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TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements		3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative and Qualitative Analysis About Market Risk		36
Item 4. Controls and Procedures		36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings		37
Item 1A. Risk Factors		37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3. Defaults Upon Senior Securities		37
Item 4. Submission of Matters to a Vote of Security Holders		37
Item 5. Other Information		37
Item 6. Exhibits		38
Signatures		39
Exhibits

 

 

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PART I - FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS (UNAUDITED)

The accompanying unaudited financial statements of Juhl Wind, Inc. (“Juhl Wind” or the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (“Commission” or “SEC”). While these statements reflect all normal recurring adjustments which are, in the opinion of management, necessary in order to make the financial statements not misleading and for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto, for the fiscal year ended December 31, 2009, previously filed with the Commission, which are included in the Annual Report on Form 10-K filed on or about March 31, 2010.

 

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1.          BACKGROUND, CHANGE OF CONTROL AND BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnotes disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations.  These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended December 31, 2009 and 2008 contained in Form 10-K filed with the Securities and Exchange Commission on March 31, 2010.

 

In the opinion of management, the interim financial statements reflect all adjustments considered necessary for fair presentation.  The adjustments made to these statements consist only of normal recurring adjustments.  The results reported in these condensed consolidated interim financial statements should not be regarded as necessarily indicative of results that may be expected for the year ended December 31, 2010.

 

Juhl Wind, Inc. (“Juhl Wind”) conducts business under three subsidiaries, Juhl Energy Services (formerly DanMar and Associates, Inc.) (“JES”), Juhl Energy Development, Inc. (“JEDI”), and Next Generation Power Systems, Inc. (“NextGen”). The Company provides development, construction, management, and consulting services to wind farm projects throughout the Midwestern U.S. and produces consumer-owned renewable energy products. All intercompany balances and transactions are eliminated in consolidation.

 

2.         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

CASH

 

The Company maintains cash balances at various financial institutions.  Accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000.  At times throughout the year cash balances may exceed the FDIC insurance limits.  In August 2008, the Company obtained an excess deposit insurance bond to insure deposits up to an additional $2,400,000 beyond the FDIC coverage. The bond was effective August 2008 through February 2010, and subsequently was replaced in February 2010 with a $1.7 million irrevocable letter of credit.  The Company monitors its cash balances to ensure adequacy of collateral for depository balances at financial institutions that exceed FDIC insured amounts.

 

RESTRICTED CASH

 

The Company maintains an escrow cash account funded by the proceeds received from the preferred stock private placement in 2008 and the warrant exercise and exchange in 2009.  The funds are to be used for investor relations initiatives.

 

SHORT TERM INVESTMENTS

 

Short-term investments include certificates of deposits maintained at various financial institutions. The certificates are intended to be held for investment purposes through their maturity dates that occur at various times throughout 2010.  At June 30, 2010, the Company’s short-term investments totaled approximately $1,351,000 which included accrued interest receivable. At December 31, 2009, the Company’s short-term investments totaled approximately $1,034,000 which included accrued interest receivable on those investments.

 

RESTRICTED SHORT TERM INVESTMENTS

 

Restricted short-term investments include certificates of deposits maintained at various financial institutions and totaled approximately $414,000 and $718,000 at June 30, 2010 and December 31, 2009, respectively. These restricted investments included accrued interest receivable. The certificates are intended to be held for investment purposes through their maturity dates that occur at various times throughout 2010.  These investments are held as collateral against the Bank Notes Payable.  

 

ACCOUNTS RECEIVABLE

 

Credit terms are extended to customers in the normal course of business.  The Company performs ongoing credit evaluations of its customers’ financial condition and, generally, requires no collateral.

 

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Trade accounts receivable are recorded at their estimated net realizable value, net of an allowance for doubtful accounts. The Company follows a policy of providing an allowance for doubtful accounts.  Based on historical experience, and its evaluation of the current status of receivables, the Company is of the belief that such accounts will be collectible in all material respects after consideration of the allowance shown in the financial statements. Accounts are considered past due if payment is not made on a timely basis in accordance with the Company’s credit terms.  Accounts considered uncollectible are written off.

 

INVENTORIES

 

Inventories, consisting primarily of parts and materials relating to the production of small scale wind turbines, are stated at the lower of average cost or market value.

 

REIMBURSABLE PROJECT COSTS

 

Reimbursable project costs represent advances made on behalf of wind farm entities to assist them in the legal, preconstruction project costs, or other temporary advances made during construction.

 

PROJECT DEVELOPMENT COSTS

 

Project development costs represent amounts paid by the Company for projects that Juhl Wind is the wind farm developer and project owner. Such costs are carried as a long-term asset until such time that the Company receives a reimbursement as a part of the permanent financing of a commissioned wind farm project, or alternatively, upon reimbursement by new project ownership. The Company may convert these costs into ownership in the project.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed currently. Property and equipment are being depreciated over their estimated useful lives using the straight-line method.

 

Major categories of property and equipment and their depreciable lives are as follows:

 

Building and Improvements	7-39 Years
Vehicles	5 Years
Machinery and Shop Equipment	5-7 Years

 

LONG-LIVED ASSETS

 

Long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by an asset to the carrying value of the asset. If the carrying value of the long-lived asset is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including, but not limited to, discounted cash flow models, quoted market values and third-party independent appraisals.

 

STOCK OPTION PLANS

 

The Company recognizes compensation expense for employee stock options based on the estimated grant date fair value using the Black-Scholes option-pricing model. The Company accounts for equity based instruments granted to nonemployees under the fair value method. Equity based instruments usually are recorded at their underlying fair value.  In certain instances the fair value of the goods or services are used to determine the value of the equity instrument as it is a better measure of fair value.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying value of cash, restricted cash, short term investments, receivables, payables, and other working capital accounts approximates their fair value at June 30, 2010 and December 31, 2009 due to the short maturity nature of these instruments. The carrying amounts of notes payable approximate fair value because of the short maturity of these instruments.

 

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Except for those assets and liabilities which are required by authoritative accounting guidance to be recorded at fair value in our Consolidated Balance Sheets, we have elected not to record any other assets or liabilities at fair value. No events occurred during 2010 which would require adjustment to the recognized balances of assets or liabilities which are recorded at fair value on a nonrecurring basis.

 

The Company has no assets and liabilities measured at fair value on a recurring basis that require disclosure.

 

USE OF ESTIMATES

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for the following significant matters, among others: revenue recorded from the development agreements is a significant estimate based on a percentage of estimated project costs and the percentage of completion method used to recognize construction contract revenue; realizability of accounts and notes receivable; valuation of deferred tax assets, stock based compensation and warrants, determination of the primary beneficiary of a variable interest entity, and other contingencies. Revenue from the development agreements is adjusted to reflect actual costs incurred by the project upon the commercial operation date.  Accordingly, actual revenue may differ from previously estimated amounts, and such differences may be material to the financial statements. The Company periodically reviews estimates and assumptions, and the effects of any such revisions are reflected in the period in which the revision is made.

 

REVENUE RECOGNITION

 

Turbine Sales and Service:

 

Turbine sales occur from small scale wind turbines that are internally re-manufactured and sold by the Company, or through purchase and resale of larger scale wind turbines to wind farm project owners. Revenue from the sale of small scale wind turbines are recognized upon shipment to the customer as transfer of ownership and risk of loss have been transferred to the customer.  Deposits received from customers are included as deferred revenue until shipment occurs. Revenues from the sale of larger scale wind turbines are generally recognized in conjunction with the construction services percentage of completion accounting discussed below. Commencement of revenue recognition is only after turbine erection activities have begun.

 

Turbine services include time-and-material arrangements related to existing installations of wind turbine equipment.  Revenue is recognized upon completion of the maintenance services.

 

Licensing Revenue

 

Revenues earned from licensing agreements are amortized straight line over the term of the agreement.

 

Wind Farm Consulting, Development and Management Services:

 

Consulting Services

 

Consulting services fees are primarily fixed fee arrangements of a short-term duration and are recognized as revenue on a completed contract basis.

 

Wind Farm Development Services

 

The Company normally earns a development service fee from each of the wind farm projects that it develops in cooperation with wind farm investors. These development services arrangements are evaluated under authoritative revenue guidance, which addresses certain aspects of accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities.

 

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The development services fee revenue is recognized as follows:

 

·

Proceeds received upon the signing of a Development Services Agreement (generally 10% of the total expected development fee) are amortized over the expected period of the development process, which is generally three years. The amortization period is re-assessed by management as new timelines are established for the project in-service date, and the amortization period is adjusted.

  

 

·

The remaining proceeds are allocated to the following deliverables based on vendor specific objective evidence of each item: 1) achievement of a signed Power Purchase Agreement (“PPA”) with an electrical utility, or in the event that a PPA will not be sought, an interconnection application, and 2) final commissioning of the wind farm turbines.  Management has determined that these deliverables have stand-alone value, and performance of the undelivered services are considered probable and in the control of the Company.

 

Wind Farm Management Services

 

Revenues earned from administrative, management and maintenance services agreements are recognized as the services are provided. The administrative and management services agreements call for quarterly payments in advance or arrears of services rendered based on the terms of the agreement. The administrative and management services payments in advance are carried as deferred revenue and recognized monthly as services are performed. Maintenance services are generally billed on a time and materials basis.  Revenues from services work are recognized when services are performed.

 

Wind Farm Construction Services

 

We recognize revenue on construction contracts on the percentage of completion method with costs and estimated profits included in contract revenue as work is performed. Construction contracts generally provide that customers accept completion of progress to date and compensate us for services rendered measured in terms of units installed, hours expended or some other measure of progress. We recognize revenue on both signed contracts and approved change orders. A discussion of our treatment of claims and unapproved change orders is described later in this section. Percentage of completion for construction contracts is measured principally by the percentage of costs incurred and accrued to date for each contract to the estimated total cost for each contract at completion. We generally consider contracts to be substantially complete upon departure from the work site and acceptance by the customer. Contract costs include all direct material, labor and insurance costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Changes in job performance, job conditions, estimated contract costs and profitability and final contract settlements may result in revisions to costs and income and the effects of these revisions are recognized in the period in which the revisions are determined. Provisions for total estimated losses on uncompleted contracts are made in the period in which such losses are determined. The balances billed but not paid by customers pursuant to retainage provisions in construction contracts will be due upon completion of the contracts and acceptance by the customer. Based on our experience with similar contracts in recent years, the retention balance at each balance sheet date will be collected within the subsequent fiscal year.

 

The asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed which management believes will be billed and collected within the next twelve months.  The liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized. Costs and estimated earnings in excess of billings on uncompleted contracts are amounts considered recoverable from customers based on different measures of performance, including achievement of specific milestones, or at the completion of the contract.

 

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EARNINGS PER SHARE

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period.  Diluted net income per share is computed by dividing net income by the weighted average number of shares and share equivalents outstanding during the period. As of June 30, 2010 and 2009, respectively, the Company had 1,895,000 and 1,685,000 share equivalents outstanding relating to outstanding stock options and warrants.  At June 30, 2010 and 2009, the effects of the share equivalents were excluded from the computation of diluted shares outstanding as their effects would be anti-dilutive, due to the Company’s net loss attributable for common stockholders for these periods.

 

INCOME TAXES

 

Deferred income taxes are provided for timing differences between financial statements and income tax reporting, primarily from the use of accelerated depreciation methods for income tax purposes, stock based compensation, accrued liabilities, warranty costs, and net operating losses that are available to offset future taxable income.  The measurement of deferred tax assets and liabilities is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated.

 

The Company accounts for income tax uncertainties using a two-step approach to recognizing and measuring tax benefits and liabilities when realization of the tax position is uncertain. The first step is to determine whether the tax positions meet the more-likely-than-not condition for recognition and the second step is to determine the amount to be recognized based on the cumulative probability that exceeds 50%.

 

The Company recognizes in its financial statements only those tax positions that are "more-likely-than-not" of being sustained upon examination by taxing authorities, based on the technical merits of the position. The Company performed a comprehensive review of its material tax positions in accordance with recognition and measurement standards.  Based on this review, the Company has concluded that there are no significant uncertain tax positions that would require recognition or disclosure within the consolidated financial statements.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With a few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations by tax authorities for years before 2006.  The Company's policy is to recognize interest and penalties related to uncertain tax benefits in income tax expense. The Company has no significant accrued interest or penalties related to uncertain tax positions as of June 30, 2010 or December 31, 2009 and such uncertain tax positions as of each date are insignificant.

 

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

In April 2010, the FASB issued guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions or units of accounting under which a vendor satisfies its performance obligations over a period of time, and when a portion or all of the consideration is contingent upon certain future events or circumstances. Consideration that is contingent on achievement of a milestone may be recognized in its entirety as revenue in the period in which the milestone is achieved only if the milestone is judged to meet certain criteria to be considered substantive. The guidance is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are currently evaluating the potential impact of this guidance on our consolidated financial statements.

 

RECLASSIFICATIONS

 

Certain reclassifications were made to the previously issued 2009 financial statements in the consolidated statement of operations  in order for the amounts to be comparable to the 2010. These reclassifications had no effect on net income, operating cash flow, or accumulated deficit as previously reported.

 

3.	PRIVATE PLACEMENT OF SERIES A 8% CONVERTIBLE PREFERRED STOCK AND COMMON STOCK WARRANTS

 

In June 2008, the Company completed a private placement consisting of shares of newly-created Series A 8% Convertible Preferred Stock (Series A), and detachable, five-year Class A, Class B and Class C warrants to purchase shares of common stock at an exercise price of $1.25 (Class A), $1.50 (Class B) and $1.75 (Class C) per share.  In total, the Company sold 5,160,000 shares of Series A (convertible at any time into a like number of shares of common stock) and Class A, Class B and Class C Warrants to each purchase 2,580,000 shares of common stock, or an aggregate of 7,740,000 shares of common stock.  Such warrants were subsequently exercised or exchanged in June 2009 (see Note 4).  We also issued 2,250,000 shares of our common stock to Greenview Capital, LLC and unrelated designees at the closing of the transaction in consideration for merger advisory services.

 

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At any time, each share of Series A is convertible into one share of common stock.  However, the number of shares of common stock issuable upon conversion of Series A is subject to adjustment upon the occurrence of certain customary events, including, among others, a stock split, reverse stock split or combination of our common stock; an issuance of our common stock or other securities as a dividend or distribution on the common stock; a reclassification, exchange or substitution of the common stock; or a capital reorganization of our company. On June 24, 2010, the holders of Series A no longer have “full-ratchet” anti-dilution price protection as it was changed to “weighted average” anti-dilution price protection.

 

Voting Rights of Series A

 

Holders of Series A are not entitled to vote their shares with the holders of our common stock, except for certain extraordinary corporate transactions, in which case they vote as a separate class. Holders of Series A shall also have any voting rights to which they are entitled by Delaware law.

 

Liquidation Rights of Series A

 

In the event of any voluntary or involuntary liquidation, dissolution or winding-up of our company, including a merger or consolidation of our company with or into another company, or any transfer, sale or lease by us of substantially all of our assets, the holders of Series A will be entitled to receive out of our assets available for distribution to stockholders, before any distribution is made to holders of our common stock or any other series of our preferred stock, liquidating distributions in an amount equal to $1.20 per share, plus accrued but unpaid dividends.

 

Redemption Rights of Series A

 

Series A may not be redeemed by the Company at any time.

 

Dividends Rights of Series A

 

Series A will be entitled to receive dividends at a rate of 8% per year, payable quarterly in arrears in cash or shares of our common stock. The Company has accrued dividends to Series A totaling $97,500 as of June 30, 2010.

 

 Certain Covenant Rights and Registration Rights of Series A

 

Series A contains certain negative covenants, such as a limitation on indebtedness, a limitation on increases in executive compensation, an incentive compensation plan not to exceed 10% of our outstanding common equivalent shares, and restrictions on mergers, acquisitions and other fundamental transactions, without the prior written consent of a majority of the holders of Series A, and certain other affirmative covenants.  All covenants expire if Series A position held by its majority original investor falls below 20% of the original Series A position held by it immediately following the closing of the original offering.

 

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The Company recorded a liability and corresponding expense at December 31, 2008 in the amount of $258,879 to account for approximated liquidated damages and late fees to the holders of the Series A shares.  The liquidated damages and late fees were related to the breach of covenants and rights contained in the Registration Rights Agreement, primarily as a result of the Company’s delay in successfully completing an effective registration statement, and to a lesser extent, the timely payment of quarterly dividends.  The Company and the holders of the Series A shares agreed in writing in March 2009 to pay the $258,879 in the form of shares of common stock issuable over the period April 1 through October 1, 2009.  The Company issued approximately 146,000 shares of common stock in payment of this liability. As of June 30, 2010, there is no remaining liability on the consolidated balance sheet.

 

4.	ISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK

 

On June 29, 2009, the Company entered into a Warrant Amendment Agreement with the holders of the Company’s Class A, Class B and Class C warrants, whereby the holders and the Company agreed that such warrants would be exercisable solely for the Company’s new Series B Convertible Preferred Stock (Series B).  In conjunction with this agreement, the holders of all classes of warrants exchanged their warrants, cash of approximately $2,339,000 and a subscription receivable totaling approximately $197,000 for 6,607,006 shares of the Company’s Series B. The subscription receivable was paid in full on December 31, 2009.

 

Series B contains the following terms:

 

Conversion Rights of Series B

 

At any time, each share of Series B is convertible into one share of common stock.  However, the number of shares of common stock issuable upon conversion of Series B is subject to adjustment upon the occurrence of certain customary events, including, among others, a stock split, reverse stock split or combination of our common stock; an issuance of our common stock or other securities as a dividend or distribution on the common stock; a reclassification, exchange or substitution of the common stock; or a capital reorganization of our company.

 

Voting Rights of Series B

 

Holders of Series B are not entitled to vote their shares with the holders of our common stock, except for certain extraordinary corporate transactions, in which case they vote as a separate class. Holders of Series B shall also have any voting rights to which they are entitled by Delaware law.

 

Liquidation Rights of Series B

 

In the event of any voluntary or involuntary liquidation, dissolution or winding-up of our company, the holders of Series B will be entitled to receive out of our assets available for distribution to stockholders, a pro rata liquidating distribution on a pari passu basis with holders of the Company’s common stock based on the number of shares convertible from the then outstanding Series B shares.  Liquidation does not include a change in control transaction or a merger or consolidation of the Company, any sale of all or substantially all of its assets in one transaction or series of related transactions, or any tender offer or exchange offer to which the holders of common stock are permitted to tender or exchange their shares for other securities, cash or property. Liquidation rights of our Series A is expressly senior to the rights of Series B.

 

Redemption Rights of Series B

 

Series B may not be redeemed by the Company at any time.

 

Dividends Rights of Series B

 

Series B has no cumulative preferred dividend provisions.  Series B shall participate in any dividends declared and paid by Juhl on its common stock on an as-converted basis.

 

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Anti-Dilution Rights of Series B

 

Series B contains provisions whereby at any time at least 25% of the Series B is outstanding, the Company may not issue rights, options or warrants to all holders of common stock entitling them to subscribe for or purchase shares of common stock at a price per share that is lower than the volume weighted average price on the date of the Series B agreement without issuing the same rights, options or warrants to all holders on an as-converted to common stock basis.

 

5.	WARRANT LIABILITY

 

Upon adoption of new accounting guidance on January 1, 2009, the Company evaluated whether its warrants or convertible preferred stock contain provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price and/or shares to be issued under the respective warrant or preferred stock agreements based on a variable that is not an input to the fair    value of a “fixed-for-fixed” option. The Company determined that the all of the outstanding warrants (until June 29, 2009 upon which all such warrants were either exercised or exchanged) contained such provisions thereby concluding they were not indexed to the Company’s own stock and must be treated as a derivative liability.  Prior to January 1, 2009, the warrants were considered equity instruments.  The Company determined that while its convertible preferred stock (Series A and Series B) contains certain anti-dilution features, the conversion feature embedded within its convertible preferred stock does not require bifurcation or liability treatment.

 

The Company, beginning on January 1, 2009, recognized these warrants as liabilities at their respective fair values on each reporting date. The cumulative effect of the change in accounting for these instruments of $12,576,816 was recognized as an adjustment to the opening balance of stockholders’ equity at January 1, 2009. In addition, the carrying value of Series A was reduced by $529,133 due to the initial valuation allocated to preferred stock was determined using the relative fair value of Series A and the related warrants issued in the original transaction.  Series A would have been valued using its residual value as the full fair value of the warrants would have had to been first allocated from the net proceeds of the transaction and then the remainder to the value of convertible preferred stock.  During  the six months ended June 30, 2009, the Company recognized a gain of $2,198,671 related to this warrant liability representing the reduced fair value of this liability compared to the January 1, 2009 adoption date of this guidance. No gain or loss was recognized in 2010 relating to the warrant liability.

 

As discussed in Note 4, the conversion of all classes of warrants to Series B eliminated the derivative accounting related to these instruments. Therefore, the warrants that were accounted for as a liability were reclassified to stockholders’ equity at its then-current fair value at the date of the exchange. The Company has no warrants outstanding that require derivative accounting.

 

6.	PROMISSORY NOTE RECEIVABLE

 

In November 2009, JEDI entered into a Development and Construction Services Agreement (the “Development Agreement”), with a wind project.  Under the Development Agreement, the Owner contracted with JEDI for the development, design, construction, installation, and financing of the project’s balance of plant. The Project’s balance of plant involves the installation of ten 2.0 MW wind turbine generators, which are subject to a Turbine Supply Agreement between the project owner and the turbine supplier. JEDI agreed to take a promissory note for a portion of the expected $8.5 million construction cost of the project together with security interest that is junior to the turbine supplier. JEDI’s primary subcontractor has also agreed to assist JEDI in its financing by deferring payment of its services through the acceptance of a promissory note until permanent financing is placed on the project.  As a part of this Development Agreement, the primary subcontractor’s note must be paid within 180 days of the project’s mechanical completion date (or approximately  August  29, 2010), and if this does not occur, the subcontractor may exercise legal rights to demand payment from JEDI only as it relates to Juhl’s rights to its promissory note and its Development Agreement, including a right of foreclosure on the note delivered to JEDI by the project owners, which could, in turn, allow for conversion of amounts to project equity by JEDI or its primary subcontractor. If converted to equity, the Company estimates that the equity fair value would be equal or greater than the carrying value of the note receivable.  This estimate is based on electricity production and the fair value of the Power Purchase Agreement (“PPA”) in place at the completion of this project. The substantial completion of the project occurred in February 2010. Neither JEDI or its primary subcontractor have collected on this note receivable as of June 30, 2010.

 

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10.	PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

		June 30, 2010				December 31, 2009*
Land		$	17,500			$	17,500
Building and improvements			268,525				238,120
Equipment, including vehicles			402,348				380,856
Construction in process			3,859				31,030
Subtotal			692,231				667,506
Less Accumulated depreciation			(267,000	)			(237,467	)
Total		$	425,231			$	430,039

 

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*	Derived from December 31, 2009 audited financial statements

 

11.	CONSTRUCTION CONTRACTS

 

The status of construction contracts is as follows:

 

		June 30, 2010 (unaudited)				December 31, 2009*
Costs incurred on uncompleted contracts		$	8,121,147			$	8,692,791
Deferred turbine costs			-				249,500
Estimated earnings recognized			423,709				412,840
Less:  billings to-date			(7,923,377	)			(8,586,031	)
Totals		$	621,479			$	769,070
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings			621,479			$	769,070
Billings in excess of costs and estimated earnings			-				-
Totals		$	621,479			$	769,070

 

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*	Derived from December 31, 2009 audited financial statements

 

12.	INCOME TAXES

 

The Company files a consolidated tax return inclusive of each of its wholly-owned subsidiaries, JES (formerly DanMar), JEDI, and NextGen.  The Company’s provision for income taxes includes only the effects of operating activities subsequent to the dates of acquisition as disclosed in Note 1 above, since each of the entities had elected Subchapter S status for all periods prior to acquisition. Upon acquisition, the Subchapter S elections were automatically terminated.

 

The Company has recorded deferred tax assets and liabilities arising from the anticipated timing differences recorded in the financial statements and income tax returns for various accrued expenses, accounting methods used in computing depreciation and revenue recognition and benefits from net operating loss carryforwards.

 

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The income tax benefit for the six month periods ended June 30, 2010 and 2009 consists of the following components:

 

		2010				2009
Current		$	-			$	-
Deferred			(111,000	)			-
Total income tax benefit		$	(111,000	)		$	-

 

The components of the deferred income tax asset and liability as of June 30, 2010 and December 31, 2009 are as follows:

 

		2010				2009*
Current deferred income tax asset:
Accrued vacation and officer’s compensation		$	18,000			$	12,000
Reserves for warranty and doubtful accounts			18,000				26,000
Net operating loss carryforward			440,000				440,000
Less valuation allowance			(268,000	)			(268,000	)
Total		$	208,000			$	210,000

Non-current deferred income tax asset:
Stock compensation expense		$	555,000			$	431,000
Deferred revenue/other			344,000				224,000
Net operating loss carryforward			648,000				310,000
Less valuation allowance			(787,000	)			(320,000	)
Total		$	760,000			$	645,000
Current deferred income tax liability:
Completed contract accounting		$	169,000			$	165,000
Non-current deferred income tax liability
Depreciation		$	29,000			$	31,000

 

Deferred income taxes are presented on the balance sheet under the following captions at June 30, 2010 and December 31, 2009:

 

		2010				2009*
Current assets		$	39,000			$	45,000
Noncurrent assets			731,000				614,000
Total		$	770,000			$	659,000

 

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*	Derived from December 31, 2009 audited financial statements

 

In assessing the realization of deferred tax assets, the Company’s management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  The Company’s management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As of June 30, 2010, a valuation allowance of $1,055,000 has been recognized for deferred tax assets.

 

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At June 30, 2010, the Company has approximately a $2.7 million federal net operating loss carryforward of approximately which will expire in the year 2028.

 

The following represents the reconciliation of the statutory federal tax rate and the effective tax rate for the six months ended June 30, 2010:

 

Statutory tax rate		$	(508,000	)			34.0	%
States taxes, net of federal benefit			(89,000	)			6.0
Nondeductible income/expenses			4,000				(.2	)
Other, net			15,000				(.2	)
Increase in valuation allowance			467,000				(26.0	)
		$	(111,000	)			13.6	%

 

13.	PROMISSORY NOTE PAYABLE

 

In November 2009, JEDI entered into a Balance of Plant Construction Services Agreement (the “Construction Agreement”), with a subcontractor relating to a wind project.  Under the Construction Agreement, the JEDI contracted with the subcontractor for the construction services for certain aspects of the project’s balance of plant. The Project’s balance of plant involves the installation of ten 2.0 MW wind turbine generators. The subcontractor has agreed to assist JEDI in its financing by deferring payment of its services through the acceptance of a promissory note until permanent financing is placed on the project. As a part of this Construction Agreement, the primary subcontractor’s note must be paid within 180 days of the mechanical completion of the project (or approximately August 29, 2010), and if this does not occur, the subcontractor may exercise legal rights to demand payment from JEDI only as it relates to Juhl’s rights to its Development Agreement with the project owners, including a right of foreclosure on the note delivered to the subcontractor by JEDI, which could, in turn, allow for conversion of amounts to project equity by the subcontractor. The substantial completion of the project occurred in February 2010.

 

The balance of the Promissory Note Payable was $8,202,552 and $7,149,912, including accrued interest of approximately $314,000 and $24,300 at June 30, 2010 and December 31, 2009, respectively. The Note carries an 8% interest rate.

 

14.	STOCK-BASED COMPENSATION

 

The Company has a incentive compensation plan to provide stock options, stock issuances and other equity interests in the Company to employees, directors, consultants, independent contractors, and advisors of the Company and other person who is determined by the Committee of the Board of Directors of the Company to have made (or expected to make) contributions to the Company. As of June 30, 2010, the Company has 1,652,111 shares available for award under the plan.

 

Stock Options

 

The Company has granted to key employees and directors of the Company 1,245,000 options to purchase common shares under the above plan.  In addition, the Company issued an additional 500,000 stock options to a director in June 2009 outside of the plan. The outstanding stock options carry an exercise price ranging from of $1.00-$2.11 per share and expire ten years from the date of grant.  The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions, underlying price ranging from $1.00 to $3.05, dividend yield of 0%, expected volatility ranging from 96% to 104%, risk-free interest rate of 4%, and average expected life of 6 years. Based on pricing model, the company expensed approximately $308,000 and $498,000 of stock compensation in the six-month period ended June 30, 2010 and 2009, respectively.

 

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A summary of the Company’s stock option plan as of June 30, 2010 and changes during the period then ended is listed below:

 

Outstanding at January 1, 2010			1,745,000
Granted			—
Exercised			—
Expired			—
Forfeited			—
Outstanding at June 30, 2010			1,745,000
Options exercisable at the end of the period			857,435

 

As of June 30, 2010, there was approximately $757,000 total unrecognized compensation expense cost.  This cost is expected to be recognized over a weighted-average period of 3 years.

 

Warrants

 

The Company has issued common stock warrants to individuals or firms for consulting and investor relations services. A summary of the warrants are as follows:

 

Issue date		Number of warrants			Expiration Date	Exercise Price per share
December 2008			50,000		June 2013	$7.00 - $10.00
December 2009			100,000		December 2014	$1.25
Total			150,000

 

All of the warrants are vested and allow the holder to purchase common stock at the exercise prices shown above.  To determine fair value of the warrants issued for the purposes of measuring stock compensation expense, the Company uses the Black-Scholes pricing model with the following assumptions, dividend yield of 0%, expected volatility of 96-102%, risk-free interest rate of 4%, and expected life of 5 years.  The Company recognized no stock compensation expense to non-employees during the three month periods ending June 30, 2010 and 2009.

 

15.	LICENSING ARRANGEMENT

 

In July 2009, NextGen entered into a non-exclusive Manufacturing License and Reseller agreement with an unrelated company. The agreement provides that NextGen will license its small turbine technology and, among other things, grants a right to manufacture units over a 20 year period. The agreement also provides for exclusive distribution rights in certain areas of the United States.  NextGen will receive payments of $1 million for granting these rights under this agreement.  Revenue will be amortized over the 20 year period.   For the period ended June 30, 2010, licensing revenue of $25,000 is included in Turbine Sales and Service revenue in the financial statements.  Licensing deferred revenue of approximately $837,000 and $512,000 is included on the balance sheet as of June 30, 2010 and December 31, 2009, respectively, in deferred revenue.

 

16.	BUSINESS SEGMENTS

 

The Company groups its operations into two business segments–Wind Farm Development and Management  and Consumer-owned Renewable Energy products.  The Company's business segments are separate business units that offer different products. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Corporate assets include: cash and cash equivalents, short-term investments, deferred income taxes, and other assets.

 

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The following is information for each segment for the six-month periods ended June 30, 2010 and 2009:

 

		Wind Farm Development and Management				Consumer- Owned Renewable Energy				Consolidated
For the Six-Month Period Ended June 30, 2010
Wind farm development/mgmt		$	287,971			$	2,400			$	290,371
Turbine sales and service			260,280				539,881				825,161
Related party revenue			161,899				-				161,899
Construction contract revenue			1,020,254				5165				1,025,419
Total revenue		$	1,730,404			$	572,446			$	2,302,850
Loss from operations		$	(1,236,197	)		$	(276,338	)		$	(1,512,535	)
Other income (loss), net			28,036				(10,886	)			17,150
Loss before income tax benefit		$	(1,208,161	)		$	(287,224	)		$	(1,495,385	)
Identifiable assets at June 30, 2010		$	11,493,811			$	376,083			$	11,869,894
Corporate assets											4,336,992
Total assets at June 30, 2010										$	16,206,886

 

		Wind Farm Development and Management				Consumer- Owned Renewable Energy				Consolidated
For the Six-Month Period Ended June 30, 2009
Wind farm development/management		$	339,889			$	-			$	339,889
Turbine Sales and Service			-				265,744				265,744
Related party revenue			50,813				-				50,813
Construction contract revenue							9,569				9,569
Other			1,929				-				1,929
Total revenue		$	392,631			$	275,313			$	667,944
Income (loss) from operations		$	(1,471,647	)		$	(244,300	)		$	(1,715,947	)
Other income (loss), net			2,270,510				(16,851	)			2,253,659
Income (loss) before income taxes		$	798,863			$	(261,151	)		$	537,712
Identifiable assets at March 31, 2009		$	1,182,602			$	1,013,047			$	2,195,649
Corporate assets											5,514,903
Total assets at March 31, 2009										$	7,710,552

 

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17.	TRANSACTIONS WITH RELATED PARTIES

 

The Company provides wind farm management services to entities that are controlled by the Company’s Chief Executive Officer and family members. This revenue is shown on the face of the consolidated statement of operations.  The fees are billed at rates similar to fee structures charged to unrelated parties.

 

18.	COMMITMENTS AND CONTINGENCIES

 

Construction Services Agreements

 

The Company enters into construction services agreements with third parties for the construction of wind projects. The construction services agreements provide for a fixed price, subject to change orders pursuant to changes in work scope or work conditions. The construction fees are generally billable on a monthly basis. At June 30, 2010, the Company was substantially complete with the construction of two wind projects in Minnesota with a combined estimated contract value of $9 million.

 

Development Agreements

 

The Company enters into development agreements with third parties for the development of wind projects. The development agreements call for development fees ranging from 3% to 5% of the total project cost. The development fees are generally paid by the project owners in installments:   upon signing of the development agreement (ranging from 2-10% of the fee), signing of the power purchase agreement (approximately 5% of the fee), upon availability of funding and signing of the PPA (approximately 40% of the fee), and the remaining 50% is due at the commercial operation date of the project. As of June 30, 2010, the Company was involved with various development agreements at different stages within the contracts. The Company was also involved with several new projects for which development agreements have not been signed.

 

Turbine Supply

 

The Company may enter into turbine supply agreements whereby it will purchase wind turbines from turbine equipment suppliers and resell the components to wind project owners. The Company incurs risks of ownership during the course of shipment and delivery to the project site. The Company passes through the warranty and performance obligations of the manufacturer onto the project owners.

 

Management Agreements

 

The Company has three agreements in place for operational wind projects to perform management services for those projects. The agreements provide monthly management fees equal to 2% of the project’s gross sales. These agreements also provide payments for general and administrative fees, maintenance fees, and any other out-of-pocket expenses for the project. The contracts expire at various dates through 2015. The agreements may be terminated by the wind farm upon the last day of the month that is at least 30 days after the Company has received written notice of the intent to terminate the agreement.

 

Turbine Maintenance Agreements

 

The Company has agreements in place to perform turbine maintenance services for two wind farm projects, and from time to time will engage in additional maintenance services on a time and materials basis. The agreements provide quarterly or annual payments on a per-turbine basis. The agreements at various dates through 2014. The agreements may only be terminated in the event of non-performance.

 

Administrative Services Agreements

 

The Company has four agreements in place for operational wind projects to perform administrative services for those projects. These agreements provide quarterly payments in advance or in arrears of services performed. Payments range from $4,000 to $5,000 per quarter, and will continue through the change of percentage ownership date, as defined by the administrative services agreements, and will be renewed annually without any additional action. The agreements may be terminated by the wind farm upon at least 90 days written notice to the Company.

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19.	NON-CONSOLIDATED VARIABLE INTEREST ENTITIES

 

Generally accepted accounting principles provide a framework for identifying variable interest entities (VIE’s) and determining when a company should include the assets, liabilities, non-controlling interest, and results of activities of a VIE in its consolidated financial statements.  In general, a VIE is a corporation, partnership, limited liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.   A VIE should be consolidated if a party with an ownership, contractual, or other financial interest in the VIE (a variable interest holder) has the power to direct the VIE’s most significant activities and the obligation to absorb losses or right to receive benefits of the VIE that could be significant to the VIE.  A variable interest holder that consolidates the VIE is called the primary beneficiary.  Upon consolidation, the primary beneficiary generally must initially record all of the VIE’s assets, liabilities, and non-controlling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest.

 

As more fully described in Note 6,  Juhl Energy Development (JEDI) entered into a Development and Construction Services Agreement in November 2009 with a special purpose limited liability company which was formed to own a wind farm  project in Minnesota.  Under this agreement, JEDI contracted with the existing owners of the wind farm project for the development, design, construction, installation, and construction period financing of the project’s balance of plant.  JEDI agreed to take a promissory note for a portion of the expected $8.5 million construction cost of the project together with security interest that is junior to the turbine supplier. JEDI’s primary subcontractor has also agreed to assist JEDI in its financing by deferring payment of its services through the acceptance of a promissory note until permanent financing is placed on the project.  The Company does not maintain any ownership interest in the special purpose entity. The Company has determined that this special purpose limited liability company is a VIE.

 

A major wind turbine manufacturer has also accepted a note receivable for approximately $30 million as their turbines are being constructed on the wind farm within this special purpose limited liability company.  The turbine manufacturer has more risk exposure as it relates to this entity and has been granted certain decision rights, superior to JEDI, that most significantly impact the economic performance of the special purpose limited liability company.  Based on this analysis, JEDI has determined that the wind turbine manufacturer is the primary beneficiary for this VIE.

 

 The Company’s evaluation of whether it qualifies as the primary beneficiary of VIEs is highly complex and involves significant judgments, estimates and assumptions. The Company generally utilizes expected cash flow scenarios to determine our interest in the expected losses or residual returns of VIEs and perform qualitative analysis of the activities that most significantly impact the VIEs’ economic performance and whether we have the power to direct those activities.

 

At June 30, 2010, the Company held the following investments that were evaluated against the criteria for consolidation and determined that it is not the primary beneficiary of the investments and therefore consolidation in the Company’s financial statements is not required:

 

Asset types		Purpose		Book Value
Promissory note receivable		Construction contract note with owners		$	8,202,552
Reimbursable project costs		Cost advances to wind farm project			193,961
Costs and profits in excess of billings		Construction contract			617,217
Promissory note payable		Construction contract note with subcontractor			(8,202,552	)

20.	PURCHASE COMMITMENT

 

In April 2010, the Company entered into a purchase commitment for wind turbines for a total of approximately $2.6 million.  The Company expects to use such turbines for a project to be commissioned in 2010.

 

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SIGNATURES

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

 

	JUHL WIND, INC. (Registrant)
Date: August 16, 2010		/s/ John Mitola
		John Mitola
		President