agreement, dated April 28, 2009, by and between Tower Tech Systems Inc.  and Great Western Bank (incorporated by reference to Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed May 1, 2009)                 |
| 10.5                |       | Promissory Note, dated  April 28, 2009, from Tower Tech Systems Inc. to Great Western Bank  (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on  Form 8-K filed May 1, 2009)                                        |
| 10.6                |       | Letter Agreement, dated  April 28, 2009, by and among Broadwind Energy, Inc., Tower Tech  Systems Inc. and Great Western Bank (incorporated by reference to Exhibit  10.3 to the Company’s Current Report on Form 8-K filed May 1, 2009) |
| 10.7                |       | Commercial Security  Agreement, dated April 28, 2009, by and between Tower Tech Systems Inc.  and Great Western Bank (incorporated by reference to Exhibit 10.4 to the  Company’s Current Report on Form 8-K filed May 1, 2009)               |
| 10.8                |       | Mortgage, dated  April 28, 2009, from Tower Tech Systems Inc. to Great Western  Bank (incorporated by reference to Exhibit 10.5 to the Company’s Current  Report on Form 8-K filed May 1, 2009)                                          |
| 10.9                |       | Assignment of Deposit  Account, dated April 28, 2009, by and between Tower Tech Systems Inc.  and Great Western Bank (incorporated by reference to Exhibit 10.6 to the  Company’s Current Report on Form 8-K filed May 1, 2009)               |
| 10.10               |       | Subordination  Agreement, dated April 27, 2009, by and between Broadwind  Energy, Inc. and Great Western Bank (incorporated by reference to  Exhibit 10.7 to the Company’s Current Report on Form 8-K filed May 1, 2009)                 |
| 10.11               |       | Commercial Guaranty,  dated April 27, 2009, from Broadwind Energy, Inc. to Great Western  Bank (incorporated by reference to Exhibit 10.8 to the Company’s Current  Report on Form 8-K filed May 1, 2009)                                |
| 10.12               |       | Separation Agreement  and Release dated as of April 30, 2009, by and between Broadwind  Energy, Inc. and Matthew Gadow (incorporated by reference to Exhibit  10.9 to the Company’s Current Report on Form 8-K filed May 1, 2009)        |
| 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*                                                                                                    |

 

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*                                         Filed herewith.

 

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