10QSB 1 f10qsb-towertech.txt FORM 10-QSB TOWER UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ________________ to _______________ 0-31313 (Commission file number) TOWER TECH HOLDINGS INC. (Exact name of small business issuer as specified in its charter) NEVADA 88-0409160 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 101 SOUTH 16TH STREET, P.O. BOX 1957, MANITOWOC, WISCONSIN 54221-1957 (Address of principal executive offices) (920) 684-5531 (Issuer's telephone number) 100 MARITIME DRIVE, SUITE 3C, MANITOWOC, WISCONSIN 54220 (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of May 11, 2007 - 47,724,464 shares of common stock Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] PAGE NUMBER PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets (unaudited) as of March 31, 2007 and December 31, 2006 3 Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2007 and 2006 4 Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2007 and 2006 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis or Plan of Operations 12 Item 3. Controls and Procedures 18 PART II. OTHER INFORMATION 19 Item 1. Legal Proceedings 19 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits 19 SIGNATURES 21 2 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Consolidated Balance Sheets
(UNAUDITED) (AUDITED) MARCH 31, DECEMBER 31, 2007 2006 ASSETS Current assets: Cash $ 10,267,620 $ 125,409 Accounts receivable, less allowance for doubtful accounts of $0 866,706 160,351 Related party receivable 56,275 - Inventories 381,834 288,291 Prepaid expenses 237,529 14,195 -------------- -------------- Total current assets 11,809,964 588,246 -------------- -------------- Property and equipment: Machinery and equipment 4,022,164 3,045,291 Office equipment 38,157 32,276 Leasehold improvements 365,310 356,434 -------------- -------------- 4,425,631 3,434,001 Less accumulated depreciation and amortization (743,985) (635,218) -------------- -------------- Net property and equipment 3,681,646 2,798,783 -------------- -------------- Other assets: Restricted cash 500,000 - Bond issuance fees, net of amortization of $2,187 3,244 14,640 and $2,091, respectively Accounts receivable - retainage - 492,945 -------------- -------------- Total other assets 503,244 507,585 -------------- -------------- TOTAL ASSETS $ 15,994,854 $ 3,894,614 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Notes payable - bank $ - $ 588,346 Notes payable - related party - 4,376,816 Current maturities of long-term debt 36,000 97,000 Accounts payable 867,844 891,797 Accounts payable - related party 474,099 725,257 Accrued liabilities 724,946 1,531,865 Customer deposits 1,430,382 190,635 -------------- -------------- Total current liabilities 3,533,271 8,401,716 Long-term debt, less current maturities 351,209 806,536 -------------- -------------- Total liabilities 3,884,480 9,208,252 -------------- -------------- Commitments and contingencies Shareholders' equity (deficit): Common stock, $.001 par value: 100,000,000 shares authorized; 47,724,464 and 35,235,500 shares issued and outstanding, respectively 47,724 35,236 Additional paid-in capital 18,491,338 1,260,992 Accumulated deficit (6,428,688) (6,609,866) -------------- -------------- Total shareholders' equity (deficit) 12,110,374 (5,313,638) -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 15,994,854 $ 3,894,614 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 3 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Consolidated Statements of Operations (Unaudited)
FOR THE THREE MONTHS ENDED --------------------------------- MARCH 31, MARCH 31, 2007 2006 Net sales $ 2,218,652 $ 590,731 Cost of sales 1,521,994 1,097,640 -------------- -------------- Gross profit (loss) 696,658 (506,909) Product development 2,063 17,078 Selling, general and administrative expenses 458,219 272,061 Merger transaction costs - 250,000 -------------- -------------- Total operating expenses 460,282 539,139 -------------- -------------- Income (loss) from operations 236,376 (1,046,048) -------------- -------------- Other income (expense): Realized loss on foreign currency transactions - (3,083) Interest income 42,370 - Interest expense (97,568) (97,221) -------------- -------------- Other expense, net (55,198) (100,304) -------------- -------------- Income (loss) before income taxes 181,178 (1,146,352) Provision for income taxes - - Net income (loss) $ 181,178 $ (1,146,352) ============== ============== Net income (loss) per common share (basic) $ 0.00 $ (0.04) ============== ============== Net income (loss) per common share (diluted) $ 0.00 $ (0.04) ============== ============== Weighted average shares outstanding: Basic 39,398,488 29,963,889 ============== ============== Diluted 39,398,488 29,963,889 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 4 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Consolidated Statements of Cash Flows (Unaudited)
FOR THE THREE MONTHS ENDED --------------------------------- MARCH 31, MARCH 31, 2007 2006 Cash flows from operating activities: Net income (loss) $ 181,178 $ (1,146,352) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 108,767 76,529 Amortization of bond issuance fees 96 419 Amortization of marketing fees 30,000 - Contributed services by shareholders - 86,500 Stock issued for merger costs - 250,000 Changes in operating assets and liabilities: Accounts receivable (706,355) 113,913 Inventories (93,543) 283,428 Prepaid expenses (13,334) 6,929 Accounts receivable - retainage 492,945 - Accounts payable (23,953) 106,783 Accounts payable - related party (101,771) - Accrued liabilities (806,919) 129,459 Customer deposits 1,239,747 (208,866) -------------- -------------- Net cash provided by (used in) operating activities 306,858 (301,258) -------------- -------------- Cash flows from investing activity: Purchases of property and equipment (991,631) (6,489) Increase in related party receivable (56,275) - Increase in restricted cash (500,000) - -------------- -------------- Net cash used in investing activities (1,547,906) (6,489) -------------- -------------- Cash flows from financing activities: Increase (decrease) in notes payable (3,511,715) 159,728 Retirement of long-term debt (516,327) (11,559) Proceeds from the issuance of common stock 15,400,001 - Refund of bond issuance fees 11,300 - -------------- -------------- Net cash provided by financing activities 11,383,259 148,169 -------------- -------------- Net increase (decrease) in cash 10,142,211 (159,578) Cash at beginning of period 125,409 166,023 -------------- -------------- Cash at end of period $ 10,267,620 $ 6,445 ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. 5 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) March 31, 2007 and 2006 NOTE 1 - Basis of presentation The accompanying unaudited consolidated financial information has been prepared by Tower Tech Holdings Inc. and Subsidiary (the "Company") in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-QSB and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, it does not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of this financial information have been included. Financial results for the interim three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. The December 31, 2006 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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-KSB for the year ended December 31, 2006. NOTE 2 - Organization Blackfoot Enterprises, Inc. ("Blackfoot") was incorporated under the laws of the State of Nevada on July 10, 1996. Blackfoot as a public company had no operations. On November 18, 2005, Blackfoot entered into a Share Exchange Agreement whereby it agreed to issue 25,250,000 shares of its common stock to acquire all of the outstanding shares of Tower Tech Systems, Inc. ("Tower Tech"), a private corporation incorporated under the laws of the State of Wisconsin. Tower Tech engineers and manufactures wind turbine extension towers in Manitowoc, Wisconsin. As part of the Share Exchange Agreement, immediately prior to the closing of the transaction on February 6, 2006, 2,500,000 restricted common shares were issued to a consultant for services provided in connection with this business combination transaction, which were valued at $250,000. These 2,500,000 shares were part of the 25,250,000 shares described above. Upon completion of the transaction on February 6, 2006, Tower Tech became a wholly-owned subsidiary of Blackfoot and Blackfoot changed its name to Tower Tech Holdings Inc. (the "Company"). Since this transaction resulted in the existing shareholders of Tower Tech acquiring control of Blackfoot, for financial reporting purposes, the business combination has been accounted for as an additional capitalization of Blackfoot (a reverse acquisition with Tower Tech as the accounting acquirer). 6 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) March 31, 2007 and 2006 NOTE 2 - Organization, continued The operations of Tower Tech are the only continuing operations of the Company. In accounting for this transaction, Tower Tech was deemed to be the purchaser and parent company for financial reporting purposes. Accordingly, its net assets were included in the consolidated balance sheet at their historical value. NOTE 3 - Revenue recognition The Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable, collectability is reasonably assured and delivery has occurred per the contract terms. Customer deposits and other receipts are generally deferred and recognized when earned. Revenue is recognized on a contract by contract basis. Depending on the terms of the contract, revenue may be earned via building of tower sections, building of complete towers, or modifications to existing towers or sections. Warranty costs are estimated and accrued based on historical rates or known costs of corrections. In lieu of customer retainages, the Company has set aside and recorded $500,000 as restricted cash in the accompanying financial statements. NOTE 4 - Earnings per share computation The Company follows SFAS No. 128, "EARNINGS PER SHARE" ("EPS"), which requires the computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is computed based only on the weighted average number of common shares actually outstanding during the period. Diluted EPS is computed based on the average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period. Potential common shares that have an anti-dilutive effect are excluded from diluted earnings per share. The income/(loss) per common share for the three months ended March 31, 2007 and 2006 is based on 39,398,488 and 29,963,889 weighted average shares outstanding during the respective periods. As of March 31, 2007 and 2006, the Company had no potential dilutive common shares. NOTE 5 - Related party receivable During the repayment of the related party debt which was outstanding from December 31, 2006, the Company overpaid the amount of accrued interest that was due. At March 31, 2007, the Company was due $56,275 from these related parties. 7 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) March 31, 2007 and 2006 NOTE 6 - Notes payable Notes payable at March 31, 2007 and December 31, 2006 consisted of the following:
March 31, December 31, 2007 2006 ---- ---- THIRD PARTY Prime plus 1% (9.25% at March 9, 2007) note, repaid in March 2007 $ - $ 100,000 Prime plus 2.5% (10.75% at March 9, 2007) note, repaid in March 2007 - 428,346 Prime rate (8.25% at March 9, 2007) note, repaid in March 2007 - 60,000 ----------------- ----------------- Total third party notes payable $ - $ 588,346 ================= ================= RELATED PARTY 5% notes, due on demand, unsecured, repaid in March 2007 $ - $ 665,500 Shareholder notes at a fixed rate of 8%, due on demand, unsecured, repaid and a portion converted to common shares in March 2007 - 3,711,316 ----------------- ----------------- Total related party notes payable $ - $ 4,376,816 ================= =================
NOTE 7 - Accrued liabilities Accrued liabilities at March 31, 2007 and December 31, 2006 consisted of the following:
March 31, December 31, 2007 2006 ---- ---- Accrued payroll and related taxes $ 195,518 $ 637,955 Accrued rent - related party 408,519 558,479 Accrued interest 2,181 213,530 Other 118,728 121,901 ----------------- ----------------- $ 724,946 $ 1,531,865 ================= =================
8 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) March 31, 2007 and 2006 NOTE 8 - Long-term debt Long-term debt consisted of the following:
March 31, December 31, 2007 2006 ---- ---- WISCONSIN BUSINESS DEVELOPMENT FINANCE CORPORATION 6.796% note, due in monthly installments of $4,982 including interest, due September 1, 2015, secured by substantially all assets of the Company and personal guarantees of the shareholders $ 387,209 $ 393,564 ASSOCIATED BANK Prime plus .5% (8.75% at March 9, 2007) note, repaid in March 2007 - 509,972 ----------------- ----------------- Total long-term debt 387,209 903,536 Less current maturities (36,000) (97,000) ------------------ ------------------ Total long-term debt, less current maturities $ 351,209 $ 806,536 ================= =================
Maturities of long-term debt for each of the years following December 31, 2006 are as follows: YEAR ENDING DECEMBER 31, 2007 $ 36,000 2008 39,000 2009 42,000 2010 45,000 2011 48,000 Thereafter 177,209 ----------------- $ 387,209 ================= 9 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) March 31, 2007 and 2006 NOTE 9 - Shareholders' equity On March 1, 2007, the Company completed a private placement of 10,266,667 shares of its unregistered common stock at a $1.50 per share totaling $15,400,000 to two accredited investors, Tontine Capital Partners, L.P. and Tontine Capital Overseas Master Fund, L.P. The investors received 8,213,334 and 2,053,333 shares with a purchase price of $12,320,001 and $3,079,999, respectively. A portion of these proceeds totaling $3,814,751 were used to extinguish all third party notes and a portion of related party notes payable. The remaining related party notes payable were extinguished with the issuance of 722,297 shares of unregistered common stock at $1.50 per share as repayment of $1,083,447 of debt owed to its directors and officers. Additionally, all long-term debt totaling $509,972 was paid off with the exception of the long-term note owed to Wisconsin Business Development Finance Corporation. The remaining proceeds of approximately $11,000,000 will be used to purchase equipment, provide working capital and for general corporate purposes. In conjunction with the private placement, an additional 1,500,000 shares of common stock were issued to Integritas, Inc. for reimbursement of short term loans and advances totaling $408,000, for transaction fees associated with this private placement and for entering into a consulting service agreement that will provide on-going marketing services through December 31, 2008. NOTE 10 - Related party transactions The Company subcontracts some of its labor from RBA, Inc., a corporation controlled by one of the Company's shareholders, to cover personnel shortages as needed. The Company's billings from RBA, Inc. for the three months ended March 31, 2007 and 2006 were $24,354 and $33,670, respectively, for contracted labor, equipment set up, and general maintenance. At March 31, 2007 and December 31, 2006, $474,099 and $419,408 was owed to RBA, Inc. and was included in accounts payable - related party, respectively. Interest expense of $69,231 and $64,727 was incurred on shareholder and related party notes during the three months ended March 31, 2007 and 2006, respectively, and $0 and $196,854 was included in accrued liabilities at March 31, 2007 and December 31, 2006, respectively. Rent is also payable to a related party. Rent expense for the three months ended March 31, 2007 and 2006 was $99,959 and $99,959, respectively. Amounts outstanding and included in accrued liabilities at March 31, 2007 and December 31, 2006 are $408,519 and $558,479, respectively. 10 TOWER TECH HOLDINGS INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (Unaudited) March 31, 2007 and 2006 NOTE 11 - Contingencies As of March 31, 2007, the Company continued to have a dispute over service billings related to contracted tower work from one vendor totaling $141,879. The Company is in disagreement over these billings with the vendor and does not believe they owe the stated amounts. The Company has not resolved these matters and it is more likely than not that the Company will pay some amount to settle these liabilities. The Company's best estimate of this potential contingent liability is 50% of the total which is approximately $71,000 and has recorded this amount in accrued liabilities at March 31, 2007 and December 31, 2006. The Company is also subject to legal proceedings in the normal course of business. Management believes these proceedings will not have a material adverse effect on the financial statements. NOTE 12 - Effect of recently issued accounting standards In July 2006, Financial Accounting Standards Board (FASB) issued Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN 48"). FIN 48 clarifies the accounting treatment (recognition and measurement) for an income tax position taken in a tax return and recognized in a company's financial statements. The new standard also contains guidance on "derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition." The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on our consolidated financial position or results of operations. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, FAIR VALUE MEASUREMENTS ("SFAS No. 157"). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a material impact on our consolidated financial position or results of operations. In February 2007, the FASB issued Statement of Financial Accounting Standards Statement No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 ("SFAS No. 159"). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We believe the adoption of SFAS No. 159 will not have a material impact on our consolidated financial position or results of operations. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS GENERAL The following discussion and analysis should be read in conjunction with our consolidated financial statements and related footnotes for the year ended December 31, 2006 included in our Annual Report on Form 10-KSB. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future. OVERVIEW Effective February 6, 2006, an arrangement was completed between the company, then known as Blackfoot Enterprises, Inc. and Tower Tech Systems, Inc., a Wisconsin corporation ("Tower Tech"), whereby the shareholders of Tower Tech exchanged all of their common shares for 25,250,000 shares of Blackfoot common stock (the "Acquisition"). Immediately following the Acquisition, the former shareholders of Tower Tech held approximately 72.1% of Blackfoot's total issued and outstanding common shares. Tower Tech was thereby deemed to be the acquiror and surviving company for accounting purposes. Accordingly, the transaction has been accounted for as a reverse acquisition using the purchase method whereby the assets and liabilities of Blackfoot have been recorded at their fair market values and operating results have been included in the company's financial statements from the effective date of purchase. The net assets of Tower Tech are included in the balance sheet at their historical book values and its historical results of operations have been presented for the comparative prior period. TOWER TECH We, through Tower Tech, engineer and manufacture wind turbine extension towers. Tower Tech was incorporated in October 2003 and was inactive during 2003. Development of the manufacturing process began in July 2004 after the acquisition and installation of necessary manufacturing equipment. Operations prior to that time were devoted primarily to securing orders and purchasing capital assets. In February 2005, we completed, for Clipper Windpower, our manufacturing of the largest wind tower in the country to specifications, which was erected in Wyoming. Tower Tech entered into a tower production agreement in May 2005 with Vestas Towers Inc., pursuant to which Tower Tech supplied towers to Vestas that were completed throughout the remainder of 2005 and the first quarter of 2006. The first purchase order under that agreement was a production run for Vestas that served as Tower Tech's "proving run," during which final adjustments were made to the capital and production plans. Following the proving run, Tower Tech temporarily suspended production in February 2006 while it focused on capital raising, production line improvements, and contract and purchase order negotiations with current and future customers. We followed up those plant improvements with a production contract with an affiliate of Gamesa Eolica, one of the largest wind tower integrators in the industry. We received an order for 32 towers, similar in size to the towers we produced for Vestas, and quickly increased the order by two additional towers. We began production of the order in July 2006 on a labor-only basis. Before completing the order in February 2007, Gamesa had increased that order by another two towers. During the period, Tower Tech achieved a contract production rate of 100 towers per year. 12 As of December 31, 2006, we no longer consider the Company to be in the development stage. During 2006, we gained manufacturing efficiency and secured a backlog of orders in the fourth quarter. The company did become profitable in this first quarter of 2007. Accordingly, our activities to date are not as broad in depth or scope as the activities we may undertake in the future, and our historical operations and financial information are not necessarily indicative of our future operating results. As of March 31, 2007, our accumulated deficit was $6,428,688. From inception to February 2007, we had financed our operations and internal growth primarily through capital contributed by shareholders and borrowings from both shareholders and financial institutions with guarantees provided by shareholders. Management sought and closed the Blackfoot acquisition transaction to obtain financing alternatives available to publicly-traded companies. On March 1, 2007, we secured $15.4 million through the private placement of our common stock. We believe with this additional capital, the Company is now positioned to meet its revenue, profitability and strategic goals. CRITICAL ACCOUNTING POLICIES The discussion and analysis of Tower Tech's financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an on going basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While Tower Tech's significant accounting policies are described in more detail in Note 1 to its financial statements included in the December 31, 2006 Form 10-KSB, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements: REVENUE RECOGNITION. Tower Tech recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services rendered, the selling price is fixed or determinable, collectibility is reasonably assured and delivery has occurred per the contract terms. Customer deposits and other receipts are generally deferred and recognized when earned. Revenue is recognized on a contract-by-contract basis. Depending on the terms of the contract, revenue may be earned by the building of tower sections, building a complete tower, or modification to existing towers or sections. Warranty costs are estimated and accrued based on historical rates or known costs of corrections. INVENTORIES. Inventories are stated at the lower of cost or market, with cost determined using the average cost method. Market value encompasses consideration of all business factors including price, contract terms and usefulness. PROPERTY AND EQUIPMENT. Property and equipment are stated at cost. Expenditures for additions and improvements are capitalized while replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are expensed currently as incurred. Properties sold or otherwise disposed of are removed from the property accounts, with gains or losses on disposal credited or charged to operations. 13 Depreciation, for financial reporting purposes, is provided over the estimated useful lives of the respective assets, which range from 3 to 15 years, using the straight-line method. Leasehold improvements are amortized over the shorter of the asset useful life or the lease term. RESEARCH AND DEVELOPMENT. Research and development costs in the product development process are expensed as incurred. Assets that are acquired for research and development activities and have alternative future uses in addition to a current use are included in equipment and depreciated over the assets' estimated useful lives. Research and development costs consist primarily of contract engineering costs for outsourced design or development, equipment and material costs relating to all design and prototype development activities. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2006, Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the accounting treatment (recognition and measurement) for an income tax position taken in a tax return and recognized in a company's financial statements. The new standard also contains guidance on "derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition." The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 did not have a material impact on our consolidated financial position or results of operations. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS No. 157"). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a material impact on our consolidated financial position or results of operations. In February 2007, the FASB issued Statement of Financial Accounting Standards Statement No. 159, THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL LIABILITIES - INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115 ("SFAS No. 159"). This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This standard is effective for financial statements issued for fiscal years beginning after November 15, 2007. We believe the adoption of SFAS No. 159 will not have a material impact on our consolidated financial position or results of operations. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006 REVENUES. For the quarter ended March 31, 2006, net sales were $590,731. Cost of sales during that period aggregated $1,097,640 and exceeded revenues due to start-up and ramp-up costs. During the first quarter 2006, the company was continuing a proving run effort that experienced operating inefficiencies that were resolved and corrected during that quarter. In comparison, we generated revenues of $2,218,652 for the quarter ended March 31, 2007, with cost of sales totaling $1,521,994. During 2007, we saw continued improvement in our 14 production costs due to our improvement of manufacturing processes and ongoing training programs. PRODUCT DEVELOPMENT EXPENSES. Product development expenses consist primarily of contract engineering costs for outsourced design or development, equipment and material costs relating to all design and prototype development activities. For the quarter ended March 31, 2007, these expenses were $2,063, as compared to $17,078 for the comparable period in 2006. As Tower Tech moves into full production mode, these expenses will continue to decrease, but may be replaced with in-house engineering expenses. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $458,219 in 2007 from $272,061 in 2006. This increase is primarily the result of ramp-up activities in association with new customers, as well as legal and accounting expenses directly related to the costs of being a public company. In addition, we hired additional administrative employees from the same period in 2006. MERGER TRANSACTION COSTS. Merger transaction costs in the quarter ended March 31, 2006 consisted primarily of consulting services and direct expenses, such as legal and accounting fees and stock issuance costs, paid by Integritas, Inc. These services and expenses were directly related to the Blackfoot acquisition transaction in February 2006. OTHER INCOME (EXPENSE). Interest expense was $97,221 in 2006, compared to $97,568 in 2007. Due to our increased cash balance as a result of the private placement of our common stock on March 1, 2007, we gained $42,370 of interest income during the first quarter of 2007. NET INCOME (LOSS). Net income of $181,178 for the quarter ended March 31, 2007 compares to a net loss of $1,146,352 for the quarter ended March 31, 2006. The net income is largely a result of the increase in revenue and interest income and a significant decrease of the manufacturing ramp-up costs and merger transaction costs, which were somewhat offset by an increase in selling, general and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES We have financed our operations since inception primarily through capital contributed by shareholders and borrowings from shareholders and from financial institutions with personal guarantees being provided by the shareholders. For the quarter ended March 31, 2007, net cash from financing activities of $11,383,259 was provided primarily by a private placement of our common stock in the amount of $15,400,000 offset by pay down of notes payable and long-term debt in the amount of $4,028,042. In comparison, cash of $148,169 was provided by financing activities in first quarter 2006, consisting primarily of borrowings from related parties and additional third-party debt. On December 31, 2005, each of Messrs. Allie, Fox, Wergin, and Brickner agreed to maintain a line of credit for the benefit of Tower Tech through December 31, 2006 in the following amounts indicated in the table below. Tower Tech drew down against the lines of credit and at December 31, 2005 and December 31, 2006, the amounts set forth in the table below were owed to these persons. Tower Tech paid interest at a fixed rate of 8% per annum. The line of credit agreements were amended as of April 1, 2006 to increase the amounts available as set forth below. 15
------------------------------------------------------------------------------------------------------------------------------ AMOUNT AMOUNT AVAILABLE PER AMOUNT OWED AVAILABLE PER AMOUNT OWED 12/31/05 LINE OF TO LENDER AT LINE OF CREDIT TO LENDER AT CREDIT 12/31/05 AGREEMENTS AS 12/31/06 LENDER AGREEMENTS AMENDED 4/1/06 ------------------------------------------------------------------------------------------------------------------------------ Christopher C. Allie $ 775,000 $ 712,533 $ 1,500,000 $ 830,326 ------------------------------------------------------------------------------------------------------------------------------ Terence P. Fox $ 1,015,000 $ 1,009,833 $ 1,750,000 $ 1,131,882 ------------------------------------------------------------------------------------------------------------------------------ Daniel P. Wergin $ 775,000 $ 755,759 $ 1,750,000 $ 908,108 ------------------------------------------------------------------------------------------------------------------------------ Raymond L. Brickner III $ 650,000 $ 612,500 $ 1,750,000 $ 841,000 ------------------------------------------------------------------------------------------------------------------------------
At December 31, 2006, we had cash of $125,409 and a working capital deficiency of $7,813,470, as compared to cash of $10,267,620 and a working capital surplus of $8,276,693 at March 31, 2007. The increases in cash and working capital surplus were due primarily to the profit for the quarter and the proceeds from the private placement of common stock. Net cash provided by operations was $306,858 for the quarter ended March 31, 2007 versus cash of $301,258 used for the quarter ended March 31, 2006. The increase for the quarter ended March 31, 2007 as compared to the quarter ended March 31, 2006 was due mainly to the increase in revenue and the vastly improved gross profit. Cash used in investing activities totaled $1,547,906 for the three months ended March 31, 2007 as compared to cash used of $6,489 for the three months ended March 31, 2006. Purchases of property and equipment totaled $991,631 for the three months ended March 31, 2007 reflecting our investment in equipment to improve our efficiencies and capacity. The Company also had to set aside $500,000 in cash reserves to accommodate a new customer order during the three months ended March 31, 2007. On March 1, 2007, we entered into a securities purchase agreement with two accredited investors (the "Investors") pursuant to which we agreed to sell, and the Investors agreed to purchase 10,266,667 restricted shares of our common stock at $1.50 per share for a total investment of $15,400,000. Proceeds of the financing were used to reduce debt, and will be used to purchase equipment, and for working capital and general corporate purposes. We agreed to file a registration statement with the Securities and Exchange Commission in order to register the resale of the shares that were issued to the Investors, pursuant to the terms of a registration rights agreement dated March 1, 2007. In connection with the closing of the stock purchase described above, we paid most of our outstanding debt in the aggregate principal amount of $4,324,723 with the proceeds of the financing and issued 722,297 shares of common stock at $1.50 per share to our four officers, directors, and principal shareholders as repayment of $1,083,447 in loans. Accordingly, as a result of these payments, we have only one outstanding loan payable to Wisconsin Business Development Finance Corporation which had a principal amount of $387,209 at March 31, 2007. This loan requires monthly installments of $4,982 including interest, is due September 1, 2015, and is secured by substantially all our assets and personal guarantees of our principal shareholders. 16 PLAN OF OPERATION Management believes that as a result of the financing obtained in March 2007, we have sufficient funding to cover our operational and capital expenses through the end of the current fiscal year. We will remain focused on manufacturing and selling wind towers and monopiles to the wind energy industry over the balance of 2007. We will improve our manufacturing production process through the acquisition of additional efficiency-enhancing equipment as well as the implementation of throughput-enhancing production methodologies. To date, we have nearly doubled our production capacity from what it was at the close of 2005. We do not anticipate that we will hire a proportionate number of employees as we increase our plant capacity during 2007, since we intend to achieve productivity improvements with the addition of labor-saving equipment and significant process improvements. We have reduced the time it takes to manufacture a 4-section tower by more than 36 percent from early 2006. We intend to procure additional equipment to increase our capacity of manufacturing over the next 18-20 months. By late summer of 2007, we will also be fabricating items (internals) that are installed inside tower sections, and are currently in negotiations to purchase the necessary equipment. We, together with City Centre LLC, an entity that is indirectly owned by some of our officers, directors, and principal shareholders, have applied to become a "Port-of-Entry" in order to secure further improvements in efficiency and to make the plant more competitive in the future. "Port-of-Entry" status will not only allow the company to reduce its shipping and related costs, but will also create an additional revenue stream for the company, as we will be able to charge fees to others for ingress and egress. As of the date of this report, the U.S. Coast Guard has given its approval of the application. Final approval is subject to a final inspection by the U.S. Coast Guard, which is expected to take place in late spring. Additional revenue for the company is expected, since we also intend to begin purchasing steel rather than having it supplied by our customers as has been done in the past. Additionally, steel will be inventoried in an indoor storage area, reducing material handling costs. OFF-BALANCE SHEET ARRANGEMENTS As of March 31, 2007, we did not have any off-balance sheet arrangements. FORWARD-LOOKING STATEMENTS The forward-looking comments contained in this discussion involve risks and uncertainties. Actual results may differ materially from those discussed here due to factors such as, among others, limited operating history, difficulty in developing and refining manufacturing operations, and competition. 17 ITEM 3. CONTROLS AND PROCEDURES As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures at the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of our management, including our principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective. There were no changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the Company does not have a formal audit committee. Its board of directors oversees the responsibilities of the audit committee. The board is fully aware that there is a lack of segregation of duties due to the small number of employees dealing with general administrative and financial matters. However, the board has determined that considering the employees involved and the control procedures in place, risks associated with such a lack of segregation are insignificant and the potential benefits of adding employees to clearly segregate duties does not justify the expenses associated with such increases at this time. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The registrant reported sales of unregistered equity securities on its current report on Form 8-K, filed March 5, 2007. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS -------------------------------------------------------------------------------- REGULATION S-B NUMBER EXHIBIT -------------------------------------------------------------------------------- 2.1 Share Exchange Agreement by and among Blackfoot Enterprises, Inc. and the shareholders of Tower Tech Systems, Inc. and Tower Tech Systems, Inc. dated as of November 7, 2005 (1) -------------------------------------------------------------------------------- 3.1 Articles of Incorporation (2) -------------------------------------------------------------------------------- 3.2 Certificate of Amendment to Articles of Incorporation (3) -------------------------------------------------------------------------------- 3.3 Bylaws (2) -------------------------------------------------------------------------------- 10.1 Tower Production Agreement (4) -------------------------------------------------------------------------------- 10.2 Associated Bank loan documents (4) -------------------------------------------------------------------------------- 10.3 Wisconsin Business Development Finance Corporation loan documents (4) -------------------------------------------------------------------------------- 10.4 Lease agreement with City Centre, LLC (4) -------------------------------------------------------------------------------- 10.5 Promissory note to BFM LLC dated January 28, 2005 (4) -------------------------------------------------------------------------------- 10.6 Promissory note to Choice Inc dated May 25, 2005 (4) -------------------------------------------------------------------------------- 10.7 Promissory note to 43 Enterprises dated October 20, 2005 (4) -------------------------------------------------------------------------------- 19 -------------------------------------------------------------------------------- REGULATION S-B NUMBER EXHIBIT -------------------------------------------------------------------------------- 10.8 Promissory note to Choice Inc. dated October 21, 2005 (4) -------------------------------------------------------------------------------- 10.9 Promissory note to City Centre LLC dated November 11, 2005 (4) -------------------------------------------------------------------------------- 10.10 Promissory note to City Centre LLC dated December 30, 2005 (4) -------------------------------------------------------------------------------- 10.11 Line of credit agreements with related parties (4) -------------------------------------------------------------------------------- 10.12 Investment Agreement, dated as of June 27, 2006, by and between Tower Tech Holdings, Inc. and Dutchess Private Equities Fund, L.P. (5) -------------------------------------------------------------------------------- 10.13 Registration Rights Agreement, dated as of June 27, 2006, by and between Tower Tech Holdings, Inc. and Dutchess Private Equities Fund, L.P. (5) -------------------------------------------------------------------------------- 10.14 April 1, 2006 amended line of credit agreements with related parties (6) -------------------------------------------------------------------------------- 10.15 Promissory note to City Centre LLC dated April 7, 2006 (6) -------------------------------------------------------------------------------- 10.16 Employment Agreement with Raymond L. Brickner III dated February 26, 2007 (7) -------------------------------------------------------------------------------- 10.17 Securities Purchase Agreement dated March 1, 2007 between Tower Tech Holdings Inc. and the Buyers named therein (7) -------------------------------------------------------------------------------- 10.18 Registration Rights Agreement dated March 1, 2007 (7) -------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- ---------------------- (1) Incorporated by reference to the exhibits to the registrant's current report on Form 8-K, filed November 21, 2005. (2) Incorporated by reference to the exhibits to the registrant's registration statement on Form 10-SB filed August 11, 2000. (3) Incorporated by reference to the exhibits to the registrant's current report on Form 8-K, filed February 10, 2006. (4) Incorporated by reference to the exhibits to the registrant's annual report for the fiscal year ended December 31, 2005. (5) Incorporated by reference to the exhibits to the registrant's current report on Form 8-K, filed June 30, 2006. (6) Incorporated by reference to the exhibits to the registrant's quarterly report on Form 10-QSB for the quarter ended June 30, 2006, filed August 14, 2006. (7) Incorporated by reference to the exhibits to the registrant's current report on Form 8-K, filed March 5, 2007. 20 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TOWER TECH HOLDINGS INC. May 14, 2007 By: /s/ RAYMOND L. BRICKNER III ------------------------------------ Raymond L. Brickner III President and acting Chief Executive Officer May 14, 2007 By: /s/ STEVEN A. HUNTINGTON ------------------------------------ Steven A. Huntington Chief Financial Officer 21