Company Quick10K Filing
Quick10K
Northern Power Systems
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
8-K 2019-08-27 M&A, Officers
8-K 2019-06-06 Officers, Other Events
8-K 2019-04-25 M&A, Officers, Other Events, Exhibits
8-K 2019-04-01 Other Events
8-K 2019-02-23 Officers, Exhibits
8-K 2019-02-19 Officers, Exhibits
8-K 2019-02-11 Enter Agreement, M&A, Officers, Exhibits
8-K 2018-12-07 M&A, Exhibits
8-K 2018-11-30 Enter Agreement, Exhibits
8-K 2018-11-15 Accountant, Exhibits
8-K 2018-10-22 Regulation FD, Exhibits
8-K 2018-09-21 Regulation FD, Exhibits
8-K 2018-08-27 Officers
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-08-07 Officers, Exhibits
8-K 2018-08-02 Enter Agreement, Sale of Shares, Regulation FD, Exhibits
8-K 2018-07-19 Sale of Shares, Exhibits
8-K 2018-07-06 Officers
8-K 2018-06-27 Shareholder Vote
8-K 2018-06-04 Other Events
8-K 2018-05-24 Regulation FD, Exhibits
HOOK HOOKIPA Pharma 158
DCSA Docasa 88
RPMT Rego Payment Architectures 22
NJMC New Jersey Mining 17
DCTH Delcath Systems 2
AOXY Advanced Oxygen Technologies 0
FPP Fieldpoint Petroleum 0
GLNS Golden Star Resource 0
NUZE Nuzee 0
DDDR DD's Deluxe Rod Holder 0
NPS 2018-06-30
Part I - Financial Information
Item 1.Financial Statements
Item 2.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
Part II - Other Information
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
EX-31.1 exh_311.htm
EX-31.2 exh_312.htm
EX-32.1 exh_321.htm
EX-32.2 exh_322.htm

Northern Power Systems Earnings 2018-06-30

NPS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 f10q_081418p.htm FORM 10-Q

 
 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from                      to                     

 

Commission File Number 000-55184

 

 

 

NORTHERN POWER SYSTEMS CORP.

 

(Exact name of registrant as specified in its charter)

 

 

 

   
British Columbia, Canada 98-1181717

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

29 Pitman Road

Barre, Vermont 05641

(Address of principal executive offices)

 

(802) 461-2955

(Registrant’s telephone number, including area code)

 

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES ☐    NO  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Common Shares, no par value per share 23,853,884
Class Outstanding at August 13, 2018

 

 

 

 

 

Table of Contents

 

Northern Power Systems Corp.

 

FORM 10-Q

 

INDEX

 

   

Page No.

PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 3
     
  Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (unaudited) 3
     
  Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2018 and 2017 (unaudited) 5
     
  Consolidated Statement of Changes in Shareholders’ Deficiency for the six months ended June 30, 2018 (unaudited) 6
     
  Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
     
Item 4. Controls and Procedures 29
   
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 30
     
Item 1A. Risk Factors 30
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
     
Item 3. Defaults Upon Senior Securities 30
     
Item 4. Mine Safety Disclosures 30
     
Item 5. Other Information 30
     
Item 6. Exhibits 31
   
Signatures 32

 

 

 

2

 

 

PART I – FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2018 AND DECEMBER 31, 2017

(In thousands, except share amounts)

 

(unaudited)

 

ASSETS  June 30, 2018  December 31, 2017
       
CURRENT ASSETS:          
Cash and cash equivalents  $670   $3,873 
Accounts receivable — net of allowance for doubtful accounts $17 at June 30, 2018 and $0 at December 31, 2017   833    1,537 
Unbilled revenue   290    1,284 
Inventories — net (Note 5)   4,857    5,273 
Deferred costs   -    152 
Prepaid expenses and other current assets   690    739 
           
Total current assets   7,340    12,858 
Property, plant and equipment — net (Note 6)   1,117    1,367 
Goodwill   361    361 
Other assets   109    54 
           
Total Assets  $8,927   $14,640 

 

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

 

 

 

3

 

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2018 AND DECEMBER 31, 2017

(In thousands, except share amounts)

 

(unaudited)

 

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY  June 30, 2018  December 31, 2017
       
CURRENT LIABILITIES:          
Working capital revolving line of credit (Note 8)  $1,007   $1,500 
Accounts payable   5,318    6,815 
Accrued expenses (Note 9)   1,905    2,641 
Accrued compensation   751    931 
Deferred revenue   1,869    1,739 
Customer deposits   1,801    1,804 
Other current liabilities   235    126 
Total current liabilities   12,886    15,556 
Deferred revenue, less current portion   967    1,337 
Deferred income taxes (Note 13)   48    42 
           
Total Liabilities   13,901    16,935 
           
Commitments and Contingencies (Note 16)          
           
           
SHAREHOLDERS’ DEFICIENCY:          
           
Voting common shares, no par value — Unlimited shares authorized; 23,853,884 shares issued and outstanding as of June 30, 2018 and December31, 2017   165,680    165,680 
Additional paid-in capital   9,298    9,278 
Accumulated other comprehensive income (loss)   (20)   (4)
Accumulated deficit   (179,932)   (177,249)
Total Shareholders’ Deficiency   (4,974)   (2,295)
Total Liabilities and Shareholders’ Deficiency  $8,927   $14,640 

 

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

 

 

4

 

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(In thousands, except share and per share amounts)

 

(unaudited)

 

   For the three months ended  For the six months ended
   June 30,2018  June 30,2017  June 30,2018  June 30,2017
REVENUES:                    
Product  $1,307   $16,014   $1,978   $21,209 
Service   891    1,750    1,780    2,758 
                     
Total revenues   2,198    17,764    3,758    23,967 
                     
Cost of product revenues   1,255    13,120    1,957    17,798 
Cost of service revenues   576    1,040    1,070    1,810 
Gross margin   367    3,604    731    4,359 
                     
OPERATING EXPENSES:                    
Sales and marketing   490    686    1,121    1,322 
Research and development   284    506    627    1,134 
General and administrative   748    1,254    1,701    2,387 
Gain on sale of assets   -    (150)   -    (375)
                     
Total operating expenses   1,522    2,296    3,449    4,468 
                     
(Loss) income from operations   (1,155)   1,308    (2,718)   (109)
Interest expense   (29)   (13)   (56)   (26)
Other (expense) income   193    (404)   (12)   (148)
                     
(Loss) income before provision for income taxes   (991)   891    (2,786)   (283)
Provision for income taxes   20    18    35    34 
                     
NET (LOSS) INCOME   (1,011)   873    (2,821)   (317)
                     
Other comprehensive (loss) income                    
Change in cumulative translation adjustment   (30)   40    (16)   51 
                     
COMPREHENSIVE (LOSS) INCOME  $(1,041)  $913   $(2,837)  $(266)
                     
Net (loss) income applicable to common shareholders (Note3)  $(1,011)  $873   $(2,821)  $(317)
                     
Net (loss) income per common share                    
Basic and diluted  $(0.04)  $0.04   $(0.12)  $(0.01)
                     
Weighted average shares used in calculating:                    
Basic earnings per share  $23,853,884   $23,661,884    23,853,884    23,637,752 
Diluted earnings per share  $23,853,884   $23,675,321    23,853,884    23,637,752 

 

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

 

5

 

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIENCY

FOR THE SIX MONTHS ENDED JUNE 30, 2018

(In thousands except share amounts)

 

(unaudited)

 

 
 
 
 
Voting Common Shares-No Par  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Shares  Amount  Additional Paid-In Capital   Accumulated Other Comprehensive Income (Loss)   Accumulated Deficit   Total Shareholder's Deficiency
                   
                   
BALANCE — December 31, 2017   23,853,884   $165,680   $9,278   $(4)  $(177,249)  $(2,295)
                               
Stock based compensation expense           20            20 
                              
Cumulative translation adjustment               (16)       (16)
                              
Cumulative effect of new accounting principle                   138    138 
                              
Net loss                   (2,821)   (2,821)
                               
BALANCE — June 30, 2018  $23,853,884  $165,680  $9,298  $(20)  $(179,932)  $(4,974)

 

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

 

 

 

 

 

6

 

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(All amounts in thousands)

(unaudited)

 

   For the six months ended
   June 30, 2018  June 30, 2017
OPERATING ACTIVITIES:          
Net loss  $(2,821)  $(317)
Adjustments to reconcile net loss to net cash used in operating activities:          
Provision for inventory obsolescence   8    3 
Provision for doubtful accounts   17    - 
Stock-based compensation expense   20    77 
Depreciation and amortization   250    255 
Gain on sale of asset   -    (375)
Deferred income taxes   7    7 
Changes in operating assets and liabilities:          
Accounts receivable and unbilled revenue   1,224    (3,361)
Other current and noncurrent assets   (7)   336 
Inventories   409    768 
Deferred costs   152    175 
Accounts payable   (1,498)   3,140 
Accrued expenses   (922)   (26)
Customer deposits   (3)   (2,166)
Deferred revenue and other short term liabilities   (5)   (123)
           
Net cash used in operating activities   (3,169)   (1,607)
           
INVESTING ACTIVITIES:          
Proceeds from sale of assets   475    2,550 
Purchases of property and equipment   -    (250)
           
Net cash provided by investing activities   475    2,300 
           
FINANCING ACTIVITIES:          
Proceeds (payments) on revolving line of credit, net of borrowings   (493)   290 
           
Net cash (used in) provided by financing activities   (493)   290 
           
Effect of exchange rate change on cash   (16)   51 
           
Change in cash and cash equivalents   (3,203)   1,034 
Cash and cash equivalent — Beginning of Period   3,873    5,423 
Cash and cash equivalent — End of Period  $670   $6,457 
           
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:          
Cash paid for interest  $29   $4 
Cash paid for income taxes  $1   $21 

 

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

 

7

 

 

NORTHERN POWER SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017

(Unaudited, in thousands except share and per share amounts)

 

 
1.DESCRIPTION OF BUSINESS

 

Northern Power Systems Corp. (together with its consolidated subsidiaries, “we”, “us”, “our”, “Northern Power Systems” or the “Company”) is a provider of advanced renewable power generation and power conversion technology for the distributed energy sector. We design, manufacture and service a suite of proven permanent magnet direct-drive (“PMDD”) wind turbine platforms for the distributed wind market and provide power converters, software controls, and integration and development services for battery energy storage applications. In 2017, we commenced developing sites for energy storage projects to provide end users with turn-key distributed energy solutions. With our predecessor companies dating back to 1974 we have decades of experience in developing proven innovative energy solutions in the power generation and conversion space.

 

The Company is headquartered and our principal manufacturing is in Barre, Vermont, and certain finance and business development teams are located in Massachusetts, with additional sales members located in Zurich, Switzerland, and sales and service members in Bari, Italy, and warehousing and manufacturing in Bisaccia, Italy, and Cornwall, U.K. The Company previously operated under the name Wind Power Holding, Inc. and was originally incorporated in Delaware on August 12, 2008. Our common shares are listed on the Toronto Stock Exchange under the symbol “NPS”.

 

On May 31, 2018, the Company announced that it had received a notice from the Toronto Stock Exchange that it had initiated a review of the Company’s eligibility for continued listing on the exchange. The Toronto Stock Exchange identified several deficiencies regarding the Company’s compliance with the Toronto Stock Exchange continued listing requirements, including the fact that (i) the trading activity of the Company’s securities has been so reduced as it does not warrant continued listing, (ii) the market value of the Company’s listed securities has been less than $3.0 million for the 30 previous consecutive trading days, (iii) market value of the Company’s publicly held listed securities has been less than $2.0 million for the 30 previous consecutive trading days and (iv) in the opinion of the Toronto Stock Exchange as well as management’s assessment, it is questionable as to whether the Company will be able to continue as a going concern. The Company is presently evaluating possible courses of action to regain compliance with the Toronto Stock Exchange continued listing requirements. The Continued Listing Committee of Toronto Stock Exchange (“the Listing Committee”) is scheduled to meet on September 13, 2018 to consider whether or not to suspend trading in and delist the securities of the Company. The Company is entitled to make submissions to the Listing Committee to address deficiencies on or before September 7, 2018. If the Company cannot demonstrate that it meets all of the Toronto Stock Exchange continued listing requirements by September 21, 2018, the Company’s securities will be delisted 30 days from such date.  

 

Liquidity — The Company has historically incurred operating losses since its inception and had an accumulated deficit of $179.9 million, a working capital deficit of $5.5 million at June 30, 2018 and used cash in operations of $3.2 million during the six months ended June 30, 2018. Management anticipates incurring additional losses until the Company can produce sufficient revenue to cover its operating costs, if ever. Since inception, the Company has funded its net capital requirements with proceeds from private equity and public and debt offerings. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company evaluated these conditions as well as actions taken in previous and current years to improve profitability. These actions included cost reductions by reducing headcount and doing temporary furloughs, as well as restructuring management, reducing the cost of our core distributed wind products, optimizing our supply chain, and monetizing certain of our utility wind assets. In addition, we have begun commercializing sales of our power converters, and full-scope energy storage solutions.

 

In the fourth quarter of 2017, the Company increased its line of credit from $2.0 million to $2.5 million and extended the maturity date from December 31, 2017 to June 30, 2019. During the second quarter of 2018 the Company became in breach of certain bank covenants. In working with its bank, the Company’s ability to borrow against its line of credit up to the maximum supported by its borrowing-base was continued until, on August 2, 2018, the Company executed a forbearance agreement with its bank. Such agreement allows the Company to borrow up to a maximum of $0.9 million through November 30, 2018. The Company will be working during this time to execute a revised line of credit with its bank. On August 2, 2018, the Company completed a convertible note transaction raising an additional $1.88 million. Subsequently on August 7, 2018, an additional $0.12 million worth of convertible notes were closed, bringing the total amount raised to $2.0 million. An additional $0.75 million may also be raised under this transaction within the month of August 2018.

 

Historically, our revenue has been driven by international sales. The Italian authorities have drafted a new law that is currently under review. The new law provides for a feed-in-tariff from the date of publication until December 31, 2020. The lack of clarity with respect to the feed-in-tariff and the delay in the approval of a 2018-2020 feed-in-tariff has stalled commercial activity, orders, order closure and contract execution and is impacting 2018 revenue. Although it is currently expected that the 2018-2020 feed-in-tariff will become effective by the fourth quarter of 2018, there is no guarantee it will be approved and implemented in a timely manner or at favorable rates. We have and will reduce headcount, including the use of temporary furloughs, or manufacturing activity as needed to maintain the Company’s long-term financial position. Despite our efforts, we cannot predict with certainty that the outcome of our plans and actions, nor our ability to renew the Company’s line of credit will be successful to meet our liquidity needs for the next twelve months from the issuance of the financial statements and as such, these issues raise substantial doubt regarding our ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recovery and classification of asset carrying amounts or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

 

8

 

 

Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the Company’s 2017 consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 000-55184). The consolidated balance sheet as of December 31, 2017 was derived from the Company’s annual audited financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from these estimates. All adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods, have been recorded. Actual amounts could differ from these estimates. Due to differing business conditions and seasonality, operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ending December 31, 2018. As of January 1, 2018, the Company adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. The impact of implementing this standard was a decrease in deferred revenue of approximately $0.1 and a corresponding reduction of accumulated deficit as of January 1, 2018. See Note 2 for further information.

 

Comprehensive Loss — Cumulative translation adjustments are excluded from net loss and shown as a separate component of shareholders’ deficiency.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers and has subsequently issued several supplemental and clarifying ASUs (collectively known as “ASC 606”). The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: identify the contract(s) with a customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 is effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt ASC 606. The Company adopted this standard on January, 1, 2018 and elected the modified retrospective method which was applied to all contracts that were not completed. The performance obligations identified under ASC 606 are in line with the elements previously identified under ASC 605. Further, there was no change in the timing of revenue recognition for our performance obligations. ASC 606 primarily affected the determination of the transaction price and allocation to our performance obligations based on the respective stand-alone selling prices. The transaction price includes measures of variable consideration, not previously available for allocation. The stand-alone selling price is computed using sales data or cost plus margin data depending on the revenue stream. These methods are different from the previous best estimated selling price used to allocate under ASC 605. The impact of implementing ASC 606 was a decrease in deferred revenue of approximately $0.1 million and a corresponding reduction of accumulated deficit for the period commencing on January 1, 2018. Prior periods were not retrospectively adjusted. See Note 2 for further information.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. This new standard is effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal years beginning after December 15, 2019. We are currently in the process of identifying our leases and evaluating the effect of this update on our consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This update indicates that there is diversity in the practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230.This amendment provides guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice. Public business entities should apply the guidance in Update 2016-15 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The adoption of the ASU did not have an impact on our financial statements.

 

9

 

 

In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation: Scope of Modification Accounting, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. ASU 2017-09 will be applied prospectively to awards modified on or after the adoption date. The standard is effective for annual period beginning after December 15, 2017. Early adoption is permitted. The impact of the adoption of this ASU on the Company’s results of operations, financial position, cash flows and disclosures will be based on any future modifications.

 

In February 2018, the FASB issued ASU 2018-02—Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance is effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this Update is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this Update should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of this ASU is not expected to have an impact on our financial statements.

 

In February 2018, the FASB issued ASU 2018-03—Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Public business entities with fiscal years beginning between December 15, 2017, and June 15, 2018, are not required to adopt these amendments until the interim period beginning after June 15, 2018, and public business entities with fiscal years beginning between June 15, 2018, and December 15, 2018, are not required to adopt these amendments before adopting the amendments in Update 2016-01. For all other entities, the effective date is the same as the effective date in Update 2016-01. All entities may early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as they have adopted Update 2016-01. The adoption of this ASU is not expected to have an impact on our financial statements.

 

In June 2018, the FASB issued ASU 2018-07 – Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. These amendments expand the scope of Topic 718, Compensation—Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This ASU is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other companies, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The adoption of this ASU is not expected to have a material impact on our financial statements.

 

There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2017 Annual Report on Form 10-K that had, or are expected to have, a material impact on our consolidated financial position, results of operations or cash flows.

 

2.REVENUE

 

On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of December 31, 2017. Results for reporting periods beginning January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect at that time. Upon adoption, the Company recorded a decrease to deferred revenue of $0.1 million and corresponding reduction of accumulated deficit. The performance obligations identified under ASC 606 are in line with the elements previously identified under ASC 605. Further, there was no change in the timing of revenue recognition for our performance obligations. ASC 606 primarily affected the determination of the transaction price and allocation to our performance obligations based on the respective stand-alone selling prices. The transaction price includes measures of variable consideration, not previously available for allocation. The stand-alone selling price is computed using sales data or cost plus margin data depending on the revenue stream. These methods are different from the previous best estimated selling price used to allocate under ASC 605.

 

The impact of adopting Topic 606 versus ASC 605 for the three months ended was $0 million and six months ended June 30, 2018 was a $0.6 million increase to product revenue with an offsetting decrease to customer deposit, and a $0.1 decrease to service revenue with an offsetting reduction in accumulated deficit which was captured in the transition adjustment as of January 1, 2018.

 

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Performance obligations -

 

A performance obligation is a promise made within a contract to transfer a good or service to a customer, and is the unit of accounting under ASC 606. The Company’s turbine and integrated battery energy storage systems (“BESS”) sales contracts usually include several performance obligations: the turbine or BESS product, commissioning services, and sometimes installation and/or extended warranty services. The Company also enters separate contracts that provide operations and maintenance (O&M), and Performance Guaranty Program (PGP).

 

Allocation of contract value -

 

The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligations are satisfied. For contracts entered with customers located in Italy, the Company considers that there is a sufficient population of contracts and uses actual recent historical sales price data to establish a range within which can be considered as estimated stand-alone pricing for the product, installation and commissioning services. For any units that fall outside of the average range by plus or minus 10%, and for contracts with customers in countries other than Italy where there is not a sufficient population of contracts to determine a range, the Company uses the cost plus margin approach. For these arrangements, the revenue is allocated to each of the performance obligations based upon using our best estimate of the standalone selling price of each distinct good or service in the contract based on the cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate, estimated margin for that distinct good or service.

 

Timing of revenue recognition -

 

Revenues from product sales are recognized at a point in time when control is transferred which is generally at the time of shipment. Revenues from commissioning and installations services are recognized when the services have been completed. Revenues from other services including extended warranty, operations and maintenance (O&M), and Performance Guaranty Program (PGP) are recognized over time as work is performed and performance obligations are satisfied. The Company uses a time based measure of progress because it transfers the benefit of services over time as it performs the services and recognizes revenue ratably over the time period.

 

For certain international turbine sales, the Company provides logistics services (including shipment and warehousing), and assistance with customer clearance if requested. In these instances, the Company recognizes revenue for the turbine product once it has cleared customs and has been shipped from logistics warehouses. Revenue from installation and commissioning is recognized at a point in time when the services are performed. In certain infrequent cases, the Company will recognize revenue when control is transferred and the Company retains possession of the product if all of the criteria for a bill and hold arrangement have been met which include (1) there is a substantive reason for the arrangement, (2) the product is identified as separately belonging to the customer and is ready for physical transfer to the customer, and (3) the Company does not have the ability to use or transfer the product to another customer. For the three and six months ended June 30, 2018, revenue resulting from bill and hold transactions amounted to $0.0 million and $0.6 million, respectively. There were no bill and hold transactions recorded under ASC 605 for the three and six months ended June 30, 2017.

 

PGP contracts provide maintenance services over a ten-year period beginning at commissioning. Revenue from PGP contracts is treated as variable consideration under ASC 606 as revenue is earned depending on the actual power performance of the turbines. These services are billed annually or semi-annually at a base amount with a premium for production in excess of a floor which depends on location and wind speed. Revenue is recognized as earned based on estimates and is later adjusted to actual when it is determined. Expenses are recorded as a cost of sale as incurred. In the event that the Company does not meet certain guaranteed service levels, the Company is required to provide liquidated damages to the customer per applicable liquidated damages formulas for each contract. The Company allows customers with PGP contracts to net liquidated damages against payments due for the PGP.

 

Contract balances

 

The timing of revenue recognition, billings and cash collections, and the satisfaction of performance obligations results in billed accounts receivable, and unbilled receivables, and contract assets that consist of deferred cost of goods sold. Customer advances and deposits, extended warranties and deferred revenue represent contract liabilities on the consolidated balance sheets. Typically, the final 10%-30% of the turbine value for billing is due subsequent to the shipping/delivery of a turbine to the customer. Our current policy states that, to the extent that the value ascribed to the product value at shipment (delivery) is greater than the value billed to date the difference is recognized as unbilled receivables. Amounts received from customers in advance of shipment are recorded as customer deposits. We record deferred revenues when cash payments are received or due in advance of our performance, including amounts which are refundable. Customer deposits are applied when revenue is recognized.

 

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At June 30, 2018, the Company had $1.5 million of revenue to be recognized from performance obligations extending over more than one year for extended warranty. The Company expects to recognize these revenues as follows - $0.6 in 2018, $0.6 million in 2019, and $0.3 million in 2020. Revenue to be recognized for performance obligations extending through 2021 and 2022 are immaterial. We have not disclosed the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. These performance obligations consist of commissioning and installation services that typically occur shortly after the equipment is delivered.

 

The Company recognized $1.8 million of revenue that was included in the beginning balance of contract liabilities for the six-month period ended June 30, 2018. Contract assets decreased by $0.2 during the six months ended June 30, 2018 resulting from the recognition of certain deferred costs for a unit recognized as revenue within the period. Contract liabilities consisting of customer deposits increased by $0.7 resulting from new customer deposits collected and decreased by $1.0 for customer deposits that settled during the six-month period ended June 30, 2018.

 

Practical Expedients and Exemptions

 

Sales commissions associated with product sales are expensed when incurred because the Company determined that any portion of the commissions that exceeded a one-year amortization period is immaterial. These costs are recorded within sales and marketing expenses.

 

Disaggregation of Revenue

 

For the three months ended June 30, 2018, substantially all of the Company’s revenue was related to distributed wind. For the six months ended June 30, 2018, the Company’s product revenue consisted of $1.4 million for distributed wind products and $0.6 million for sales of energy storage systems and substantially all of the Company’s service revenue was related to distributed wind.

 

The following table disaggregates revenue by geographic region based on shipments and/or services to customers:

 

   Three Months ended June 30, 2018
   Product  Service  Total
          
Italy   -    0.4    0.4 
United Kingdom   -    0.1    0.1 
United States   1.3    0.4    1.7 
Total  $1.3   $0.9   $2.2 

 

   Six Months ended June 30, 2018
   Product  Service  Total
          
Brazil  $0.6    -   $0.6 
Italy   0.1    0.8    0.9 
United States   1.4    0.9    2.3 
Total  $2.1   $1.7   $3.8 

 

During the three months ended June 30, 2018, the Company had revenue recognized at a point in time of $1.4 million and over time of $0.8 million. During the six months ended June 30, 2018, the Company had revenue recognized over time of $2.2 million and at a point in time of $1.6 million.

 

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3.NET LOSS PER SHARE

 

Basic loss per share is determined by dividing net loss attributable to common shareholders by the weighted average common shares outstanding during the period. Diluted income per share is determined by dividing income attributable to common shareholders by diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of potential common shares. To the extent their effect is dilutive, employee equity awards and restricted common shares, based on the treasury stock method, are included in the calculation of diluted earnings per share. All common share options were excluded from the denominator in the calculation of dilutive earnings per share, as their inclusion would have been antidilutive, due to the net loss of the Company.

 

4.FAIR VALUE MEASUREMENT

 

The Company measures fair value using the framework specified in U.S. GAAP. This framework emphasizes that fair value is a market-based measurement, not an equity-specific measurement, and establishes a fair value hierarchy that distinguishes between assumptions based on market data obtained from independent sources and those based on an entity’s own assumptions. The hierarchy prioritizes the inputs for fair value measurement into three levels:

 

Level 1 — Measurements utilizing unadjusted quoted prices in active markets that the entity has the ability to access for identical assets or liabilities.

 

Level 2 — Measurements that include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 — Measurements using unobservable inputs for assets or liabilities for which little or no market information exists, and are based on the best information available and might include the entity’s own data.

 

In some valuations, the inputs used may fall into different levels of the hierarchy. In these cases, the financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

Financial Instruments — The Company’s financial instruments consist primarily of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable and the working capital revolving line of credit. The carrying amounts of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable and the working capital revolving line of credit, as of June 30, 2018 and December 31, 2017, approximate fair value due to their short-term nature. The Company defines cash equivalents as highly liquid instruments with maturities of three months or less that are regarded as high quality, low risk investments. Cash equivalents when held consist of principally FDIC insured certificates of deposits.

 

Nonrecurring Fair Value Measurements — The Company holds certain assets and liabilities that are measured at fair value on a nonrecurring basis in periods subsequent to initial recognition. There were no assets or liabilities measured at fair value on a nonrecurring basis at June 30, 2018 or December 31, 2017.

 

5.INVENTORIES

 

Inventories, net of reserves, as of June 30, 2018 and December 31, 2017 consist of:

 

   June 30, 2018  December 31, 2017
       
Raw materials  $2,715   $3,069 
Work in process   860    597 
Finished goods   1,658    1,985 
Allowance for obsolescence   (376)   (378)
          
Total inventory — net  $4,857   $5,273 

 

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For the three months ended June 30, 2018 and 2017, the Company recorded inventory provisions of $2 and $3, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded inventory provisions of $8 and $3, respectively.

 

 

 

 

 

 

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6.PROPERTY, PLANT, AND EQUIPMENT

 

Property, plant, and equipment, net of depreciation, at June 30, 2018 and December 31, 2017 consist of:

 

   June 30, 2018  December 31, 2017
       
Lease improvements  $21   $21 
Vehicles   69    69 
Machinery and equipment   2,354    2,354 
Patterns and tooling   788    788 
Office furniture and equipment   424    424 
Information technology equipment and software   677    677 
   $4,333   $4,333 
           
Less accumulated depreciation   (3,216)   (2,966)
           
Total property, plant and equipment, net of depreciation  $1,117   $1,367 

 

Depreciation expense was $123 and $250 for the three and six months ended June 30, 2018, respectively. Depreciation expense was $128 and $246 for the three and six months ended June 30, 2017, respectively.

 

Amortization expense for the six months ended June 30, 2018 and 2017 was $0 and $9, respectively.

 

7.GAIN ON SALE OF ASSETS

 

On October 26, 2016, the Company entered into a definitive agreement for WEG Electric Corp. and WEG Equipamentos Eletricos S.A. (collectively, “WEG”) to acquire some of the Company’s utility wind assets. Under the agreement, the proven utility scale direct drive technology developed are solely owned by WEG and its affiliates. All assets and liabilities, including the related patent portfolio for utility wind greater than 1.5 MW were acquired by WEG. In addition, WEG assumed all liabilities related to a maintenance agreement the Company had entered into upon the sale of two prototype turbines to a customer. WEG will continue to compensate the Company under the existing arrangement paying royalties for sales in South America resulting in future payments of potentially up to approximately $10.0 million, of which $3.0 million are fixed payments, which have been historically collected. Additionally, WEG will potentially pay the Company up to $17.5 million in royalty payments over the next decade for turbines shipped anywhere outside of South America.

 

Any future royalty payments will be considered additional proceeds from sale and will be recorded as gain on sale of assets in the consolidated statements of operations. Gain on sale of assets for the three months ended June 30, 2018 and 2017 was $0 and $150, respectively. Gain on sale of assets for the six months ended June 30, 2018 and 2017 was $0 and $0.4 million, respectively. Unbilled revenue includes $0 million and $0.5 million, related to this transaction as of June 30, 2018 and December 31, 2017, respectively.

 

8.DEBT

 

Debt at June 30, 2018 and December 31, 2017 consist of:

 

   June 30, 2018  December 31, 2017
           
Working capital revolving line of credit  $1,007   $1,500 

 

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In December 2017, the Company amended its foreign working capital revolving line of credit with Comerica to extend the maturity date of December 31, 2017 to June 30, 2019. The line of credit was increased from $2.0 million to $2.5 million with the available borrowing base being limited to the amount of collateral available at the time the line is drawn. All other significant terms of the line of credit remained the same. The renegotiated loan agreement with Comerica contains a financial covenant which requires the Company to maintain unencumbered liquid assets having a value of at least $1.0 million at all times. As of June 30, 2018, the Company is non-compliant with the $1.0 million threshold. In addition, the Company was not compliant with a requirement to have not more than $0.5 million at banks other than Comerica. At June 30, 2018, we had unencumbered liquid assets having a value of $0.3 million. On May 29, 2018, Comerica informed the Company that the Company was no longer in compliance with two covenants (collectively, the “Covenants”) under that certain Amended and Restated Loan and Security Agreement by and between the Company and Comerica dated December 31, 2013 and as amended (the “Loan”). In connection with the above referenced financing, the Company and Comerica Bank entered into a Forbearance Agreement and Comerica agreed to among other things, to forbear existing defaults and non-compliance under the Loan through the end of November 2018. Under such agreement we may borrow up to $0.9 million through November 30, 2018.

 

At June 30, 2018, there was $1.0 million outstanding on the revolving line of credit and $0 outstanding in performance and warranty letters of credit. The Company had no further capability to borrow under its line of credit based upon its limitations in available collateral.

 

 

9.ACCRUED EXPENSES

 

Accrued expenses consist of:

 

   June 30, 2018  December 31, 2017
       
Accrued warranties  $894   $1,420 
Accrued rebates, allowances and discounts   18    18 
Other accrued expenses   993    1,203 
           
Total accrued expenses  $1,905   $2,641 

 

Changes in the Company’s product warranty accrual consisted of the following:

 

   Three months ended  Six months ended
   June 30,2018  June 30,2017  June 30,2018  June 30,2017
Beginning balance  $1,140   $1,683   $1,420   $1,912 
Provisions, net of reversals   24    592    49    784 
Settlements   (270)   (463)   (575)   (884)
                     
Ending balance  $894   $1,812   $894   $1,812 

 

10.CAPITAL STRUCTURE

 

Common Shares-No Par —The Company’s authorized capital consists of an unlimited number of voting common shares and an unlimited number of class B restricted voting shares. As of June 30, 2018, there were 23,853,884 voting common shares issued and outstanding and no class B restricted voting shares issued and outstanding.

 

11.STOCK BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

 

Northern Power Systems Corp. 2014 Stock Option and Incentive Plan (“2014 NPS Corp Plan”)—The Company has adopted the 2014 NPS Corp Plan, which reserved 4,000,000 shares of the Company’s voting common shares for both future exercise of outstanding stock options and shares available for future outstanding grants. Effective June 27, 2018 the company increased it available reserved shares for both the future exercise of outstanding options and shares by 2,000,000 shares to 6,000,000 shares. The Company is accounting for grants under the 2014 NPS Corp Plan as equity awards.

 

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A summary of the stock option activity under the 2014 NPS Corp Plan for the six months ended June 30, 2018, is as follows:  

 

   Shares 

Weighted-Average

Exercise

Price

 

Average Remaining Weighted-Average

Contractual Term

(In Years)

 

Aggregate

Intrinsic

Value

Outstanding — December31, 2017   1,888,240   $1.19    4.4   $ 
Granted                
Canceled   (129,909)  $0.80           
                     
Outstanding — June 30, 2018   1,758,331   $1.21    3.9   $ 
                     
Exercisable — June 30, 2018   1,417,733   $1.46    3.5   $ 
                     
Shares vested and expected to vest June 30, 2018   1,727,677   $1.43    3.8   $ 

 

As of June 30, 2018, 3,104,289 options were available for grant under the 2014 NPS Corp Plan.

 

The aggregate intrinsic value in the table above represents the difference between the fair value of common shares and the exercise price of outstanding, in-the-money, stock options.

 

At June 30, 2018, unrecognized stock-based compensation expense related to non-vested stock options is $37 which is expected to be recognized over the weighted-average remaining vesting period of 1.4 years.

 

There were no restricted share grants issued during the six months ended June 30, 2018.

 

In May 2017, the Company granted 240,000 restricted common shares, with a fair value per share of $0.16 to its non-employee directors under the 2014 NPS Corp Plan as part of each such director’s annual retainer for service on the Company’s Board of Directors. These restricted common share grants vested 25% on the grant date and 25% on June 30, 2017, and vested 25% on September 30, 2017 and December 31, 2017.

 

The Company recognizes stock-based compensation expense net of estimated forfeitures on a straight-line basis over the requisite service period. The forfeiture rate was 10% for the three and six months ended June 30, 2018 and 2017. Stock-based compensation expense, a non-cash expense, is included in each respective expense category as follows, for the three and six months ended June 30, 2018 and 2017:

 

   Three months ended June 30  Six months ended June 30
   2018  2017  2018  2017
             
Cost of revenue  $1   $3   $3   $5 
Sales and marketing   3    8    6    16 
Research and development   1    1    2    2 
General and administrative   5    38    9    54 
                     
Total stock-based compensation expense  $10   $50   $20   $77 

 

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12.401(k) PLAN

 

The Company has a defined contribution plan covering substantially all of its employees, subject to certain eligibility requirements. Under the plan, participating employees may defer up to 15% of their pre-tax compensation, as defined. The Company contributes 25% of the amount contributed by a participating employee, up to a maximum of 6% of the participant’s pre-tax compensation. Company matching contributions for the three months ended June 30, 2018 and 2017 were $10 and $11, respectively. Company matching contributions for the six months ended June 30, 2018 and 2017 were $24, and $24, respectively

 

13.INCOME TAXES

 

For the three and six months ended June 30, 2018, the Company recorded income tax expense of $20 and $35, respectively, which is comprised of $16 current expense and $4 deferred expense for the three months ended June 30, 2018 and is comprised of $28 current expense and $7 deferred expense for the six months ended June 30, 2018.

 

For the three and six months ended June 30, 2017, the Company recorded income tax expense of $18 and $34, respectively, which is comprised of $14 current expense and $4 deferred expense for the three months ended June 30, 2017 and is comprised of $28 current expense and $7 deferred expense for the six months ended June 30, 2017.

 

During 2017, the Tax Cuts and Jobs Act (the “Act”) was signed into law. Among other changes, the Act significantly changes corporate income tax law by reducing the corporate income tax rate from 35% to 21%, creating a territorial tax system including a one-time transition tax on the untaxed cumulative foreign earnings and profits as of December 31, 2017, adding a new inclusion rule for global intangible low-taxed income (“GILTI”) and deduction for foreign derived intangible income (“FDII”), and allowing for immediate capital expensing of certain qualified property. Under the Act, federal net operating loss carryforwards generated as of the end of 2017 continue to be carried forward for 20 years and are generally available to fully offset taxable income earned in a tax year. Federal net operating losses generated after 2017 will be carried forward indefinitely, but generally may only offset up to 80% of taxable income earned in future tax years. The tax laws are generally effective for the 2018 tax year. However, the Company recognized certain effects of changes in tax laws in 2017, which was when the new legislation was enacted. Specifically, the Company remeasured the deferred tax assets and liabilities in 2017 based on the rate at which they are expected to reverse in the future.

 

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Legislation. The Company has recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities and included these amounts in its consolidated financial statements for the year ended December 31, 2017. As of December 31, 2017, the Company has substantially completed its accounting for the tax effects of the 2017 Tax Act.  If revisions are needed as new information becomes available, the final determination of the deemed re-measurement of the Company’s deferred assets and liabilities, the deemed mandatory repatriation or other applicable provisions of the Tax Legislation will be completed as additional information becomes available, but no later than one year from the enactment of the 2017 Tax Act.

 

As of December 31, 2017, the Company had $137,277 of federal net operating loss carryforwards that expire beginning in 2028, $81,386 of state net operating loss carryforwards that expire from 2018 through 2028, and $1,462 of research and development tax credits that begin to expire in 2028. The amount of the net operating loss and research and development tax credit carryforwards that may be utilized annually to offset future taxable income and tax liability may be limited as a result of certain ownership changes pursuant to Section 382 of the Internal Revenue Code. The Company has completed a Section 382 study, through June 30, 2017, to assess if any ownership changes would have caused limitations to our net operating loss carryforwards. Based on that study, the Company has concluded an ownership change occurred on September 19, 2008 and therefore there is potential for $2,600 of net operating loss to be limited. For the period September 20, 2008 through June 30, 2017, the Company has determined that it is more likely than not that there has not been an ownership change under Section 382. We have not completed an updated Section 382 study for periods after June 30, 2017, and as such are not able to assess whether and ownership change has occurred that could cause limitations to our net operating loss carryforwards.

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established for any deferred tax asset for which realization is not more likely than not. The net deferred tax liability as of June 30, 2018 and December 31, 2017 includes deferred tax liabilities related to amortizable goodwill, which are anticipated to reverse in an indefinite period and which are not currently available as a source of taxable income. The net deferred tax liability is classified as long term on the condensed consolidated balance sheets.

 

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The Company recognizes in its consolidated 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. As of June 30, 2018, there are no uncertain tax positions. In addition, there are no amounts required to be included in the financial statements for interest or penalties on uncertain tax positions.

 

14.SEGMENT REPORTING

 

The chief operating decision maker re-evaluates the Company’s business structure to best align reporting with the Company’s operating strategies. The Company’s operating strategy includes direct product sales and related service as its core focus. Therefore, the Company has concluded that it has one reportable segment.

 

15.SUBSEQUENT EVENTS

 

The Company completed the initial closing of a private placement financing effected under the financial hardship exemption available to companies listed on the Toronto Stock Exchange under certain circumstances (the “Financing”). At the initial closing, the Company issued Convertible Subordinated Promissory Notes (the “Notes”) to certain new investors as well as certain existing investors, in the aggregate amount of C$2,446,642 or US$1,880,000.

 

Under the Financing, (i) the new investors agreed to invest up to an aggregate of C$650,703 or US$500,000 which amount was conditioned upon the existing investors investing an aggregate of C$1,952,108 or US$1,500,000 and (ii) the Company may raise up to an aggregate of US$2,750,000. As of the date hereof, the existing investors have invested an aggregate of C$1,952,108 or US$1,500,000 and the new investors have invested C$494,535 or US$380,000. Subsequently on August 7, 2018, a further $0.12 million worth of convertible notes were closed, bringing the total amount raised to $2.0 million. The remaining US$750,000 contemplated to be raised under the Financing is expected to close, if at all, by August 31, 2018.

 

The investors may convert the Notes at any time into shares of the Company’s common shares (“Shares”). Interest under the Notes accrues but shall not be due and payable until the maturity date. Under the Notes the outstanding principal balance and accrued interest under each Note shall be convertible, in whole or in part, at the option of the holder at any time prior to the maturity date, into shares of common stock at a per share price of C$.0675 or US$.051 (the “Conversion Price”). The Conversion Price of C$.0675 per Share or US$.051 is approximately a 32.5% discount to the market price of C$.10 per Share or US$.076 per Share based on the volume weighted average trading price of the Company’s common shares on the TSX for the five trading days immediately prior to, and including, July 10, 2018.

 

In connection with the above referenced financing, the Company and Comerica Bank entered into a Forbearance Agreement and Comerica agreed to among other things, to forbear existing defaults and non-compliance under the Loan through the end of November 2018.

 

On August 7, 2018 the Company announced that Ciel R. Caldwell, the Company’s President and Chief Operating Officer and current interim Chief Financial Officer, was resigning as President and Chief Operating Officer of Northern Power System Corp. She re-assumed the responsibilities Chief Financial Officer effective as such date. The Company has experienced significant loss of key financial personnel within the second quarter of 2018, as well as subsequent to June 30, 2018. Commensurate to her resignation from the position of President and Chief Operating Officer she also resigned from the Board of Directors of the Company as well as its Executive Committee of the Board of Directors. On August 7, 2018, the Board of Directors of the Company appointed William St. Lawrence and Reinout G. Oussoren as Interim Co-Chief Executive Officers of the Company.

 

Except as disclosed above, the Company evaluated subsequent events through the date of the filing and had no additional subsequent events to report.

 

16.COMMITMENTS AND CONTINGENCIES

 

During 2015, the Defense Contract Auditing Agency (“DCAA”) completed field work on the 2004 audit and issued a final report to the National Renewable Energy Laboratory (“NREL”). NREL has not issued a final determination related to the findings as of September 30, 2017. The DCAA considers the years 2005 through 2007 and 2010 open for audit, however, there has been no audit activity related to these years and the Company has not received formal notification that such audits are on hold. Management believes that as of the date of these financial statements these audits have been delayed or placed on hold. Based upon the lack of a final determination from NREL on the 2004 audit and lack of activity on later audits, the Company does not have adequate information at the date of issuance of these financial statements to determine if the outcome of any of these remaining open audits will result in a cost to the Company. The Company, however, does not expect a material impact based on the results of previous audits.

 

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The Company has entered into several operating lease agreements, primarily for the lease of office and manufacturing facilities, and office equipment, expiring through 2020. Rental expense under these operating lease arrangements for the three and six months ended June 30, 2018 was $68 and $135, respectively. Rental expense under these operating lease arrangements for the three and six months ended June 30, 2017 was $125 and $229, respectively. In June 2017, the Company entered into a new lease agreement for its headquarters and production facility in Barre, Vermont. The lease term commenced on August 1, 2017 and expires July 31, 2020, with an option to extend the lease term for a single three-year period. Furthermore, the Company has subleased a portion of its Barre facility. Future minimum lease payments, net of sublease income, under non-cancelable lease agreements (with initial or remaining lease terms in excess of one year) are as follows:

 

Years Ending December 31   
    
2018  $137 
2019   268 
2020   157 
      
Total  $562 

 

 

 

 

 

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Item 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on April 2, 2018.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including those described in this discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q and those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017. Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition and results of operations. Accordingly, readers should not place undue reliance on these forward-looking statements. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” among others, generally identify forward-looking statements; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. We are not under any obligation to, and do not intend to, publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Please carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

 

Overview

 

We are a provider of advanced renewable power generation and power conversion technology for the distributed energy sector. We design, manufacture and service a suite of proven permanent magnet direct-drive (“PMDD”) wind turbine platforms for the distributed wind market and provide power converters, software controls, and integration and development services for battery energy storage applications. In 2017, we commenced developing sites for energy storage projects to provide end users with turn-key distributed energy solutions. Historically, we licensed our utility-class wind turbine platform, which uses the same PMDD technology as our distributed turbines, to large manufacturers. In October 2016, we completed the transfer of these technology rights, which enabled us to focus our efforts on the distributed energy business. With our predecessor companies dating back to 1974, we have decades of experience in developing proven innovative energy solutions in the power generation and conversion space.

 

Our PMDD wind turbine technology is based on a simplified architecture that utilizes a unique combination of a permanent magnet generator and direct-drive design. The permanent magnet generator provides higher efficiency and higher energy capture than units that utilize a traditional gearbox design. Importantly, our direct-drive turbine design requires significantly fewer moving parts than traditional geared turbines, which increases reliability due to reduced maintenance and downtime costs. Since our early days of pioneering this technology, PMDD has become an industry standard.

 

Our current sales are primarily in the small wind subset of the distributed wind market, which is commonly known to consist of turbines with rated capacities of 500 kW output or smaller. Based on the number of turbines that we have sold and installed to date, we consider ourselves a leader in the U.S., U.K., and Italy in the largest sub-segment of this market in terms of energy output, turbines ranging in size from 50 kW to 100 kW. Since the introduction of our second generation 60 kW and 100 kW PMDD wind turbines in late 2008, we have sold over 800 of these turbines. To date, these units, in the aggregate, have run for over twenty million hours. Our distributed wind customers include financial investors and project developers, but also the end users themselves such as farms, schools, municipalities, businesses, remote villages, and U.S. military installations.

 

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Historically, our largest markets for wind turbines have been the Italy and UK. Sales of our turbines in these countries, have been driven and supported by government sponsored feed-in-tariff programs or economic incentives. Unfortunately, the Italian feed-in-tariff for distributed wind that boosted sales in 2017 expired on June 30, 2017 without extension. Uncertainty in the marketplace regarding the status of a new feed-in-tariff and prolonged delays surrounding the drafting, approval, adoption and ultimately the implementation of a new feed-in-tariff regime in Italy for distributed wind, together with uncertainty surrounding the Italian election and government, has halted sales of our distributed wind products in Italy. Accordingly, in April 2018, we restructured operations to maintain manufacturing activity consistent with market traction. In connection with the restructuring, we took steps to reduce our workforce and temporarily suspended full-scale manufacturing activities for its distributed wind business until at least the third quarter of 2018. We anticipate that with the expected implementation of the new feed-in-tariff in the fourth quarter of 2018, Italy, once again, will be a robust market for our distributed wind turbines. While manufacturing is suspended, we will continue to sell and market its products across the globe and all orders will be slotted to be manufactured in the third quarter of 2018.  Similarly, sales in the UK have slowed due to the transmission and/or distribution network congestion, restricted grid connections and political uncertainties, including Brexit and regulatory policies.

 

We had developed a 2 MW turbine platform with three wind-speed regime variants based upon our PMDD technology, of which the 2.3 MW variant is certified to International Electrotechnical Commission, or IEC, standard 61400-1 by Det Norske Veritas, or DNV, a globally recognized certification firm. On October 26, 2016, we entered into a definitive agreement for WEG Electric Corp. and WEG Equipamentos Elétricos S.A. (collectively, “WEG”), to acquire certain of our utility wind assets. Under the agreement, the proven utility scale direct drive technology we developed are solely owned by WEG and its affiliates.

 

Regarding the power electronics product line, we have been developing our power converter technology since the early 2000s. Our capabilities in this area resulted from the complex power conversion technology required for wind power generation. We currently sell our MW power converters for a range of applications under the branded name of FlexPhase. Our power electronics products are incorporated into our distributed wind turbines, and also sold independently for use in microgrids and energy storage projects. Our FlexPhase products are modular in nature allowing for a common platform to service multiple applications. Currently, we are actively commercializing sales of our power converters products as part of integrated battery energy storage systems (“BESS”), working with various battery manufactures and systems integrators.

 

In addition to wind turbine and productized energy storage solutions, we are developing sites for energy storage projects and provide technology development services to customers for more complex energy storage, microgrid, and grid stabilization situations. While our efforts to develop sites for energy storage projects and providing technology development services to customers are in the early stages, these capabilities and expertise serve as a differentiator for our company with our customers.

 

For the three months ended June 30, 2018 and 2017, we generated revenues of $2.2 million and $17.8 million, respectively. For the three months ended June 30, 2018 and 2017, we incurred net loss of $1.0 million and earned a net income of $0.9 million, respectively. We have an accumulated deficit of $179.9 million as of June 30, 2018.

 

We are headquartered and our principal manufacturing is in Barre, Vermont, and certain finance and business development teams are located in Massachusetts, with additional sales offices in Zurich, Switzerland, and sales and service office in Bari, Italy, and warehousing and manufacturing in Bisaccia, Italy, and Cornwall, U.K. We previously operated under the name Wind Power Holdings, Inc. and was originally incorporated in Delaware on August 12, 2008. Our common shares are listed on the Toronto Stock Exchange under the symbol “NPS”.

 

On May 31, 2018 we announced that it had received a notice from the Toronto Stock Exchange that it had initiated a review of our eligibility for continued listing on the exchange. The Toronto Stock Exchange identified several deficiencies regarding our compliance with the Toronto Stock Exchange continued listing requirements, including the fact that (i) the trading activity of our securities has been so reduced as it does not warrant continued listing, (ii) the market value of our listed securities has been less than $3.0 million for the 30 previous consecutive trading days, (iii) market value of our publicly held listed securities has been less than $2.0 million for the 30 previous consecutive trading days and (iv) in the opinion of the Toronto Stock Exchange as well as based upon our assessment, it is questionable as to whether we will be able to continue as a going concern. We are presently evaluating possible courses of action to regain compliance with the Toronto Stock Exchange continued listing requirements. The Continued Listing Committee of Toronto Stock Exchange is scheduled to meet on September 13, 2018 to consider whether or not to suspend trading in and delist the securities of the Company. We are entitled to make submissions to the Listing Committee to address deficiencies on or before September 7, 2018. If we cannot demonstrate that it meets all of the Toronto Stock Exchange continued listing requirements by September 21, 2018, our securities will be delisted 30 days from such date.  

 

Factors Affecting Our Results of Operations

 

Governmental Policies and Incentives

 

Government incentives continue to be one of the main drivers for developing wind energy technology and increasing capacity. Although government support programs differ from country to country, a number of countries have implemented incentive schemes, thus providing various types of subsidies to wind power developers and long-term tariffs. Historically, we and our customers have benefited from fiscal incentives applicable to investments in the wind power industry by federal, state and local governments in the U.S. and Europe. Changes in these policies have affected, and will continue to affect, the investment plans of our customers and us, as well as our business, financial condition and results of operations.

 

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There are certain feed-in-tariff regimes in Italy, the U.K. and certain states within the U.S. supporting the installation and operation of distributed-class wind turbines. Published information from the U.K. indicates that the feed-in-tariff rates and deployment caps by rated capacity have declined on a quarterly basis. The Italian authorities have drafted a new law that is currently under review. The new law provides for a feed-in-tariff from the date of publication until December 31, 2020. It is expected that the new law will be effective potentially in the fourth quarter of 2018, but potentially in the first quarter of 2019. Although it is expected that the 2018-2020 feed-in-tariff will become effective by the fourth quarter of 2018, there is no guarantee it will be approved and implemented in a timely manner or at favorable rates.

 

In the U.S., the Bipartisan Budget Act of 2018 renewed Investment Tax Credits (ITC) for renewal energy products that were left out of the 2015 legislation. For distributed wind projects there is a 30% ITC for projects that begin prior to 2020, 26% ITC for projects that begin in 2020 and 22% ITC for projects that begin construction in 2021.

 

Our third generation distributed turbine offers customers meaningfully improved economics that make the turbines more relevant for regions that do not have economic incentives. As we continue sales in our core markets we expect to continue to expand our product offering and sales force to increase our sales in other regions.

 

Seasonality in Our Operations

 

Wind turbine sales in the regions in which we currently sell our turbines are affected by seasonal variations and the timing of government incentive structures. To satisfy the delivery schedules, we manufacture most of our wind turbines during the second and third quarters of each year for delivery and installation in the third and fourth quarters. This schedule is due primarily to the weather conditions, which are more favorable in these quarters for installation in northern areas to which we supply most of our wind turbines. We expect that the seasonality will gradually lessen as we obtain more purchase orders for sale of wind turbines in additional geographies.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the Company’s 2017 consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017 (File No. 000-55184). The consolidated balance sheet as of December 31, 2017 was derived from the Company’s annual audited financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from these estimates. All adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods, have been recorded. Actual amounts could differ from these estimates. Due to differing business conditions and seasonality, operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ending December 31, 2018.

 

Significant Accounting Estimates

 

We review all significant estimates affecting our consolidated financial statements on a recurring basis and record the effects of any necessary adjustments prior to their publication. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of consolidated financial statements; accordingly, it is possible that actual results could differ from those estimates and changes to estimates could occur in the near term. The preparation of our consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of the contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. We use estimates and assumptions in accounting for the following significant matters, among others: revenue recorded from licensing and development agreements; ability to realize accounts receivable; and valuation of inventory, goodwill and long-lived assets, warranty reserves, deferred income tax assets, share-based compensation and contingencies.

 

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Results of Operations of the three months ended June 30, 2018 compared to the three months ended June 30, 2017

 

Overview

 

Our general activity during the three months ended June 30, 2018 was primarily focused on: exploring strategic alternative to bring additional capital into our business, working toward closing initial full scope energy storage projects; developing sites for energy storage projects; expansion of our order backlog of distributed wind turbines in key markets, especially the United States; and managing our supply chain as well as expenses.

 

Our general activity during the three months ended June 30, 2017 was primarily focused on: meeting the heavy backlog conversion demand driven by the Italian market wind feed-in-tariff stepdown that occurred on June 30, 2017, expansion of our order backlog of distributed wind turbines in key markets, especially Italy and the United States; expansion of order backlog for FlexPhase power conversion technology used in battery-energy-storage and microgrid applications; expansion of services offerings to include full turnkey wind turbine installations, and optimizing our supply chain and operating profile to improve our margins.

 

Revenue, Orders and Deferred Revenue (dollars in millions)

 

Total revenues decreased by $15.6 million, or 88%, to $2.2 million for the three months ended June 30, 2018 from $17.8 million for the three months ended June 30, 2017. Our overall backlog decreased to approximately $5 million at June 30, 2018 as compared to approximately $14 million at June 30, 2017. Our backlog of orders generally, but not always, converts to revenue for us within a one-year period. The timing of such revenue recognition is impacted by customer specific installation conditions such as site preparation and readiness by local utilities for grid connection.

 

The decrease in revenue was primarily attributed to $14.8 million decrease in distributed-class turbines sales and service revenue of $0.9 million partially offset by an increase in non-turbine sales of $0.1 million. We recognized revenue on 4 units for the three months ended June 30, 2018 as compared to 74 units for the three months ended June 30, 2017.

 

Our international revenue was $0.5 million and $17.2 million for the three months ended June 30, 2018 and 2017, respectively, representing 23%, and 97% of our revenues for those periods, respectively. A portion of our revenues were denominated in currencies other than our reporting currency, the U.S. dollar, which decreased to 21% of total revenues for the three months ended June 30, 2018 as compared to 97% of total revenues for the same period in 2017. Our revenues may be denominated in euro and other non-U.S. dollar currencies over time as we continue to expand our international sales. We are currently experiencing negative movement between the euro and the U.S. dollar, which has an adverse effect on our revenue and profitability.

 

During the three months ended June 30, 2018, we executed 0 new distributed-class turbine sales orders. During the three months ended June 30, 2017, we executed 10 new distributed-class turbine sales orders. Our deferred revenue balance at June 30, 2018 was $2.8 million which is included in the backlog value disclosed above. At June 30, 2017, such balance was $3.8 million.

 

Cost of Goods Sold and Cost of Service Revenues (dollars in millions)

 

Cost of goods sold and cost of services revenues collectively decreased by $12.3 million or 87% in the three months ended June 30, 2018 to $1.8 million as compared to $14.1 million in the three months ended June 30, 2017. The lower cost of sales is primarily the result of 4 turbines units sold for the three months ended June 30, 2018 as compared to 74 units for the same period in 2017. Our cost of product revenues was $1.2 million along with $0.6 million of related service costs for the three months ended June 30, 2018 compared to $13.1 million for product sales and $1.0 million for related service costs for the same period in 2017.

 

Gross Margin (dollars in millions)

 

Gross margin decreased $3.2 million in the three months ended June 30, 2018 to a profit of $0.4 million as compared to a profit of $3.6 million in the three months ended June 30, 2017.

 

This change was due to the $15.6 million decrease in revenues combined with the $12.3 million decrease in cost of revenues for the three months ended June 30, 2018, primarily from a decrease in sales volume.

 

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Operating Expenses

 

Sales and Marketing

 

Sales and marketing expenses decreased by $0.2 million or 29% to $0.5 million from $0.7 million for the three months ended June 30, 2018 as compared to the same period in 2017. The decrease in sales and marketing expense is primarily from a reduction of $0.1 million in compensation and benefits expenses and $0.1 million in other sales and marketing expenses.

 

Research and Development Expenses

 

Research and development expenses decreased by $0.2 million or 40% to $0.3 million from $0.5 million for the three months ended June 30, 2018 as compared to the same period in 2017. The reduction in research and development expense is primarily the result of a reduction in consulting expenses of $0.2 million during the three months ending June 30, 2018.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $0.6 million or 46% to $0.7 million for the three months ended June 30, 2018 from $1.3 million for the same period in 2017. This decrease is principally due to $0.3 million reduction in compensation and benefits expense, $0.1 million decrease in professional fees and $0.2 million decrease in other general and administrative expenses.

 

Gain on Sale of Assets

 

Gain on sale of assets was $0 for the three months ended June 30, 2018 as compared to $0.2 million for the same period in 2017. This decrease reflects the reduction of units shipped by WEG related to the sales of certain utility wind assets in the fourth quarter of 2016.

 

(Loss) Income from Operations

 

Our loss from operations increased by ($2.5) million to ($1.2) million for the three months ended June 30, 2018 compared to income from operations of $1.3 million for the same period in 2017. The increase in loss from operations is due to a decrease in gross profit offset by a reduction in operating expenses.

 

Other (Expense)/Income and Income Tax Expense

 

Other income increased $0.6 million to $0.2 million for the three months ended June 30, 2018 compared to other expense of $0.4 for the same period in 2017. The increase in other income is attributable to a change in foreign currency gains of $0.6 million.

 

Income tax expense was approximately $0 for the three months ended June 30, 2018 and 2017.

 

Net (Loss) Income

 

Net loss increased by ($1.9) million to ($1.0) million for the three months ending June 30, 2018 compared to net income of $0.9 million for the same period in 2017.

 

Results of Operations of the six months ended June 30, 2018 compared to the six months ended June 30, 2017

 

Overview

 

Our general activity during the six months ended June 30, 2018 was primarily focused on: working toward closing initial full scope energy storage projects; developing sites for energy storage projects; expansion of our order backlog of distributed wind turbines in key markets, especially the United States; managing our supply chain as well as expenses; and exploring strategic alternative to bring additional capital into our business.

 

Our general activity during the six months ended June 30, 2017 was primarily focused on: meeting the heavy backlog conversion demand driven by the Italian market wind feed-in-tariff stepdown that occurred on June 30, 2017, expansion of our order backlog of distributed wind turbines in key markets, especially Italy and the United States; expansion of order backlog for FlexPhase power conversion technology used in battery-energy-storage and microgrid applications; expansion of services offerings to include full turnkey wind turbine installations, and optimizing our supply chain and operating profile to improve our margins.

 

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Revenue, Orders and Deferred Revenue (dollars in millions)

 

Total revenues decreased by $20.2 million, or 84%, to $3.8 million for the six months ended June 30, 2018 from $24.0 million for the six months ended June 30, 2017. Our overall backlog decreased to approximately $5 million at June 30, 2018 as compared to approximately $14 million at June 30, 2017. Our backlog of orders generally, but not always, converts to revenue for us within a one-year period. The timing of such revenue recognition is impacted by customer specific installation conditions such as site preparation and readiness by local utilities for grid connection.

 

The decrease in revenue was primarily attributed to $19.9 million decrease in distributed-class turbines sales along with a $1.0 million decrease in service revenue partially offset by $0.7 million increase in non-turbine revenue. We recognized revenue on 4 units for the six months ended June 30, 2018 as compared to 98 units for the six months ended June 30, 2017. The decrease in turbine sales was driven by demand in the Italian market as customers were seeking to grid connect prior to the June 30, 2017 reduction in the feed-in-tariff. The reduction of the feed-in-tariff, together with the delay and uncertainty surrounding establishing a new Italian law regarding feed-in-tariff programs will likely be a continued slow Italian order rate during the second half of the year.

 

Our international revenue was $1.5 million for the six months ended June 30, 2018 as compared to $22.9 million for the six months ended June 30, 2017, representing 39% and 95% of our revenues for those periods, respectively. A portion of our revenues continue to be denominated in currencies other than our reporting currency, the U.S. dollar, which decreased to 38% of total revenues for the six months ended June 30, 2018 as compared to 95% of total revenues for the same period in 2017. We are currently experiencing positive movement between the euro and the U.S. dollar, which has a favorable effect on our revenue.

 

During the six months ended June 30, 2018, we executed 5 new distributed-class turbine sales orders. During the six months ended June 30, 2017, we executed 35 new distributed-class turbine sales orders. Our deferred revenues balance at June 30, 2018 was $2.8 million which is included in the backlog value disclosed above. At June 30, 2017, such balance was $3.8 million.

 

Cost of Goods Product Revenues and Cost of Service Revenues (dollars in millions)

 

Cost of product revenues and cost of services revenues collectively decreased by $16.6 million or 85% in the six months ended June 30, 2018 to $3.0 million as compared to $19.6 million in the six months ended June 30, 2017. The lower cost of sales is the result of lower number of units sold for the six months ended June 30, 2018 as compared to the same period in 2017. Our cost of product revenues was $1.9 million along with $1.1 million of related service cost for the six months ended June 30, 2018 compared to $17.8 million for product sales and $1.8 million for related service for the same period in 2017.

 

Gross Profit (dollars in millions)

 

Gross profit decreased $3.7 million in the six months ended June 30, 2018 to $0.7 as compared to $4.4 million during the six months ended June 30, 2017. This change was due to a decrease in the volume of sales combined with a reduction in product costs.

 

Operating Expenses

 

Sales and Marketing

 

Sales and marketing expenses decreased by $0.2 million or 15% to $1.1 million for the six months ended June 30, 2018 from $1.3 million for the same period in 2017. This decrease is principally due to $0.1 million reduction in compensation and benefits and $0.1 million in other sales and marketing expenses resulting from cost cutting efforts enacted during 2018.

 

Research and Development Expenses

 

Research and development expenses decreased by $0.5 million or 45% to $0.6 million for the six months ended June 30, 2018 from $1.1 million for the same period in 2017. The reduction in research and development expense is primarily the result of certain research credits of $0.2 million and a decrease consulting of $0.2 million and $0.1 million reduction in other research and development expenses as a result.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $0.7 million or 29% to $1.7 million for the six months ended June 30, 2018 from $2.4 million for the same period in 2017. This decrease is principally due to $0.5 million lower compensation and benefits expense, $0.1 million reduction in professional fees and $0.1 million lower other general and administrative expenses resulting from successful cost cutting efforts in 2018.

 

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Gain on Sale of Assets

 

Gain on sale of assets was $0 million for the six months ended June 30, 2018 as compared to $0.4 million for the same period in 2017. This increase reflects the gain on the sales of certain utility wind assets in the fourth quarter of 2016.

 

Loss from Operations

 

Our loss from operations increased by $2.6 million to $2.7 million for the six months ended June 30, 2018 compared to $0.1 million for the same period in 2017. The increase in loss from operations is due to a decrease in gross profit partially offset by a reduction in operating expenses.

 

Other (Expense)/Income and Income Tax Expense

 

Other expenses for the six months ended June 30, 2018 decreased by $0.1 million or 50% to $0.1 million as compared to $0.2 million for the same period in 2017.

 

Income tax expense was approximately $0 for the six months ended June 30, 2018 and 2017.

 

Net Loss

 

Net loss increased by $2.5 million, to $2.8 million for the six months ended June 30, 2018 from a net loss of $0.3 million for the same period in 2017. The increase in our net loss for the six months ended June 30, 2018, is primarily due to the increase in loss from operations.

 

Liquidity

 

As of June 30, 2018, we had cash and cash equivalents of $0.6 million of which $0.3 million was held by a foreign holding company and subsidiaries. We had cash and cash equivalents of $6.5 million of which $0.6 million was held by a foreign subsidiary for the same period in 2017. We have an existing cash plan which forecasts that we can operate beyond one year from the date of the issuance of these financial statements. However, there is uncertainty as discussed below.

 

Historically, we have experienced recurring operating losses and had an accumulated deficit of $179.9 million as of June 30, 2018. In addition, we have experienced recurring negative operating cash flows, which have resulted in a decrease in our cash balance. If we continue to incur significant operating losses and fail to generate significant revenues; and, if we are not able to renegotiate our line of credit to an adequate level within the forbearance period the bank has granted us, we will not have the money to pay our ongoing expenses and we may be required to restructure our business or go out of business. These factors raise substantial doubt regarding our ability to continue as a going concern. The Company evaluated these conditions as well as actions taken to improve profitability. These actions included cost reductions by reducing headcount and doing temporary furloughs, as well as restructuring management, reducing the cost of our core distributed wind products, optimizing our supply chain, and monetizing certain of our utility wind assets. In addition, we have begun commercializing our sales of our power converters, and full-scope energy storage solutions.

 

In the fourth quarter of 2017, we increased our line of credit from $2.0 million to $2.5 million and extended the maturity date from December 31, 2017 to June 30, 2019. Effective Jun 30, 2019, we are in breach of certain of our bank covenants. In working with Comerica, our ability to borrow against our line of credit up to the maximum supported by our borrowing-base was continued until on August 2, 2018 we executed a forbearance agreement with our bank allowing us to borrow up to a maximum of $0.9 million through November 30, 2018. The Company will be working during this time to execute a revised line of credit with our bank. On August 2, 2018 we completed a convertible note transaction raising an additional $1.88 million. Subsequently on August 7, 2018, a further $0.12 million worth of convertible notes were closed, bringing the total amount raised to $2.0 million. A further $0.75 million may also be raised under this transaction within the month of August 2018. Despite our efforts, we cannot predict, with certainty that the outcome of our plans and actions will be successful to meet our liquidity needs for the next twelve months from the issuance of the financial statements and as such, raise substantial doubt regarding our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this outcome of this uncertainty.

 

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Operating Activities

 

Cash used in operating activities consists of net loss adjusted for certain non-cash items including depreciation and amortization, share-based compensation, and changes in working capital and other activities. In addition to the decrease in net loss, cash used in operations increased as described below as a result of working capital needs.

 

For the six months ended June 30, 2018, net cash used in operating activities increased by $1.6 million to $3.2 million from $1.6 million for the six months ended June 30, 2017. Cash used in operating activities for 2018 is primarily due to the net loss of $2.8 million and the effect of changes in operating assets and liabilities resulting in a cash outflow of $0.5 million. Included in these changes were a decrease of $0.9 million in accrued expenses, a decrease of $1.5 million in accounts payable, partially offset by an increase in accounts receivable and unbilled revenue of $1.2 and a decrease in inventory and deferred costs of $0.6 million.

 

Investing Activities

 

Net cash provided by investing activities was $0.5 million for the six months ended June 30, 2018 as compared to $2.3 million provided by investing activities for the same period in 2017. In the six months ended June 30, 2018 and 2017, we received proceeds related to the sales of certain utility wind assets of $0.5 million and $2.6 million, respectively. In addition, 2017 also includes $0.3 million of property and equipment additions.

 

Financing Activities

 

For the six months ended June 30, 2018, net cash used in financing activities was $0.5 million compared to net cash provided by of $0.3 million for the six months ended June 30, 2017. For the six months ended June 30, 2018, we repaid $0.5 million on our revolving line of credit. We had borrowed $0.3 million against our working capital revolving line of credit for the period ended June 30, 2017.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements and did not have any such arrangements at June 30, 2018.

 

Contractual Obligations

 

As described below, we have no long-term debt obligations as of June 30, 2018 and December 31, 2017. We have $1.0 million outstanding on our working capital revolving line of credit and $0 outstanding on our performance letter of credit and warranty guarantee, as of June 30, 2018, which is described below in the Comerica Credit Facility section. In addition, we have leased our headquarters and production facility which expires in July of 2020.

 

Comerica Credit Facility

 

In December 2017, the Company amended its foreign working capital revolving line of credit with Comerica to extend the maturity date of December 31, 2017 to June 30, 2019. The line of credit maximum availability was increased from $2,000 to $2,500, with the available borrowing base being limited to the amount of collateral available at the time the line is drawn. This line is guaranteed by the U.S. Export-Import Bank, as well as by the assets of the Company. As of June 30, 2018, we had $1.0 million outstanding on the working capital revolving line of credit. At June 30, 2018, we had exceeded the maximum supported borrowing base by $0.1 million. The excess borrowing will be repaid subsequent to the quarter end and is not a non-compliance event.

 

The loan agreement with Comerica contains a financial covenant which requires us to maintain unencumbered liquid assets having a value of at least $1.0 million at all times. At June 30, 2018, we had become non-compliant with this requirement. We had unencumbered liquid assets having a value of $0.3 million.

 

As of June 30, 2018, we were not in compliance with the liquid asset covenant contained in our working capital line of credit. As of August 2, 2018 we executed a forbearance agreement with Comerica allowing us to borrow up to $0.9 million with no requirement to maintain a minimum unencumbered liquid asset value through November 30, 2018.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk

 

Not applicable for Smaller Reporting Company as defined by 229.10(f)(1)

 

Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Co-Interim Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits 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 a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, after evaluating the effectiveness of our disclosure controls and procedures as of the evaluation date, concluded that as of the evaluation date, our disclosure controls and procedures were not effective at the reasonable assurance level due to a material weakness in our internal control over financial reporting as discussed below.

 

As more fully set forth in Part II Item 9A, “Controls and Procedures,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2017 because we identified four material weaknesses. Specifically, we had (a) inadequate and ineffective controls for reviewing and analyzing revenue transactions related to certain international turbine sales that remained in logistics warehouses while certain logistics events were completed, (b) inadequate and ineffective controls for reviewing and analyzing complex or non-routine transactions, (c) ineffective controls for identifying and accounting for Performance Guarantee Program (PGP) revenue, and (d) inadequate and ineffective controls over the implementation and transition related to the adoption of ASU 2014-09. Additionally, as of June 30, 2018, management identified a fifth material weakness. Specifically, due to the loss of certain key financial reporting personnel, we had inadequate resources to effectively review and ensure timely closing of books and financial reporting. The Company continues to make enhancements to existing internal controls, to improve the quality and timing of the accounting close process and is in the process of assessing the resource needs of the department and engaging the appropriate accounting and financial expertise. Further work, however, is required to develop appropriate operational and procedural controls and in our review process to provide reasonable assurance that our financial controls over financial reporting are designed in the most effective and efficient manner possible. Therefore, while we are working to remediate the material weaknesses, additional work is required to reasonably assure that certain controls are operating effectively and in a timely manner. We expect to continue to undertake these actions as appropriate throughout 2018.

 

The Audit Committee is monitoring management’s continuing development and implementation of its remediation plan. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as the continued development of policies and procedures to improve the overall effectiveness of internal control over financial reporting.

 

Based on the evaluation of our financial reporting controls, our Principal Executive Officers and Principal Financial Officer concluded that, our financial reporting controls were not effective as of June 30, 2018. The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control over Financial Reporting

 

As discussed above, during the three months ended June 30, 2018, and subsequently, the Company lost additional financial reporting resources. Specifically, the Company has lost several important members of its accounting and financial reporting functions and is therefore reliant on contract resources and certain re-positioned resources within the business to complete its financial reporting. This has impacted segregation of duties and resulted in gaps in our internal controls processes and procedures. The Company is in the process of assessing the resource needs of the department and engaging the appropriate accounting and financial expertise, but the current reduction in personnel has resulted in delays in the closing of the books and filing of the Form 10-Q.

 

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PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

 

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings, incidental to the normal course of our business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

 

Item 1A.Risk Factors

 

In addition to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 000-55184) filed with the SEC on April 2, 2018, the Company discloses:

 

·That common stock is traded on the Toronto Stock Exchange (“TSX”) and the Company must satisfy certain listing requirements for continued listing on the TSX, including the requirement that the market value of “publicly held” shares of the Company are at least $3.0 million.  Since mid-April 2018, the Company’s market capitalization has been under $3.0 million. If this continues for 30 consecutive business days, the TSX will notify the Company that the Company does not currently meet the TSX’s requirement for continued listing requirements. The TSX provides companies with 120 calendar days to regain compliance with this continued rule. If our stock is delisted from the TSX, some investors may find our common shares less attractive, the trading market for our common shares may be limited and our share price may be more volatile and further depressed. If TSX notifies the Company of non-compliance with respect to the market capitalization listing requirement or any other listing requirement, there can be no assurance that the Company will be able to regain compliance or that the Company will be able to maintain its TSX listing.

 

·That on May 29, 2018, Comerica informed that the Company is currently not in compliance with two covenants (collectively, the “Covenants”) under that certain Amended and Restated Loan and Security Agreement by and between the Company and Comerica dated December 31, 2013 and as amended (the “Loan”).  On August 2, 2018, the Company entered into a Subordinated Convertible Note Purchase Agreement with certain investors under the financial hardship exemption available to companies listed on the TSX under certain circumstances (the “Financing”).  In connection with the financing, the Company and Comerica Bank entered into a Forbearance Agreement and Comerica agreed to among other things, to forbear existing defaults and non-compliance under the Loan through end of November 2018.  The Company intends to continue to work with Comerica to obtain a waiver relating to the Company’s compliance with the two Covenants and/or explore with Comerica amending the Loan, including the Covenants, to facilitate the Company’s compliance with its obligations under the Loan.  There can be no assurances that the Company will regain compliance with respect to the Covenants during the forbearance period or that the Comerica will waive the violation of the Covenants or any future covenant violations under the Loan or agree to amend the terms of the Loan. 

 

·That the Trump Administration recently imposed a 25% tariff on steel imports and such tariffs may increase the price of steel and various steel components, including the towers used in the construction and deployment of our wind turbines. The increased cost of our turbines, if any, could negatively impact sales and our revenue and results of operations may be harmed.

 

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

 

None

 

Item 3.Defaults Upon Senior Securities

 

None

 

Item 4.Mine Safety Disclosures

 

Not applicable

 

Item 5.Other Information

 

None

 

30

 

 

Item 6.Exhibits

 

See the Exhibit Index on the page immediately preceding the exhibits for a list of exhibits filed as part of this quarterly report, which Exhibit Index is incorporated herein by this reference.

 

 

 

 

 

31

 

 

SIGNATURES

 

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

 

       
    Northern Power Systems Corp.
    (Registrant)
       
Date: August 16, 2018   By:

/s/ William St. Lawrence

 
      William St. Lawrence
     

Co- interim Chief Executive Officer

(Principal Executive Officer)

 

Date: August 16, 2018   By:

/s/ Reinout G. Oussoren

 
      Reinout G. Oussoren
     

Co-interim Chief Executive Officer

(Principal Executive Officer)

 

Date: August 16, 2018   By:

/s/ Ciel R. Caldwell

 
      Ciel R. Caldwell
     

Chief Financial Officer

(Principal Financial Officer)

 

 

32

 

 

EXHIBIT INDEX

 

   

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

Filed

Herewith

             
31.1 Principal Executive Officer— Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         X
             
31.2 Principal Financial Officer and Principal Financial Officer — Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.         X
             
32.1 Principal Executive Officer — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.         *
             
32.2 Principal Financial Officer — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002         *
             
101.INS XBRL Instance Document.         **
             
101.SCH XBRL Taxonomy Extension Schema Document.         **
             
101.CAL XBRL Taxonomy Calculation Linkbase Document.         **
             
101.DEF XBRL Definition Linkbase Document.         **
             
101.LAB XBRL Taxonomy Label Linkbase Document.         **
             
101.PRE XBRL Taxonomy Presentation Linkbase Document.         **

 

*Furnished herewith

 

**Submitted electronically herewith

 

Attached as Exhibits 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i)  Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 and (ii)  Consolidated Statements of Operations and Comprehensive (Loss) Income for the three and six months ended June 30, 2018 and 2017 (unaudited), (iii)  Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2018 (unaudited), (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

 

33