UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




FORM 10-Q




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





For the quarterly period ended September 30, 2010


OR




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





Commission file number: 001-53510





WINDTAMER CORPORATION


(Exact name of Registrant as specified in its charter)





New York
16-1610794(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)1999 Mount Read BlvdRochester, NY
14615(Address of principal executive offices)
(Zip Code)





(585) 243-4040


(Registrant's telephone number, including area code)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.


Yes   x   No    ̈





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant has been required to submit and post such files).* Yes   ̈ No   ̈


* Registrant is not yet required to submit Interactive Data Files pursuant to Rule 405 of Regulation S-T





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





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





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





As of November 9, 2010, the Registrant had outstanding 116,521,045 shares common stock, $0.0001 par value.







WINDTAMER CORPORATION


TABLE OF CONTENTS





PART I. FINANCIAL INFORMATIONItem 1. Financial Statements
1Condensed Balance Sheets as of  September 30, 2010 (unaudited) and December 31, 2009
1Unaudited Condensed Statements of Operations for the Three Months and Nine Months Ended September  30, 2010 and 2009
2Unaudited Condensed Statements of Cash Flows for the Nine Months Ended September  30, 2010 and 2009
3Unaudited Statement of Stockholders' Equity through  September 30, 2010
4Notes to Unaudited Condensed Financial Statements
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
14Item 4.
Controls and Procedures
20PART II. OTHER INFORMATIONItem 1.
Legal Proceedings
22Item 1A.
Risk Factors
22Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
22Item 3.
Defaults Upon Senior Securities
22Item 5.
Other Information
22Item 6.
Exhibits
22Signatures

23Exhibits














PART I – FINANCIAL INFORMATION





Item 1. Financial Statements and Notes




WINDTAMER CORPORATION
 Balance Sheets




September 30,

2010

(unaudited)


December31, 2009ASSETSCurrent assetsCash
$
38,191


$
1,027,977Accounts Receivable

21,250



0Prepaid expenses and other current assets

65,727



84,948Inventory

628,263



47,101Total current assets

753,431



1,160,026Intangible assets, net

35,925



37,277Property and equipment, net

141,308



175,109Total assets
$
930,664


$
1,372,412LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilitiesAccounts payable
$
811,510


$
302,806Line of credit

772,967



0Customer deposits

192,557



95,000Accrued liabilities

334,730



19,256Total current liabilities

2,111,764



417,062Stockholders' equityPreferred stock, 5,000,000 shares authorized, $0.0001 par value; none issued or outstanding at September  30, 2010 or December 31, 2009

0



0Common stock, 500,000,000 shares authorized, $0.0001 par value; 106,447,817 and 115,297,000 shares issued and outstanding at September  30, 2010 and December 31, 2009, respectively

10,644



11,530Additional paid-in capital

13,681,117



4,998,421Accumulated deficit

(14,872,861
)


(4,054,601
)Total stockholders' equity/(deficit)

(1,181,100
)


955,350Total liabilities and stockholders' equity
$
930,664


$
1,372,412The accompanying notes are an integral part of the financial statements.






1






WINDTAMER CORPORATION


Statements of Operations (unaudited)




Three Months

Ended


Three Months

Ended


Nine Months

Ended


Nine Months

EndedSeptember

30,


September

30,


September

30,


September

30,2010


2009


2010


2009Sales

$
438,985





$
438,985Cost of Goods Sold


714,856






714,856Gross Loss


(275,871
)





(275,871
)Operating Expenses:Research and development expenses


412,949


$
278,421



1,858,589


$
669,694Selling, general and administrative expenses


621,634



101,368



8,842,784



1,350,629Total expenses


1,034,583



379,789



10,701,373



2,020,323Loss from operations


(1,310,454
)


(379,789
)


(10,977,244
)


(2,020,323
)Non-operating (revenue)/expenseInterest


3,135



0



3,936



0Net loss before income taxes


(1,313,589
)


(379,789
)


(10,981,180
)


(2,020,323
)Income taxes


(162,919
)


0



(162,919
)


0Net loss

$
(1,150,670
)

$
(379,789
)

$
(10,818,261
)

$
(2,020,323
)Net loss per common share - basic and diluted

$
(.01
)

$
(.00
)

$
(.10
)

$
(.02
)Weighted average number of common shares outstanding - basic and diluted


106,421,171



98,341,000



107,206,733



87,023,556




The accompanying notes are an integral part of the financial statements.





2





WINDTAMER CORPORATION


Statements of Cash Flows(unaudited)




Nine Months Ended September 30,

2010


Nine Months Ended September 30,

2009Operating activitiesNet loss

$
(10,818,261
)

$
(2,020,323
)Adjustments to reconcile net loss to net cash used in operating activities:Amortization and depreciation expense


119,497



7,988Stock-based compensation


1,337,935



649,024Financing fees- issuance of warrants, non-cash


6,235,000



0Stock issued for services and rent


108,871



0Changes in operating assets and liabilities:Decrease/(Increase) in prepaid expenses and other current assets


19.221



(6,071
)Increase in trade accounts receivable


(21,250
)


0Increase in inventory


(581,162
)


0Increase in customer deposits


97,557



60,000Increase in trade accounts payable and accrued liabilities


824,180



162,249Net cash used in operating activities


(2,678,412
)


(1,147,133
)Investing ActivitiesAcquisition of fixed assets


(84,341
)


(26,327
)Acquisition of intangible assets


0



(16,994
)Net cash used in investing activities


(84,341
)


(43,321
)Financing activitiesBorrowings on line of credit, net of repayments


772,967



0Proceeds from issuance of common stock


1,000,000



741,000Proceeds from the exercise of stock options


0



833,000Stock offering expenses paid


0



(16,344
)Net cash provided by financing activities


1,772,967



1,557,656Increase (decrease) in cash


(989,786
)


367,202Cash – beginning of period


1,027,977



204,771Cash – end of period

$
38,191


$
571,973Supplemental Information:Income Taxes Paid/(Tax credits received)

$
(162,919
)

$
0Interest Paid

$
3,745


$
0





The accompanying notes are an integral part of the financial statements.





3











WINDTAMER CORPORATION





Statement of Stockholders’ Equity/(Deficit) (unaudited)


Number of Shares


Par Value


Additional Paid-In Capital


Accumulated Deficit


Total Stockholders' EquityBalance, December 31, 2009


115,297,000


$
11,530


$
4,998,421


$
(4,054,601
)

$
955,350Issuance of common stock for services


135,848



13



98,068







98,081Issuance of common stock under stock award


25,000



2



2,500







2,502Stock option expense










299,880







299,880Net loss for quarter














(1,245,954
)


(1,245,954
)Balance, March 31, 2010


115,457,848



11,545



5,398,869



(5,300,555
)


109,859Retirement of common shares


(29,050,000
)


(2,905
)


2,905







0Issuance of warrants for loan guarantee










6,235,000







6,235,000Issuance of commons stock for cash


20,000,000



2,000



998,000







1,000,000Stock option expense










834,447







834,447Net loss for quarter














(8,421,636
)


(8,421,636
)Balance, June 30, 2010


106,407,848



10,640



13,469,221



(13,722,191
)


(242,330
)Issuance of common stock for rent


39,969



4



10,788







10,792Stock option expense










201,108







201,108Net loss for quarter














(1,150,670
)


(1,150,670
)Balance, September 30,2010


106,447,817


$
10,644


$
13,681,117


$
(14,872,861
)

$
(1,181,100
)





The accompanying notes are an integral part of the financial statements




4










WINDTAMER CORPORATION





Notes to The Financial Statements


Nine-Month Period ended September 30, 2010


(Unaudited)





Note 1 – Description of Business and Summary of Significant Accounting Policies




WindTamer Corporation (the Company) was incorporated on March 30, 2001 in the State of New York as Future Energy Solutions, Inc. and in November 2008 changed its name to WindTamer Corporation. The Company is a developer and manufacturer of wind power turbines that utilize a patented technology for the production of electrical power and of a proprietary energy management system that enables customers to reduce and better manage energy costs.




Basis of Preparation





The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information required by GAAP for complete annual financial statement presentation.





In the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of the results of operations have been included in the accompanying unaudited condensed financial statements.  Operating results for the three and nine-month periods ended September 30, 2010, are not necessarily indicative of the results to be expected for other interim periods or the full fiscal year.  These financial statements should be read in conjunction with the financial statements and accompanying notes contained in the WindTamer Corporation Form 10-K for the fiscal year ended December 31, 2009.





Method of Accounting





The accompanying financial statements have been prepared in accordance with GAAP.  WindTamer Corporation maintains its books and prepares its financial statements on the accrual basis of accounting.





The Company had operated as a development stage enterprise until June 30, 2010 as substantially all of its efforts were planning, raising capital, research and development, and developing markets for its products. Effective July 1, 2010, the company exited development stage, as it shifted its efforts toward product commercialization and sale.  As a result, the financial statements of the Company are no longer  prepared in accordance with the accounting and reporting principles prescribed by Accounting Standards Codification (ASC) 915, “Development Stage Entities”.





Use of Estimates





The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.





Cash and Cash Equivalents





For financial statement presentation purposes, the Company considers all short-term, highly liquid investments with original maturities of three months or less to be cash and cash equivalents.  The Company maintains its cash and cash equivalents in bank deposit accounts, which at times may exceed federally insured limits.  The Company believes it is not exposed to any significant credit risk as a result of any non-performance by the financial institutions.






5


Accounts Receivable Trade accounts receivable are recorded at their estimated net realizable value.  The Company requires a down payment upon acceptance of the customer purchase order, and the remaining balance is generally due upon completion of the turbine installation.  Although management expects to collect these amounts in full, the amounts actually collected may differ. Accounts receivable are reviewed on an on-going basis, and based upon the current status of an account, and management's judgment of ultimate collectability, a reserve for doubtful accounts is established.
 
 Inventory





Inventory consists primarily of parts and subassemblies for wind turbines and is stated at the lower of cost or market value.  The Company capitalizes applicable direct and indirect costs incurred in the Company’s manufacturing operations to bring its products to a sellable state.  The inventory as of September 30, 2010 consists of raw materials amounting to $422,263 and work-in-process amounting to $206,000. Inventory is reviewed quarterly to determine the need for an excess and obsolete inventory reserve.  As of September 30, 2010 no such reserve is necessary.





Fixed Assets





Fixed assets are recorded at cost.  Depreciation is on a straight line basis over the shorter of the estimated useful lives or the related lease for leasehold improvements.  Leasehold improvements for space leased on a month-to-month basis are expensed when incurred. Expenditures for renewals and betterments are capitalized.  Expenditures for minor items, repairs and maintenance are charged to operations as incurred.  Any gain or loss upon sale or retirement due to obsolescence is reflected in the operating results in the period the event takes place.





Intangible Assets





Intangible assets consist of costs associated with the application and acquisition of the Company’s patents and trademarks. Patent application costs are capitalized and amortized over the estimated useful life of the patent, which generally approximates its legal life.





Impairment of Long-Lived Assets





Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset, including its ultimate disposition.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets.  During the quarter ended June 30, 2010, the Company relocated its headquarters to a larger, more accessible location, and as a result, leasehold improvements from the previous location, totaling $86,765, were impaired, and charged to depreciation expense.  For the year ended December 31, 2009, and for the first and third quarters of 2010, no impairments were necessary.





Fair Value of Financial Instruments


The carrying amount of cash, accounts payable and accrued expenses are reasonable estimates of their fair value due to their short maturity.





Revenue Recognition





Revenue is recognized when all of the following conditions are satisfied:   (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the sale price to be paid by the customer is fixed or determinable; and (4) the collection of the sale price is reasonably assured.  Amounts billed and/or collected prior to satisfying our revenue recognition policy are reflected as customer deposits.





Research and Development Costs





All costs related to research and development are expensed when incurred.  Research and development costs consist of expenses to develop, test, assemble and install prototypes.  Specifically, these costs consist of labor and manufacturing materials, consultants and test facility costs.





6





Warranty Costs





The Company’s standard warranty on each turbine sold protects against defects in design, material and workmanship under normal use for up to a six-year period, however there are several warranties which have specific terms and conditions.  The Company provides for estimated cost of warranties at the time the revenue is recognized.  Factors that affect the warranty reserve are projected cost of repair and/or replacement, component life cycles, and limited historical data. These estimates are reviewed quarterly and are updated as new information becomes available. The impact of any change in estimates will be taken into account when analyzing future warranty reserve requirements.





Stock-Based Compensation





The Company accounts for stock option awards granted under the Company’s Equity Incentive Plans in accordance with ASC 718. Under ASC 718, compensation expense related to stock-based payments is recorded over the requisite service period based on the grant date fair value of the awards.  Compensation previously recorded for unvested stock options that are forfeited is reversed upon forfeiture.  The Company uses the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which determine the fair value of stock-based awards, including the option’s expected term and the price volatility of the underlying stock.





The Company’s accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50.  Accordingly, the measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant’s or vendor’s performance is complete. In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.





Income Taxes





The Company accounts for income taxes using the asset and liability approach, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of such assets and liabilities.  This method utilizes enacted statutory tax rates in effect for the year in which the temporary differences are expected to reverse and gives immediate effect to changes in income tax rates upon enactment.  Deferred assets are recognized, net of any valuation allowance, for temporary differences and net operating loss and tax credit carry forwards.  Deferred income tax expense represents the change in net deferred assets and liability balances. A valuation allowance is recognized if it is more likely than not that some portion, or all, of a deferred tax asset will not be realized.





Basic and Diluted Loss Per Share





Basic earnings per share reflect the actual weighted average of shares issued and outstanding during the period.  Diluted earnings per share are computed including the number of additional shares that would have been outstanding if dilutive potential shares had been issued. In a loss year, the calculation for basic and diluted earnings per share is considered to be the same, as the impact of potentially issued common shares would be anti-dilutive.





As of September 30, 2010 there were 6,750,000 stock options, and 29,000,000 warrants outstanding that, upon exercise, could dilute future earnings.





Reclassifications





Certain prior year amounts have been reclassified to conform to the current year presentation.




Note 2 - Going Concern





The financial statements have been prepared assuming that the Company will continue as a going concern. The Company exited development stage during the quarter ended September 30, 2010 and had recognized minimal revenues prior to that date. Since its formation, the Company has incurred a cumulative net loss of $14,872,861. The minimal sales volumes to date and recurring losses from operations raise substantial doubt about the Company’s ability to continue as a going concern. Continuation of the Company is dependent on achieving sufficiently profitable operations and obtaining additional financing. During the year ended December 31, 2007, the Company sold 1,400,000 shares of its common stock for gross proceeds of $70,000. The Company commenced a private placement in 2007 of its common stock which it completed in July 2008, in which it raised gross proceeds of $907,000.   During 2009, the Company conducted a private placement, which resulted in gross proceeds of $816,000 as of December 31, 2009.  Exercises of stock option awards resulted in additional proceeds of $1,670,000 for the year ended December 31, 2009. The Company plans to continue the launch of the commercialization of its products utilizing its current working capital and funds from a $1,000,000 line of credit with First Niagara Bank established on April 26, 2010.  In June, 2010, the Company raised $1,000,000 in a private placement offering. This added working capital is not expected to be sufficient to fund operational growth, and the Company expects to need to raise additional capital. There can be no assurance that the Company will be able to raise sufficient additional capital, or if it does raise additional capital, it will do so on terms favorable to the Company.


7




Note 3 – Long-lived Assets





The following table summarizes the Company’s long-lived assets as of




September 30, 2010


December 31, 2009Property and equipmentEquipment

$
91,387


$
44,360Leasehold Improvements


0



76,213Furniture and fixtures


40,787



30,436Software


54,739



40,308Product Tooling


1,983



0Total property and equipment before accumulated depreciation


188,896



191,317Less accumulated depreciation


(47,588
)


(16,208
)Total property and equipment

$
141,308


$
175,109Intangible assetsPatents

$
34,862


$
34,862Trademark


4,525



4,525Total intangible assets before accumulated amortization


39,387



39,387Less accumulated amortization


(3,462
)


(2,110
)Total intangible assets

$
35,925


$
37,277





In June, 2010, the Company relocated its headquarters to a larger, more accessible location, which resulted in an impairment of leasehold improvements of $86,765.  This was charged to depreciation expense for the quarter ending June 30, 2010.





Note 4 – Debt





In April, 2010, the Company established a $1,000,000 line of credit with First Niagara Bank to provide the Company with liquidity in light of its limited cash flow.  The facility is secured by the guarantees of two officers of the Company and one shareholder of the Company. The line of credit bears interest at prime rate, plus 0%.  At no time shall the applicable interest rate be less than 3.25%.






8





The borrowings under the loan agreement are secured by limited guarantees provided by two of our officers, William Schmitz and Molly Hedges, and one of our shareholders, Michael Hughes.  The guarantees are supported by cash collateral accounts maintained by the individuals at First Niagara Bank. Additionally, Gerald Brock, a director of the Company, granted the guarantors the right to sell his shares in the Company in the event they are required to pay under the guarantees.  Mr. Brock pledged his 20,000,000 shares of the Company’s common stock owned by him as security for his obligations to the guarantors.





In consideration of the guarantees, the Company issued to Mr. Brock and the guarantors warrants to purchase an aggregate of 29,000,000 shares of our common stock at $0.25 per share.  The warrants have a term of 10 years, with a six-month incremental vesting schedule in tranches of 25% of the shares under each warrant from the date of issue. No warrants have vested during the quarter ended September, 2010.  The total non-cash expense recorded during the quarter ended June 30, 2010 was $6,235,000.





On September 30, 2010 borrowings under the line of credit amounted to $772,967.





Note 5 – Stockholders’ Equity




During the quarter ended March 31, 2010, 135,848 shares were issued in exchange for services totaling approximately $98,000 provided by three vendors.





On April 26, 2010, the Company’s founder agreed to the voluntary cancellation of 29,050,000 shares of the Company’s common stock owned by him for no additional consideration. These shares were returned to authorized but unissued shares.  In June, 2010, the Company sold 20,000,000 shares in a private placement for a price of $.05, resulting in gross proceeds of $1,000,000.Costs associated with this private placement were minimal.





During the quarter ended September 30, 2010, 39,969 shares of common stock were issued to the Company’s landlord of its Rochester, NY headquarters for base rent payments.




Note 6 – Stock Based Compensation





The Company has established the “2008 Equity Incentive Plan” which is a shareholder approved plan that permits the granting of  stock options and restricted stock to employees, directors and consultants.   The 2008 Equity Incentive Plan originally provided for the issuance of up to 8,000,000 shares of common stock of which 1,000,000 shares are available for grant as Incentive Stock Options.  The exercise price for options awarded is no less than 100% of the fair market value of the common stock on the day of grant.  The options generally vest either immediately on the date of grant or 1 to 3 years from the date of grant.  On December 30, 2009, the Board of Directors approved an amendment to increase the number of shares available for award under the plan from 8,000,000 to 16,000,000, and this amendment was approved by the Company’s stockholders at its Annual Meeting on April 28, 2010.




On March 10, 2010 the Board of Directors approved a change to the vesting of non-employee director stock options. Options granted to non-employee directors after March 10, 2010 will vest immediately upon grant and all outstanding options issued to non-employee directors prior to March 10, 2010 had their vesting date accelerated so that such options were immediately exercisable.   These amendments were approved by the shareholders at its Annual Meeting on April 28, 2010, and all shares granted to directors for 2010 vested as of April 28, 2010.  The expense associated with this amounted to $370,406.
 
 On May 17, 2010, the Board of Directors approved a modification to options held by all employees, directors and consultants, which had an exercise price greater than the closing price of the Company’s common stock on the OTCBB on May 17, 2010, were re-priced to equal the closing price of the common stock on the OTCBB as of May 17, 2010.  As a result, all such options were revalued based upon this new exercise price, which generated an additional expense of $166,045 for quarter ended June 30, 2010. For the nine months ended September 30, 2010, the Company recorded compensation costs for options and shares granted under the plan amounting to $ 1,337,935 as compared to $649,024 for the nine months ended September 30, 2009.  This expense increased basic and diluted net loss per share by $.01 for the nine months ended September 30, 2010 (no impact on basic and diluted net loss per share for the nine months ended September 30, 2009).


9




Management has valued the options at their date of grant utilizing the Black Scholes Option Pricing Model.  Prior to the fourth quarter of 2009, there was not a public market for the Company shares.  Accordingly, the fair value of the underlying shares was determined based on recent transactions by the Company to sell shares to third parties and other factors determined by management to be relevant to the valuation of such shares.  Beginning in the fourth quarter of 2009, the Company’s quoted price on the OTCBB was used to value the underlying shares.  Expected volatility is based upon a weighted average historical volatility of peer companies operating in a similar industry.   The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options depending on the date of the grant and expected life of the options.  The expected life of options used was based on the contractual life of the option granted.  The Company determined the expected dividend rate based on the assumption and expectation that earnings generated from operations are not expected to be adequate to allow for the payment of dividends in the near future.  The following weighted-average assumptions were utilized in the fair value calculations for options granted:





Nine Months ended


Nine months endedSeptember 30, 2010


September 30, 2009Expected dividend yield


0
%


0
%Expected stock price volatility


86-93
%


40-50
%Risk-free interest rate


1.14-4.06
%


1.46-2.9
%Expected life of options

.25-10Years


3-10 Years




The following table summarizes the status of the Company’s aggregate stock options granted:





Number of Shares Remaining Options


Weighted

Average

Exercise

Price


Weighted-Average Remaining Contractual Term (Years)


Aggregate Intrinsic ValueOutstanding at January 1, 2010


4,661,667


$
.72Options granted during 2010


2,088,333


$
.28Outstanding at September, 2010


6,750,000


$
.26



7.9


$
2,435,550Exercisable at September 30, 2010


3,575,000


$
.21



7.0


$
1,014,000





The weighted average fair value of options granted during nine months ended September 30, 2010 was approximately $.28, as adjusted for the revaluation of options approved by the Board of Directors on May 17, 2010. ($.46 for the nine months ended September 30, 2009).   During the nine months ended September 30, 2010, 2,058,333 options vested, and no options were exercised. There were no options vested, however 16,660,000 options were exercised and 650,000 options were cancelled for the nine months ended September 30, 2009.  On May 17, 2010, the Board of Directors approved a modification to reset the exercise price all outstanding options which had an exercise price greater than the closing of the Company’s common stock on the OTCBB on May 17, 2010.  The modified price of the options was the closing price of the Company’s common stock price on the OTCBB on May 17, 2010.





10





Note 7 – Consulting Agreement





On May 24, 2010 the Company entered into an agreement with an individual to become a technical consultant, and to assist in further optimization of the Company’s wind turbine system.   This individual is currently a professor of senior aircraft design and performance courses at the Clarkson University, in Potsdam, New York, the location of one of the Company’s turbine test sites. Payment for services is on an hourly basis at an agreed upon rate for work performed for the Company.  In conjunction with the agreement, the individual received 200,000 stock options, vesting over a one-year period.  During the nine months ended September 30, 2010, the Company expensed $32,686 relating to options awarded to him.




Note 8 – Related Party Transactions




Certain services were provided to the Company by immediate family members of a director / shareholder of the Company.  These services relate to inventory production, leasehold improvements, research and development efforts and administrative wages and amounted to $70,636 for the nine months ended September 30, 2010, compared to $130,298 for the nine months ended September 30, 2009.  As of September 30, 2010, there were no payments due to these related parties.





Note 9 – Commitments and Contingencies





Employment Agreements





As of December 31, 2009, the Company had entered into employment agreements with various members of management.  These employment agreements have three year terms with the Company’s option to extend employment for a fourth year, expiring at various dates from July 14, 2012 to December 28, 2012.  Annual compensation required under these agreements includes base salary aggregating approximately $800,000, as well as annual bonuses based on achieving certain performance milestones.  All of these agreements contain severance provisions in the event of termination of the employee without cause that require continued payment of the annual salary through the term of the agreement but for a minimum period of at least two years.





As of March 31, 2010, the Company had entered into employment agreements with two additional members of management.  These agreements each have a three year term with the Company’s option to extend employment to a fourth year.





On May 16, 2010, one of executive officers covered by an employment agreement was terminated for good cause, and accordingly will not be eligible for salary continuation benefits as outlined in his employment agreement.





Annual compensation under all agreements in place as of September 30, 2010 amounts to $847,000.





Operating lease





On August 20, 2009, the Company entered into a lease for office space in Geneseo, New York requiring a monthly rental payment of $1,400, which commenced on November 1, 2009 and expires October 31, 2011 with a two year renewal option.  In June, 2010, the Company relocated its headquarters from Geneseo, NY to Rochester, NY into a larger, more easily accessible location. Inventory warehousing space and assembly capabilities at the Geneseo facility were neither large enough, nor flexible enough to allow for continued growth, and therefore management determined that it was prudent to move to a location that could accommodate both manufacturing and assembly growth, as well as to house research and development activities and administrative office space. The Company is currently negotiating with the landlord of the Geneseo property on a lease settlement of any potential liability of the Company with respect to the lease of such property.





In October, 2010 a lease was executed for the Rochester facility.  The lease term is from August, 2010 through July, 2015.  The first year of the lease term requires monthly base rent payments of $5,396, payable in cash or in the Company’s common stock. The base rent increases by 3% on August 1st of the each year of the lease.  The Company also is required to pay their proportionate share of real estate taxes, and common area maintenance costs for the Rochester facility.





Annual commitments by year under the Company’s lease agreements are as follows:





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Rental Commitment2010

$
43,7802011

$
80,9612012

$
67,5282013

$
69,5542014

$
71,6412015

$
42,513


Warranty





During the year ended December 31, 2009 and for the nine months ended September 30, 2010, the Company entered into a number of sales orders for wind turbine units.  These sales orders required certain deposits of the agreed-upon purchase price upon acceptance of the sales order.  The advance payments received as of September 30, 2010 amounted to $192,557 (the December 31, 2009 total was $95,000) and have been included in customer deposits.  We expect to install the units associated with these deposits during the next two quarters, as we obtain permits and zoning approvals from customer’s town officials, complete site assessments, and continue product evaluation. The sales orders included product warranties for a six year period against defects in materials and workmanship. The Company provides for estimated cost of warranties at the time the revenue is recognized and has established a corresponding warranty reserve.  Factors that affect the balance required in the warranty reserve are projected cost of repair and/or replacement, component life cycles, and limited historical data. These estimates are reviewed quarterly and are updated as new information becomes available. The impact of any change in warranty cost estimates will be taken into account when analyzing future warranty reserve requirements. As of September, 2010, a warranty reserve totaling $47,048 has been established which is reported in the accrued liabilities section of the balance sheet.





Other matters





The Company entered into an agreement with Alternative Wind Resources, LLC ("AWR") to produce a 15kWh prototype wind turbine unit by May 30, 2009, in which AWR agreed to reimburse the Company for engineering and materials costs for development of this larger prototype unit.  The Company has demanded $77,413 as reimbursement for engineering and materials costs, which has not been paid to date.  AWR also agreed to provide the Company with a purchase order for one thousand (1,000) 15kWh units within one year after delivery of the prototype.  The prototype was not completed or delivered to AWR.  AWR provided a $50,000 deposit for the orders, but never provided the purchase order.  The agreement also granted AWR the exclusive right to purchase all 15kWh and larger wind turbine units for wind farm and industrial uses and development.  On April 29, 2009 the Company also granted AWR an option for 60 days to enter into an exclusive license agreement with the Company for 50 years for the sale of the Company’s 15kWh wind turbines and larger upon the payment of a $6.0 million license fee. The option was subject to extension if the due diligence provided to AWR by the Company was not reasonably acceptable. AWR paid a $10,000 fee for the option. The payments from AWR, aggregating $60,000 are included in accounts payable and accrued expenses in the accompanying balance sheet.  On September 10, 2009, the Company received a letter from counsel to AWR terminating the March 2009 agreement and the April 2009 option described above and demanding the return of $60,000 provided to the Company.  The Company has confirmed the termination of the agreements and has disputed these requests for the return of the $60,000 although there can be no assurance that it will be successful.  The Company has requested payment from AWR pursuant to the agreement in the amount of $77,000 for out-of-pocket costs for engineering and materials used for building the 15kWh prototype, although there can be no assurance that it will be successful in collecting these costs.





In July, 2010, the Company received a request from AWR to jointly release each party from their liability.  The Company is currently evaluating this request.






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Note 9 –Income Taxes





The Company filed its 2009 and 2008 New York State corporate income tax return during March, 2010 and July 2009, respectively, and anticipates a refund upon approval by state tax authorities in the amount of $132,002 for 2009, and $31,217 for 2008, related to tax credits for being a Qualified Emerging Technology Company.  These refunds will be recognized when received by the Company.





The Company received a Statement of Tax Reduction or Overpayment notice, dated June 21, 2010, indicating that  refunds’ as claimed were allowed. Subsequently, on July 7, 2010 a payment for the 2008 tax refund was received.  The 2009 refund has been approved, but is pending release of funds from the New York State Comptroller.





During the three months ended September 30, 2010 the Company received refunds of $162,919 relating to both 2008 and 2009.  The proceeds from these refunds were reported as income tax credits in the financial statements.





Note 10- Subsequent Events





In October, 2010 the Company completed the $1,500,000 private placement approved by the Board of Directors in May, 2010. The Company raised $1,000,000 in June, 2010 and $500,000 in October, 2010 in the private placement offering. Aggregate proceeds from the private placement amounted to $1,500,000 for 30,000,000 shares of common stock.





In October, 2010 a lease was executed for the Rochester facility.  The lease term is from August, 2010 through July, 2015.  The first year of the lease term requires monthly base rent payments of $5,396. The base rent increases by 3% on August 1st of each year of the lease. The Company also is required to pay its proportionate share of real estate taxes and common area maintenance costs for the Rochester facility.





Note 11- Recent Accounting Pronouncements





In April 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-17, “Revenue Recognition - Milestone Method (Topic 605): Milestone Method of Revenue Recognition - a consensus of the FASB Emerging Issues Task Force (“EITF”)”.  ASU No. 2010-17 is limited to research or development arrangements and requires that this ASU be met for an entity to apply the milestone method (record the milestone payment in its entirety in the period received) of recognizing revenue.  However, the FASB clarified that, even if the requirements in this ASU are met, entities would not be precluded from making an accounting policy election to apply another appropriate policy that results in the deferral of some portion of the arrangement consideration.  The guidance in this ASU will apply to milestones in both single-deliverable and multiple-deliverable arrangements involving research or development transactions.  ASU No. 2010-17 will be effective prospectively for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  Early adoption is permitted.  We are currently evaluating the impact that ASU No. 2010-17 will have on our financial statements.





In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - a consensus of the FASB EITF”.  ASU No. 2009-13 eliminates the residual method of accounting for revenue on undelivered products and instead requires companies to allocate revenue to each of the deliverable products based on their relative selling price.  In addition, this ASU expands the disclosure requirements surrounding multiple-deliverable arrangements.  ASU No. 2009-13 will be effective for revenue arrangements entered into for fiscal years beginning on or after June 15, 2010.  We are currently evaluating the impact that ASU No. 2009-13 will have on our financial statements.








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





The following discussion should be read in conjunction with the unaudited historical financial statements and the related notes and the other financial information included elsewhereinthis report and in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 11, 2010. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under “Information Concerning Forward-Looking Statements” and under other captions contained elsewhere in this report.





Overview





We have developed a new type of wind turbine, based on our patented technology.  We believe that our patented technology enables our turbines to harness wind energy more efficiently than other small wind turbines currently available in the market, thereby enabling our turbines to provide more energy than other comparably sized and priced turbines. We have also developed a proprietary energy management that enables customers to better manage and reduce energy costs.  We believe that this energy management system, which we call “Power on Demand”, provides a cost-effective solution to commercial and governmental agencies to reduce their energy costs.




Utility companies often charge commercial customers demand charges, which can double or even triple energy costs.  The WindTamer Power on Demand system integrates the patented WindTamer turbine, energy storage and power distribution into one system to improve the customer’s return on investment.   The system is designed to generate power at all available times but only release the power to during high demand periods, to increase the customer’s savings.  We believe that there will be significant demand for our Power on Demand system.




We were formed in 2001 and received our first patent in 2003. From 2003 through the third quarter of 2009, we focused virtually all of our resources on research and development, including the testing of multiple prototypes.  We continue to collect a variety of test data related to the performance of the machine.  During the fourth quarter of 2009, we began hiring our experienced management team as we expanded our efforts from research and development to also include sales, marketing, operations and related efforts.  In the fourth quarter of 2009, we began selling our turbines, and had our first installations of turbines in the first half of 2010, proceeds of which were netted against research and development costs, where the cost of the installations were charged. We continue to collect data, monitor our installed sites, and enhance the original design concept in order to maximize output potential. During the third quarter of 2010, we exited reporting as a development stage company as we reached a reasonable product efficiency output, and increased installations and customer sales. We are filling our supply chain based upon minimal, prototype vendor orders, and have not yet begun ordering from our suppliers on a full-scale production level, which we expect to do early in 2011.





We are seeking to market our products in the residential, commercial, governmental, military, industrial, educational, recreational, and portable markets. We are developing WindTamer turbines mounted on mobile units to be used for military and off-grid applications, and for use in back up power systems and demand management applications. We installed our initial turbines, primarily for residential, small-scale and educational customers in the first three quarters of 2010, and expect to continue installations throughout the remainder of 2010 and beyond.  We expect to install our initial Power on Demand system in the fourth quarter of 2010.





Financial Operations





The Company has incurred significant costs, and expects to incur substantial additional costs, including costs related to expanding our operations to meet our anticipated growth and ongoing research and development activities. We have utilized the proceeds raised from our private placements of common stock conducted in 2008, 2009 and 2010 to, among other things, sustain our operations and produce our WindTamer prototype turbines, commence initial manufacturing and installation of our turbines, continue our research and development efforts and develop our Power on Demand system.






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In April, 2010, we established a $1.0 million revolving credit facility with First Niagara Bank to help supplement our cash flow.  The facility is secured by personal guarantees of two our officers and one other shareholder. In May, 2010, the Board of Directors authorized a private placement of up to 30 million shares of common stock at $.05 per share to accredited third party investors who are not insiders of the Company.  In June, 2010, we sold 20 million shares of common stock at $.05 per share, netting $1.0 million and in October, 2010 we sold an additional 10 million shares of common stock at $.05 per share, netting an additional $0.5 million.





Our future cash requirements will depend on many factors, including our level and types of sales and the timing and progress of those efforts, continued progress in our research and development programs, the costs involved in filing, prosecuting and enforcing patents, competing technological and market development and the cost of product commercialization. We do not expect to generate a positive cash flow from operations until at least the middle of 2011, and possibly later if we are unable to establish satisfactory manufacturing and distribution arrangements, or our products are not initially accepted by the market. This will be affected to a large extent by our ability to secure multi-unit orders from larger commercial customers that we have begun targeting, obtaining state grants for growth and expansion, or customer or government funding to assist with product development.





We expect to require additional external financing to sustain our operations. Success in our future operations is subject to a number of technical and business risks, including, but not limited to our continued ability to obtain future funding, satisfactory product development, and market acceptance for our products as further described in our Annual Report on Form 10-K under the heading “Risk Factors” and under other captions contained elsewhere in this report.





Results of Operations





Results of Operations for Quarter Ended September 30, 2010 Compared to Quarter Ended September 30, 2009





Revenues





During the quarter ended September 30, 2010, we exited development stage, as a result of  increased order booking and sales volumes.   For the quarter ended September 30, 2010, we completed installation of multiple turbine units and the sale of a mobile unit, resulting in revenue of $439,000, as compared with no sales for the quarter ending September 30, 2009, when we were operating as a development stage company, focusing purely on product development.





We continue to expand our selling efforts in residential, agricultural, small scale commercial, educational and governmental channels via our website, our direct sales force and our distribution network. We have deposits from customers totaling $193,000 as of September 30, 2010.  We expect to install the units associated with these deposits during the  next two quarters, as we obtain permits and zoning approvals from customer’s town officials, complete site assessments, and continue product evaluation, although there can be no assurance that we will be able to meet this schedule.





Gross Loss





For the quarter ended September 30, 2010, gross loss amounted to $276,000.  This is primarily attributable to the purchase of inventory to build installed turbines at low volume, prototype costs, and to costs associated with turbine installations that exceeded initial estimates.  Additionally during the quarter, we installed our first rooftop mounted system and delivered our first mobile trailer unit, with the costs of these initial products in excess of selling price.





Research and Development





Research and development costs increased in the quarter ended September 30, 2010 by $135,000 or 48%, to $413,000 when compared to the quarter ended September 30, 2009. This increase in research and development expenses was comprised primarily of labor and materials for the testing and refinement of our test unit models, and costs associated with our mobile unit development.




15





Selling, General and Administrative





Selling, general and administrative expenses, or SG&A expenses, for the quarter ended September 30, 2010 were $622,000, an increase of $520,000, when compared to the quarter ended September 30, 2009.  The increase over the prior year was related to costs associated with establishing a management team late in 2009 to ramp up to full-scale operations, and due to the reversal of stock option expense in the quarter ending September 30, 2009 for the forfeiture of unvested options by a terminated employee.





Depreciation and Amortization





Depreciation and amortization charges were $13,000 for the quarter ended September 30, 2010 compared to $3,000 during the quarter ended September 30, 2009 due to the increase in fixed assets related to development test equipment and furniture and fixtures for our new employees.


Other Income (Expense)





Interest expense for the quarter ended September 30, 2010 was $3,000 as a result of the borrowing activity on our line of credit.





Net Loss





We incurred net losses of $1,151,000 and $380,000 for the third quarters of fiscal 2010 and 2009, respectively.  The loss for the quarter ended September 30, 2010 was primarily due to costs to increase internal resources, perform product testing, and improve product performance.


Results of Operations for Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009





Revenues




During the quarter ending September 30, 2010, we exited development stage reporting as a result of increased sales and order bookings.  For the nine months ended September 30, 2010, sales totaled $439,000 as we have installed turbines at multiple residential sites, completed a rooftop mounted multi-turbine installation and delivered a mobile unit to a military customer. For the nine months ended September 30, 2009, we had no sales as we were a development stage company focusing on research and development efforts.  We continue to focus significant resources on research and development, including the testing of multiple turbine prototypes and gathering and assessing data from installed and demonstration units and developing our Power in Demand system.  In April, 2010 it became apparent that initial test results from installed sites indicated that product performance data was not meeting our product specifications. This led to the suspension of active sales activities until the product data could be validated by wind tunnel environment testing, which we performed in May, 2010.  The data generated by the wind tunnel testing, and our testing of prototype/installed units was analyzed to determine the optimal product design to maximize production output. During the quarter ended June 30, 2010, we continued to enhance product design.  Because of the initial uncertainty with respect to product performance, we agreed to refund customer deposits to those customers that requested it. During the quarter ended September 30, 2010, we finalized a more efficient blade design that improved the performance of our turbines so that they met current specifications, and we recommenced selling activities. We plan to upgrade all existing installed units with this blade configuration at no cost to the customer over the next two quarters.




16





We continue to expand our selling efforts in residential, agricultural, small scale commercial, educational and governmental channels via our website, our direct sales force and our distribution network. We have deposits from customers totaling approximately $193,000 as of September 30, 2010.  We expect to install the units associated with these deposits during the  next two quarters, as we obtain permits and zoning approvals from customer’s town officials, complete site assessments, and continue product evaluation although there can be no assurance that we will be able to meet this schedule.





Gross Loss





For the nine months ended September 30, 2010, our gross loss was $276,000, as a primarily as result of selling turbines below cost to early adopters, to purchasing  product components at low volume, higher cost as design improvements are being made, and to the establishment  early in 2010 of an Operations department .  For the nine months ended September 30, 2009, as a development stage company, we focused our efforts on research and turbine design, and therefore had no sales revenue or related product cost of sales.




Research and Development





Research and development costs in the nine months ended September 30, 2010 amounted to $1,859,000, an increase of $1,189,000 or 178% when compared to the quarter ended September 30, 2009. This increase in research and development expenses was comprised primarily of labor, consulting and materials for the continued testing and enhancement of our turbines and the development of our Power on Demand system. During 2010, we have incurred significant costs associated with preparing for full-scale production, and product testing and refinement





Selling, General and Administrative





Selling, general and administrative expenses, or SG&A expenses, for the nine months ended September 30, 2010 were $8,843,000, an increase of $7,492,000 when compared to the nine months ended September 30, 2009. The increase over the prior year consists primarily of approximately $6,737,000 in the non-cash expense for warrants issued to the guarantors of the Company’s $1.0 million credit facility with First Niagara Bank, impairment costs associated with the Company’s headquarter relocation during the second quarter of 2010, and an increase in stock based compensation resulting from the Board of Director’s decision to modify the option price for most of the Company’s outstanding stock options in addition to changing the vesting period for the Non-Employee Director Compensation Plan, as well as increases associated with ramping to full scale operations in late 2009, and into the first quarter of 2010.





Depreciation and Amortization





Depreciation and amortization charges were $119,000 for the nine months ended September 30, 2010 compared to $8,000 for the nine months ended September 30, 2009.  The increase is related to the impairment of leasehold improvement on our former corporate headquarters in Geneseo, NY, from which we moved in June, 2010, as well as costs associated with increases in fixed assets for test equipment, and headcount related additions.




Other Income (Expense)





Interest expense for the nine months ended September 30, 2010 was $4,000 due the borrowing activity on our line of credit, offset by minimal interest income earned in the first quarter of 2010.








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Net Loss





We incurred net losses of $10,818,000 and $2,020,000 for the nine months of fiscal 2010 and 2009, respectively.  The loss for the nine months ended September 30, 2010 was significantly impacted by non-cash financing costs related to the Company’s loan guarantee by two corporate officers and one shareholder, as well as costs to increase internal resources, perform product development and testing, and  to continue our initial product launch.





We have introduced WindTamer turbines from 1.0 to 3.5 kilowatts for commercial, industrial, governmental, educational and residential use. We are developing mobile units for use in military and off-grid applications, as well as turbine systems used for back-up power and demand management systems.  We are also developing our Power on Demand system. We have not yet begun large scale manufacturing of our turbines or large scale marketing of them to customers, although we expect to commence both during 2010. We have begun working with distributors to sell WindTamer turbines and Power on Demand systems for United States sale.  We have utilized the proceeds we raised from our private placements conducted in 2008, 2009 and 2010 and from our credit facility to, among other things, implement our business plan and build prototypes of our WindTamer turbines. Late in 2009, and during the first quarter of 2010, we expanded our management and sales and marketing teams to facilitate our growth and expansion. We began taking orders for our initial turbine sales in late 2009 and made our first installations during the first quarter of 2010. We have purchased significantly all inventory required to satisfy installations that are currently on order for the fourth quarter of 2010. Currently, we outsource our component manufacture, however, we will evaluate the costs and benefits of in-house manufacture over the course of the next twelve months.




There can be no assurance that our management will be successful in completing our product development programs, implementing the corporate infrastructure to support operations at the levels called for by our business plan, conclude a successful sales and marketing plan with third parties to attain significant market penetration or that we will generate sufficient revenues or raise sufficient capital to meet our expenses or to achieve or maintain profitability.





Liquidity and Capital Resources





As of September 30, 2010, we had a working capital deficit of $1,358,000 as compared to $743,000 of positive working capital as of December 31, 2009.  The decrease in working capital is attributed to the net loss generated from operations for the nine months ended September 30, 2010 which included the use of capital in the development of our internal resources, and our initial product launch and related expenses.





Our principal source of liquidity has been through private placement offerings of our common stock and a credit facility. We completed a private placement in 2008, with proceeds of $907,000 (net proceeds were $880,742), the proceeds from a private placements conducted in 2009 for $816,000 (net proceeds were $ 799,658), the exercise of 33,400,000 stock options in 2009, which yielded $1,666,660, $1,000,000 from a private placement of our common stock completed in June, 2010, and a $500,000 private placement of our common stock completed in October, 2010.




We launched the commercialization of our products in the third quarter of 2009 with installations of turbines beginning in the first quarter of 2010.  We believe that we will need additional capital to meet our expenses over the next twelve months.  We raised approximately $2.6 million in private equity financing in 2009 and $1 million in June, 2010. We believe that we will need approximately an additional $1.0 to $2.0 million of additional capital over the next twelve months to bring our business to a level to be able to sustain positive cash flow from operations. We are seeking expect to seek additional funding for some or all of this capital, although there can be no assurance that we will be successful in securing these funds.


On April 26, 2010, we entered into a Loan Agreement for a working capital line of credit with our lender, First Niagara Bank.  The loan agreement consisted of a revolving credit facility with an aggregate maximum commitment of $1.0 million.  Our revolving credit facility bears a prime variable interest rate (3.25% as of September 30, 2010) subject to a minimum rate of no less than 3.25%.  Interest is payable monthly.  The credit facility matures on May 1, 2011, and all borrowings are due and payable on that date. The loan agreement includes customary covenants related to, among other things, restrictions on our ability to incur additional debt or encumbrances on our assets, or pay or declare dividends, make sales of assets, make certain investments and lending, but does not contain any specific financial covenants.




18





The borrowings under the Loan Agreement are secured by a limited guarantees provided by two of our officers, William Schmitz and Molly Hedges, and one of our shareholders, Michael Hughes.  The guarantees are supported by cash collateral accounts maintained by the individuals at First Niagara Bank. Additionally, Gerald Brock, a director of the Company, granted the guarantors the right to sell his shares in the Company in the event they are required to pay under the guarantees.  Mr. Brock pledged his 20,000,000 shares of the Company’s common stock owned by him as security for his obligations to the guarantors.





In connection with the guarantees and pledge, we issued to Mr. Brock and the guarantors warrants to purchase an aggregate of 29,000,000 shares of our common stock at $0.25 per share.  The warrants have a term of 10 years, with a six-month incremental vesting schedule in tranches of 25% of the shares under each warrant from the date of issue. The expense associated with this warrant grant amounted to $6,235,000.




Also on April 26, 2010, Mr. Brock agreed to the voluntary cancellation of 29,050,000 shares of the Company’s common stock owned by him for no additional consideration.  Such shares were returned to authorized but unissued shares.





On June 17, 2010, the Board of Directors approved a private placement of up to 30 million shares of our common stock at $.05 each, to accredited, non-related party investors.  On June 23 and June 26, 2010, we sold an aggregate of 20 million shares netting $1.0 million. We sold the remaining 10 million shares available under the private placement in October, 2010, which yielded $500,000.





We have utilized our private placement funds and our line of credit to establish our management team, further our research and product development by, among other things, increased product testing at both wind tunnel settings and at outside test sites, and to purchase inventory to satisfy short term customer demand.





We do not expect revenues from our operations, our credit facility, and our recent stock offering to be sufficient to satisfy all of our cash requirements and implement our plan of operations for the next twelve month period. We expect to raise additional capital through debt or equity financing, although there can be no assurance that we will be successful in securing these funds. Additionally, even if we are able to achieve cash flow from operations we may seek to raise additional capital for other purposes, such as to accelerate the growth of our operations or build on our manufacturing and distribution infrastructure.




Due to the uncertainty of our ability to meet our current operating and capital expenses, in their report on our audited annual financial statements as of and for the years ended December 31, 2009 and 2008, our independent auditors included an explanatory paragraph regarding concerns about our ability to continue as a going concern. Our financial statements contain additional note disclosures describing the circumstances that led to this disclosure by our independent auditors. There is substantial doubt about our ability to continue as a going concern as the continuation and expansion of our business is dependent upon obtaining further financing, successful and sufficient market acceptance of our products, and, finally, achieving a profitable level of operations.





The issuance of additional equity securities by us may result in a significant dilution in the equity interests of our current shareholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations. Furthermore, our ability to raise additional capital may be made more difficult by the global financial crisis.





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Off-Balance Sheet Arrangements





We have no significant off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to shareholders.





Critical Accounting Policies





As of September 30, 2010, the Company’s critical accounting policies and estimates have not changed materially from those set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.





Information Concerning Forward-Looking Statements





All statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (“Commission”), the Company’s press releases and oral statements by authorized officers of the Company, other than statements of historical facts, that address future activities, events or developments are “forward-looking statements.”





These forward-looking statements include, but are not limited to, statements relating to our anticipated financial performance, business prospects, new developments, new merchandising strategies and similar matters, and/or statements preceded by, followed by or that include the words “believes,” “could,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “projects,” “seeks,” or similar expressions. We have based these forward-looking statements on certain assumptions and analyses made by us in light of our experience and on our assessment of historical trends, current conditions, expectations, and projections about expected future developments and events, as well as on other factors we believe are appropriate under the circumstances and other information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described under the heading “Risk Factors” appearing in Item 1A of Part II of this Report and in Item 1A of Part I of the Company’s 10-K filed with the Commission, for the fiscal year ended December 31, 2009, that may affect the operations, performance, development and results of our business. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date hereof.





Although we believe that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties. All forward-looking statements and reasons why results may differ contained herein are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results might differ. All of the forward-looking statements contained herein are qualified by these cautionary statements.





Item 4. Controls and Procedures





The Company’s management has established disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within time periods specified in the SEC rules and forms. Such disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management to allow timely decisions regarding required disclosure.




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Based on the evaluation of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were not effective as of September 30, 2010.  This conclusion is based on the material weaknesses in our internal control over financial reporting discussed further identified by our management as of December 31, 2009.





In connection with management’s assessment of our internal control over financial reporting described above, management identified the following material weaknesses in the Company’s internal control over financial reporting as of December 31, 2009:





·
We were ineffective in maintaining a sufficient complement of qualified accounting personnel and controls in order to assure adequate segregation of duties where all aspects of our financial reporting process were performed by a single individual with limited segregation of duties and limited secondary review.  As a result of the above, there was a lack of segregated duties in the following business processes: payroll, treasury and accounts payable.  Specifically, we determined that because of the latter situations, our controls over the preparation, review and monitoring of the financial statements were ineffective to provide reasonable assurance that financial disclosures agreed to appropriate supporting detail, calculations or other documents.·
We had a general lack of formally documented comprehensive entity level controls, including a process for anonymously reporting potential code of conduct violations without fear of retribution and a lack of a formal audit committee and audit committee charter.





·
Our documentation and application of general computer control policies and procedures associated with information technology systems used for financial reporting were incomplete to the level necessary to reasonably assure the financial statements and related disclosures were complete and accurate.





We are committed to improving our disclosure controls and procedures and internal controls over financial reporting.  As part of this commitment, we took steps during 2009 to improve our disclosure controls and procedures, including establishing more robust procedures for the review and reporting of material agreements.   We took additional steps during the first quarter of 2010 to remediate the material weaknesses in our internal controls over financial reporting including, the appointment of Molly Hedges as Acting Chief Financial Officer and Vice-President of Finance and the establishment of an independent Audit Committee and charter for the committee.





We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.  These ongoing efforts are focused on (i) developing a sufficient code of conduct including a process for anonymously reporting potential code of conduct violations without fear of retribution, and (ii) the issuance of general computer control policies and procedures associated with information technology systems used for financial reporting to the level necessary to reasonably assure the financial statements and related disclosures are complete and accurate.





There can be no assurance, however, that our disclosure controls and procedures will detect or uncover all failures of persons within the Company to disclose material information otherwise required to be set forth in our periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.





Notwithstanding the material weaknesses discussed above, management believes that the financial statements included in this report present fairly, in all material respects, our financial position, results of operations, and cash flows for the periods presented in accordance with U.S. generally accepted accounting principles.






21





Changes in Internal Control Over Financial Reporting





Except as described above under the heading, “Evaluation of Disclosure Controls and Procedures,” there was no change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2010 that has materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.





Part II – OTHER INFORMATION





Item 1. Legal Proceedings





From time to time we are involved with legal proceedings, claims and litigation arising in the ordinary course of business. As of the date of this report we are not a party to any material pending legal proceedings.





Item 1A. Risk Factors





Smaller reporting companies are not required to provide the information required by this item.




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




As reported on the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on October 18, 2010 the Company sold and issued an aggregate of 10,000,000 shares of its common stock with a purchase price of $.05 per share, with the Company receiving a total of $500,000 in gross proceeds from the sale. The Company used the proceeds of such sale for working capital needs.




Item 3.  Defaults Upon Senior Securities





None.





Item 5.  Other Information





None




Item 6.  Exhibits





(a)

Exhibits:4.210.110.210.310.410.510.610.731.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1

Certification Pursuant to 18 U.S.C. Section 1350 by the Chief Executive Officer, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2

Certification Pursuant to 18 U.S.C. Section 1350 by the Chief Financial Officer, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.








22








SIGNATURES





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








WINDTAMER CORPORATIONNovember 15, 2010By:

/s/ WILLIAM A. SCHMITZName:

William A. SchmitzTitle:

President and Chief Executive Officer