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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2018
 
OR
 
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                   to
 
Commission file number 001-34278

 
BROADWIND ENERGY, INC.
(Exact name of registrant as specified in its charter)
 
Delaware	 	88-0409160	
(State or other jurisdiction
of incorporation or organization)	 	(I.R.S. Employer
Identification No.)	
 
3240 S. Central Avenue, Cicero, IL 60804
(Address of principal executive offices)
 
(708) 780-4800
(Registrant’s telephone number, including area code)
 
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒  No  ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding twelve months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒  No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer ☐	 	Accelerated filer ☐	
 	 	 	
Non-accelerated filer ☐
 
Emerging growth company ☐	 	Smaller reporting company ☒

      
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period to comply with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐  No  ☒
 
Number of shares of registrant’s common stock, par value $0.001, outstanding as of October 23,  2018:  15,616,668.

 

 
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BROADWIND ENERGY, INC. AND SUBSIDIARIES
 
INDEX
 
 	 	Page No.	
 	 	 	
PART I. FINANCIAL INFORMATION  	
 	 	 	
Item 1.  	Financial Statements	
1	
 	Condensed Consolidated Balance Sheets	
1	
 	Condensed Consolidated Statements of Operations	
2	
 	Condensed Consolidated Statements of Stockholders’ Equity	
3	
 	Condensed Consolidated Statements of Cash Flows	
4	
 	Notes to Condensed Consolidated Financial Statements	
5	
Item 2.  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
23	
Item 3.  	Quantitative and Qualitative Disclosures About Market Risk	
31	
Item 4.  	Controls and Procedures	
31	
PART II. OTHER INFORMATION  	
Item 1.  	Legal Proceedings	
33	
Item 1A.  	Risk Factors	
33	
Item 2.  	Unregistered Sales of Equity Securities and Use of Proceeds	
33	
Item 3.  	Defaults Upon Senior Securities	
33	
Item 4.  	Mine Safety Disclosures	
33	
Item 5.  	Other Information	
33	
Item 6.  	Exhibits	
33	
Signatures  	 	
35	

 

 
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PART I.       FINANCIAL INFORMATIO  N
 
Item 1. Financial Statement  s
 
BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET  S
(Unaudited)
(in thousands, except share and per share data)

 	 	September 30,	 	December 31,	 	 	
 	    	2018	    	2017	 	 	
 	 	 	 	 	 	 	
ASSETS	 	 	 	 	 	 	 	 	
CURRENT ASSETS:	 	 	 	 	 	 	 	 	
Cash and cash equivalents	 	$	142	 	$	78	 	 	
Accounts receivable, net of allowance for doubtful accounts of $177 and $225 as of September 30, 2018 and December 31, 2017, respectively	 	 	16,727	 	 	13,644	 	 	
Inventories, net	 	 	23,541	 	 	19,279	 	 	
Prepaid expenses and other current assets	 	 	1,817	 	 	1,798	 	 	
Current assets held for sale	 	 	19	 	 	580	 	 	
Total current assets	 	 	42,246	 	 	35,379	 	 	
LONG-TERM ASSETS:	 	 	 	 	 	 	 	 	
Property and equipment, net	 	 	50,711	 	 	55,693	 	 	
Goodwill	 	 	 —	 	 	4,993	 	 	
Other intangible assets, net	 	 	14,665	 	 	16,078	 	 	
Other assets	 	 	412	 	 	207	 	 	
TOTAL ASSETS	 	$	108,034	 	$	112,350	 	 	
LIABILITIES AND STOCKHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	
CURRENT LIABILITIES:	 	 	 	 	 	 	 	 	
Line of credit, NMTC and other notes payable	 	$	19,684	 	$	14,138	 	 	
Current maturities of long-term debt	 	 	 —	 	 	114	 	 	
Current portions of capital lease obligations	 	 	954	 	 	762	 	 	
Accounts payable	 	 	14,424	 	 	11,756	 	 	
Accrued liabilities	 	 	4,820	 	 	4,393	 	 	
Customer deposits	 	 	7,773	 	 	9,791	 	 	
Current liabilities held for sale	 	 	28	 	 	30	 	 	
Total current liabilities	 	 	47,683	 	 	40,984	 	 	
LONG-TERM LIABILITIES:	 	 	 	 	 	 	 	 	
Long-term debt, net of current maturities	 	 	1,760	 	 	797	 	 	
Long-term capital lease obligations, net of current portions	 	 	818	 	 	941	 	 	
Other	 	 	2,268	 	 	3,557	 	 	
Total long-term liabilities	 	 	4,846	 	 	5,295	 	 	
COMMITMENTS AND CONTINGENCIES	 	 	 	 	 	 	 	 	
STOCKHOLDERS’ EQUITY:	 	 	 	 	 	 	 	 	
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding	 	 	 —	 	 	 —	 	 	
Common stock, $0.001 par value; 30,000,000 shares authorized; 15,890,605 and 15,480,299 shares issued as of September 30, 2018, and December 31, 2017, respectively	 	 	16	 	 	15	 	 	
Treasury stock, at cost, 273,937 shares as of September 30, 2018 and December 31, 2017	 	 	(1,842)	 	 	(1,842)	 	 	
Additional paid-in capital	 	 	381,175	 	 	380,005	 	 	
Accumulated deficit	 	 	(323,844)	 	 	(312,107)	 	 	
Total stockholders’ equity	 	 	55,505	 	 	66,071	 	 	
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	 	$	108,034	 	$	112,350	 	 	
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION  S
(UNAUDITED)
(in thousands, except per share data)

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended September 30,	 	 	 	Nine Months Ended September 30,	 	 	
 	 	2018	 	    	2017	 	 	2018	    	2017	 	 	
Revenues	 	$	31,445	 	 	$	29,595	 	 	$	98,193	 	$	129,017	 	 	
Cost of sales	 	 	29,802	 	 	 	28,581	 	 	 	94,228	 	 	117,757	 	 	
Restructuring	 	 	157	 	 	 	 —	 	 	 	388	 	 	 —	 	 	
Gross profit	 	 	1,486	 	 	 	1,014	 	 	 	3,577	 	 	11,260	 	 	
OPERATING EXPENSES:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative	 	 	3,627	 	 	 	2,374	 	 	 	10,020	 	 	10,711	 	 	
Impairment charges	 	 	 —	 	 	 	 —	 	 	 	4,993	 	 	 —	 	 	
Intangible amortization	 	 	471	 	 	 	471	 	 	 	1,413	 	 	1,293	 	 	
Restructuring	 	 	 —	 	 	 	 —	 	 	 	36	 	 	 —	 	 	
Total operating expenses	 	 	4,098	 	 	 	2,845	 	 	 	16,462	 	 	12,004	 	 	
Operating loss	 	 	(2,612)	 	 	 	(1,831)	 	 	 	(12,885)	 	 	(744)	 	 	
OTHER (EXPENSE) INCOME, net:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense, net	 	 	(372)	 	 	 	(228)	 	 	 	(1,022)	 	 	(584)	 	 	
Other, net	 	 	2,247	 	 	 	(12)	 	 	 	2,243	 	 	17	 	 	
Total other income (expense), net	 	 	1,875	 	 	 	(240)	 	 	 	1,221	 	 	(567)	 	 	
Net loss before provision (benefit) for income taxes	 	 	(737)	 	 	 	(2,071)	 	 	 	(11,664)	 	 	(1,311)	 	 	
Provision (benefit) for income taxes	 	 	13	 	 	 	(22)	 	 	 	(20)	 	 	(5,056)	 	 	
(LOSS) INCOME FROM CONTINUING OPERATIONS	 	 	(750)	 	 	 	(2,049)	 	 	 	(11,644)	 	 	3,745	 	 	
LOSS FROM DISCONTINUED OPERATIONS	 	 	(33)	 	 	 	(158)	 	 	 	(93)	 	 	(405)	 	 	
NET (LOSS)  INCOME	 	$	(783)	 	 	$	(2,207)	 	 	$	(11,737)	 	$	3,340	 	 	
NET (LOSS) INCOME PER COMMON SHARE—BASIC:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(Loss) income from continuing operations	 	$	(0.05)	 	 	$	(0.14)	 	 	$	(0.76)	 	$	0.25	 	 	
Loss from discontinued operations	 	 	(0.00)	 	 	 	(0.01)	 	 	 	(0.00)	 	 	(0.03)	 	 	
Net (loss) income	 	$	(0.05)	 	 	$	(0.15)	 	 	$	(0.76)	 	$	0.22	 	 	
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC	 	 	15,541	 	 	 	15,095	 	 	 	15,390	 	 	15,013	 	 	
NET (LOSS) INCOME PER COMMON SHARE—DILUTED:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
(Loss) income from continuing operations	 	$	(0.05)	 	 	$	(0.14)	 	 	$	(0.76)	 	$	0.24	 	 	
Loss from discontinued operations	 	 	(0.00)	 	 	 	(0.01)	 	 	 	(0.00)	 	 	(0.02)	 	 	
Net (loss) income	 	$	(0.05)	 	 	$	(0.15)	 	 	$	(0.76)	 	$	0.22	 	 	
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED	 	 	15,541	 	 	 	15,095	 	 	 	15,390	 	 	15,345	 	 	
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT  Y
(UNAUDITED)
(in thousands, except share data)

 	 	Common Stock	 	Treasury Stock	 	Additional	 	 	 	 	 	 	 	
 	 	Shares	 	Issued	 	 	 	Issued	 	Paid-in	 	Accumulated	 	 	 	 	
 	 	Issued	 	Amount	 	Shares	 	Amount	 	Capital	 	Deficit	 	Total	 	
BALANCE, December 31, 2016	    	15,175,767	 	$	15	 	(273,937)	 	$	(1,842)	 	$	378,876	 	$	(308,466)	 	$	68,583	  	
Stock issued for restricted stock	 	190,482	 	 	 —	 	 —	 	 	 —	 	 	 —	 	 	 —	 	 	 —	 	
Stock issued under defined contribution 401(k) retirement savings plan	 	114,050	 	 	 —	 	 —	 	 	 —	 	 	316	 	 	 —	 	 	316	 	
Share-based compensation	 	 —	 	 	 —	 	 —	 	 	 —	 	 	813	 	 	 —	 	 	813	 	
Net loss	 	 —	 	 	 —	 	 —	 	 	 —	 	 	 —	 	 	(3,641)	 	 	(3,641)	 	
BALANCE, December 31, 2017	 	15,480,299	 	$	15	 	(273,937)	 	$	(1,842)	 	$	380,005	 	$	(312,107)	 	$	66,071	 	
Stock issued for restricted stock	 	153,554	 	 	 1	 	 —	 	 	 —	 	 	 —	 	 	 —	 	 	 1	 	
Stock issued under defined contribution 401(k) retirement savings plan	 	241,640	 	 	 —	 	 —	 	 	 —	 	 	537	 	 	 —	 	 	537	 	
Share-based compensation	 	 —	 	 	 —	 	 —	 	 	 —	 	 	685	 	 	 —	 	 	685	 	
Sale of common stock, net	 	15,112	 	 	 	 	 	 	 	 	 	 	(52)	 	 	 	 	 	(52)	 	
Net loss	 	 —	 	 	 —	 	 —	 	 	 —	 	 	 —	 	 	(11,737)	 	 	(11,737)	 	
BALANCE, September 30, 2018	 	15,890,605	 	$	16	 	(273,937)	 	$	(1,842)	 	$	381,175	 	$	(323,844)	 	$	55,505	 	
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW  S
(UNAUDITED)
(in thousands)
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended September 30,	 	 	
 	    	2018	    	2017	 	 	
CASH FLOWS FROM OPERATING ACTIVITIES:	 	 	 	 	 	 	 	 	
Net (loss) income	 	$	(11,737)	 	$	3,340	 	 	
Loss from discontinued operations	 	 	(93)	 	 	(405)	 	 	
(Loss) income from continuing operations	 	 	(11,644)	 	 	3,745	 	 	
Adjustments to reconcile net cash used in operating activities:	 	 	 	 	 	 	 	 	
Depreciation and amortization expense	 	 	6,990	 	 	6,571	 	 	
Deferred income taxes	 	 	(45)	 	 	(5,056)	 	 	
Impairment charges	 	 	4,993	 	 	 —	 	 	
Remeasurement of contingent consideration	 	 	(1,140)	 	 	(1,394)	 	 	
Stock-based compensation	 	 	685	 	 	651	 	 	
Extinguishment of New Markets Tax Credits obligation	 	 	(2,249)	 	 	 —	 	 	
Allowance for doubtful accounts	 	 	(48)	 	 	13	 	 	
Common stock issued under defined contribution 401(k) plan	 	 	537	 	 	175	 	 	
Gain on disposal of assets	 	 	(23)	 	 	(12)	 	 	
Changes in operating assets and liabilities, net of acquisition:	 	 	 	 	 	 	 	 	
Accounts receivable	 	 	(3,035)	 	 	5,281	 	 	
Inventories	 	 	(3,814)	 	 	10,928	 	 	
Prepaid expenses and other current assets	 	 	(19)	 	 	377	 	 	
Accounts payable	 	 	3,576	 	 	(9,284)	 	 	
Accrued liabilities	 	 	1,567	 	 	(2,643)	 	 	
Customer deposits	 	 	(2,018)	 	 	(15,934)	 	 	
Other non-current assets and liabilities	 	 	(1,546)	 	 	(45)	 	 	
Net cash used in operating activities of continuing operations	 	 	(7,233)	 	 	(6,627)	 	 	
CASH FLOWS FROM INVESTING ACTIVITIES:	 	 	 	 	 	 	 	 	
Cash paid in acquisition	 	 	 —	 	 	(16,449)	 	 	
Sales of available for sale securities	 	 	 —	 	 	2,221	 	 	
Maturities of available for sale securities	 	 	 —	 	 	950	 	 	
Purchases of property and equipment	 	 	(2,018)	 	 	(5,972)	 	 	
Proceeds from disposals of property and equipment	 	 	583	 	 	 5	 	 	
Net cash used in investing activities of continuing operations	 	 	(1,435)	 	 	(19,245)	 	 	
CASH FLOWS FROM FINANCING ACTIVITIES:	 	 	 	 	 	 	 	 	
Proceeds from line of credit	 	 	103,406	 	 	130,470	 	 	
Payments on line of credit	 	 	(95,493)	 	 	(122,700)	 	 	
Proceeds from long-term debt	 	 	2,060	 	 	 —	 	 	
Payments on long-term debt	 	 	(536)	 	 	 —	 	 	
Principal payments on capital leases	 	 	(581)	 	 	(557)	 	 	
Proceeds from sale of common stock, net	 	 	(52)	 	 	 —	 	 	
Net cash provided by financing activities of continuing operations	 	 	8,804	 	 	7,213	 	 	
DISCONTINUED OPERATIONS:	 	 	 	 	 	 	 	 	
Operating cash flows	 	 	(72)	 	 	(40)	 	 	
Net cash used in discontinued operations	 	 	(72)	 	 	(40)	 	 	
Add: Cash balance of discontinued operations, beginning of period	 	 	 —	 	 	 2	 	 	
NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS	 	 	64	 	 	(18,697)	 	 	
CASH AND CASH EQUIVALENTS beginning of the period	 	 	78	 	 	18,738	 	 	
CASH AND CASH EQUIVALENTS end of the period	 	$	142	 	$	41	 	 	
Supplemental cash flow information:	 	 	 	 	 	 	 	 	
Interest paid	 	$	822	 	$	413	 	 	
Income taxes paid	 	$	94	 	$	52	 	 	
Non-cash activities:	 	 	 	 	 	 	 	 	
Issuance of restricted stock grants	 	$	685	 	$	651	 	 	
Equipment additions via capital lease	 	$	 —	 	$	1,582	 	 	
Contingent consideration related to business acquisition	 	$	 —	 	$	2,534	 	 	
Red Wolf acquisition:	 	 	 	 	 	 	 	 	
Assets acquired	 	$	 —	 	$	26,491	 	 	
Liabilities assumed	 	$	 —	 	$	7,508	 	 	
The accompanying notes are an integral part of these condensed consolidated financial statements.

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BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT  S
(UNAUDITED)
(In thousands, except share and per share data)
 
NOTE 1 — BASIS OF PRESENTATION  
The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. (the “Company”) and its wholly-owned subsidiaries Broadwind Towers, Inc. (“Broadwind Towers”), Brad Foote Gear Works, Inc. (“Brad Foote”), and Red Wolf Company, LLC (“Red Wolf”).  All intercompany transactions and balances have been eliminated.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2018. The December 31, 2017 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. 
In February 2017, the Company acquired Red Wolf and formed the Process Systems segment. Consequently, the Company revised its segment presentation to include three reportable operating segments: Towers and Heavy Fabrications, Gearing and Process Systems. All current results have been presented to reflect this change. See Note 14, “Segment Reporting” of these condensed consolidated financial statements for further discussion of reportable segments. 
There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2018 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, other than the adoption of Accounting Standards Updates (“ASU”) 2014-09 and 2015-14 described in Note 2 “Revenues” of these condensed consolidated financial statements, and ASU 2017-04 described in Note 13 “Recent Accounting Pronouncements” of these condensed consolidated financial statements. 
Company Description   
Through its subsidiaries, the Company provides technologically advanced high-value products to energy, mining and infrastructure sector customers, primarily in the United States of America (the “U.S.”). The Company’s most significant presence is within the U.S. wind energy industry, which accounted for 55% of the Company’s revenue during the first nine months of 2018. 
The Company has diversified its operations to provide precision gearing, specialty fabrications, kitting and assemblies of industrial systems to a broad range of industrial customers for oil and gas (“O&G”), mining, steel, and other industrial applications.
Please refer to Note 18, “Restructuring” of these condensed consolidated financial statements for the discussion of the restructuring plan which the Company initiated in the first quarter of 2018. The Company has incurred a total of approximately $424 of net costs in the first nine months of 2018 to implement this restructuring plan.
Liquidity
The Company meets its short term liquidity needs through cash generated from operations, its available cash balances,  the Credit Facility (as defined below), additional equipment financing, and access to the public or private debt equity markets, including the option to raise capital under the Company’s Form S-3 (as discussed below).
See Note 8, “Debt and Credit Agreements” of these condensed consolidated financial statements for a complete description of the Credit Facility and the Company’s other debt.
Total debt and capital lease obligations at September 30, 2018 totaled $23,216, which includes current outstanding debt and capital leases totaling $20,638. The current outstanding debt includes $18,765 outstanding under the Company’s revolving line of credit.

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On August 11, 2017, the Company filed a “shelf” registration statement on Form S-3, which was declared effective by the Securities and Exchange Commission (the “SEC”) on October 10, 2017. This shelf registration statement, which includes a base prospectus, allows the Company at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in the prospectus supplement accompanying the base prospectus, the Company would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes.
On July 31, 2018, the Company entered into an At Market Issuance Sales Agreement (the "ATM Agreement") with Roth Capital Partners, LLC (the “Agent”). Pursuant to the terms of the ATM Agreement, the Company may sell from time to time through the Agent shares of the Company's common stock, par value $0.001 per share with an aggregate sales price of up to $10,000.  The Company will pay a commission to the Agent of 3% of the gross proceeds of the sale of the shares sold under the ATM Agreement and reimburse the Agent for the expenses of their counsel. During the three months ended September 30, 2018, the Company issued 15,112 shares of the Company’s common stock under the ATM Agreement and the net proceeds (before upfront costs) to the Company from the sale of the Company’s common stock were approximately $33 after deducting commissions paid of approximately $1. As of September 30, 2018, the Company’s common stock having a value of approximately $9,967 remained available for issuance with respect to the ATM Agreement.
The Company anticipates that current cash resources, amounts available under the Credit Facility, cash to be generated from operations, and any potential proceeds from the sale of further Company securities under the Form S-3 will be adequate to meet the Company’s liquidity needs for at least the next twelve months. If assumptions regarding the Company’s production, sales and subsequent collections from certain of the Company’s large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, the Company may in the future encounter cash flow and liquidity issues. If the Company’s operational performance deteriorates significantly, it may be unable to comply with existing financial covenants, and could lose access to the Credit Facility. This could limit the Company’s operational flexibility, require a delay in making planned investments and/or require the Company to seek additional equity or debt financing. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other restrictions on the Company. While the Company believes that it will continue to have sufficient cash available to operate its businesses and to meet its financial obligations and debt covenants, there can be no assurances that its operations will generate sufficient cash, or that credit facilities will be available in an amount sufficient to enable the Company to meet these financial obligations.
Management’s Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reported period. Significant estimates, among others, include revenue recognition, future tax rates, future cash flows, inventory reserves, warranty reserves, impairment of long-lived assets, allowance for doubtful accounts, workers’ compensation reserves, and health insurance reserves. Although these estimates are based upon management’s best knowledge of current events and actions that the Company may undertake in the future, actual results could differ from these estimates.

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NOTE 2 — REVENUES
On January 1, 2018, the Company adopted ASU 2014-09 and 2015-14, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606 while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. Based on the Company’s contract evaluation, the Company determined there was no need to record any changes to the opening retained earnings due to the impact of adopting Topic 606. The adoption of Topic 606 did not have a material impact on the Company’s condensed consolidated financial statements.
Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The following table presents the Company’s revenues disaggregated by revenue source for the three and nine months ended September 30, 2018 and 2017:
 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended September 30,	 	 	Nine Months Ended September 30,	
 	 	2018	 	2017   (1)	 	 	2018	 	2017   (1)	
Towers and Heavy Fabrications	$	17,331	$	15,971	 	$	58,139	$	99,194	
Gearing	 	10,056	 	7,570	 	 	27,494	 	17,511	
Process Systems	 	4,155	 	6,054	 	 	12,680	 	12,312	
Eliminations	 	(97)	 	 -	 	 	(120)	 	 -	
Consolidated	$	31,445	$	29,595	 	$	98,193	$	129,017	
	(1)		As noted above, prior period amounts have not been adjusted under the modified retrospective method.	
Revenue within the Company’s Gearing and Process Systems segments is recognized at a point in time, typically when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The Company measures revenue based on the consideration specified in the purchase order and revenue is recognized when the performance obligations are satisfied. If applicable, the transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.
For many transactions within the Company’s Towers and Heavy Fabrications segment, products are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition. The Company recognizes revenue under these arrangements only when the buyer requests the arrangement, the ordered goods are segregated from inventory and not available to fill other orders, the goods are currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or to direct it to another customer. Assuming these required revenue recognition criteria are met, revenue is recognized upon completion of product manufacture and customer acceptance.
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses. Customer deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in the Company’s statement of operations.
The Company does not disclose the value of the unsatisfied performance obligations for contracts with an original expected length of one year or less.
 
NOTE 3 — EARNINGS PER SHARE  
The following table presents a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017, as follows: 

 

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 	 	Three Months Ended	 	 	Nine Months Ended	 	 	
 	 	September 30,	 	 	September 30,	 	 	
 	    	2018	    	2017	 	 	2018	    	2017	 	 	
Basic earnings per share calculation:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	$	(783)	 	$	(2,207)	 	 	$	(11,737)	 	$	3,340	 	 	
Weighted average number of common shares outstanding	 	 	15,541,289	 	 	15,094,991	 	 	 	15,390,090	 	 	15,013,312	 	 	
Basic net (loss) income per share	 	$	(0.05)	 	$	(0.15)	 	 	$	(0.76)	 	$	0.22	 	 	
Diluted earnings per share calculation:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net (loss) income	 	$	(783)	 	$	(2,207)	 	 	$	(11,737)	 	$	3,340	 	 	
Weighted average number of common shares outstanding	 	 	15,541,289	 	 	15,094,991	 	 	 	15,390,090	 	 	15,013,312	 	 	
Common stock equivalents:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Stock options and non-vested stock awards (1)	 	 	 —	 	 	 —	 	 	 	 —	 	 	331,196	 	 	
Weighted average number of common shares outstanding	 	 	15,541,289	 	 	15,094,991	 	 	 	15,390,090	 	 	15,344,508	 	 	
Diluted net (loss) income per share	 	$	(0.05)	 	$	(0.15)	 	 	$	(0.76)	 	$	0.22	 	 	
 
	(1)		Stock options and restricted stock units granted and outstanding of 870,707 are excluded from the computation of diluted earnings for the three and nine months ended September 30, 2018 due to the anti dilutive effect as a result of the Company’s net loss for those respective periods. Stock options and restricted stock units granted and outstanding of 593,583 are excluded from the computation of diluted earnings for the three months ended September 30, 2017 due to the anti dilutive effect as a result of the Company’s net loss for that period. Stock options outstanding of 47,033 for the nine months ended September 30, 2017 are excluded from the computation of diluted earnings as the strike price was greater than the fair market value as of September 30, 2017.	

 

 

NOTE 4 — DISCONTINUED OPERATIONS
The Company’s former Services segment had substantial continued operating losses for several years, due to operating issues and an increasingly competitive environment due in part to increased in-sourcing of service functions by customers. In July 2015, the Company’s Board of Directors (the “Board”) directed management to evaluate potential strategic alternatives with respect to the Services segment. In September 2015, the Board authorized management to sell substantially all of the assets of the Services segment to one or more third-party purchasers, and thereafter to liquidate or otherwise dispose of any such assets remaining unsold. The divestiture was substantially completed in December 2015.
Results of Discontinued Operations
Results of operations for the Services segment, which are reflected as discontinued operations in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017, were as follows:

 	 	Three Months Ended September 30,	 	 	Nine Months Ended September 30,	 	
 	    	2018	    	2017	 	    	2018	    	2017	 	
Revenues	 	$	 —	 	$	23	 	 	$	 1	 	$	150	 	
Cost of sales	 	 	(32)	 	 	(195)	 	 	 	(90)	 	 	(350)	 	
Selling, general and administrative	 	 	(1)	 	 	14	 	 	 	(4)	 	 	(44)	 	
Impairment of held for sale assets and liabilities and gain on sale of assets	 	 	 —	 	 	 —	 	 	 	 —	 	 	(161)	 	
Loss from discontinued operations	 	$	(33)	 	$	(158)	 	 	$	(93)	 	$	(405)	 	

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Assets and Liabilities Held for Sale
Services assets and liabilities classified as held for sale in the Company’s condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 include the following:
 	 	 	 	 	 	 	
 	 	September 30,	 	December 31,	
 	    	2018	    	2017	
Assets:	 	 	 	 	 	 	
Accounts receivable, net	 	$	10	 	$	11	
Inventories, net	 	 	 9	 	 	 9	
Total Assets Held For Sale Related To Discontinued Operations	 	$	19	 	$	20	
Liabilities:	 	 	 	 	 	 	
Accrued liabilities	 	$	27	 	$	27	
Customer deposits and other current obligations	 	 	 1	 	 	 3	
Total Liabilities Held For Sale Related To Discontinued Operations	 	$	28	 	$	30	

 
NOTE 5 — INVENTORIES  
The components of inventories as of September 30, 2018 and December 31, 2017 are summarized as follows:

 	 	September 30,	 	December 31,	 	
 	    	2018	    	2017	 	
Raw materials	 	$	15,154	 	$	11,945	 	
Work-in-process	 	 	7,061	 	 	6,305	 	
Finished goods	 	 	3,448	 	 	3,538	 	
 	 	 	25,663	 	 	21,788	 	
Less: Reserve for excess and obsolete inventory	 	 	(2,122)	 	 	(2,509)	 	
Net inventories	 	$	23,541	 	$	19,279	 	

NOTE 6 — GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities. Goodwill is not amortized but is tested at least annually for impairment or more frequently whenever events or circumstances occur indicating that those assets might be impaired. The Company added $4,993 of goodwill as a result of the Red Wolf acquisition, which was included in the Process Systems segment. See Note 14, “Segment Reporting” of these condensed consolidated financial statements for further discussion of the Company’s segments.
During the second quarter of 2018, the Company identified triggering events associated with the release of Red Wolf’s final earn-out reserve, Red Wolf’s recent operating results, a reduction in Red Wolf’s major customer’s performance and the delay of new initiatives being implemented. As a result, the Company evaluated the recoverability of the Red Wolf asset group. In accordance with GAAP, the Company compared the carrying value of the Red Wolf asset group to the forecast undiscounted cash flows associated with this asset group. Based on the analysis performed, the forecast undiscounted cash flows exceeded the carrying value and no impairment of this group was indicated or recorded. 
The Company next compared the carrying value of the Red Wolf reporting unit to the fair value of the Red Wolf reporting unit.  The fair value was determined using significant unobservable inputs, or level 3 in the fair value hierarchy. The two main assumptions utilized in the forecast discounted cash flow analysis were the cash flows from operations and the weighted average cost of capital of 18.6%. Based on the analysis performed, the Company determined that the carrying amount of the reporting unit exceeded the fair value and recorded a $4,993 goodwill impairment charge in the second quarter. The Company utilized a third-party appraisal to validate the results of the analysis.
Other intangible assets represent the fair value assigned to definite-lived assets such as trade names and customer relationships as part of the Company’s acquisition of Brad Foote completed in 2007 as well as the noncompetition agreements, trade names and customer relationships that were part of the Company’s acquisition of Red Wolf in 2017. See Note 17,  

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“Business Combinations” of these condensed consolidated financial statements for further discussion of the Red Wolf acquisition. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, with a remaining life range from 4 to 10 years. The Company tests other intangible assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable.
During the third quarter of 2018, the Company continued to identify triggering events associated with the Gearing segment’s history of operating losses. As a result, the Company evaluated the recoverability of certain long-lived assets associated with the Gearing segment. The Company relied upon an appraisal completed in a prior quarter and determined that there were no significant changes to the inputs or assumptions used previously. The Company concluded that no impairment to this asset group was indicated as of September 30, 2018.
During the third quarter of 2018, the Company also identified a triggering event associated with Red Wolf’s recent operating losses. The Company relied upon an undiscounted cash flow analysis performed in the prior quarter and determined that there were no significant changes to the inputs or assumptions used previously.  The Company concluded that no impairment to this asset group was indicated as of September 30, 2018.
As of September 30, 2018 and December 31, 2017, the cost basis, accumulated amortization and net book value of intangible assets were as follows: 

 	 	September 30, 2018	 	December 31, 2017	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Remaining	 	 	 	 	 	 	 	 	 	 	Remaining	 	
 	    	 	 	    	 	 	    	 	 	 	 	 	 	 	    	Weighted	    	 	 	    	 	 	    	 	 	    	Weighted	 	
 	 	 	 	 	 	 	 	 	 	 	 	Net	 	Average	 	 	 	 	 	 	 	Net	 	Average	 	
 	 	Cost	 	Accumulated	 	 	Impairment	 	 	Book	 	Amortization	 	Cost	 	Accumulated	 	Book	 	Amortization	 	
 	 	Basis	 	Amortization	 	 	Charge	 	 	Value	 	Period	 	Basis	 	Amortization	 	Value	 	Period	 	
Goodwill and other intangible assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Goodwill	 	$	4,993	 	$	 —	 	 	$	(4,993)	 	 	$	 —	 	 	 	$	4,993	 	$	 —	 	$	4,993	 	 	 	
Noncompete agreements	 	 	170	 	 	(47)	 	 	 	 —	 	 	 	123	 	4.3	 	 	170	 	 	(26)	 	 	144	 	
5.1	 	
Customer relationships	 	 	15,979	 	 	(6,025)	 	 	 	 —	 	 	 	9,954	 	7.3	 	 	15,979	 	 	(4,992)	 	 	10,987	 	8.0	 	
Trade names	 	 	9,099	 	 	(4,511)	 	 	 	 —	 	 	 	4,588	 	9.7	 	 	9,099	 	 	(4,152)	 	 	4,947	 	10.5	 	
Other intangible assets	 	$	25,248	 	$	(10,583)	 	 	$	 —	 	 	$	14,665	 	6.8	 	$	25,248	 	$	(9,170)	 	$	16,078	 	8.8	 	
 
As of September 30, 2018, estimated future amortization expense is as follows: 

2018	    	$	471	 	
2019	 	 	1,884	 	
2020	 	 	1,884	 	
2021	 	 	1,884	 	
2022	 	 	1,884	 	
2023 and thereafter	 	 	6,658	 	
Total	 	$	14,665	 	

NOTE 7 — ACCRUED LIABILITIES  
Accrued liabilities as of September 30, 2018 and December 31, 2017 consisted of the following: 

 	 	September 30,	 	December 31,	 	
 	    	2018	    	2017	 	
Accrued payroll and benefits	 	$	2,310	 	$	1,797	 	
Accrued property taxes	 	 	464	 	 	144	 	
Income taxes payable	 	 	 8	 	 	77	 	
Accrued professional fees	 	 	55	 	 	40	 	
Accrued warranty liability	 	 	523	 	 	581	 	
Accrued self-insurance reserve	 	 	395	 	 	812	 	
Accrued other	 	 	1,065	 	 	942	 	
Total accrued liabilities	 	$	4,820	 	$	4,393	 	

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NOTE 8 — DEBT AND CREDIT AGREEMENTS
 
The Company’s outstanding debt balances as of September 30, 2018 and December 31, 2017 consisted of the following:

 	 	 	 	 	 	 	 	
 	 	September 30,	 	December 31,	 	
 	    	2018	    	2017	 	
Line of credit	 	$	18,765	 	$	10,733	 	
NMTC note payable	 	 	 —	 	 	2,600	 	
Other notes payable	 	 	2,109	 	 	1,146	 	
Long-term debt	 	 	570	 	 	570	 	
Less: Current portion	 	 	(19,684)	 	 	(14,252)	 	
Long-term debt, net of current maturities	 	$	1,760	 	$	797	 	
 
Credit Facility
On October 26, 2016, the Company established a $20,000 three-year secured revolving line of credit  (the “Credit Facility”) with The PrivateBank and Trust Company which was subsequently acquired by CIBC Bank USA (“CIBC”). The Credit Facility was subsequently increased to $25,000 in March of 2017 with a Second Amendment to Loan and Security Agreement and an Amended and Restated Revolving Note.  Under the Credit Facility, CIBC advances funds when requested against a borrowing base consisting of up to 85% of the face value of eligible accounts receivable of the Company, up to 50% of the book value of eligible inventory of the Company and up to 50% of the appraised value of eligible machinery, equipment and certain real property up to $10,000. Borrowings under the Credit Facility bear interest at a per annum rate equal to the applicable London Interbank Offered Rate (“LIBOR”) plus a margin ranging from 2.25% to 3.00%, or the applicable base rate plus a margin ranging from 0.00% to 1.00%, both of which are based on the Company’s trailing twelve-month adjusted earnings before interest, taxes, depreciation, amortization, share-based payments, restructuring costs, and intangible impairments (“EBITDA”). The Company also pays an unused facility fee to CIBC equal to 0.50% per annum on the unused portion of the Credit Facility, along with other standard fees. The Credit Facility contains customary representations and warranties. It also contains a requirement that the Company, on a consolidated basis, maintain a minimum Fixed Charge Coverage Ratio Covenant, along with other customary restrictive covenants. The obligations under the Credit Facility are secured by, subject to certain exclusions, (i) a first priority security interest in all accounts receivable, inventory, equipment, cash and investment property of the Company, and (ii) a mortgage on the Company’s Abilene, Texas tower facility.
On January 29, 2018, the Company executed the Third Amendment to Loan and Security Agreement waiving the Company’s non-compliance with the Fixed Charge Coverage Ratio as of December 31, 2017 and, among other changes, added new minimum monthly EBITDA and capital expenditure covenants through June 30, 2018. The amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated commencing with the quarter ending June 30, 2018.
On May 3, 2018, the Company executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), waiving the Company’s non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amends the minimum EBITDA thresholds for the period ending June 30, 2018 and adjusts the definition of EBITDA to add back certain restructuring expenses.
On October 26, 2018, the Company executed the Fifth Amendment to Loan and Security Agreement which included minimum EBITDA covenants through June 30, 2019, eliminating the Fixed Charge Coverage Ratio and capital expenditure covenants as of the period ending December 31, 2018.
As of September 30, 2018, there was $18,765 of outstanding indebtedness under the Credit Facility, with the ability to borrow an additional  $5,811 under the Credit Facility.
Other  
Included in line of credit, NMTC (as defined below) and other notes payable line item of the Company’s consolidated financial statements is $2,600 associated with the New Markets Tax Credit Transaction (the “ NMTC Transaction”) described further in Note 16, “New Markets Tax Credit Transaction” of these condensed consolidated financial statements at December 31, 2017.  During the third quarter of 2018, the loan was extinguished and the Company recorded a gain of $2,249 in other income, net of transaction expenses. Additionally, the Company has entered into a $570 loan agreement with the Development Corporation of Abilene which is included in Long-term debt, less current maturities. The loan is forgivable upon the Company meeting and maintaining specific employment thresholds. In addition, the Company has outstanding notes payable for capital expenditures in the amount of $2,109 and $1,146 as of September 30, 2018 and December 31, 2017, respectively, with $919 and $804 included in the Line of credit, NMTC and other notes payable line item as of September 30, 2018 and December 31,

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2017, respectively.  The notes payable have monthly payments that range from $3 to $36 and an interest rate of 5%.  The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable have maturity dates that range from April 2020 to May 2021. 
  
NOTE 9 — FAIR VALUE MEASUREMENTS  
The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. Financial instruments are assessed quarterly to determine the appropriate classification within the fair value hierarchy. Transfers between fair value classifications are made based upon the nature and type of the observable inputs. The fair value hierarchy is defined as follows: 
Level 1 — Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. 
Level 2 — Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.
Level 3 — Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date. The Company used market negotiations to value the Gearing segment’s assets.
The following tables represent the fair values of the Company’s financial assets as of September 30, 2018 and December 31, 2017: 

 	 	September 30, 2018	 	
 	    	Level 1	    	Level 2	    	Level 3	    	Total	 	
Assets measured on a nonrecurring basis:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Services assets	 	 	 	 	 	 	 	 	19	 	 	19	 	
Total assets at fair value	 	$	 —	 	$	 —	 	$	19	 	$	19	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2017	 	
 	    	Level 1	    	Level 2	    	Level 3	    	Total	 	
Assets measured on a nonrecurring basis:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gearing Cicero Ave. facility	 	 	 —	 	 	 —	 	 	560	 	 	560	 	
Services assets	 	 	 —	 	 	 —	 	 	20	 	 	20	 	
Total assets at fair value	 	$	 —	 	$	 —	 	$	580	 	$	580	 	
 
Fair Value of Financial Instruments  
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and customer deposits, approximate their respective fair values due to the relatively short-term nature of these instruments. Based upon interest rates currently available to the Company for debt with similar terms, the carrying value of the Company’s long-term debt is approximately equal to its fair value. 
Assets Measured at Fair Value on a Nonrecurring Basis  
The fair value measurement approach for long lived assets utilizes a number of significant unobservable inputs or Level 3 assumptions. To the extent assumptions used in the Company’s evaluations are not achieved, there may be a negative effect on the valuation of these assets. 
The carrying value of the land and building comprising one of Brad Foote’s facilities located in Cicero, Illinois (the “Cicero Avenue Facility”) of $560 reflected the expected proceeds associated with selling this facility. During 2017, the Company reclassified the Cicero Avenue Facility as Assets Held for Sale upon completion of general site remediation activities. See Note 15, “Commitments and Contingencies” of these condensed consolidated financial statements for additional detail of the Cicero Avenue Facility. During the third quarter of 2018, the Company sold the Cicero Avenue Facility and recognized a gain of $23 on the sale. The gain is included in operating income in these condensed consolidated financial statements.

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Following the Board’s approval of a plan to divest the Company’s Services segment, the Company has been able to evaluate the value of the segment’s assets on the open market; therefore, the Company has utilized this measurement to determine the fair value of the Services segment assets.
 
NOTE 10 — INCOME TAXES  
Effective tax rates differ from federal statutory income tax rates primarily due to changes in the Company’s valuation allowance, permanent differences and provisions for state and local income taxes. As of September 30, 2018, the Company has a full valuation allowance recorded against deferred tax assets. During the nine months ended September 30, 2018, the Company recorded a benefit for income taxes of $20, compared to a benefit for income taxes of $5,056 during the nine months ended September 30, 2017. The income tax benefit during the nine months ended September 30, 2017 included an income tax benefit of $5,060 from the partial release of the valuation allowance, net of Red Wolf’s current state taxes, resulting from the consolidation of the Company’s deferred tax assets with Red Wolf’s deferred tax liabilities upon acquisition.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. In connection with the Tax Act, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law.
The Company files income tax returns in U.S. federal and state jurisdictions. As of September 30, 2018, open tax years in federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carryforwards. As of December 31, 2017, the Company had net operating loss (“NOL”) carryforwards of $227,871 expiring in various years through 2037.  
Since the Company has no unrecognized tax benefits, they will not have an impact on the condensed consolidated financial statements as a result of the expiration of the applicable statues of limitations within the next twelve months. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), generally imposes an annual limitation on the amount of NOL carryforwards and associated built-in losses that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. The Company’s ability to utilize NOL carryforwards and built-in losses may be limited, under IRC Section 382 or otherwise, by the Company’s issuance of common stock or by other changes in stock ownership. Upon completion of the Company’s analysis of IRC Section 382, the Company has determined that aggregate changes in stock ownership have triggered an annual limitation on NOL carryforwards and built-in losses available for utilization. To the extent the Company’s use of NOL carryforwards and associated built-in losses is significantly limited in the future due to additional changes in stock ownership, the Company’s income could be subject to U.S. corporate income tax earlier than it would be if the Company were able to use NOL carryforwards and built-in losses without such limitation, which could result in lower profits and the loss of benefits from these attributes. 
In February 2013, the Board adopted a Stockholder Rights Plan, which was amended in February 2016 (as amended, the “Rights Plan”), designed to preserve the Company’s substantial tax assets associated with NOL carryforwards under IRC Section 382. The Rights Plan was subsequently ratified by the Company’s stockholders at the Company’s 2013 Annual Meeting of Stockholders.  The Rights Plan was amended and extended for an additional three years on February 5, 2016, and such extension was subsequently ratified by the Company’s stockholders at the Company’s 2016 Annual Meeting of Stockholders.
The Rights Plan is intended to act as a deterrent to any person or group, together with its affiliates and associates, becoming the beneficial owner of 4.9% or more of the Company’s common stock and thereby triggering a further limitation of the Company’s available NOL carryforwards. In connection with the adoption of the Rights Plan, the Board declared a non‑taxable dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock to the Company’s stockholders of record as of the close of business on February 22, 2013. Each Right entitles its holder to purchase from the Company one one‑thousandth of a share of the Company’s Series A Junior Participating Preferred Stock at an exercise price of $9.81 per Right, subject to adjustment. As a result of the Rights Plan, any person or group that acquires beneficial ownership of 4.9% or more of the Company’s common stock without the approval of the Board would be subject to significant dilution in the ownership interest of that person or group. Stockholders who owned 4.9% or more of the outstanding shares of the Company’s common stock as of February 12, 2013 will not trigger the preferred share purchase rights unless they acquire additional shares after that date. 

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As of September 30, 2018, the Company had no unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense. The Company had no accrued interest and penalties as of September 30, 2018.
 
NOTE 11 — SHARE-BASED COMPENSATION  
Overview of Share-Based Compensation Plans  
2007 Equity Incentive Plan  
The Company has granted incentive stock options and other equity awards pursuant to the Amended and Restated Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “2007 EIP”), which was approved by the Board in October 2007 and by the Company’s stockholders in June 2008. The 2007 EIP has been amended periodically since its original approval. 
The 2007 EIP reserved 691,051 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates depends to a large degree. As of September 30, 2018, the Company had reserved 25,233 shares for issuance upon the exercise of stock options outstanding and no shares for issuance upon the vesting of restricted stock unit (“RSU”) awards outstanding. As of September 30, 2018,  253,659 shares of common stock reserved for stock options and RSU awards under the 2007 EIP had been issued in the form of common stock. 
2012 Equity Incentive Plan  
The Company has granted incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2012 Equity Incentive Plan (the “2012 EIP”), which was approved by the Board in March 2012 and by the Company’s stockholders in May 2012. 
The 2012 EIP reserved 1,200,000 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates will depend to a large degree. As of September 30, 2018, the Company had reserved 34,129 shares for issuance upon the exercise of stock options outstanding and no shares for issuance upon the vesting of RSU awards outstanding. As of September 30, 2018,  635,089 shares of common stock reserved for stock options and RSU awards under the 2012 EIP had been issued in the form of common stock.
2015 Equity Incentive Plan  
The Company has granted equity awards pursuant to the Broadwind Energy, Inc. 2015 Equity Incentive Plan (the “2015 EIP,” and together with the 2007 EIP and the 2012 EIP, the “Equity Incentive Plans”), which was approved by the Board in February 2015 and by the Company’s stockholders in April 2015. The purposes of the Equity Incentive Plans are to (a) align the interests of the Company’s stockholders and recipients of awards under the Equity Incentive Plans by increasing the proprietary interest of such recipients in the Company’s growth and success; (b) advance the interests of the Company by attracting and retaining officers, other employees, non-employee directors and independent contractors; and (c) motivate such persons to act in the long-term best interests of the Company and its stockholders. Under the Equity Incentive Plans, the Company may grant (i) non-qualified stock options; (ii) “incentive stock options” (within the meaning of IRC Section 422); (iii) stock appreciation rights; (iv) restricted stock and RSUs; and (v) performance awards.
The 2015 EIP reserves 1,100,000 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates will depend to a large degree. As of September 30, 2018, the Company had reserved 811,345 shares for issuance upon the vesting of RSU awards outstanding. As of September 30, 2018,  340,511 shares of common stock reserved for RSU awards under the 2015 EIP had been issued in the form of common stock. 
Stock Options.  The exercise price of stock options granted under the Equity Incentive Plans is equal to the closing price of the Company’s common stock on the date of grant. Stock options generally become exercisable on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. Additionally, stock options expire ten years after the date of grant. The fair value of stock options granted is expensed ratably over their vesting term. 
Restricted Stock Units (RSUs).  The granting of RSUs is provided for under the Equity Incentive Plans. RSUs generally vest on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. The fair value of each RSU granted is equal to the closing price of the Company’s common stock on the date of grant and is generally expensed ratably over the vesting term of the RSU award. 

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

 	    	 	    	 	 	    	
 	 	 	 	Weighted Average	 	
 	    	Options	    	Exercise Price	 	
Outstanding as of December 31, 2017	 	67,188	 	$	24.65	 	
Expired	 	(7,826)	 	$	68.96	 	
Outstanding as of September 30, 2018	 	59,362	 	$	18.81	 	
Exercisable as of September 30, 2018	 	59,362	 	$	18.81	 	
 
The following table summarizes RSU activity during the nine months ended September 30, 2018 under the Equity Incentive Plans, as follows: 

 	    	 	    	Weighted Average	 	
 	 	Number of	 	Grant-Date Fair Value	 	
 	 	Shares	 	Per Share	 	
Unvested as of December 31, 2017	 	512,142	 	$	4.57	 	
Granted	 	556,944	 	$	2.43	 	
Vested	 	(198,159)	 	$	4.47	 	
Forfeited	 	(59,582)	 	$	3.91	 	
Unvested as of September 30, 2018	 	811,345	 	$	3.17	 	
 
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected volatility of the price of the Company’s stock over the expected life of the awards and actual and projected stock option exercise behavior. No stock options were granted during the nine months ended September 30, 2018. 
The Company utilized a forfeiture rate of 25% during the nine months ended September 30, 2018 and 2017 for estimating the forfeitures of equity compensation granted. 
The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2018 and 2017, as follows: 

 	 	 	 	 	 	 	 	
 	 	Nine Months Ended September 30,	 	
 	    	2018	    	2017	 	
Share-based compensation expense:	 	 	 	 	 	 	 	
Cost of sales	 	$	79	 	$	82	 	
Selling, general and administrative	 	 	606	 	 	569	 	
Net effect of share-based compensation expense on net income	 	$	685	 	$	651	 	
Reduction in earnings per share:	 	 	 	 	 	 	 	
Basic earnings per share	 	$	0.04	 	$	0.04	 	
 	 	 	 	 	 	 	 	
Diluted earnings per share	 	$	0.04	 	$	0.04	 	
 
As of September 30, 2018, the Company estimates that pre-tax compensation expense for all unvested share-based RSUs in the amount of approximately $1,347 will be recognized through 2020. The Company expects to satisfy the exercise of stock options and future distribution of shares of restricted stock by issuing new shares of common stock.
 
NOTE 12 — LEGAL PROCEEDINGS
 
The Company is party to a variety of legal proceedings that arise in the normal course of its business. While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on the Company’s results of operations, financial condition or cash flows. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s results of operations, financial condition or cash flows. It is possible that if one or more of such matters were decided against the Company, the effects could be material to the Company’s results of operations in the period in which the Company would be required to record or adjust

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the related liability and could also be material to the Company’s financial condition and cash flows in the periods the Company would be required to pay such liability.
 
NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS  
The Company reviews new accounting standards as issued. Although some of the accounting standards issued or effective in the current fiscal year may be applicable to it, the Company believes that none of the new standards have a significant impact on its condensed consolidated financial statements, except as discussed below. The Company is currently evaluating the impact of the new standards on its condensed consolidated financial statements. 
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842), which is intended to improve financial reporting about leasing transactions. This ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current guidance. In addition, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. This ASU will be effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted.  In July 2018, FASB issued ASU 2018-11 which provides a practical expedient to adopt the ASU with a cumulative effect at the adoption date without restating prior periods. The Company expects to utilize this practical expedient and plans to adopt the ASU on January 1, 2019. The Company expects to adopt this guidance for leases existing at the date of adoption and expects to recognize a liability and corresponding asset associated with in-scope leases. The Company has commenced identifying its lease population, but is still in the process of determining those amounts to be recognized as liabilities and right of use assets.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which clarifies the definition of a business. The amendments in this ASU provide a screen to determine when a set (group of assets and activities) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. This ASU became effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this ASU had no material impact on the Company’s condensed consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the test for goodwill impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2, which compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill, from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This ASU will be effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The Company early adopted this ASU during the second quarter of 2018 and recorded a $4,993 impairment charge as discussed in Note 6 “Goodwill and Other Intangible Assets” of these condensed consolidated financial statements.
 
NOTE 14 — SEGMENT REPORTING  
The Company is organized into reporting segments based on the nature of the products offered and business activities from which it earns revenues and incurs expenses for which discrete financial information is available and regularly reviewed by the Company’s chief operating decision maker. The Company’s segments and their product and service offerings are summarized below: 
Towers and Heavy Fabrications
The Company manufactures towers for wind turbines, specifically the large and heavier wind towers that are designed for multiple megawatt (“MW”) wind turbines, as well as heavy fabrications for mining and other industrial customers. Production facilities, located in Manitowoc, Wisconsin and Abilene, Texas, are situated in close proximity to the primary U.S.

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domestic wind energy and equipment manufacturing hubs. The two facilities have a combined annual tower production capacity of up to approximately 550 towers, sufficient to support turbines generating more than 1,100 MW of power. 
Gearing 
The Company engineers, builds and remanufactures precision gears and gearing systems for O&G, wind, mining, steel and other industrial applications. The Company uses an integrated manufacturing process, which includes machining and finishing processes in Cicero, Illinois, and heat treatment processes in Neville Island, Pennsylvania.
Process Systems 
The Company acquired Red Wolf on February 1, 2017 and as a result, aggregated its Abilene compressed natural gas (“CNG”) and heavy fabrication business with Red Wolf to form the Process Systems reportable segment. This segment provides contract manufacturing services that include build-to-spec, kitting, fabrication and inventory management for customers throughout the U.S. and in foreign countries, primarily supporting the natural gas electrical generation market.
Corporate
“Corporate” includes the assets and selling, general and administrative expenses of the Company’s corporate office. “Eliminations” comprises adjustments to reconcile segment results to consolidated results. 
Summary financial information by reportable segment for the three and nine months ended September 30, 2018 and 2017 is as follows:

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	    	Towers and	    	 	 	 	Process	 	 	 	 	    	 	 	    	 	 	 	
 	 	Heavy Fabrications	 	Gearing	 	Systems	 	 	Corporate	 	Eliminations	 	Consolidated	 	
For the Three Months Ended September 30, 2018	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues from external customers	 	$	17,320	 	$	10,056	 	$	4,069	 	 	$	 —	 	$	 —	 	$	31,445	 	
Intersegment revenues	 	 	11	 	 	 —	 	 	86	 	 	 	 —	 	 	(97)	 	 	 —	 	
Net revenues	 	 	17,331	 	 	10,056	 	 	4,155	 	 	 	 —	 	 	(97)	 	 	31,445	 	
Operating (loss) profit	 	 	(755)	 	 	346	 	 	(917)	 	 	 	(1,286)	 	 	 —	 	 	(2,612)	 	
Depreciation and amortization	 	 	1,237	 	 	566	 	 	429	 	 	 	52	 	 	 —	 	 	2,284	 	
Capital expenditures	 	 	137	 	 	76	 	 	11	 	 	 	118	 	 	 —	 	 	342	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	    	Towers and	    	 	 	    	Process	 	 	 	    	 	 	    	 	 	 	
 	 	Heavy Fabrications	 	Gearing	 	Systems	 	Corporate	 	Eliminations	 	Consolidated	 	
For the Three Months Ended September 30, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues from external customers	 	$	15,971	 	$	7,570	 	$	6,054	 	$	 —	 	$	 —	 	$	29,595	 	
Operating (loss) profit	 	 	(1,473)	 	 	(396)	 	 	115	 	 	(77)	 	 	 —	 	 	(1,831)	 	
Depreciation and amortization	 	 	1,122	 	 	609	 	 	477	 	 	59	 	 	 —	 	 	2,267	 	
Capital expenditures	 	 	1,423	 	 	232	 	 	11	 	 	 2	 	 	 —	 	 	1,668	 	

 

 

 

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	    	Towers and	    	 	 	 	Process	    	 	 	 	    	 	    	 	 	
 	 	Heavy Fabrications	 	Gearing	 	Systems	 	Corporate	 	Eliminations	 	Consolidated	
For the Nine Months Ended September 30, 2018	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues from external customers	 	$	58,105	 	$	27,494	 	$	12,594	 	$	 —	 	$	 —	 	$	98,193	
Intersegment revenues	 	 	34	 	 	 —	 	 	86	 	 	 —	 	 	(120)	 	 	 —	
Net revenues	 	 	58,139	 	 	27,494	 	 	12,680	 	 	 —	 	 	(120)	 	 	98,193	
Operating (loss)	 	 	(1,535)	 	 	(941)	 	 	(7,581)	 	 	(2,828)	 	 	 —	 	 	(12,885)	
Depreciation and amortization	 	 	3,773	 	 	1,742	 	 	1,304	 	 	171	 	 	 —	 	 	6,990	
Capital expenditures	 	 	1,335	 	 	543	 	 	11	 	 	129	 	 	 —	 	 	2,018	

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 	    	Towers and	    	 	 	 	Process	    	 	 	    	 	 	    	 	 	
 	 	Heavy Fabrications	 	Gearing	 	Systems	 	Corporate	 	Eliminations	 	Consolidated	
For the Nine Months Ended September 30, 2017	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Revenues from external customers	 	$	99,194	 	$	17,511	 	$	12,312	 	$	 —	 	$	 —	 	$	129,017	
Operating profit (loss)	 	 	7,177	 	 	(2,562)	 	 	(1,805)	 	 	(3,554)	 	 	 —	 	 	(744)	
Depreciation and amortization	 	 	3,283	 	 	1,847	 	 	1,278	 	 	163	 	 	 —	 	 	6,571	
Capital expenditures	 	 	4,812	 	 	564	 	 	421	 	 	175	 	 	 —	 	 	5,972	

 	 	 
 
Total Assets as of 	 	
 	 	September 30,	 	December 31,	 	
Segments:	 	2018	 	2017	 	
Towers and Heavy Fabrications	    	$	33,047	    	$	27,958	 	
Gearing	 	 	37,434	 	 	37,456	 	
Process Systems	 	 	19,418	 	 	26,442	 	
Assets held for sale	 	 	19	 	 	580	 	
Corporate	 	 	253,566	 	 	249,326	 	
Eliminations	 	 	(235,450)	 	 	(229,412)	 	
 	 	$	108,034	 	$	112,350	 	

NOTE 15 — COMMITMENTS AND CONTINGENCIES  
Environmental Compliance and Remediation Liabilities  
The Company’s operations and products are subject to a variety of environmental laws and regulations in the jurisdictions in which the Company operates and sells products governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous materials, soil and groundwater contamination, employee health and safety, and product content, performance and packaging. Certain environmental laws may impose the entire cost or a portion of the cost of investigating and cleaning up a contaminated site, regardless of fault, upon any one or more of a number of parties, including the current or previous owners or operators of the site. These environmental laws also impose liability on any person who arranges for the disposal or treatment of hazardous substances at a contaminated site. Third parties may also make claims against owners or operators of sites and users of disposal sites for personal injuries and property damage associated with releases of hazardous substances from those sites. 
In connection with the Company’s previous restructuring initiatives, during the third quarter of 2012, the Company identified a liability associated with the planned sale of the Cicero Avenue Facility. The liability was associated with environmental remediation costs that were identified while preparing the site for sale. During 2013, the Company applied for and was accepted into the Illinois Environmental Protection Agency (the “IEPA”) voluntary site remediation program. In the first quarter of 2014, the Company completed a comprehensive review of remedial options for the Cicero Avenue Facility and selected a preferred remediation technology. As part of the voluntary site remediation program, the Company submitted a plan to the IEPA for approval to conduct a pilot study to test the effectiveness of the selected remediation technology. In the fourth quarter of 2017, the Company completed the remediation of the Cicero Avenue Facility which was subsequently sold for $583, net of expenses, in the third quarter of 2018.   
Warranty Liability  
The Company provides warranty terms that range from one to five years for various products supplied by the Company. In certain contracts, the Company has recourse provisions for items that would enable recovery from third parties for amounts paid to customers under warranty provisions. As of September 30, 2018 and 2017, estimated product warranty liability was $523 and $596, respectively, and is recorded within accrued liabilities in the Company’s condensed consolidated balance sheets. 

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

 	 	For the Nine Months Ended September 30,	 	
 	    	2018	    	2017	 	
Balance, beginning of period	 	$	581	 	$	671	 	
Addition to (reduction of) warranty reserve	 	 	(58)	 	 	(82)	 	
Warranty claims	 	 	 —	 	 	 7	 	
Balance, end of period	 	$	523	 	$	596	 	
 
Allowance for Doubtful Accounts  
Based upon past experience and judgment, the Company establishes an allowance for doubtful accounts with respect to accounts receivable. The Company’s standard allowance estimation methodology considers a number of factors that, based on its collections experience, the Company believes will have an impact on its credit risk and the collectability of its accounts receivable. These factors include individual customer circumstances, history with the Company, the length of the time period during which the account receivable has been past due and other relevant criteria. 
The Company monitors its collections and write-off experience to assess whether or not adjustments to its allowance estimates are necessary. Changes in trends in any of the factors that the Company believes may impact the collectability of its accounts receivable, as noted above, or modifications to its credit standards, collection practices and other related policies may impact the Company’s allowance for doubtful accounts and its financial results. The activity in the accounts receivable allowance liability for the nine months ended September 30, 2018 and 2017 consisted of the following: 

 	 	 	 	 	 	 	 	
 	 	For the Nine Months Ended September 30,	 	
 	    	2018	    	2017	 	
Balance at beginning of period	 	$	225	 	$	145	 	
(Recoveries) bad debt expense	 	 	(47)	 	 	56	 	
Write-offs	 	 	(1)	 	 	 —	 	
Balance at end of period	 	$	177	 	$	201	 	
 
Collateral  
In select instances, the Company has pledged specific inventory and machinery and equipment assets to serve as collateral on related payable or financing obligations. 
Liquidated Damages  
In certain customer contracts, the Company has agreed to pay liquidated damages in the event of qualifying delivery or production delays. These damages are typically limited to a specific percentage of the value of the product in question and/or are dependent on actual losses sustained by the customer. The Company does not believe that this potential exposure will have a material adverse effect on the Company’s consolidated financial position or results of operations. There was no reserve for liquidated damages as of September 30, 2018 or December 31, 2017. 
Workers’ Compensation Reserves  
At the beginning of the third quarter of 2013, the Company began to self-insure for its workers’ compensation liabilities, including reserves for self-retained losses. Historical loss experience combined with actuarial evaluation methods and the application of risk transfer programs are used to determine required workers’ compensation reserves. The Company takes into account claims incurred but not reported when determining its workers’ compensation reserves. Although the ultimate outcome of these matters may exceed the amounts recorded and additional losses may be incurred, the Company does not believe that any additional potential exposure for such liabilities will have a material adverse effect on the Company’s consolidated financial position or results of operations. Although the Company entered into a guaranteed cost program at the beginning of the third quarter of 2016, the Company maintained a liability for the trailing claims from the self-insured policy. As of September 30, 2018 and December 31, 2017, the Company had $395 and $812, respectively, accrued for self-insured workers’ compensation liabilities. 
Other  
As of December 31, 2017, approximately 24% of the Company’s employees were covered by two collective bargaining agreements with local unions at Brad Foote’s Cicero, Illinois and Neville Island, Pennsylvania locations. The

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current three-year collective bargaining agreement with the Neville Island union is expected to remain in effect through October 2022. During the third quarter of 2018, a new collective bargaining agreement was negotiated and ratified with the Cicero Union. The new four-year collective bargaining agreement with the Cicero union is expected to remain in effect through February 2022. 
See Note 16, “New Markets Tax Credit Transaction” of these condensed consolidated financial statements for a discussion of a strategic financing transaction, the NMTC Transaction, which originally related to the Company’s drivetrain service center in Abilene, Texas (the “Abilene Gearbox Facility”), and was amended in August 2015 to also include the activities of the Company’s heavy industries business conducted at the same location in Abilene, Texas (the “Abilene Heavy Industries Facility”). The Abilene Gearbox Facility focused on servicing the growing installed base of MW wind turbines as they come off warranty and, to a limited extent, industrial gearboxes requiring precision repair and testing. The Abilene Heavy Industries Facility focuses on heavy fabrications and assembly for industries including those related to compressed natural gas distribution. Pursuant to the NMTC Transaction, the gross loan and investment in the Abilene Heavy Industries Facility and the Abilene Gearbox Facility of $10,000 is expected to generate $3,900 in tax credits over a period of seven years, which the NMTC Transaction makes available to Capital One, National Association (“Capital One”). The Abilene Heavy Industries Facility and/or the Abilene Gearbox Facility operated and remained in compliance with the terms and conditions of the NMTC Transaction during the seven-year compliance period ending in the third quarter of 2018, allowing Capital One to capture up to  $3,900 in tax credits. At the end of the seven year compliance period, Capital One exercised its right to put the investment back to the Company in exchange for $130. The loan was extinguished and the Company recorded a gain of $2,249 in other income, net of transaction expenses.
 
NOTE 16 — NEW MARKETS TAX CREDIT TRANSACTION  
On July 20, 2011, the Company executed the NMTC Transaction, which was amended on August 24, 2015, involving the following third parties: AMCREF Fund VII, LLC (“AMCREF”), a registered community development entity; COCRF Investor VIII, LLC (“COCRF”); and Capital One. The NMTC Transaction allows the Company to receive below market interest rate funds through the federal New Markets Tax Credit (“NMTC”) program. The Company received $2,280 in proceeds from the NMTC Transaction. The NMTC Transaction qualifies under the NMTC program and included a gross loan from AMCREF to the Company’s wholly-owned subsidiary Broadwind Services, LLC in the principal amount of $10,000, with a term of fifteen years and interest payable at the rate of 1.4% per annum, largely offset by a gross loan in the principal amount of $7,720 from the Company to COCRF, with a term of fifteen years and interest payable at the rate of 2.5% per annum. The August 2015 amendment did not change the financial terms of the NMTC Transaction, but did add the activities and assets of the Abilene Heavy Industries Facility to the NMTC Transaction and allow for the possible sale of the Abilene Gearbox Facility assets, provided that the proceeds of such sale are re-invested in the Abilene Heavy Industries Facility. 
The NMTC regulations permit taxpayers to claim credits against their federal income taxes for qualified investments in the equity of community development entities. The NMTC Transaction could generate $3,900 in tax credits, which the Company has made available under the structure by passing them through to Capital One. The proceeds have been applied to the Company’s investment in the Abilene Gearbox Facility assets and associated operating costs and in the assets of the Abilene Heavy Industries Facility, as permitted under the amended NMTC Transaction. 
The Abilene Heavy Industries Facility and/or the Abilene Gearbox Facility had to operate and remain in compliance with various regulations and restrictions through the third quarter of 2018, the end of the seven year compliance period, to comply with the terms of the NMTC Transaction, or the Company may be liable under its indemnification agreement with Capital One for the recapture of tax credits. In the event the Company did not comply with these regulations and restrictions, the NMTC program tax credits could have been subject to 100% recapture for a period of seven years as provided in the IRC. No tax credit recapture events occurred that required the Company to make any payments to Capital One under the indemnification agreement.  
The Capital One contribution, including a loan origination payment of $320, was included as other assets in the Company’s condensed consolidated balance sheet as of December 31, 2017. Capital One exercised an option to put its investment to the Company and received $130 from the Company at that time. The Capital One contribution, other than the amount allocated to the put obligation, was recognized in income only after the put/call was exercised and when Capital One had no ongoing interest. 
The Company has determined that two pass‑through financing entities created under the NMTC Transaction structure are variable interest entities (“VIEs”). The ongoing activities of the VIEs—collecting and remitting interest and fees and complying with NMTC program requirements—were considered in the initial design of the NMTC Transaction and are not expected to significantly affect economic performance throughout the life of the VIEs. In making this determination, management also considered the contractual arrangements that obligate the Company to deliver tax benefits and provide

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various other guarantees under the NMTC Transaction structure, Capital One’s lack of a material interest in the underlying economics of the project, and the fact that the Company is obligated to absorb losses of the VIEs. The Company has concluded that it is required to consolidate the VIEs because the Company has both (i) the power to direct those matters that most significantly impact the activities of each VIE, and (ii) the obligation to absorb losses or the right to receive benefits of each VIE.  
The $262 of issue costs paid to third parties in connection with the NMTC Transaction were recorded as prepaid expenses, and were amortized over the expected seven year term of the NMTC arrangement. Capital One’s net contribution of $2,600 was included in Line of credit,  NMTC and other notes payable in the condensed consolidated balance sheet at December 31, 2017. Incremental costs to maintain the transaction structure during the compliance period were recognized as they were incurred. At the end of the seven year compliance period, Capital One exercised its right to put the investment back to the Company in exchange for $130. The loan was extinguished and the Company recorded a gain of $2,249 in other income, net of transaction expenses.

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NOTE 17 —  BUSINESS COMBINATIONS
Overview
On January 30, 2017, the Company announced that it had agreed upon the material terms to acquire Red Wolf, a Sanford, North Carolina-based, privately held fabricator, kitter and assembler of industrial systems primarily supporting the global gas turbine market, for approximately $18,983, subject to certain adjustments. The transaction closed on February 1, 2017, and Red Wolf is being operated as a wholly-owned subsidiary of the Company.
Accounting for the Transaction
The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill. Red Wolf’s results are included in the Company’s results from the acquisition date of February 1, 2017.
The purchase price of the transaction totaled $18,983 net of working capital adjustments that occurred after the acquisition date. The purchase price includes $16,449 which was paid in cash and $2,534 which was the expected value of contingent future earn-out payments. The contingent consideration arrangement required the Company to pay the former owners of Red Wolf a payout if Red Wolf achieved a targeted profitability benchmark. The potential undiscounted amount of all future payments that the Company could have been required to make under the contingent consideration arrangement was between $0 and $9,900. Annual earn-out payments may not exceed $4,950. The fair value of the contingent consideration arrangement of $2,534 was estimated by using a Monte Carlo simulation. Key assumptions included a short-term weighted average cost of capital of 15% and historical volatility of public company comparables. The fair value of the contingent consideration arrangement was determined using significant unobservable inputs, or level 3 in the fair value hierarchy.
During the third quarter of 2017, the Company released $1,394 of this contingency into operating income because management determined that Red Wolf’s full-year financial performance during the first year of ownership by the Company was unlikely to meet the threshold required to pay the first installment of the contingent earn-out. During the second quarter of 2018, the Company released the final contingent earn-out liability of $1,140 into operating income as the Company does not expect Red Wolf to achieve the targeted profitability benchmark for the second year of ownership. The release of the earn-out is reflected in the selling, general, and administrative line item of these condensed consolidated statements of operations.
The Company’s allocation of the $18,983 purchase price to Red Wolf’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values as of February 1, 2017, is included in the table below. Goodwill is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax purposes. The measurement period adjustments were a result of changes in the fair value of the contingent consideration arrangement and adjustments to working capital accounts. The purchase price allocation was finalized at December 31, 2017. The decrease in goodwill from March 31, 2017 is due to opening balance sheet changes noted in the table below.
The purchase price allocation as of March 31, 2017 and December 31, 2017 is as follows (in thousands):

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

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Total purchase price	$	19,603	$	(620)	$	18,983	
 
The allocation of the purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date. The acquired noncompete agreements, customer relationships, and trade names have weighted average amortization periods of 6.0 years, 9.0 years, and 14.0 years, respectively, and the total weighted average life of the acquired intangible assets is 9.4 years. Goodwill from this transaction has been allocated to the Company’s Process Systems segment.
NOTE 18 — RESTRUCTURING
During the first quarter of 2018, the Company conducted a review of its business strategies and product plans given the outlook of the industries it serves and its business environment. As a result, the Company began to execute a restructuring plan to rationalize its facility capacity and management structure, and to consolidate and increase the efficiencies of its Abilene operations. Management decided to exit the CNG and Fabrication Manufacturing location in Abilene as soon as it fully complied with the requirements established as part of the NMTC Transaction agreement and consolidate these manufacturing activities into other locations. The Company expects to vacate the facility by the end of 2018.  All remaining costs associated with this facility have been recorded as restructuring expenses. All costs will be incurred solely within the Process Systems segment.
The Company expects to incur restructuring costs associated with the restructuring plan totaling an estimated $721, of which $424 has been incurred to date.  The Company anticipates annual cost savings going forward of approximately $575 in facility expenses related to the restructuring. 
The Company’s total net restructuring charges for the three and nine months ended September 30, 2018, in addition to the total projected restructuring costs, consist of the following:
 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended	 	Nine Months Ended	 	Total	 	
 	 	September 30, 2018	 	September 30, 2018	 	Projected	 	
Cost of sales:	 	 	 	 	 	 	 	 	 	 	
    Facility costs	 	$	69	 	$	215	 	$	277	 	
    Moving and remediation	 	 	 —	 	 	 1	 	 	152	 	
    Salary and severance	 	 	 —	 	 	17	 	 	17	 	
    Depreciation	 	 	88	 	 	155	 	 	239	 	
        Total cost of sales	 	 	157	 	 	388	 	 	685	 	
Selling, general, and administrative expenses:	 	 	 	 	 	 	 	 	 	 	
   Salary and severance	 	 	 —	 	 	36	 	 	36	 	
        Total selling, general, and administrative expenses	 	 	 —	 	 	36	 	 	36	 	
        Grand Total	 	$	157	 	$	424	 	$	721	 	

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

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OUR BUSINESS  
Third Quarter Overview  
We booked $19,717 in new orders in the third quarter of 2018, up 12%  from $17,675 in the third quarter of 2017. The increase in orders was driven by growth in heavy fabrications orders within the Towers segment, primarily supporting mining and construction customers, and increased Gearing orders associated with the timing of replacement gearing orders from a  wind customer.  Towers orders in the third quarter of 2018 were flat compared to the third quarter of 2017. Gearing orders increased by  $964 in the current period to $11,530. Our Process Systems segment had $4,420 in orders in the third quarter of 2018, a decrease of $925 over the third quarter of 2017 primarily due to lower customer demand for natural gas turbine content. 
We recognized revenue of $31,445 in the third quarter of 2018, up from revenue of $29,595 in the third quarter of 2017. Gearing segment revenues were up $2,486 or 33%, as a result of the recovery in the oil and gas (“O&G”) market and improved plant efficiencies.  The Towers and Heavy Fabrications segment revenues increase was due to a 5% increase in tower sections sold and an increase in the volume of heavy fabrications, partially offset by a lower average sales price on the product mix sold.
The Process Systems segment recognized revenue of $4,155 as compared to $6,054 in the prior quarter period due primarily to lower customer demand for natural gas turbine content. This was partially offset by increased sales within mining and industrial markets.
We reported a net loss of $783 or $0.05 per share in the third quarter of 2018, compared to a net loss of $2,207 or $0.15 per share in the third quarter of 2017. The change in earnings was due primarily to higher gearing sales and a $2,249 gain recognized on the NMTC Transaction. Partially offsetting these factors was the absence of the prior year reversal of the Red Wolf earn-out reserve of $1,394.
During the first quarter of 2018, we conducted a review of our business strategies and product plans given the outlook of the industries we serve and our business environment. As a result, we executed a restructuring plan to rationalize our facility capacity and management structure, and to consolidate and increase the efficiencies in our Abilene operations. We have decided to exit the market for natural gas compression units and transfer remaining operations from a leased facility into other production locations. We expect to vacate the facility by the end of 2018 (following the expiration of the New Markets Tax Credit Transaction compliance period). All remaining costs associated with this facility will be recorded as restructuring expenses going forward. All costs will be incurred solely within the Process Systems segment. We expect to incur restructuring costs associated with the restructuring plan totaling an estimated $721, of which $424 has been incurred to date. We anticipate annual cost savings going forward of approximately $575 in facility expenses related to the restructuring.
 
RESULTS OF OPERATIONS  
Three months ended September 30, 2018, Compared to Three months ended September 30, 2017  
The Condensed Consolidated Statement of Operations table below should be read in connection with a review of the following discussion of our results of operations for the three months ended September 30, 2018, compared to the three months ended September 30, 2017.   

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 	 	Three Months Ended September 30,	 	2018 vs. 2017	 	 	
 	 	 	 	 	% of Total	 	 	 	 	% of Total	 	 	 	 	 	 	 	
 	 	2018	 	Revenue	 	2017	 	Revenue	 	$ Change	 	% Change	 	 	
Revenues	    	$	31,445	    	100.0	%  	$	29,595	    	100.0	%  	$	1,850	    	6.3	%  	 	
Cost of sales	 	 	29,802	 	94.8	%  	 	28,581	 	96.6	%  	 	1,221	 	4.3	%  	 	
Restructuring	 	 	157	 	0.5	%  	 	 —	 	 —	%  	 	157	 	100.0	%  	 	
Gross profit	 	 	1,486	 	4.7	%  	 	1,014	 	3.4	%  	 	472	 	46.5	%  	 	
Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative expenses	 	 	3,627	 	11.5	%  	 	2,374	 	8.0	%  	 	1,253	 	52.8	%  	 	
Intangible amortization	 	 	471	 	1.5	%  	 	471	 	1.6	%  	 	 —	 	 —	%  	 	
Total operating expenses	 	 	4,098	 	13.0	%  	 	2,845	 	9.6	%  	 	1,253	 	44.0	%  	 	
Operating loss	 	 	(2,612)	 	(8.3)	%  	 	(1,831)	 	(6.2)	%  	 	(781)	 	(42.7)	%  	 	
Other expense	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense, net	 	 	(372)	 	(1.2)	%  	 	(228)	 	(0.8)	%  	 	(144)	 	(63.2)	%  	 	
Other, net	 	 	2,247	 	7.1	%  	 	(12)	 	(0.0)	%  	 	2,259	 	18,825.0	%  	 	
Total other expense, net	 	 	1,875	 	6.0	%  	 	(240)	 	(0.8)	%  	 	2,115	 	881.3	%  	 	
Net loss before benefit for income taxes	 	 	(737)	 	(2.3)	%  	 	(2,071)	 	(7.0)	%  	 	1,334	 	64.4	%  	 	
Provision (benefit) for income taxes	 	 	13	 	0.0	%  	 	(22)	 	(0.1)	%  	 	35	 	159.1	%  	 	
Loss from continuing operations	 	 	(750)	 	(2.4)	%  	 	(2,049)	 	(6.9)	%  	 	1,299	 	63.4	%  	 	
Loss from discontinued operations	 	 	(33)	 	(0.1)	%  	 	(158)	 	(0.5)	%  	 	125	 	79.1	%  	 	
Net loss	 	$	(783)	 	(2.5)	%  	$	(2,207)	 	(7.5)	%  	$	1,424	 	64.5	%  	 	
 
Consolidated  
Revenues increased from $29,595 during the three months ended September 30, 2017,  to $31,445 during the three months ended September 30, 2018.  Gearing segment revenues increased by $2,486 compared to the prior year period. The revenue increase was due to improved capacity utilization driven in part by the recovery in demand from O&G customers. The $1,360 increase in Towers and Heavy Fabrications segment revenue was due primarily to a 5% increase in towers sections sold and an increase in the volume of heavy fabrications, partially offset by a lower average sales price on the product mix sold.
Process Systems revenues decreased by $1,899 due to lower customer demand for natural gas turbine content, partially offset by increased sales within mining and other industrial markets.
Gross profit increased by $472, from $1,014 during the three months ended September 30, 2017, to $1,486 during the three months ended September 30, 2018.  Gross margin increased from 3.4% during the three months ended September 30, 2017, to 4.7% during the three months ended September 30, 2018.  The increase in gross profit was primarily attributable to improved plant utilization in our Towers and Gearing facilities. 
Operating  expenses increased from $2,845 during the three months ended September 30, 2017, to $4,098 during the three months ended September 30, 2018. The increase was attributable primarily to the $1,394 reversal of the Red Wolf earn-out reserve in the prior year, partially offset by lower corporate salaries and benefits expense in the current year period. Operating expenses as a percentage of sales increased from 9.6% in the prior-year quarter to 13.0% in the current-year quarter.
Loss from continuing operations decreased from $2,049 during the three months ended September 30, 2017, to $750 during the three months ended September 30, 2018, as a result of the factors described above and a $2,249 gain recognized on the NMTC Transaction.
Net loss decreased from $2,207 during the three months ended September 30, 2017, to  $783 during the three months ended September 30, 2018, as a result of the factors described above. 

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

 	 	Three Months Ended	 	 	
 	 	September 30,	 	 	
 	 	2018	 	2017	 	 	
Orders	    	$	3,767	    	$	1,764	 	 	
Revenues	 	 	17,331	 	 	15,971	 	 	
Operating loss	 	 	(755)	 	 	(1,473)	 	 	
Operating margin	 	 	(4.4)	%  	 	(9.2)	%  	 	
  Towers and Heavy Fabrications segment orders were higher than the prior year quarter due to an increase in mining and industrial demand.  Towers and Heavy Fabrications segment revenues increased by $1,360, from $15,971 during the three months ended September 30, 2017 due to a 5% increase in towers sections sold and an increase in demand for heavy fabrications from mining and other industrial customers, partially offset by a  lower average sales price on the tower sold.
Towers and Heavy Fabrications segment operating loss improved by $718, from a loss of $1,473 during the three months ended September 30, 2017, to a loss of $755 during the three months ended September 30, 2018.  The improvement was primarily attributable to higher production volumes resulting in better plant utilization and the benefit of reduced overhead and operating expenses. The operating margin improved from (9.2%) during the three months ended September 30, 2017, to (4.4%) during the three months ended September 30, 2018.
Gearing Segment  
The following table summarizes the Gearing segment operating results for the three months ended September 30, 2018 and 2017:   

 	 	Three Months Ended	 	 	
 	 	September 30,	 	 	
 	 	2018	 	2017	 	 	
Orders	    	$	11,530	    	$	10,566	 	 	
Revenues	 	 	10,056	 	 	7,570	 	 	
Operating income (loss)	 	 	346	 	 	(396)	 	 	
Operating margin	 	 	3.4	%  	 	(5.2)	%  	 	
  Gearing segment orders increased $964 primarily due to the timing of replacement gearing orders from a  wind customer. As a result of the continued O&G market recovery, revenue increased from $7,570 during the three months ended September 30, 2017, to $10,056 during the three months ended September 30, 2018.  
The Gearing segment operating profit improved by $742, from a loss of $396 during the three months ended September 30, 2017, to income of $346 during the three months ended September 30,  2018.  The improvement was primarily attributable to increased plant utilization and higher productivity, partially offset by higher commission expenses. Operating margin was 3.4%  during the three months ended September 30, 2018, an increase from (5.2%) during the three months ended September 30, 2017.
  Process Systems Segment  
The following table summarizes the Process Systems segment operating results for the three months ended September 30, 2018: 
 	 	 	 	 	 	 	
 	Three Months Ended	
 	September 30,	
 	
2018	 	 	2017	
Orders	$	4,420	 	$	5,345	    	
Revenues	 	4,155	 	 	6,054	 	
Operating (loss) income	 	(917)	 	 	115	 	
Operating margin	 	(22.1)	%  	 	1.9	%  	
Process Systems segment orders decreased $925, from $5,345 during the three months ended September 30, 2017, to $4,420 during the three months ended September 30, 2018. The decrease in orders is due to lower customer demand for natural gas turbine content. Process Systems segment revenues decreased by $1,899, from $6,054 during the three months ended

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September 30,  2017, to $4,155 during the three months ended September 30, 2018 primarily due to lower customer demand for natural gas turbine content, partially offset by increased sales to other industrial customers. 
The Process Systems segment operating income decreased by $1,032, from income of $115 during the three months ended September 30, 2017, to a loss of $917 during the three months ended September 30, 2018 primarily due to lower customer demand. Partially offsetting this was the benefit of improved plant utilization supporting mining and other industrial customers. The operating margin decreased from 1.9% during the three months ended September 30, 2017, to (22.1%) during the three months ended September 30, 2018. 
Corporate and Other  
Corporate and Other expenses increased by $1,209, from $77 during the three months ended September 30, 2017, to $1,286 during the three months ended September 30, 2018. The increase was primarily attributable to the reversal of the accrued Red Wolf earn-out reserve of $1,394 in the prior year, partially offset by a reduction in salaries and benefits of $382.
Nine months ended September 30, 2018, Compared to Nine months ended September 30, 2017 
The Condensed Consolidated Statement of Operations table below should be read in connection with a review of the following discussion of our results of operations for the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017.

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended September 30,	 	2018 vs. 2017	 	
 	 	 	 	 	% of Total	 	 	 	 	% of Total	 	 	 	 	 	 	
 	 	2018	 	Revenue	 	2017	 	Revenue	 	$ Change	 	% Change	 	
Revenues	    	$	98,193	    	100.0	%  	$	129,017	 	100.0	%  	$	(30,824)	    	(23.9)	%  	
Cost of sales	 	 	94,228	 	96.0	%  	 	117,757	 	91.3	%  	 	(23,529)	 	(20.0)	%  	
Restructuring	 	 	388	 	0.4	%  	 	 —	 	 —	%  	 	388	 	100.0	%  	
Gross profit	 	 	3,577	 	3.6	%  	 	11,260	 	8.7	%  	 	(7,683)	 	(68.2)	%  	
Operating expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Selling, general and administrative expenses	 	 	10,020	 	10.2	%  	 	10,711	 	8.3	%  	 	(691)	 	(6.5)	%  	
Impairment charges	 	 	4,993	 	5.1	%  	 	 —	 	 —	%  	 	4,993	 	100.0	%  	
Intangible amortization	 	 	1,413	 	1.4	%  	 	1,293	 	1.0	%  	 	120	 	9.3	%  	
Restructuring	 	 	36	 	0.0	%  	 	 —	 	 —	%  	 	36	 	100.0	%  	
Total operating expenses	 	 	16,462	 	16.8	%  	 	12,004	 	9.3	%  	 	4,458	 	37.1	%  	
Operating (loss) income	 	 	(12,885)	 	(13.1)	%  	 	(744)	 	(0.6)	%  	 	(12,141)	 	(1,631.9)	%  	
Other (expense) income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest expense, net	 	 	(1,022)	 	(1.0)	%  	 	(584)	 	(0.5)	%  	 	(438)	 	(75.0)	%  	
Other, net	 	 	2,243	 	2.3	%  	 	17	 	0.0	%  	 	2,226	 	13,094.1	%  	
Total other expense, net	 	 	1,221	 	1.2	%  	 	(567)	 	(0.4)	%  	 	1,788	 	315.3	%  	
Net (loss) income before benefit for income taxes	 	 	(11,664)	 	(11.9)	%  	 	(1,311)	 	(1.0)	%  	 	(10,353)	 	(789.7)	%  	
Benefit for income taxes	 	 	(20)	 	(0.0)	%  	 	(5,056)	 	(3.9)	%  	 	5,036	 	99.6	%  	
Income (loss) from continuing operations	 	 	(11,644)	 	(11.9)	%  	 	3,745	 	2.9	%  	 	(15,389)	 	(410.9)	%  	
Loss from discontinued operations, net of tax	 	 	(93)	 	(0.1)	%  	 	(405)	 	(0.3)	%  	 	312	 	77.0	%  	
Net (loss) income	 	$	(11,737)	 	(12.0)	%  	$	3,340	 	2.6	%  	$	(15,077)	 	(451.4)	%  	
 
Consolidated  
Revenues decreased from $129,017 during the nine months ended September 30, 2017,  to $98,193 during the nine months ended September 30, 2018.  Lower sales in our Towers and Heavy Fabrications segment of $41,055 were partially offset by the  higher sales in the Gearing segment of $9,983 and higher sales in the Process Systems segment of $368. The Towers and Heavy Fabrications segment revenue decrease was due primarily to a 40% decrease in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the decrease in towers sections sold was an increase in the volume of Heavy Fabrications due primarily to the recovery in mining and other industrial markets and the expansion of our machining capabilities. Gearing segment revenues increased due to improved order intake beginning in the second half of 2017, primarily resulting from the recovery in demand from O&G customers and growth in volumes of gearboxes.
Gross profit decreased by $7,683, from $11,260 during the nine months  ended September 30, 2017, to $3,577 during the nine months ended September 30, 2018.  Gross margin decreased from 8.7% during the nine months ended September 30, 2017, to 3.6% during the nine months ended September 30, 2018.  The decrease in gross profit was primarily attributable to 

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lower capacity utilization in the tower plants early in 2018 following a near shutdown at year end 2017 as our major customer rebalanced inventories. This decrease was partially offset by a $1,901 improvement in gross profit in our Gearing segment due to improved plant utilization and higher productivity.
Operating  expenses increased from $12,004 during the nine months ended September 30, 2017,  to $16,462 during the nine months  ended September 30, 2018. The increase was primarily attributable to the $4,993 goodwill impairment charge recognized during the second quarter of 2018 and the $254 change in the Red Wolf earn-out release in the current year compared to the prior year. This was partially offset by a reduction in salaries and benefits of $1,243 in response to lower activity levels compared to the prior year period. As a result of the items described above, operating expenses as a percentage of sales increased from 9.3% in the first three quarters of 2017 to 16.8% in the first three quarters of 2018. 
Income from continuing operations decreased from income of $3,745 during the nine months ended September 30, 2017, to a loss of $11,644 during the nine months ended September 30, 2018, as a result of the factors described above, partially offset by a $2,249 gain recognized on the NMTC Transaction during the current year.
Net income decreased from income of $3,340 during the nine months ended September 30, 2017, to a net loss of $11,737 during the nine months ended September 30, 2018, as a result of the factors described above in addition to the absence of a $5,034 benefit from income taxes in the prior year due to the release of a portion of the tax provision related to the acquisition of Red Wolf.
Towers and Heavy Fabrications Segment  
The following table summarizes the Towers and Heavy Fabrications segment operating results for the nine months ended September 30, 2018 and 2017:   

 	 	Nine Months Ended	 	
 	 	September 30,	 	
 	 	2018	 	2017	 	
Orders	    	$	21,080	    	$	32,331	 	
Revenues	 	 	58,139	 	 	99,194	 	
Operating (loss) income	 	 	(1,535)	 	 	7,177	 	
Operating margin	 	 	(2.6)	%  	 	7.2	%  	
 
Towers orders decreased from the nine months ended September 30, 2017. This decrease was partially offset by increased heavy fabrication orders for the nine months ended September 30, 2018 due to the recovery in mining and other industrial markets. Towers and Heavy Fabrications segment revenues decreased by $41,055, from $99,194 during the nine months ended September 30, 2017 due to a  40% reduction in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the decrease in towers sections sold was an increase in heavy fabrications due primarily to the recovery in mining and other industrial markets.
Towers and Heavy Fabrications segment operating income decreased by $8,712, from income of $7,177 during the nine months ended September 30, 2017, to a loss of $1,535 during the nine months ended September 30, 2018.  The reduction was primarily attributable to lower tower production volumes, a less favorable product mix and start-up costs associated with restoring production levels as we ramped up activity during the first quarter following a near shutdown in late 2017. This was partially offset by a reduction in manufacturing overhead and productivity improvements. The operating margin decreased from 7.2% during the nine months ended September 30, 2017, to a loss of 2.6% during the nine months ended September 30, 2018.
Gearing Segment  
The following table summarizes the Gearing segment operating results for the nine months ended September 30, 2018 and 2017:   

 	 	Nine Months Ended	 	
 	 	September 30,	 	
 	 	2018	 	2017	 	
Orders	    	$	33,044	    	$	29,530	 	
Revenues	 	 	27,494	 	 	17,511	 	
Operating loss	 	 	(941)	 	 	(2,562)	 	
Operating margin	 	 	(3.4)	%  	 	(14.6)	%  	

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Gearing segment orders increased $3,514 from the nine months ended September 30, 2017, primarily due to the recovery in demand from O&G and strong demand from wind customers. As a result of the recovery in order intake that began in the prior year, revenue increased from $17,511 during the nine months ended September 30, 2017, to $27,494 during the nine months ended September 30, 2018.  
The Gearing segment operating loss improved by $1,621, from $2,562 during the nine months ended September 30, 2017, to $941 during the nine months ended September 30,  2018. The operating loss narrowed as a result of the revenue increase, which was partially offset by the impact of supply chain disruptions and general manufacturing inefficiencies during the first half of 2018, as well as increased commissions and overhead costs to support higher production levels. The operating margin improved based on the above items from (14.6%) during the nine months ended September 30, 2017, to (3.4%) during the nine months ended September 30, 2018.
Process Systems Segment  
The following table summarizes the Process Systems segment operating results for the nine months ended September 30, 2018 and 2017: 
 	 	 	 	 	 	 	
 	 	Nine Months Ended	
 	 	September 30,	
 	 	
2018	 	2017	
Orders	 	$	12,390	 	$	13,404	
Revenues	 	 	12,680	 	 	12,312	
Impairment charges	 	 	4,993	 	 	 -	
Operating loss	 	 	(7,581)	 	 	(1,805)	
Operating margin	 	 	(59.8)	%  	 	(14.7)	
 
Process Systems segment orders decreased $1,014 from $13,404 during the nine months ended September 30, 2017, to $12,390 during the nine months ended September 30, 2018 due to weaker natural gas turbine component demand, partially offset by higher sales to other industrial customers. Process Systems segment revenues increased by $368, from $12,312 during the nine months ended September 30, 2017, to $12,680 during the nine months ended September 30, 2018 due to the recovery in mining and other industrial markets and the full year impact of the Red Wolf acquisition which closed in February of 2017.
The Process Systems segment operating loss increased by $5,776, from $1,805 during the nine months ended September 30, 2017, to $7,581 during the nine months ended September 30, 2018 primarily due to the $4,993 impairment charge resulting from the write-off of goodwill and $424 of restructuring costs related to the Heavy Abilene facility. The operating margin decreased from (14.7%) during the nine months ended September 30, 2017, to (59.8%) during the nine months ended September 30, 2018. 
Corporate and Other  
Corporate and Other expenses decreased by $726, from $3,554 during the nine months ended September 30, 2017, to $2,828 during the nine months ended September 30, 2018. The decrease was primarily attributable to lower salaries and benefits expense of $738, partially offset by the $254 change in the Red Wolf earn-out release in the current period compared to the prior year.
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES  
As of September 30, 2018, cash and cash equivalents totaled $142, in line with the $78 balance as of December 31, 2017.  Cash balances remain minimal as operating receipts and disbursements flow through our Credit Facility, which is in a drawn position. Debt and capital lease obligations at September 30, 2018 totaled $23,216.  As of September 30, 2018, we had the ability to borrow up to an additional $5,811 under the Credit Facility (as defined in Note 8 “Debt and Credit Agreements” in the notes to our condensed consolidated financial statements). On July 31, 2018, we entered into an At Market Issuance Sales Agreement (the "ATM Agreement") with Roth Capital Partners, LLC (the “Agent”). Pursuant to the terms of the ATM Agreement, we may sell from time to time through the Agent shares of the Company's common stock, par value $0.001 per share with an aggregate sales price of up to $10,000. The Company will pay a commission to the Agent of 3% of the gross proceeds of the sale of the shares sold under the ATM Agreement and reimburse the Agent for the expenses of their counsel. We anticipate that we will be able to satisfy the cash requirements associated with, among other things, working capital needs, capital expenditures and lease commitments through at least the next twelve months primarily through cash generated from operations, available cash balances, the Credit Facility, additional equipment financing, and access to the public or private debt equity markets, including the option to raise capital from the sale of our securities under the Form S-3.

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On January 29, 2018, we executed the Third Amendment to Loan and Security Agreement which waived the Fixed Charge Coverage Ratio Covenant as of December 31, 2017 and added new minimum  earnings before interest, taxes, depreciation, amortization, share-based payments, restructuring costs, and intangible impairments (“EBITDA”) and capital expenditure covenants through June 30, 2018. Among other changes, the amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated commencing with the quarter ending June 30, 2018.
On May 3, 2018, we executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), waiving our non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amends the minimum EBITDA thresholds through the period ending June 30, 2018 and adjusts the definition of EBITDA to add back certain restructuring expenses. We were in compliance with all debt covenants at September 30, 2018.
On October 26, 2018, we executed the Fifth Amendment to Loan and Security Agreement which eliminated the Fixed Charge Coverage Ratio and capital expenditure covenants as of the period ending December 31, 2018, and modified the minimum EBITDA covenant through June 30, 2019.
We anticipate that current cash resources, amounts available under the Credit Facility, cash to be generated from operations, and any potential proceeds from the sale of our securities under the Form S-3 or other private raised funds will be adequate to meet our liquidity needs for at least the next twelve months. If assumptions regarding our production, sales and subsequent collections from certain of our large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, we may encounter cash flow and liquidity issues. Additionally new or existing customers may request acceleration of production or we may accept new orders or modify existing orders to purchase steel opportunistically or to build products without deposits, which will reduce our liquidity.  Further in advance of anticipated cash needs, we may also issue debt or sell equity or equity linked securities.  
If our operational performance does not improve, we may be unable to comply with existing financial covenants, and could lose access to the Credit Facility. This could limit our operational flexibility, require a delay in making planned investments and/or require us to seek additional equity or debt financing. Any attempt to raise equity through the public markets could have a negative effect on our stock price, making an equity raise more difficult or more dilutive. Any additional equity financing or equity linked financing, if available, will be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other operating and financial restrictions on us. While we believe that we will continue to have sufficient cash available to operate our businesses and to meet our financial obligations and debt covenants, there can be no assurances that our operations will generate sufficient cash or that existing or new credit facilities or equity or equity linked financings will be available in an amount sufficient to enable us to meet these financial obligations.
Sources and Uses of Cash  
Operating Cash Flows  
During the nine months ended September 30, 2018, net cash used in operating activities totaled $7,233, compared to net cash used in operating activities of $6,627 for the nine months ended September 30, 2017. The operating cash outflow remained consistent versus the prior year despite lower operating income because in 2017 customer deposits declined as our largest tower customer slowed orders in order to correct inventories during the second half of 2017. Operating working capital increased in the current year primarily as a result of the slow-down in the timing of customer payments.
Investing Cash Flows  
During the nine months ended September 30, 2018, net cash used in investing activities totaled $1,435, compared to net cash used in investing activities of $19,245 during the nine months ended September 30, 2017. The decrease in net cash used in investing activities as compared to the prior-year period was primarily due to the $16,449 cash paid for the Red Wolf acquisition and a $4,532 decrease in net investments in property and equipment partially offset by the $3,171 liquidation of available-for-sale securities in 2017.
Financing Cash Flows  
During the nine months ended September 30, 2018, net cash provided by financing activities totaled $8,804, compared to net cash provided by financing activities of $7,213 for the nine months ended September 30,  2017.  The increase in net cash provided by financing activities as compared to the prior-year period was primarily due to the proceeds of long-term debt of $2,060, partially offset by payments on long-term debt of $536 during the nine months ended September 30, 2018. 
Other

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We also entered into a $570 loan agreement with the Development Corporation of Abilene which is included in Long-term debt, less current maturities. The loan is forgivable upon meeting and maintaining specific employment thresholds. In addition, we have outstanding notes payable for capital expenditures in the amount of $2,109 and $1,146 as of September 30, 2018 and December 31, 2017, respectively,  with $919 and $804 included in the Line of Credit, NMTC and other notes payable line item as of September 30, 2018 and December 31, 2017, respectively. The notes payable have monthly payments that range from $3 to $36 and an interest rate of 5%.  The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable have maturity dates that range from April 2020 to May 2021.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS  
The preceding discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2017. Portions of this Quarterly Report on Form 10-Q, including the discussion and analysis in this Item 2, contain “forward looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Forward looking statements include any statement that does not directly relate to a current or historical fact. Our forward-looking statements may include or relate to our beliefs, expectations, plans and/or assumptions  with respect to the following: (i) state, local and federal regulatory frameworks affecting the industries in which we compete, including the wind energy industry, and the related extension, continuation or renewal of federal tax incentives and grants and state renewable portfolio standards; (ii) our customer relationships and our substantial dependency on a few significant customers and our efforts to diversify our customer base and sector focus and leverage relationships across business units; (iii) our ability to continue to grow our business organically and through acquisitions; (iv) our production, sales, collections, customer deposits and revenues generated by new customer orders and the resulting cash flows; (v) the sufficiency of our liquidity and alternate sources of funding, if necessary; (vi) our ability to realize revenue from customer orders and backlog; (vii) our ability to operate our business efficiently, manage capital expenditures and costs effectively, and generate cash flow; (viii) the economy and the potential impact it may have on our business, including our customers; (ix) the state of the wind energy market and other energy and industrial markets generally and the impact of competition and economic volatility in those markets; (x) the effects of market disruptions and regular market volatility, including fluctuations in the price of oil, gas and other commodities; (xi) the effects of the change of administrations in the U.S. federal government; (xii) our ability to successfully integrate and operate the business of Red Wolf Company, LLC and to identify, negotiate and execute future acquisitions; (xiii) the potential loss of tax benefits if we experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended; and (xiv) the impact of future sales of our common stock or securities convertible into our common stock on our stock price. These statements are based on information currently available to us and are subject to various risks, uncertainties and other factors that could cause our actual results to be materially different from the forward-looking statements including, but not limited to, those set forth under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 and in subsequent filings, including the amended and restated risk factors set forth under the caption  “Risk Factors” in Item 1A of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018. We are under no duty to update any of these statements. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties or other factors that could cause our current beliefs, expectations, plans and/or assumptions to change.
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk   
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this Item. 
Item 4. Controls and Procedures   
Evaluation of Disclosure Controls and Procedures  
We seek to maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This information is also accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal quarter reported on herein. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2018.  
Changes in Internal Control over Financial Reporting

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

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PART II.   OTHER INFORMATIO  N  
Item 1. Legal Proceeding  s  
The information required by this item is incorporated herein by reference to Note 12, “Legal Proceedings” of the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.  
Item 1A. Risk Factor  s
There have been material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2017. These risk factors were amended and restated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceed  s
None  
Item 3. Defaults Upon Senior Securitie  s  
None  
Item 4. Mine Safety Disclosure  s  
Not Applicable  
Item 5. Other Informatio  n  
Not Applicable   
Item 6. Exhibit  s  
The exhibits listed on the Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.

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EXHIBIT INDEX
BROADWIND ENERGY, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018
 
Exhibit
Number	 	Exhibit	
10.1	 	At Market Issuance Sales Agreement, dated July 31, 2018, by and among the Company and Roth Capital Partners, LLC (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed July 31, 2018)	
10.2	 	Fifth Amendment to Loan and Security Agreement, dated October 26, 2018 among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc.,  Red Wolf Company, LLC and CIBC Bank USA *	
31.1	 	Rule 13a-14(a) Certification of Chief Executive Officer*	
31.2	 	Rule 13a-14(a) Certification of Chief Financial Officer*	
32.1	 	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Executive Officer*	
32.2	 	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Chief Financial Officer*	
101	 	The following financial information from this Form 10-Q of Broadwind Energy, Inc. for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.	

* Filed herewith.

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

October 30, 2018	By:	/s/ Stephanie K. Kushner	
 	 	Stephanie K. Kushner	
 	 	President, Chief Executive Officer	

 	 	(Principal Executive Officer)  	
October 30, 2018	By:	/s/ Jason L. Bonfigt	
 	 	Jason L. Bonfigt	
 	 	Vice President, Chief Financial Officer
(Principal Financial Officer)	

 

35

EXHIBIT 10.2
 
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT

THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT (this “ Amendment ”) is dated as of October 26, 2018, by and among CIBC BANK USA, formerly known as THE PRIVATEBANK AND TRUST COMPANY (“ Lender ”), BROADWIND ENERGY, INC., a Delaware corporation (“ Parent ”), BRAD FOOTE GEAR WORKS, INC., an Illinois corporation (“ Brad Foote ”), BROADWIND TOWERS, INC., a Wisconsin corporation (“ Towers ”), RED WOLF COMPANY, LLC, a North Carolina limited liability company (“ Red Wolf ”), BROADWIND SERVICES, LLC, a Delaware limited liability company (“ Services ,” and collectively with Parent, Brad Foote, Towers and Red Wolf, “ Borrowers ,” and each, a “ Borrower ”).
WITNESSETH:
WHEREAS, Lender and Borrowers have previously entered into that certain Loan and Security Agreement, dated October 26, 2016, as amended by that certain First Amendment to Loan and Security Agreement, dated February 10, 2017, that certain Second Amendment to Loan and Security Agreement, dated March 27, 2017, that certain Third Amendment to Loan and Security Agreement dated January 29, 2018, and that certain Fourth Amendment to Loan and Security Agreement dated May 2, 2018 (as amended, restated, modified or supplemented from time to time, the “ Loan Agreement ”); and
WHEREAS, the parties desire to amend the terms of the Loan Agreement as provided below.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth in this Amendment, and in consideration of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereby covenant and agree as follows:
1. Definitions .  All capitalized terms not otherwise defined herein shall have the meanings ascribed to such terms in the Loan Agreement.
2. Amendments to Loan Agreement . 
(a) “3,000,000” in the first sentence of Section 3.1 of the Loan Agreement is hereby deleted and replaced with “$5,000,000”.
(b) Section 4.3.3 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:
“4.3.3 Collateral Monitoring Fees :
(a) Borrowers shall pay to Lender an annual collateral monitoring fee of $15,000, which fee shall be fully earned by Lender and payable in advance on the Closing Date and on each anniversary of the Closing Date prior to the Maturity Date.
(b) Borrower shall pay to Lender a quarterly collateral monitoring fee in the amount of:
(i) $15,000, in the event the trailing twelve-month EBITDA for such quarter is less than $2,500,000, or
(ii) $10,000, in the event the trailing twelve-month EBITDA for such quarter is greater than or equal to $2,500,000, but less than $5,000,000.
(iii) $0.00, in the event the trailing twelve-month EBITDA for such quarter is greater than or equal to $5,000,000.
Such quarterly collateral monitoring fee shall be paid within five (5) Business Days after Lender’s receipt of Borrower's quarterly financial statements pursuant to Section 9.3, beginning with the quarterly financial statements

 

prepared for the quarter ending December 31, 2018, and shall be based on Borrower's EBITDA for the trailing twelve (12) month period ending on the date of calculation as shown on such financial statements (provided that if Borrower fails to deliver such financial statements within the time period required in Section 9.3, the quarterly collateral monitoring fee shall conclusively be presumed to be $15,000 for such quarter).”
(c) The following is hereby added as Section 9.8 of the Loan Agreement:
“ Fiscal Year 2019 Budget .  Notwithstanding anything to the contrary contained in Section 9.4, on or prior to December 15, 2018, Borrowers shall deliver to Lender Borrowers’ Fiscal Year 2019 budget for each of the twelve months of Fiscal Year 2019, which shall include appropriate supporting detail as reasonably requested by Lender.”
(d) The following is hereby added as Section 9.9 of the Loan Agreement:
“ Updated Appraisals .  On or prior to December 31, 2018, Borrowers shall deliver to Lender updated appraisals acceptable to Lender on real property, Equipment and Inventory of Borrower constituting Collateral.”
(e) Section 14.1 of the Loan Agreement is hereby deleted in its entirety and replaced with the following:
“ Minimum EBITDA .  Borrowers shall not permit EBITDA to be less than (i) $750,000 as of December 31, 2018, for the trailing ten-month period; (ii) $1,500,000 as of March 31, 2019, for the trailing twelve-month period; and (iii) $1,400,000 as of June 30, 2019, for the trailing twelve-month period.”
(f) Section 14.2 and 14.3 of the Loan Agreement are hereby deleted in their entireties.
3. Amendment Fee .  On or prior to the execution of this Amendment, Borrowers shall pay Lender an amendment fee of $25,000.00 (the “ Amendment Fee ”).  It is expressly understood that the Amendment Fee shall not be refundable under any circumstances.
4. Representations and Warranties .  Each Borrower represents and warrants as follows: (a) the execution and delivery of and the performance under this Amendment is within such Borrower’s power and authority, has been duly authorized by all requisite action and is not in contravention of any law, any other agreement made by such Borrower or by which such Borrower’s assets are bound, except for conflicts with agreements, contracts or other documents which would not reasonably be expected to have a Material Adverse Effect; (b) this Amendment (and the Loan Agreement in its entirety) constitutes the legal, valid and binding obligations of such Borrower and are enforceable against such Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal laws from time to time in effect which affect the enforcement of creditors’ rights in general and the availability of equitable remedies; (c) the representations and warranties of such Borrower set forth in the Loan Documents are true and correct as of the date hereof (except for representations and warranties that expressly relate to an earlier date which are true and correct as of such earlier date); (d) there exists no Event of Default, and no event has occurred and is continuing which, with the lapse of time or the giving of notice, or both, would constitute an Event of Default, other than the Breached Covenant; and (e) such Borrower has no defenses to the enforcement of the Loan Agreement or the other Loan Documents.
5. Reaffirmation .  Except as expressly modified or amended by this Amendment, each Borrower reaffirms and reconfirms each and all of the warranties, representations, covenants and agreements of such Borrower under all Loan Documents to which such Borrower is party.
6. Release by Borrowers .  Each Borrower hereby releases Lender from any and all causes of action or claims, whether known or unknown, which such Borrower may have as of the date hereof for any asserted loss or damages to such Borrower claimed to be caused by, or arising from, any act or omission to act on the part of Lender, its shareholders, directors, officers, employees, agents or representatives with respect to the Loan Documents.

 

7. References .  All references to the Loan Agreement in any future correspondence or notice shall be deemed to refer to the Loan Agreement as modified by this Amendment.
8. Ratification .  Except as expressly modified or amended by this Amendment, all of the terms, covenants and conditions of the Loan Agreement are hereby ratified and confirmed. 
9. Governing Law .  This Amendment shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to principles of conflicts of laws. 
10. Counterparts .  This Amendment may be signed in any number of counterparts, each of which shall be deemed to be an original, with the same effect as if the signatures thereto and hereto were on the same instrument.  Delivery of this Amendment by facsimile, pdf, or .tif signature by any party shall represent a valid and binding execution and delivery of this Amendment by such party.
11. JURISDICTION; VENUE .  THE PARTIES HERETO IRREVOCABLY AGREE THAT ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO THIS AMENDMENT, SHALL BE LITIGATED ONLY IN COURTS HAVING SITUS WITHIN CHICAGO, ILLINOIS.  EACH PARTY HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED THEREIN AND WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO TRANSFER THE VENUE OF ANY SUCH LITIGATION.
12. WAIVER OF JURY TRIAL .  EACH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AMENDMENT, OR THE TRANSACTIONS CONTEMPLATED BY THIS AMENDMENT.  EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (B) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (C) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY AND (D) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AMENDMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
[Remainder of page intentionally left blank.]

 

IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment as of the date first written above.

 	 	 	
BORROWERS:	 	LENDER:	
BROADWIND ENERGY, INC.	 	CIBC BANK USA	
 	 	 	
By:  /s/ Jason Bonfigt	 	By: /s/ Tom Hunt	
Name: Jason Bonfigt	 	Name: Tom Hunt	
Title: Authorized Signatory	 	Title: Managing Director	
 	 	 	
BRAD FOOTE GEAR WORKS, INC.	 	 	
 
By:  /s/ Jason Bonfigt	 	 	
Name: Jason Bonfigt	 	 	
Title: Authorized Signatory	 	 	

BROADWIND TOWERS, INC.	 	 	
 	 	 	
By:  /s/ Jason Bonfigt	 	 	
Name: Jason Bonfigt	 	 	
Title: Authorized Signatory	 	 	
 	 	 	
BROADWIND SERVICES, LLC
 	 	 	
By:  /s/ Jason Bonfigt	 	 	
Name: Jason Bonfigt	 	 	
Title: Authorized Signatory	 	 	
 	 	 	
RED WOLF COMPANY, LLC
 	 	 	
By:  /s/ Jason Bonfigt	 	 	
Name: Jason Bonfigt	 	 	
Title: Authorized Signatory	 	 	

EXHIBIT 31.1
CERTIFICATION
I, Stephanie K. Kushner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Broadwind Energy, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

October 30, 2018	 	
 	 	
 	/s/ Stephanie K. Kushner	
 	Stephanie K. Kushner	
 	President, Chief Executive Officer	
 	(Principal Executive Officer)	

EXHIBIT 31.2
 
CERTIFICATION
 
I, Jason L. Bonfigt, certify that:
 
1. I have reviewed this quarterly report on Form 10-Q of Broadwind Energy, Inc.;
 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have:
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

October 30, 2018	 	
 	 	
 	/s/ Jason L. Bonfigt	
 	Jason L. Bonfigt	
 	Vice President, Chief Financial Officer	
 	(Principal Financial Officer)	

 
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of Broadwind Energy, Inc. (the “Company”) for the period ended September 30, 2018, as filed with the Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”), I, Stephanie K. Kushner,  President, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that:
(i) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

October 30, 2018	 	
 	 	
 	/s/ Stephanie K. Kushner	
 	Stephanie K. Kushner	
 	President, Chief Executive Officer	
 	(Principal Executive Officer)
 	
This certification accompanies the Report pursuant to Section 906 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Commission or its staff upon request.

EXHIBIT 32.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the quarterly report on Form 10-Q of Broadwind Energy, Inc. (the “Company”) for the period ended September 30, 2018, as filed with the Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”), I, Jason L. Bonfigt, Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that:
 
(i) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; (the “Exchange Act”); and
 
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

October 30, 2018	 	
 	 	
 	/s/ Jason L. Bonfigt	
 	Jason L. Bonfigt	
 	Vice President, Chief Financial Officer	
 	(Principal Financial Officer)	
 
This certification accompanies the Report pursuant to Section 906 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act.
 
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Commission or its staff upon request.