Northern Power Systems Corp. - FORM 10-Q

Northern Power Systems Corp. - FORM 10-Q - September 14, 2016

Attached files

Attached files

Northern Power Systems Corp. Reports

file	filename
EX-32.1 - EX-32.1 - Northern Power Systems Corp.	d208431dex321.htm
EX-31.1 - EX-31.1 - Northern Power Systems Corp.	d208431dex311.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2016

¨	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 x

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 x

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):

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

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		23,173,884
Class		Outstanding at September 12, 2016

Table of Contents

Northern Power Systems Corp.

FORM 10-Q

INDEX


		Page No.
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)		3
	Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015		3
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2016 and 2015 (unaudited)		5
	Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the six months ended June 30, 2016 (unaudited)		6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)		7
	Notes to Consolidated Financial Statements (unaudited)		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39

Item 4.	Controls and Procedures		39

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings		41

Item 1A.	Risk Factors		41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3.	Defaults Upon Senior Securities		41

Item 4.	Mine Safety Disclosures		41

Item 5.	Other Information		41

Item 6.	Exhibits		41

Signatures			42

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NORTHERN POWER SYSTEMS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2016 AND DECEMBER 31, 2015

(In thousands, except share and per share amounts)


ASSETS	June 30, 2016		December 31, 2015
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	3,265	$	6,333
Accounts receivable — net of allowance for doubtful accounts of $0 and $350 at June 30, 2016 and December 31, 2015, respectively		1,600		3,046
Unbilled revenue		2,391		2,216
Inventories — net (Note 4)		8,450		9,233
Deferred costs		4,152		6,379
Prepaid expenses and other current assets		646		850

Total current assets		20,504		28,057
Property, plant and equipment — net (Note 5)		1,954		2,169
Intangible assets — net (Note 6)		836		928
Goodwill		722		722
Other assets		22		—

Total Assets	$	24,038	$	31,876

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

NORTHERN POWER SYSTEMS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF JUNE 30, 2016 AND DECEMBER 31, 2015

(In thousands, except share and per share amounts)


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	June 30, 2016			December 31, 2015
	(Unaudited)
CURRENT LIABILITIES:
Working capital revolving line of credit (Note 7)	$	2,500		$	2,892
Accounts payable		2,922			3,838
Accrued expenses (Note 8)		3,188			4,005
Accrued compensation		1,332			1,253
Deferred revenue		5,815			6,888
Customer deposits		5,598			3,596
Other current liabilities		105			357

Total current liabilities		21,460			22,829

Deferred revenue, less current portion		2,722			2,718
Deferred income taxes, net of current portion (Note 12)		182			175
Other long-term liability		228			245

Total Liabilities		24,592			25,967

Commitments and Contingencies (Note 15)
SHAREHOLDERS’ EQUITY (DEFICIT):
Voting common shares, no par value — Unlimited shares authorized; 23,173,884 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively.		165,568			165,568
Accumulated other comprehensive loss		—			(13	)
Additional paid-in capital		8,994			8,713
Accumulated deficit		(175,116	)		(168,359	)

Total Shareholders’ Equity (Deficit)		(554	)		5,909

Total Liabilities and Shareholders’ Equity (Deficit)	$	24,038		$	31,876

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

NORTHERN POWER SYSTEMS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)

FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(In thousands, except share and per share amounts)


	For the three months ended						For the six months ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
	(Unaudited)						(Unaudited)
REVENUES:
Product	$	6,819		$	9,679		$	10,934		$	15,917
License		323			2,291			441			2,906
Design service		310			321			528			2,077
Service		1,257			724			1,984			1,339

Total revenues		8,709			13,015			13,887			22,239

Cost of product revenues		6,782			10,191			11,853			16,158
Cost of service revenues		994			1,020			1,738			2,318

Gross profit		933			1,804			296			3,763
OPERATING EXPENSES:
Sales and marketing		796			1,150			1,823			2,462
Research and development		697			810			1,621			1,949
General and administrative		1,667			2,017			3,226			5,037

Total operating expenses		3,160			3,977			6,670			9,448

Loss from operations		(2,227	)		(2,173	)		(6,374	)		(5,685	)
Interest expense		(31	)		(71	)		(79	)		(97	)
Other expense		(146	)		(25	)		(116	)		(112	)

Loss before provision for income taxes		(2,404	)		(2,269	)		(6,569	)		(5,894	)
Provision for income taxes		122			383			188			768

NET LOSS		(2,526	)		(2,652	)		(6,757	)		(6,662	)
Other comprehensive loss
Change in cumulative translation adjustment		(10	)		18			13			(14	)

COMPREHENSIVE LOSS	$	(2,536	)	$	(2,634	)	$	(6,744	)	$	(6,676	)

Net loss applicable to common shareholders (Note 2)	$	(2,526	)	$	(2,652	)	$	(6,757	)	$	(6,662	)
Net loss per common share
Basic and diluted	$	(0.11	)	$	(0.11	)	$	(0.29	)	$	(0.30	)
Weighted average number of common shares outstanding
Basic and diluted		23,173,884			22,765,949			23,173,884			22,765,526

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

NORTHERN POWER SYSTEMS CORP.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

FOR THE SIX MONTHS ENDED JUNE 30, 2016 (unaudited)

(In thousands except share amounts)


	Voting Common Shares — No Par				Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Shareholders’ Equity (Deficit)
	Shares		Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Shareholders’ Equity (Deficit)
BALANCE — December 31, 2015		23,173,884	$	165,568	$	8,713		(13	)	$	(168,359	)	$	5,909
Stock based compensation expense		—		—		281		—			—			281
Cumulative translation adjustment		—		—		—		13			—			13
Net loss		—		—		—		—			(6,757	)		(6,757	)

BALANCE — June 30, 2016		23,173,884	$	165,568	$	8,994		—		$	(175,116	)	$	(554	)

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

NORTHERN POWER SYSTEMS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015

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


	For the six months ended
	June 30, 2016			June 30, 2015
	(Unaudited)
OPERATING ACTIVITIES:
Net loss	$	(6,757	)	$	(6,662	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for inventory obsolescence		186			132
Recovery of doubtful accounts		(44	)		(90	)
Stock-based compensation expense		281			368
Depreciation and amortization		361			373
Noncash implied license revenue		—			(420	)
Loss on disposal of asset		83			50
Deferred income taxes		7			7
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue		1,315			(1,084	)
Other current and noncurrent assets		182			1,141
Inventories		597			1,134
Deferred costs		2,227			403
Accounts payable		(916	)		(115	)
Accrued expenses		(738	)		55
Customer deposits		2,002			1,178
Deferred revenue and other short term liabilities		(1,321	)		(1,907	)
Other liabilities		(18	)		5

Net cash used in operating activities		(2,553	)		(5,432	)

INVESTING ACTIVITIES:
Purchases of property and equipment		(137	)		(575	)

Net cash used in investing activities		(137	)		(575	)

FINANCING ACTIVITIES:
Payments of revolving line of credit, net of borrowings		(392	)		(1,000	)
Proceeds from the exercise of stock options		—			3

Net cash used in financing activities		(392	)		(997	)

Effect of exchange rate change on cash		14			(14	)

Change in cash and cash equivalents		(3,068	)		(7,018	)
Cash and cash equivalent — Beginning of Period		6,333			13,142

Cash and cash equivalent — End of Period	$	3,265		$	6,124

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	36		$	23

Cash paid for income taxes	$	16		$	14

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

NORTHERN POWER SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2016 AND 2015

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

1.	DESCRIPTION OF BUSINESS

Northern Power Systems Corp. (together with its consolidated subsidiaries, “Northern Power Systems” or the “Company”) is a provider of advanced renewable power creation and power conversion technology for the energy sector. We design, manufacture and service next-generation Permanent Magnet Direct-Drive, or PMDD, wind turbines for the distributed wind market, and we currently license our utility-class wind turbine platform, which uses the same PMDD technology as our distributed turbines, to large manufacturers on a global basis. We also provide technology development services for a wide variety of energy applications. With our predecessor companies dating back to 1974 and our new turbine development since 1977, we have decades of experience in developing advanced, innovative wind turbines, as well as technology for power conversion and integration with other energy applications.

The Company’s headquarters are in Barre, Vermont, with additional office space in Waltham, Massachusetts, Zurich, Switzerland, Bari, Italy, and Cornwall, U.K.

Going Concern — The Company has incurred operating losses since its inception. 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. At June 30, 2016, the Company has cash of $3.3 million and an accumulated deficit of $175.1 million and the current line of credit is set to expire on September 30, 2016. We are in discussions with our lender to renew our line of credit prior to September 30, 2016 or obtain alternative financing. However, we cannot guarantee that we will be able to procure additional financing upon favorable terms, if at all. These conditions raise substantial doubt about the Company’s 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.

On May 23, 2016, the Company announced that it will be dedicating its focus on distributed energy solutions, including the design, manufacture and sale of distributed wind turbines and integrated microgrid and distributed energy storage solutions, featuring its state-of-the-art controller and smart power converters. Consistent with this refocus, the Company is exploring arrangements to further monetize its investment in its utility scale wind businesses and technology. If such monetization takes the form of a sale or a strategic investment in the Company, it may affect existing strategic partnerships including impacting significant amounts currently owed to the Company by our strategic partners. As part of this effort, the Company is taking steps to realign its workforce and streamline operations.

Basis of Presentation — The accompanying unaudited condensed 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 2015 consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2015 (File No. 000-55184). The condensed consolidated balance sheet as of December 31, 2015 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, 2016 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ending December 31, 2016.

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

Recent Accounting Pronouncements — In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). The core principle of ASU 2014-09 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. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification Topic No. 605, Revenue Recognition, most industry-specific guidance throughout the industry topics of the accounting standards codification, and some cost guidance related to construction-type and production-type contracts. ASU 2014-09 is effective for public entities for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09.

In August 2015, the FASB issued Accounting Standards Update No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017. Early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date (December 15, 2015). The Company is currently evaluating the potential impact of adopting this guidance on the consolidated financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”) which provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact this accounting standard update may have on its current practices.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Inventory (Topic 330). Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments in this update require an entity to measure inventory within the scope of this update at the lower of cost and net realizable value. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory method. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The application of this ASU will not have an impact on our financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in our results of operations. The new standard does not apply to investments accounted for under the equity method of accounting or those that result in consolidation of the investee. This new standard is effective for fiscal years beginning after December 15, 2017, including interim periods with those fiscal year. The adoption of this standard is not expected to have an impact on our financial position or results of operations.

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, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the potential impact of adopting this guidance on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The new standard simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or credit risks. This new standard is effective for fiscal years beginning after December 15, 2016, including interim periods with those fiscal year. The application of this ASU will not have an impact on the Company’s financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The new standard eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an adjustment must be made to the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. This new standard is effective for fiscal years beginning after December 15, 2016, including interim periods with those fiscal year. The application of this ASU will not have an impact on the Company’s financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This new standard is effective for fiscal years beginning after December 15, 2016, including interim periods with those fiscal year. The Company is currently evaluating the potential impact of adopting this guidance on the consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606). This update clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on input the Board received from the Transition Resource Group for Revenue Recognition and other stakeholders. The Update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The amendments in this update are effective at the same time as ASU 2014-09. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in Update 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company is currently evaluating the impact this ASU will have on our consolidated financial statements.

There were no other new accounting pronouncements that were issued or became effective since the issuance of our 2015 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.	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 loss per share is determined by dividing loss 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 warrants, based on the treasury stock method, are included in the calculation of diluted earnings per share. For the three and six months ended June 30, 2016 and 2015, all potential common shares were anti-dilutive due to the net loss and were excluded from the diluted net loss per share calculations.

The calculations of basic and diluted net loss per share are as follows:


	For the three months ended						For the six months ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Basic earnings per share calculation
Numerator
Net loss	$	(2,526	)	$	(2,652	)		(6,757	)		(6,662	)

Net loss attributable to common shareholders	$	(2,526	)	$	(2,652	)		(6,757	)		(6,662	)

Denominator
Weighted average common shares outstanding — Basic and diluted		23,173,884			22,765,949			23,173,884			22,765,526

Net loss per share — Basic and diluted	$	(0.11	)	$	(0.11	)	$	(0.29	)	$	(0.30	)

The following potentially dilutive securities were excluded from the calculation of dilutive weighted average shares outstanding because they were considered anti-dilutive due to the Company’s loss position:


	June 30, 2016		June 30, 2015
Common share options		2,395,922		2,754,672

Total potentially dilutive securities		2,395,922		2,754,672

The Company had 367,500 placement agent options that expired on March 17, 2016. In addition, the Company has 2,395,922 options outstanding as of June 30, 2016 related to the 2014 NPS Corp. plan. As of June 30, 2015, the Company had 367,500 placement agent options outstanding and 2,387,172 options outstanding as of June 30, 2015 related to the 2014 NPS Corp. plan. Such options are considered to be potentially dilutive securities.

3.	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, the working capital revolving line of credit and debt. 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, 2016 and December 31, 2015, approximate fair value due to their short-term nature and are classified within Level 3 of the valuation hierarchy. 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.

During 2014, the Company entered into a technology development contract with a customer that will result in the Company receiving a royalty free license upon successful completion of the development. The Company determined the value of this license using a probability weighted analysis. The analysis applied a range of possibilities to a set of possible outcomes and attributed a value in the event of each outcome. The probabilities and weightings used in the analysis were based on management’s views of the opportunities that will be available to the Company upon completion of the contract and receipt of the license, as well as a review of the outcomes that would result from the selected scenarios. The Company determined this was the most reliable approach to value the license. The license will be accreted to full value over the development period of the contract and will subsequently be amortized over its estimated useful life at the time. The value assigned to the license as of June 30, 2016 and December 31, 2015 was $792, this represents a fair value measurement on a nonrecurring basis and is included in intangible assets on the accompanying consolidated balance sheets included in assets held for sale. Due to the unobservable key inputs to the analysis, the license has been classified as Level 3.

In 2015, the Company entered into foreign currency forward contracts and no-cost collars, usually with one to three month durations, to mitigate the foreign currency risk related to certain balance sheet positions. The Company has not elected hedge accounting for these transactions. There were no foreign currency forward contracts entered into during the six months ended June 30, 2016. There were no foreign currency forward contracts outstanding at June 30, 2016.

4.	INVENTORIES

Inventories, net of reserves, as of June 30, 2016 and December 31, 2015 consist of:


	June 30, 2016			December 31, 2015
Raw materials	$	2,593		$	3,298
Work in process		1,172			1,170
Finished goods		5,152			5,081
Allowance for obsolescence		(467	)		(316	)

Total inventory — net	$	8,450		$	9,233

For the three months ended June 30, 2016 and 2015, the Company recorded inventory write-downs of $101 and $102, respectively. For the six months ended June 30, 2016 and 2015, the Company recorded inventory write-downs of approximately $186 and $132, respectively.

5.	PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment, net of depreciation, at June 30, 2016 and December 31, 2015 consist of:


	June 30, 2016			December 31, 2015
Lease improvements	$	113		$	75
Machinery and equipment		2,473			2,453
Patterns and tooling		1,567			1,615
Office furniture and equipment		424			424
Information technology equipment and software		855			848
Field service spare parts		122			122

		5,554			5,537
Less accumulated depreciation		(3,600	)		(3,368	)

Total property, plant and equipment, net of depreciation	$	1,954		$	2,169

Depreciation expense was $134 and $269 for the three and six months ended June 30, 2016, respectively. Depreciation expense was $141 and $280 for the three and six months ended June 30, 2015, respectively.

In March 2016, the Company disposed of a property and equipment with a cost of $120 and a net book value of $83.

6.	INTANGIBLE ASSETS

Intangible assets consist of:


	June 30, 2016
	Average Remaining Amortization Period		Cost		Accumulated Amortization			Net Carrying Amount End of Year
Core technology		0.2 years	$	978	$	(951	)	$	27
Trade name		1.2 years		89		(72	)		17
Royalty license		See below		792		—			792

			$	1,859	$	(1,023	)	$	836


	December 31, 2015
	Average Remaining Amortization Period		Cost		Accumulated Amortization			Net Carrying Amount End of Year
Core technology		0.7 years		978	$	(865	)	$	113
Trade name		1.7 years		89		(66	)		23
Royalty license		See below		792		—			792

			$	1,859	$	(931	)	$	928

As part of an agreement with WEG Equipamentos Elétricos S.A. to develop a 3.3 MW wind turbine, the Company has recorded an intangible asset of $792 representing the earned value of the royalty free license the Company will receive upon completion of the development project. The Company’s estimate of the total value of this intangible asset will be capitalized over the period of the development project. Amortization of the intangible asset will commence as the Company completes the project and has the ability to license/sell the 3.3 MW wind turbine.

Amortization expense for the three and six months ended June 30, 2016 was $47 and $92, respectively. Amortization expense for the three and six months ended June 30, 2015 was $47 and $93, respectively.

The expected aggregate future amortization expense, excluding amortization expense related to the royalty license, is as follows:


Years	Amortization
2016	$	35
2017		9
Beyond		—

	$	44

7.	DEBT AND SENIOR SECURED CONVERTIBLE NOTES

Debt at June 30, 2016 and December 31, 2015 consists of:


	June 30, 2016			December 31, 2015
Working capital revolving line of credit	$	2,500		$	2,892

Total debt		2,500			2,892
Less current portion		(2,500	)		(2,892	)

Long-term debt	$	—		$	—

In April 2015, the Company amended its foreign working capital revolving line of credit with Comerica to extend the maturity date of June 30, 2015 by 15 months to September 30, 2016. The line of credit remains at $6,000, 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 $1,500 at all times.

At June 30, 2016, there was $2,500 outstanding on the revolving line of credit as well as approximately $554 outstanding in performance and warranty letters of credit guaranteed on behalf of four customers and the Company had a net maximum supported borrowing base, in excess of loans outstanding, of $392. A delay in filing our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016 (“Quarterly Reports”), resulted in a violation of the reporting covenants of the Comerica loan agreement. Comerica has been informed of the delay and has approved a waiver of the applicable reporting requirements until July 31, 2016 (filed July 25, 2016) for the 2015 Form 10-K and September 15, 2016 for the Quarterly Reports.

8.	ACCRUED EXPENSES

Accrued expenses consist of:


	June 30, 2016		December 31, 2015
Accrued warranties	$	2,070	$	2,171
Accrued rebates, allowances and discounts		—		20
Other accrued expenses		1,118		1,814

Total accrued expenses	$	3,188	$	4,005

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


	Three months ended						Six months ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Beginning balance	$	2,231		$	1,580		$	2,171		$	1,637
Provisions, net of reversals		188			375			583			582
Settlements		(349	)		(251	)		(684	)		(515	)

Ending balance	$	2,070		$	1,704		$	2,070		$	1,704

9.	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, 2016, there were 23,173,884 voting common shares issued and outstanding and no class B restricted voting shares issued and outstanding

10.

STOCK BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

The Company had four equity incentive plans. As a result of the reverse takeover transaction all of these plans were converted in substance to the Northern Power Systems Corp. 2014 Stock Option and Incentive Plan (“2014 NPS Corp Plan”).

2014 Northern Power Systems Corp. Stock Option and Incentive Plan — In April 2014 and as a result of the reverse takeover transaction, the Company 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. All other relevant terms and conditions remained the same. At such time the Company considered the modification of such awards in accordance with ASC 718 and concluded that such transaction did not result in additional compensation expense. The Company is accounting for grants under the 2014 NPS Corp Plan as equity awards.

A summary of the stock option activity under the 2014 NPS Corp Plan for the six months ended June 30, 2016, is as follows:


	Shares			Weighted- Average Exercise Price		Average Remaining Weighted- Average Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding — December 31, 2015		2,532,711		$	1.90		5.2 years	$	—
Granted		2,500		$	0.13
Exercised		—		$	—
Canceled		(139,289	)	$	2.62

Outstanding — June 30, 2016		2,395,922		$	1.86		4.6 years	$	—

Exercisable — June 30, 2016		1,689,026		$	2.03		4.2 years	$	—

Shares vested and expected to vest June 30, 2016		2,342,799		$	1.87		4.6 years	$	—

As of June 30, 2016, 1,146,698 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.

The weighted-average grant-date fair value of options granted under the 2014 NPS Corp Plan during the six months ended June 30, 2016 was $0.08 per share. At June 30, 2016, unrecognized stock-based compensation expense related to non-vested stock options is $501 which is expected to be recognized over the weighted-average remaining vesting period of 1.2 years.

The Company estimated the grant-date fair values of stock options granted in the six months ended June 30, 2016, using the Black-Scholes option pricing model and the following assumptions:


	June 30, 2016
Expected volatility		77	%
Risk-free interest rate		1.40	%
Expected life (years)		4.5
Dividend yield		0.0	%

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, 2016 and 2015. 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, 2016 and 2015:


	Three months ended June 30				Six months ended June 30
	2016		2015		2016		2015
Cost of revenue	$	2	$	11	$	5	$	20
Sales and marketing		14		15		31		31
Research and development		3		3		7		8
General and administrative		103		161		238		309

Total stock-based compensation expense	$	122	$	190	$	281	$	368

11.

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. As of January 1, 2016, 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. Prior to January 1, 2016, the Company contributed 50% 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 and six months ended June 30, 2016 were $21, and $42, respectively, and $62 and $115 for the three and six months ended June 30, 2015, respectively.

12.

INCOME TAXES

For the three and six months ended June 30, 2016, the Company recorded income tax expense of $122 and $188, respectively, which is comprised of $118 current expense and $4 deferred expense for the three months ended June 30, 2016 and is comprised of $181 current expense and $7 deferred expense for the six months ended June 30, 2016.

For the three and six months ended June 30, 2015, the Company recorded income tax expense of $383 and $768, respectively, which is comprised of $379 current expense and $4 deferred expense for the three months ended June 30, 2015 and is comprised of $761 current expense and $7 deferred expense for the six months ended June 30, 2015.

For the three and six months ended June 30, 2016 the current income tax expense included $108 and $161, respectively, of foreign tax expense related to Brazilian withholding taxes. Such taxes are applicable to licensing, technology services and royalty revenues earned within Brazil. The tax rate for such taxes is between 15%-18% and is based upon the character of the revenue and the jurisdiction of where it was earned.

As of December 31, 2015, the Company had $127,696 of federal net operating loss carryforwards that expire beginning in 2028, $75,831 of state net operating loss carryforwards that expire from 2016 through 2034, and $1,312 of research and development tax credits that expire beginning in 2028. The net operating loss carryforwards include approximately $71 for which a benefit

will be recorded in additional paid-in capital when realized. In addition, 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 study, through November 30, 2014, to assess if any ownership changes would have caused limitations to net operating loss carryforwards. Based upon that study, the Company has concluded an ownership change occurred on September 19, 2008 and therefore there is the potential for $2,600 of net operating loss to be limited. For the period September 20, 2008 through November 30, 2014, the Company has determined that it is more likely than not that there has not been an ownership change under Section 382 through November 30, 2014. We have not completed and updated a Section 382 study, since November 30, 2014, and as such are not able to assess whether an 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, 2016 and 2015 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 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, 2016, 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.

13.

SEGMENT REPORTING

The Company’s segments are defined as components of the enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

The performance of the segments is evaluated based upon several factors, of which the primary financial measures are segment revenues, gross profits, and loss from operations. The disaggregated financial results of the segments reflect the allocation of certain functional expense categories consistent with the basis and manner in which management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. In addition, certain expenses and other shared costs which management does not believe are specifically and directly attributable or allocable to any of the business segments have been excluded from the presented segment contribution margins. The accounting policies of the business segments are the same as those for the consolidated Company. The Company assigns revenues to individual countries based on the customer’s shipment location.

The Company manages its business with the four following segments:

•

Product Sales and Service — Included in this business segment are the Company’s sales of distributed turbines along with related services, other products produced and sold to customers, as well as, in the future the Company’s direct sales of utility-class turbines.

•

Technology Licensing — Included in this business segment is the licensing of packages of the Company’s developed technology.

•

Technology Development — Included in this business segment is the Company’s development of technology for customers.

•

Shared Services — These costs and expenses are comprised mainly of the general and administrative departments including executive, finance and accounting, legal, human resources, and information technology support, as well as certain shared engineering, and in certain circumstances, sales and marketing activities.

Unallocated costs and expenses include depreciation and amortization, stock compensation, and certain other non-cash charges, such as restructuring and impairment charges.

Revenue for the business segments are shown as follows:


	For the three months ended				For the six months ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Product Sales and Services	$	8,076	$	10,403	$	12,918	$	17,256
Technology Licensing		323		2,291		441		2,906
Technology Development		310		321		528		2,077

Total	$	8,709	$	13,015	$	13,887	$	22,239

Income (loss) from operations for the business segments and unallocated costs and expenses are as follows:


	For the three months ended						For the six months ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Product Sales and Services	$	(539	)	$	(1,462	)	$	(2,639	)	$	(2,859	)
Technology Licensing		223			1,844			226			2,086
Technology Development		183			256			287			1,733
Shared Services		(1,612	)		(2,141	)		(3,226	)		(5,464	)
Unallocated costs and expenses		(482	)		(670	)		(1,022	)		(1,181	)

Loss from operations	$	(2,227	)	$	(2,173	)	$	(6,374	)	$	(5,685	)

Unallocated costs and expenses consist of:


	For the three months ended						For the six months ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Depreciation and amortization	$	(181	)	$	(188	)	$	(361	)	$	(373	)
Stock-based compensation expense		(122	)		(190	)		(281	)		(368	)
Other		(179	)		(292	)		(380	)		(440	)

Total	$	(482	)	$	(670	)	$	(1,022	)	$	(1,181	)

Total business segment assets are as follow:


	June 30, 2016		December 31, 2015
Product Sales and Services	$	17,947	$	22,732
Technology Licensing		1,450		1,222
Technology Development		1,538		1,477
Shared Services		182		381
Unallocated assets		2,921		6,064

Total	$	24,038	$	31,876

Unallocated assets consist of the following:


	June 30, 2016		December 31, 2015
Cash	$	2,909	$	6,047
Property, plant and equipment, net		12		17

Total	$	2,921	$	6,064

Geographic information about revenue, based on shipments and/or services to customers by region, is as follows:


	For the three months ended				For the six months ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
United States	$	850	$	1,833	$	1,276	$	3,915
United Kingdom		2,118		5,056		3,220		6,557
Italy		5,085		3,597		8,309		6,885
Brazil		653		2,527		969		4,878
Asia		2		—		2		—
Rest of the world		1		2		111		4

Total	$	8,709	$	13,015	$	13,887	$	22,239

For the three and six months ended June 30, 2016, 90% and 91% of revenues, respectively, were recognized from sales outside the United States. For the three and six months ended June 30, 2015, 86% and 82% of revenues, respectively, were recognized from sales outside the United States.

Geographic information about long-lived assets associated with particular regions is as follows:


	June 30, 2016		December 31, 2015
United States	$	3,365	$	3,729
Rest of the world		147		90

Consolidated Total	$	3,512	$	3,819

14.

SUBSEQUENT EVENTS

On April 13, 2016, on account of the Company’s delay in filing its Annual Report on Form 10-K for the fiscal year ending December 31, 2015 (2015 Annual Report”), the Ontario Securities Commission (“OSC”) issued a Management Cease Trade Order (“MCTO”) temporarily halting trading in the Company’s shares by its CEO and CFO until such time as the Company’s filings were up to date and the MCTO was lifted. On August 25, 2016, the staff of the OSC informed the Company that it would recommend converting the MCTO to a Failure to File Cease Trading Order (“FFCTO”) if the Company did not, by August 31, 2016, file its Quarterly Reports on Form 10-Q for the periods ended March 31, 2016 and June 30, 2016 (together, the “Quarterly Reports”), each of which were delayed due to the delays in filing the 2015 Annual Report. The Company filed its Quarterly Report for the quarter ending Mach 31, 2016 on August 31, 2016, but was unable to complete its Quarterly Report for the quarter ending June 30, 2016 (“Q2 Quarterly Filing”) by that date. As a result, on September 2, 2016, the OSC issued an order converting the MCTO to a temporary Failure to File Cease Trading Order (“FFCTO”) pursuant to which all trading of the Company shares will be suspended for as long as the FFCTO is in effect. Today’s filing of the Q2 Quarterly Filings, including the related Management’s discussion and analysis and certifications, constitutes an application to lift the FFCTO pursuant to National Policy 11-207—Failure to File Cease Trade Orders and Revocations in Multiple Jurisdictions. The Company expects the FFCTO to be lifted within four to five business days, at which point trading in the Company’s securities will resume.

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

15.

COMMITMENTS AND CONTINGENCIES

The Company has sold two prototype turbines to a customer resulting in a potential cost to perform a separately priced maintenance agreement. The Company is accounting for this contract is under ASC 460 Guarantees, which requires that the measurement of a guarantee liability be the fair value of the obligation at the reporting period. If the consideration of the fair value of an obligation results in the potential of a contingent loss, consideration of the probable and estimable criteria of ASC 450-20-25 is appropriate. Furthermore, for longer-term obligations, such as this, the Company considers the use of a discount factor in determining the estimated liability to be appropriate. The Company originally estimated the discounted value of such exposure at $562, using a discount rate of 9% over approximately 10 years. The agreement was extended to December 2025 in the first quarter of 2015. The total liability related to this exposure, as of June 30, 2016 and December 31, 2015, is $333 and $406, respectively, of which $105 and $160, respectively, is recorded as a current liability.

The Defense Contract Auditing Agency (“DCAA”) is currently auditing the years 2004 through 2007 and an external independent audit firm is auditing 2010. These audits are in various stages of completion. During the six months ended June 30, 2015 field work on the 2004 audit was completed and a final report issued to the National Renewable Energy Laboratory (NREL). NREL has not issued a final determination related to the findings as of June 30, 2015. There has been no activity related to audits of any other year and although 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.

The Company has entered into several operating lease agreements, primarily for the lease of office facilities, and office equipment, expiring through 2019. Rental expense under these operating lease arrangements for the three and six months ended June 30, 2016 was $103 and $207, respectively. Rental expense under these operating lease arrangements for the three and six months ended June 30, 2015 was $103 and $207, respectively. The Company has leased its headquarters and production facility back from the buyer for up to a five year term. Effective as of the second anniversary of the lease

commencement (June 19, 2014), the Company has an annual right to terminate the lease without penalty. Therefore, only one year (July 2016 through June 2017) of rental expense is included in the table below. Future minimum lease payments under noncancelable lease agreements (with initial or remaining lease terms in excess of one year) are as follows:


Years Ending December 31
2016	$	203
2017		189
2018		15
Thereafter		3

Total	$	410

If the Company continues to lease the facility after the three year cancellation period, it would have additional annual lease payment obligations of $173 in 2017, $345 in 2018 and $173 in 2019

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 July 25, 2016.

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. 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 Securities and Exchange Commission 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 creation and power conversion technology for the energy sector. We design, manufacture and service next-generation permanent magnet direct-drive, or PMDD, wind turbines for the distributed wind market, and we license our utility-class wind turbine platform, which uses the same PMDD technology as our distributed turbines, to large manufacturers on a global basis. We also provide technology development services for a wide variety of energy applications. With our predecessor companies dating back to 1974 and our new turbine development since 1977, we have decades of experience in developing advanced, innovative wind turbines, as well as technology for power conversion and integration with other energy applications.

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, the direct-drive design of our turbine utilizes significantly fewer moving parts than traditional geared turbines, which increases reliability due to reduced maintenance and downtime costs.

The substantial majority of our current sales are in the small wind subset of the distributed wind market, which commonly consists 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 larger energy output sub-segment of this market, which comprises 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 shipped over 600 of these turbines. To date, these shipped units have run for over eleven million hours in the aggregate. Our distributed wind customers include financial investors and project developers which deploy our turbines to provide power for farms, remote villages, schools, small businesses, and U.S. military installations.

We have 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. In 2013, we launched a strategy of partnering with large-scale manufacturers in developing regions, starting with a multi-billion dollar (in revenue) industrial equipment manufacturer based in Brazil, WEG Equipamentos Elétricos S.A., or WEG. We have licensed our technology to WEG exclusively for Brazil, but retain our right to sell Northern Power-branded utility-class turbines produced by WEG on a rest-of-world basis. Our contract with this customer provides for payment of $3.4 million in milestone-based license fees. The company also expects to recognize approximately $10 million to $15 million in revenue for royalties on turbines shipped by WEG over a period of time not to exceed ten years for the license of our 2.X MW platform exclusively in Brazil and non-exclusively in the rest of South America. As of the date of this filing, WEG has paid the Company $3.4 million in license fees and approximately $2.1 million in royalties. WEG has accumulated a backlog of orders comprising over 600 MW of turbines built using our design.

In May 2016, based on market trends and emerging market opportunities, we announced that we are increasing our focus on distributed energy solutions, including the design, manufacture, sale, and servicing of distributed wind turbines and integrated migrogrid and distributed energy storage solutions. We also announced that we are exploring opportunities to further monetize the Company’s investment in our utility scale wind business and technology, including potentially selling the Company’s utility wind division.

As previously disclosed, on August 10, 2016, the Company re-aligned its leadership to focus its future on delivering business solutions for a range of distributed energy customers. As part of this transition the Board of Directors of Northern Power Systems has decided to eliminate the office of chief executive and form an office of the president and chief operating officer.

We have been developing our power converter technology since the early 2000s and currently sell our MW power converters under the branded name of FlexPhase. These products are supplied as part of our distributed wind and utility class turbines, and also sold independently for use in microgrids and energy storage projects. Our power converters are modular in nature allowing for a common platform to service multiple applications. As of December 31, 2015, we have deployed over 100 MW of products based on this technology, primarily in connection with our wind turbine designs. Our intention is to commercialize sales of our power converters outside of the wind industry, such as the battery energy storage system (BESS) market.

In addition to wind turbine and product development, we provide technology development services to customers to develop products and technology for a variety of complex energy applications, including energy storage, microgrids, and grid stabilization. While the customer owns the developed technology for a limited field of use, we typically maintain a license for all other applications and all other markets. While we do not expect material revenue from our development services, these services fund the expansion of our intellectual property portfolio

For the three months ended June 30, 2016 and 2015, respectively, we generated $8.7 million, and $13.0 million in revenue. For the three months ended June 30, 2016 and 2015 we incurred net losses of $2.5 million, and $2.7 million, respectively. We have an accumulated deficit of $175.1 million as of June 30, 2016.

We are headquartered in Barre, Vermont, and lease additional office space in Waltham, Massachusetts, Zurich, Switzerland, Bari, Italy, and Cornwall, U.K. We were originally incorporated in Delaware on August 12, 2008 as Wind Power Holdings, Inc., or WPHI. In February 2014, WPHI filed a Registration Statement on Form 10 (File No. 001-36317) with the SEC to register the shares of common stock of WPHI, which became effective on June 3, 2014. On April 16, 2014, we (as WPHI) completed a reverse takeover transaction, or RTO, with Mira III Acquisition Corp., or Mira III, a Canadian capital pool company incorporated in British Columbia, Canada, whereby all of the equity securities of WPHI were exchanged (as described below) for common shares and restricted voting shares of Mira III, which became the holding company of our corporate group. In connection with the RTO, Mira III changed its name to Northern Power Systems Corp., the WPHI business became Mira III’s operating business, the WPHI directors and officers became Mira III’s directors and officers, and the WPHI historical consolidated financial statements became the historical consolidated financial statements of Northern Power Systems Corp.

Upon completion of the RTO, Northern Power Systems Corp. succeeded to WPHI’s status as a reporting company under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which permits us to continue to prepare our financial statements in accordance with generally accepted accounting principles in the U.S., or GAAP. Also in connection with the RTO, we completed a CDN$24.5 million private placement whereby we issued 6,125,000 subscription receipts, and our common shares were listed on the Toronto Stock Exchange under the Symbol “NPS”.

As discussed in our Annual Report, management and the Audit Committee concluded that the Company needed to restate previously issued financial statements. As a result, there has been a delay in filing our Annual Report and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016.

How We Conduct Our Business

We manage our business under four business segments:

•

Product Sales and Service — Included in this business line are our sales of distributed-class turbines along with related services, other products produced and sold to customers, as well as in the future our direct sales of utility-class turbines. This business line reflects 93% and 93% of our revenues for the three and six months ended June 30, 2016, respectively, and 80% and 78% for the three and six months ended June 30, 2015, respectively.

•

Technology Licensing — Included in this business line is the licensing of packages of our developed technology. This business line reflects 4% and 3% of our revenues for the three and six months ended June 30, 2016 and 18% and 13% for the three and six months ended June 30, 2015, respectively.

•

Technology Development — Included in this business line is our development of technology for specific customer needs. This business line reflects 3% and 4% of our revenues for the three and six months ended June 30, 2016, respectively, and 2% and 9% for the three and six months ended June 30, 2015.

•

Shared Services — These costs and expenses are comprised mainly of the general and administrative departments including executive, finance and accounting, legal, human resources, and information technology support, as well as certain shared engineering, and in certain circumstances, sales and marketing activities.

Unallocated costs and expenses include depreciation and amortization, stock compensation, and certain other non-cash charges, such as restructuring and impairment charges.

We have certain customer segments that are specific to each of our business offerings but we also have customers that see significant value in our ability to bring full suite licensing, development and prototype production of projects and could therefore leverage offerings across all of these capabilities.

Our international revenue was $7.9 million and $12.6 million for the three and six months ended June 30, 2016, respectively and $11.2 million and $18.3 million for the three and six months ended June 30, 2015, respectively, representing 90%, 91%, 86% and 82% of our revenues for those periods, respectively. We expect the majority of our revenue to continue to be outside of the U.S. for the foreseeable future. A portion of our revenues continue to be denominated in currencies other than our reporting currency, the U.S. dollar, which increased to 69% of total revenues for the three months ended June 30, 2016 as compared to 33% of total revenues for the same period in 2015 and increased to 67% of total revenues for the six months ended June 30, 2016 as compared to 34% of total revenues for the same period in 2015. We expect to see a continued significant proportion of our revenues 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. In October 2015, we began employing hedging strategies to reduce currency fluctuation risk. There were no foreign currency forward contracts entered into during the six months ended June 30, 2016. There were no foreign currency forward contracts outstanding at June 30, 2016.

How We Evaluate Our Operations

In managing our business we use a variety of financial and operational metrics to assess our performance, including:

•

Backlog value of our offerings;

•

Deferred revenues;

•

Segment revenue, gross profits and income (loss) from operations; and

•

Non-GAAP adjusted EBITDA.

Backlog Value of Our Offerings

We track the value of turbine product orders executed with our customers during a period, as well as the cumulative balance of backlog for all of our offerings as leading indicators of our revenue performance. We consider an order executed when a contract has been duly signed and a deposit for such contract has been received.

•

Product Sales — We determine order value for our turbine backlog as the turbine sale price along with our best estimate of other services expected to be rendered, such as shipping, installation and other services to ensure the effective initial operation of the turbine. Our backlog of orders for distributed turbines generally, but not always, converts to revenue 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. In our backlog, we do not include the value of subsequent services such as operations and maintenance support that we might provide for such turbines. We track order value of other products that we sell based upon our proprietary technologies in aggregate. Other products include non-turbine products such as maintenance kits, generators and converters we assemble and sell to customers.

•

License & Development Activity — We track the value of our license and development activity based on our best estimates on what will be earned in the next twelve months. The timing of revenue recognized is impacted by the achievement of contractual milestones or the percentage of the work completed as a percentage of the total costs.

Deferred Revenues

We believe that deferred revenue is a leading indicator of our revenue performance. We present values on our balance sheet as deferred revenue at such time as cash has been collected from our customer and certain aspects of the earnings process have been completed but recognition as revenue has not been achieved in conformity with GAAP. Each of our three customer facing lines typically has deferred revenue balances, including:

•

Product Sales and Services — When sales of our products involve transferring title of the equipment at delivery, which we have determined to be the correct point for recognition of revenue for domestic sales and for sales in which the customer handles logistics, we present products which have been produced and billed but not delivered as deferred revenue. In cases in which the Company handles logistics for the sales to customers in foreign countries, we recognize revenue when we have met all significant delivery obligations, generally when the product clears customs. We also present products which have been billed prior to the point as deferred revenue. We also defer the recognition of revenue for our operations and maintenance services that are performed over a period of time; revenue from such contracts is recognized ratably over the contract period. We present cash values collected from customers of such contracts, net of the related recognized revenue, as deferred revenue.

•

Technology Licensing and Technology Development — Our license and technology development agreements frequently result in our collection of cash for our delivery of certain milestones; however, such milestones do not always reflect the culmination of the earnings process and we therefore present the related cash collections as deferred revenue.

Segment Revenues, Gross Profits and Income (Loss) from Operations

We define segment gross profit as segment revenues less certain direct cost of sales and services. We define segment income (loss) from operations as segment gross profit less operating expenses excluding non-cash items such as depreciation, amortization, impairments, share-based compensation or restructuring charges. We use these profitability measures internally to track our business performance.

Non-GAAP adjusted EBITDA

We believe it is useful to exclude non-cash charges, such as depreciation and amortization and share-based compensation, from our non-GAAP adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. Because of the aforementioned limitations, you should consider non-GAAP adjusted EBITDA alongside other financial performance measures, including net income (loss), cash flow metrics and our financial results presented in accordance with GAAP.

We define non-GAAP adjusted EBITDA as earnings before interest expense, income taxes, depreciation, amortization, non-cash compensation expense, changes in the fair value of certain liability classified instruments, and certain other one-time non-cash charges.

Generally, a non-GAAP financial measure is a numerical measure of a Company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures included in this Quarterly Report on Form 10-Q, however, should be considered in addition to, and not as a substitute for, or superior to, the comparable measure prepared in accordance with GAAP.

Non-GAAP adjusted EBITDA is a key financial measure used by our management and by external users of our financial statements, such as investors, commercial banks and others, to:

•

assess our operating performance as compared to that of other companies in our industry, without regard to financing methods, capital structure or historical cost basis;

•

assess our ability to incur and service debt and fund capital expenditures; and

•

generate future operating plans and make strategic decisions.

Non-GAAP adjusted EBITDA should not be considered an alternative to net loss, operating loss, net cash used in operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Our non-GAAP adjusted EBITDA may not be comparable to similarly titled measures of another company because all companies may not calculate non-GAAP adjusted EBITDA in the same manner. Some of the limitations in non-GAAP adjusted EBITDA are:

•

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future;

•

non-GAAP adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

•

non-GAAP adjusted EBITDA does not include the impact of share-based compensation;

•

non-GAAP adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; and

•

other companies, including companies in our industry, may calculate non-GAAP adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

Factors Affecting Our Results of Operations

We believe that the most significant factors that affect our financial performance and results of operations are as follows:

Italian Government Feed-in-Tariff and Blade Supply Impact on Near-term Results

In December 2015, the U.K. Department of Energy and Climate Change announced a 40% reduction to the feed-in-tariff for wind turbines ranging in capacity from 50-100 kW. This reduction became effective on February 1, 2016. The change to the feed-in-tariff as enacted may have a negative impact on orders in the U.K. market in the remainder of 2016, and a corresponding adverse effect on our financial results in one or more fiscal quarters during 2016.

In November 2014, the Italian governmental authorities announced that a clarification of the feed-in-tariff law applicable to distributed-class turbines would be issued in the near term. Uncertainty on the clarification caused a portion of our Italian order negotiations in our fourth quarter of 2015 to be delayed. Delay in final implementation of the extension had a corresponding adverse effect on our revenue, net income, earnings per share and gross margin for our fiscal year ending December 31, 2015. In the beginning of 2015, we committed a large amount of our working capital to build up substantial inventory in anticipation of distributed-class turbine orders for the Italian market. During the quarter ended December 31, 2015, we began to see a reduction in our committed working capital as deployment activity in the Italian market began to increase. With the revision to the law being published in June 2016, the authorities extended the feed-in-tariff until December 31, 2016 with an ability to grid connect turbines and an eligibility to the current feed-in-tariff until June 30, 2017.

Our revenue during 2015 was negatively impacted by our primary supplier of blades ceasing operations, which occurred in February 2015, and our resulting decision to transition to two new suppliers. We continue to work with our suppliers to manage the cost, capacity and quality of our blade supply.

Foreign Currency Fluctuations Could Impact Profitability

A substantial amount of our business in 2016 is expected to be non-U.S. dollar denominated sales transactions, which we currently expect to be predominantly denominated in euros. This can result in a significant proportion of our receivables being denominated in foreign currencies. While a majority of our costs will be in the U.S. dollar, we do incur a portion of our costs in Chinese renminbi, Canadian dollars, Swiss francs, British pounds and Euro. In addition, we expect to be entering into extended duration operations and maintenance contracts, which would obligate us to perform services in the future based upon currently negotiated non-U.S. dollar

denominated pricing terms. Although we are pursuing economic hedging strategies, including increasing our euro-denominated costs and entering into euro-based forward contracts, there can be no assurance that we can execute these strategies to effectively control the economic exposure of currency movements. Negative movements in the exchange rate between foreign currencies and the U.S. dollar, such as those recently affecting the euro, could have an adverse effect on our revenues and delay our achieving profitability.

Our Ability to Source and Manage Working Capital Requirements

Our business operations require significant working capital. Our operating results and future growth depend on our ability to optimize the working capital cycle time and to source adequate working capital commensurate with the size of our business. Some of our suppliers require us to make prepayments in advance of shipment. We have currently started providing our customers with alternative payment options, such as letters of guarantee. Historically, we have managed to optimize our working capital cycle time and to source the required working capital from banks and capital financings.

Government Policies Including Incentives, Tariffs, Taxes and Duties Affecting the Wind Power Sector

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 benefits 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.

Currently there are certain feed-in-tariff regimes in Italy and the U.K. supporting the installation and operation of our distributed-class wind turbines. Since these regimes were clarified recently relative to the sales cycle of our turbines, our orders for distributed-class turbines increased in the three months ended June 30, 2016 compared to same period in 2015 driven by strong demand in Italy. Published information from the U.K. indicates that the feed-in-tariff rates and deployment cap for wind turbines between 50 kW to 100 kW rated capacity have declined as of October 2015. The feed-in tariff rate will decline further on a quarterly basis. The Italian authorities have extended the feed-in-tariff until December 31, 2016 with an ability to grid connect turbines and an eligibility to the current feed-in-tariff until June 30, 2017.

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.

Demand for Renewable Energy and Specifically for Wind Power Energy

Changes in prices of oil, coal, natural gas and other conventional energy sources influence the demand for electricity and for renewable energy sources. Our business expansion and revenue growth has depended, and will continue to depend, on demand for renewable energy, specifically wind power energy products and future growth of the wind turbine market which will be affected by the growth of the global and regional economies, the stability of financial markets and the ability of wind turbine manufacturers to further expand production capacity and reduce manufacturing costs.

In addition to competition from other industry participants and to traditional fossil fuel sources, we face competition from other renewable energy sources such as solar power. The competition depends on the resources available within the specific markets. Although the cost to produce clean, reliable, wind energy is becoming more competitive, we must also compete with the production of solar power, hydroelectric, geothermal, and other forms of renewable energy. However, deregulation, legislative mandates for renewable energy, and consumer preference for environmentally more benign energy sources are becoming important factors in increasing the development of wind energy projects.

Wind Turbine Sales to Customers

We began commercial delivery of our platform of distributed-class wind turbines in 2008. We recognize revenue based on the value of the turbine product when title is transferred assuming all other criteria for revenue recognition have been met. In cases in which the Company handles logistics for the sales to customers in foreign countries, we recognize revenue when we have met all significant delivery obligations, generally when the product clears customs. Consequently, our results of operations have been and will continue to be significantly affected by the number of units of wind turbines we sell and the timing of revenue recognition on such sales at any given period. In addition, since certain of our wind turbine products are sold at different prices and we are developing other models of wind turbines, we expect changes to our product mix will also affect our results of operations and margins.

Development of the Distributed Wind Market

Applications for distributed energy, and as a subset distributed wind, continue to evolve globally. Many regions of the world have notable proportions of their population with either no access to electrical power or with unstable power access. It is important to the growth of our business to have offerings that are well suited to support such distributed energy needs. We expect to continue to invest in both research and development to refine our distributed-class turbine offerings as well as in our sales force to develop opportunities globally for the sales of our turbines.

International Expansion

We intend to invest in the expansion of our international sales and marketing efforts as we see opportunities for us to expand direct turbine sales, and development offerings. Certain regions are expanding wind power as a source of energy driven either by the natural cost of energy in such regions or by certain incentive regimes. We currently derive a significant proportion of our revenues outside of the U.S., and we expect this to continue. We currently intend to increase our sales and marketing investment on targeted regions with strong wind resources within Asia, Europe, and North America.

Pricing of Wind Turbines

Pricing of our wind turbines is principally affected by the overall demand and supply in the wind power equipment industry and by the average wind turbine manufacturing cost. We price our wind turbines with reference to the prevailing market prices when we enter into sales contracts with our customers, taking into consideration our estimated costs and an appropriate expected gross profit margin.

Prices of Raw Materials and Components and Their Availability

Raw materials and components used in the production of our wind turbines are sourced from domestic suppliers as well as international suppliers, and their prices are dependent on various factors in addition to supply and demand. The fluctuations in prices of such raw materials and components and their availability will affect our operating results. In addition, the primary raw materials used in some of our components include steel and copper. Consequently, the prices we pay to our suppliers for such components may be affected by movements in prices for these raw materials.

We generally engage two suppliers for each of our major components to minimize the dependency on any single supplier. We currently have certain critical components for which we only have a single source supplier. As noted above, the primary supplier of blades for our distributed-class turbines ceased operations in February 2015, and the resulting supply constraint had an adverse effect on our revenues. We continue to work with our suppliers to manage the cost, capacity and quality of our blade supply.

Ability to Design and Market Technologically Advanced and Cost-Competitive Turbine Models

Although we have successfully launched three generations of our distributed-class wind turbines, our operating results and future growth depend on our ability to continue to develop and license technologies, and market technologically advanced and cost competitive wind turbines. We expect to continue to optimize the performance of our products under diverse operating conditions such as in low and high temperatures, low wind velocity and coastal areas, as well as reduce the cost of our offerings. Our ability to design and develop new products that meet these changing requirements has been and will continue to be critical to our ability to maintain and increase our installed capacity sold and profitability. As a result, we expect to continue to make significant investments in research and development, particularly with respect to designing and developing more technologically advanced and cost-competitive products and core components.

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.

Investment in People

As of June 30, 2016, we had 86 full-time employees, a decrease of 31 employees, or approximately 26%, from June 30, 2015. We continuously align our workforce to our business needs, with a focus on retaining our high-performing personnel in order to continue to develop, sell and market our products and services and manage our business.

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 2015 consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (File No. 000-55184). The condensed consolidated balance sheet as of December 31, 2015 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, 2016 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ending December 31, 2016.

Share-based Compensation

We previously had four equity incentive plans. In 2014 these plans were converted in substance to the Northern Power Systems Corp. 2014 Stock Option and Incentive Plan (“2014 NPS Corp Plan”), which was adopted in April 2014. The 2014 NPS Corp Plan provides for the grant of incentive stock options, non-statutory share options, and other types of share awards to our officers, employees, non-employee directors and consultants. 4,000,000 common shares are reserved for issuance upon the grant or exercise of awards under this plan.

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.

Results of Operations of the three months ended June 30, 2016 compared to the three months ended June 30, 2015

Overview

Our general activity during the three months ended June 30, 2016 was primarily focused on: growing revenue, orders and backlog of distributed wind turbines in key markets, especially Italy and the United States; continued 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.

Our general activity during the three months ended June 30, 2015 was primarily focused on: expanding our order backlog of distributed turbines in key European markets, especially in Italy; stabilizing our supply chain for blades with the transition to two new suppliers; continued support of our release of our third generation products turbine which is projected to reduce our cost of the turbine while increasing energy capture; and continuing to expand our technology licensing and development business.

Revenue, Orders and Deferred Revenue (dollars in millions)

Total revenues decreased by $4.3 million, or 33%, to $8.7 million for the three months ended June 30, 2016 from $13.0 million for the three months ended June 30, 2015. Our overall backlog decreased to approximately $33 million at June 30, 2016 as compared to approximately $40 million at June 30, 2015. 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.

A comparison of our revenues for the three months ended June 30, 2016 and 2015 is as follows:


	Three months ended June 30,
	2016		2015		Change			% Change
Product Sales and Service	$	8.1	$	10.4	$	(2.3	)		22	%
Technology Licensing		0.3		2.3		(2.0	)		87
Technology Development		0.3		0.3		(0.0	)		—

Total	$	8.7	$	13.0	$	(4.3	)		33	%

Product Sales and Service

Product sales and service revenue decreased by $2.3 million to $8.1 million for the three months ended June 30, 2016, from $10.4 million for the same period in 2015. The decrease in our Product Sales and Service revenue was primarily attributed to recognizing revenue on fewer units of our distributed-class turbines which totaled $6.6 million along with a decrease in sales of our non-turbine products which totaled $0.2 million for the three months ended June 30, 2016 as compared to $9.3 million and $0.4 million for turbines and non-turbine products, respectively, for the three months ended June 30, 2015. Related service revenue totaled $1.3 million for the three months ended June 30, 2016 and $0.7 million for the same period in 2015. The increase in the U.S. dollar relative to the Euro over the periods also contributed to lower revenue for the period ended June 30, 2016.

Technology Licensing Revenue

Technology licensing revenue decreased by $2.0 million to $0.3 million for the three months ended June 30, 2016 from $2.3 million for the same period in 2015. The decrease is attributed to recognizing $0.3 million in royalty revenues related to our licensing agreement with a significant customer, as compared to $2.3 million in license and royalty fees in the same period in 2015, as the customer shipped fewer units in 2016. Our deferred revenue balance associated with the Technology Licensing was $0 as of June 30, 2016. At June 30, 2015, such balance was $0.

Technology Development Revenue

Technology development revenue was unchanged at $0.3 million for the three months ended June 30, 2016 and 2015 as a reduction in development work was offset by an increase in sustaining engineering for a significant customer. Our total deferred revenue balance associated with Technology Development was $0.1 million as of June 30, 2016. At June 30, 2015, such balance was $0.

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 $3.4 million or 30% in the three months ended June 30, 2016 to $7.8 million as compared to $11.2 million in the three months ended June 30, 2015.

A comparison of our costs of product revenues and cost of services for the three months ended June 30, 2016 and 2015 is as follows:


	Three months ended June 30,
	2016		2015		Change			% Change
Product Sales and Service	$	7.5	$	10.8	$	(3.3	)		(31	)%
Technology Licensing		0.1		0.2		(0.1	)		(67	)
Technology Development		0.1		0.1		0.0			—
Unallocated		0.1		0.1		(0.0	)		—

Total	$	7.8	$	11.2	$	(3.4	)		(30	)%

Cost of Product Revenues and Costs of Services

Product sales and service cost for the three months ended June 30, 2016 decreased $3.3 million to $7.5 million from $10.8 million in the same period in 2015. The decrease is attributable to recognizing cost of product revenues on fewer distributed class and non-turbine products in the three months ending June 30, 2015 as compared to the same period in 2015. Our cost of goods sold was $6.7 million for product sales along with $0.8 million of related service costs for the three months ended June 30, 2016 and $10.2 million for product sales and $0.6 million for related service costs for the same period in 2015.

Technology Licensing Cost of Service

Technology licensing cost of services for the three months ended June 30, 2016 decreased by $0.1 million to $0.1 million from $0.2 million for the same period in 2015. The decrease reflects reduced costs associated with license and royalty revenue in the three months ended June 30, 2016 as compared to 2015.

Technology Development Cost of Service

Technology development cost of services for the three months ended June 30, 2016 and 2015 remained consistent at $0.1 reflecting unchanged revenues for the two periods.

Unallocated

The costs from unallocated expenses for the three months ended June 30, 2016 was unchanged at $0.1 million compared to the same period in 2015.

Segment Gross Profit (Loss) (dollars in millions)


	Three months ended June 30,
	2016			2015			Change			% Change
Product Sales and Service	$	0.6		$	(0.4	)	$	1.0			263	%
Technology Licensing		0.2			2.2			(2.0	)		(91	)
Technology Development		0.2			0.2			(0.0	)		—
Unallocated		(0.1	)		(0.2	)		0.1			70

Total	$	0.9		$	1.8		$	(0.9	)		(49	)%

Product Sales and Service

Gross profit from product sales and service for the three months ended June 30, 2016 increased by $1.0 million to $0.6 million as compared to a loss of $0.4 million for the same period in 2015. This change was principally due to a decrease in cost of product revenues more than offsetting a decrease in revenues in the three months ended June 30, 2016 as compared to the same period in 2015.

Technology Licensing

Gross profit from technology licensing for the three months ended June 30, 2016 decreased by $2.0 million to $0.2 million from $2.2 million for the same period in 2015. The decrease is principally due to lower revenue recognition from third party licensing and royalty arrangements in the three months ended June 30, 2016 as compared to the same period in 2015.

Technology Development

Gross profit from technology development for the three months ended June 30, 2016 remained consistent at $0.2 million compared to the same period in 2015, reflecting flat revenues and cost of services sold for both periods.

Unallocated

Gross margin from unallocated expenses for the three months ended June 30, 2016 improved by $0.1 million to $0.1 million from $0.2 million for the same period in 2015. This improvement reflects continued success of cost cutting efforts enacted over the past year.

Operating Expenses

Research and Development Expenses

Research and development expenses decreased by $0.1 million or 14% to $0.7 million from $0.8 million for the three months ended June 30, 2016 as compared to the same period in 2015. This decrease reflects success reduced use of consultants during the three months ended June 30, 2016 as part of cost cutting efforts enacted over the past year.

Sales and Marketing

Sales and marketing expenses decreased by $0.4 million or 34% to $0.8 million for the three months ended June 30, 2016 from $1.2 million for the same period in 2015. The decrease in sales and marketing expenses was driven by a $0.1 million decrease in consulting expense and a $0.3 million decrease in other sale and marketing expenses from cost cutting efforts in enacted over the past year.

General and Administrative Expenses

General and administrative expenses decreased by $0.3 million or 15% to $1.7 million for the three months ended June 30, 2016 from $2.0 million for the same period in 2015. This decrease is attributable to a $0.2 million decrease in consulting and professional fees, a $0.2 million decrease in compensation and benefits offsetting a $0.1 million increase in other general and administrative expenses.

Loss from Operations

Our loss from operations for the three months ended June 30, 2016 remained consistent at $2.2 million compared to the same period in 2015, reflecting a decrease in operating expenses offsetting a lower gross profit.

Segment Income (Loss) from Operations (dollars in millions)


	Three months ended June 30,
	2016			2015			Change			% Change
Product Sales and Service	$	(0.5	)	$	(1.5	)	$	1.0			66	%
Technology Licensing		0.2			1.8			(1.6	)		(88	)
Technology Development		0.2			0.3			(0.1	)		(29	)
Shared Service		(1.6	)		(2.1	)		0.5			25
Unallocated		(0.5	)		(0.7	)		0.2			29

Loss from operations	$	(2.2	)	$	(2.2	)	$	(0.0	)		—	%

Product Sales and Service

Loss from operations from product sales and service for the three months ended June 30, 2016 decreased by $1.0 million to $0.5 million compared to a loss of $1.5 million for the same period in 2015 principally due to an increase in gross profit.

Technology Licensing

Income from operations from technology licensing for the three months ended June 30, 2016 decreased by $1.6 million to $0.2 million compared to $1.8 million for the same period in 2015, due to an decrease in gross profit of $1.9 million from revenue license fees and royalties under our 2.X license agreement, partially offset by an increase of $0.3 million in operating expenses for research and development expenses attributable to technology licensing in the three months ended June 30, 2016.

Technology Development

Income from operations from technology development for the three months ended June 30, 2016 decreased by $0.1 million to $0.2 million compared to $0.3 million for the same period in 2015, due to an increase in operating expenses in 2016.

Shared Services

Corporate shared general and administrative loss for the three months ended June 30, 2016 decreased by $0.5 million to $1.6 million compared to $2.1 million for the same period in 2015 principally due to decreased legal expense of $0.2 million.

Unallocated

The loss from unallocated expenses for the three months ended June 30, 2016 decreased by $0.2 million to $0.5 million compared to $0.7 million in the same period in 2015 principally due to lower expense from cost cutting effort enacted over the past year.

The table below breaks out the unallocated expenses by category for the periods reported (dollars in millions).


	Three months ended June 30,
	2016		2015		Change			% Change
Depreciation and amortization	$	0.2	$	0.2	$	—			—	%
Stock-based compensation		0.1		0.2		(0.1	)		(35	)
Other		0.2		0.3		(0.1	)		(33	)

Total charges	$	0.5	$	0.7	$	(0.2	)		(25	)%

Other Expense and Income Tax Expense

Other expense for the three months ended June 30, 2016 remained consistent at $0.2 compared to the same period in 2015. Foreign exchange loss was up $0.1 million offsetting a decrease in other expenses and interest in the three months ended June 30, 2016 when compared to the same time period in 2015.

Income tax expense was $0.1 million for the three months ended June 30, 2016 and $0.4 million for the same period in 2015. The decrease is the result of lower Brazilian income tax expense incurred on certain license and royalty revenue earned in Brazil in 2016.

Net Loss

Net loss improved by $0.2 million or 7%, to $2.5 million for the three months ended June 30, 2016 from a net loss of $2.7 million for the same period in 2015. The improvement in our net loss for the three months ended June 30, 2016, is primarily due to the increase in foreign exchange and decrease in income tax expense as noted above.

Non-GAAP Measures

Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures included in this Form 10-Q, however, should be considered in addition to, and not as a substitute for or superior to the comparable measure prepared in accordance with GAAP. We utilize the non-GAAP measure of non-GAAP adjusted EBITDA which we define as earnings before interest expense, income taxes, depreciation, amortization, non-cash compensation expense, changes in the fair valuation of certain liability classified instruments, and certain other one-time non-cash charges.

Non-GAAP Adjusted EBITDA (Loss) (dollars in millions)


	Three months ended June 30,
	2016			2015
Net loss	$	(2.5	)	$	(2.7	)
Provision for income tax		0.1			0.4
Interest expense		—			0.1
Depreciation and amortization		0.2			0.2
Stock-based compensation		0.1			0.2
Non cash implied license revenue		—			(0.2	)

Total noncash addbacks		0.4			0.7

Adjusted EBITDA	$	(2.1	)	$	(2.0	)

Non-GAAP adjusted EBITDA was a loss of $2.1 million for the three months ended June 30, 2016 and $2.0 million for the same period in 2015. The change in non-GAAP adjusted EBITDA loss is primarily attributable to the improvement in net loss for the three months ending June 30, 2016 as compared to the same period in 2015.

Results of Operations of the six months ended June 30, 2016 compared to the six months ended June 30, 2015

Overview

Our general activity during the six months ended June 30, 2016 was primarily focused on: growing revenue, orders and backlog of distributed wind turbines in key markets, especially Italy and the United States; continued 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.

Our general activity during the six months ended June 30, 2015 was primarily focused on: expanding our order backlog of distributed turbines in key European markets, especially in Italy; stabilizing our supply chain for blades with two new suppliers; continued support of our release of our third generation products turbine which is projected to reduce our cost of the turbine while increasing energy capture; and continuing to expand our technology licensing and development business. In addition, we pursued an equity capital raise in the first quarter; however, due to then current market conditions, we decided not to complete this capital raise at that time.

Revenue, Orders and Deferred Revenue (dollars in millions)

Total revenues decreased by $8.3 million, or 37%, to $13.9 million for the six months ended June 30, 2016 from $22.2 million for the six months ended June 30, 2015. Our overall backlog decreased by 18% to approximately $33 million at June 30, 2016 as compared to approximately $40 million at June 30, 2015. 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.

A comparison of our revenues for the six months ended June 30, 2016 and 2015 is as follows:


	June 30,
	2016		2015		Change			% Change
Product Sales and Service	$	12.9	$	17.3	$	(4.4	)		(25	)%
Technology Licensing		0.5		2.9		(2.4	)		(83	)
Technology Development		0.5		2.0		(1.5	)		(74	)

Total	$	13.9	$	22.2	$	(8.3	)		(37	)%

Product Sales and Service

Product sales and service revenue decreased by $4.4 million to $12.9 million for the six months ended June 30, 2016, from $17.3 million for the same period in 2015. The decrease in our Product Sales and Service revenue was primarily attributed to lower sales of our distributed-class turbines which totaled $10.7 million along with a decrease in sales of our non-turbine products which totaled $0.2 million for the six months ended June 30, 2016 as compared to $14.1 million and $0.9 million for turbines and non-turbine products, respectively, for the six months ended June 30, 2015. Declines in distributed class and non-turbine revenues were exacerbated by a $0.9 million decrease in utility scale turbine revenue resulting from the sale of a prototype 2.2 MW unit during 2015. Related service revenue totaled $2.0 million for the six months ended June 30, 2016 and $1.4 million for the same period in 2015. In addition, the increase in the U.S. dollar relative to the Euro over the periods resulted in lower revenue for the latter period.

During the six months ended June 30, 2016, we executed 76 new distributed-class turbine sales orders. During the six months ended June 30, 2015, we executed 71 new distributed-class turbine sales orders. Our deferred revenue balance associated with Product Sales and Service at June 30, 2016 was $8.4 million which is included in the backlog value disclosed above. At June 30, 2015, such balance was $8.4 million.

Technology Licensing Revenue

Technology licensing revenue decreased by $2.4 million to $0.5 million for the six months ended June 30, 2016 from $2.9 million for the same period in 2014. This decrease is attributed to recognizing $0.5 million royalty revenues related to our licensing agreement with a significant customer. Our deferred revenue balance associated with Technology Licensing was $0 as of June 30, 2016. At June 30, 2015, such balance was $0.

Technology Development Revenue

Technology development revenue decreased by $1.5 million to $0.5 million for the six months ended June 30, 2016 from $2.0 million for the same period in 2015. This decrease is attributed to recognizing $0.5 million of revenue related to a contract with a significant customer. We determined that the contract milestones were non-substantive because they did not correlate with the level of effort expended. Therefore, we are recognizing revenue on the contract using the percentage of completion method. The degree of completion is determined based on costs incurred, excluding costs that are not representative of progress to completion, as a

percentage of total costs anticipated for the contract. There is a risk that costs could exceed billings in which case costs would be deferred until such time as the associated revenue is recognized. Deferred revenue would result when amounts billed exceed costs incurred under the contract. As of June 30, 2016, $0.1 million of cash collected for certain milestones were recorded as deferred revenue. Our total deferred revenue balance associated with Technology Development was $0.1 million as of June 30, 2016. At June 30, 2015, such balance was $0.

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

Cost of goods product revenues and cost of services revenues collectively decreased by $4.9 million or 27% in the six months ended June 30, 2016 to $13.6 million as compared to $18.5 million in the six months ended June 30, 2015.

A comparison of our costs of product revenues and cost of services for the six months ended June 30, 2016 and 2015 is as follows:


	Six months ended June 30,
	2016		2015		Change			% Change
Product Sales and Service	$	13.0	$	17.5	$	(4.5	)		(26	)%
Technology Licensing		0.1		0.4		(0.3	)		(82	)
Technology Development		0.2		0.3		(0.1	)		(38	)
Unallocated		0.3		0.3		(0.0	)		—

Total	$	13.6	$	18.5	$	(4.9	)		(27	)%

Cost of Product Revenues and Costs of Services Sold

Product sales and service cost for the six months ended June 30, 2016 decreased by $4.5 million to $13.0 million from $17.5 million for the same period in 2015. The decrease is attributable to the recognition of a lower volume related to our distributed-class turbine sales and decreased sales of non-turbine products for the six months ended June 30, 2016 as compared to the same period in 2015. Our cost of product revenues was $11.6 million for product sales along with $1.4 million of related service costs for the six months ended June 30, 2016 and $16.0 million for product sales and $1.5 million for related service costs for the same period in 2015.

Technology Licensing Cost of Service

Technology licensing cost of services for the six months ended June 30, 2016 decreased by $0.3 million to $0.1 million from $0.4 million for the same period in 2015. The decrease reflects reduced costs associated with license revenue in the six months ended June 30, 2016 as compared to 2015.

Technology Development Cost of Service

Technology development cost of services for the six months ended June 30, 2016 decreased by $0.1 million to $0.2 million from $0.3 million for the same period in 2015. This decrease is related to decreased activity related to development of a 3.3 MW turbine for a significant customer and a decrease in development activity with other parties.

Unallocated

The costs from unallocated expenses for the six months ended June 30, 2016 was unchanged from the same period in 2015

Segment Gross Profit (Loss) (dollars in millions)


	Six months ended June 30,
	2016			2015			Change			% Change
Product Sales and Service	$	(0.1	)	$	(0.1	)	$	0.0			—	%
Technology Licensing		0.3			2.6			(2.3	)		(89	)
Technology Development		0.4			1.7			(1.3	)		(76	)
Unallocated		(0.3	)		(0.4	)		0.1			25

Total	$	0.3		$	3.8		$	(3.5	)		(93	) %

Product Sales and Service

Gross loss from product sales and service for the six months ended June 30, 2016 remained consistent at $0.1 million compared to the same period in 2015, reflecting a decrease in cost of product revenues offsetting a decrease in product sales and service.

Technology Licensing

Gross profit from technology licensing for the six months ended June 30, 2016 decreased by $2.3 million to $0.3 million from $2.6 million for the same period in 2015. The improvement is principally due to lower revenue recognition in 2016 from third party licensing and royalty arrangements partially offset by lower related cost of sales.

Technology Development

Gross profit from technology development for the six months ended June 30, 2016 decreased by $1.3 million to $0.4 million compared to $1.7 million for the same period in 2015, principally due to lower revenues from contract technology development services provided to a significant customer and other third parties in 2015.

Unallocated

Gross loss from unallocated expenses for the six months ended June 30, 2016 decreased by $0.1 million to a loss of $0.3 million compared to a loss of $0.4 million for the same period in 2015. The decrease is principally due to successful cost cutting efforts.

Operating Expenses

Research and Development Expenses

Research and development expenses decreased by $0.3 million or 17% to $1.6 million for the six months ended June 30, 2016 as compared to $1.9 million for the same time period in 2015. This decrease reflects the success of cost cutting efforts enacted during 2015 resulting in lower employee and consulting costs

Sales and Marketing

Sales and marketing expenses decreased by $0.7 million or 28% to $1.8 million for the six months ended June 30, 2016 from $2.5 million for the same period in 2015. This decrease is principally due to $0.4 million reduction in employee and consulting expenses along with $0.3 million decrease in other sales and marketing expenses from cost cutting efforts enacted during 2015.

General and Administrative Expenses

General and administrative expenses decreased by $1.8 or 36% to $3.2 million for the six months ended June 30, 2016 from $5.0 million for the same period in 2015. This decrease is principally due to a $0.6 million reduction in capital raising expense, $0.5 million reduction in consulting expense, $0.3 million reduction in compensation and benefits expense, $0.2 million reduction in legal expense, and $0.2 million reduction in other G&A expenses resulting from successful cost cutting efforts.

Loss from Operations

Our loss from operations increased by $0.7 million to $6.4 million for the six months ended June 30, 2016 compared to $5.7 million for the same period in 2015. The increase in loss from operations is principally due to a decrease in gross loss from product sales and services of $3.5 million offsetting lower operating expenses of $2.8 million due to cost cutting efforts.

Segment Income (Loss) from Operations (dollars in millions)


	Six months ended June 30,
	2016			2015			Change			% Change
Product Sales and Service	$	(2.7	)	$	(2.8	)	$	0.1			4	%
Technology Licensing		0.2			2.1			(1.9	)		(89	)
Technology Development		0.3			1.7			(1.4	)		(83	)
Shared Service		(3.2	)		(5.5	)		2.3			42
Unallocated		(1.0	)		(1.2	)		0.2			14

Loss from operations	$	(6.4	)	$	(5.7	)	$	(0.7	)		(12	)%

Product Sales and Service

Loss from operations from product sales and service for the six months ended June 30, 2015 decreased by $0.1 million to a loss of $2.7 million compared to a loss of $2.8 million for the same period in 2015 principally due to the decrease in cost of product revenue offsetting a decrease in product sales.

Technology Licensing

Income from operations from technology licensing for the six months ended June 30, 2016 decreased by $1.9 million to $0.2 million compared to $2.1 million for the same period in 2015, due to a decrease in gross profit of $2.3 million from decreased revenue from license fees and royalties under our 2.X license agreement, partially offset by a decrease of $0.4 million in operating expenses for research and development expenses attributable to technology licensing in the six months ended June 30, 2016.

Technology Development

Income from operations from technology development for the six months ended June 30, 2016 decreased by $1.4 million to $0.3 million compared to $1.7 million for the same period in 2015, due to a decrease in gross profit of $1.3 million from decreased development revenue and a $0.1 million increase in operating expense in 2016.

Shared Services

Corporate shared general and administrative loss for the six months ended June 30, 2016 decreased by $2.3 million to $3.2 million compared to $5.5 million for the same period in 2015 principally due to a $0.6 million decrease in costs related to an uncompleted capital raise, a $0.6 million decrease in consulting expense, a $0.2 million decrease in compensation and benefits costs, a decrease in recruiting expenses of $0.2, a decrease of $0.2 million in legal expenses, and an increase in other corporate and shared services expenses of $0.5 million.

Unallocated

The loss from unallocated expenses for the six months ended June 30, 2016 decreased by $0.2 million to $1.0 million from $1.2 million as compared to the same period in 2015 primarily attributable to $0.2 million lower international sales and use taxes in 2016.

The table below breaks out the unallocated expenses by category for the periods reported (dollars in millions).


	Six months ended June 30,
	2016			2015			Change		% Change
Depreciation and amortization	$	(0.4	)	$	(0.4	)	$	0.0		5	%
Stock-based compensation		(0.3	)		(0.4	)		0.1		23
Other		(0.3	)		(0.4	)		0.1		26

Total charges	$	(1.0	)	$	(1.2	)	$	0.2		18	%

Other Expense and Income Tax Expense

Other expense remained unchanged at $0.2 million for the six months ended June 30, 2016 as compared to the same time period in 2015. Income tax expense decreased to $0.2 million for the six months ended June 30, 2016 as compared to $0.8 million for the same period in 2015. The decrease is the result of lower Brazilian tax expense incurred on certain license and royalty revenue earned in Brazil in 2016 as compared to 2015.

Net Loss

Net loss increased by $0.1 million or 1%, to $6.8 million for the six months ended June 30, 2016 from a net loss of $6.7 million for the same period in 2015. The increase in our net loss for the six months ended June 30, 2016, is primarily due to the increase in operating loss of $0.7 million offsetting a decrease in income tax expense of $0.6 million.

Non-GAAP Measures

Generally, a non-GAAP financial measure is a numerical measure of a company’s performance, financial position or cash flow that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP measures included in this Quarterly Report on Form 10-Q, however, should be considered in addition to, and not as a substitute for or superior to the comparable measure prepared in accordance with GAAP. We utilize the non-GAAP measure of non-GAAP adjusted EBITDA which we define as earnings before interest expense, income taxes, depreciation, amortization, non-cash compensation expense, changes in the fair valuation of certain liability classified instruments, and certain other one-time non-cash charges.

Non-GAAP Adjusted EBITDA (Loss) (dollars in millions)


	Six months ended June 30,
	2016			2015
Net loss	$	(6.8	)	$	(6.7	)
Provision for income tax		0.2			0.8
Interest expense		0.1			0.1
Depreciation and amortization		0.4			0.4
Stock-based compensation		0.3			0.4
Non cash implied license revenue		—			(0.4	)
Loss on disposal		0.1			0.1

Total noncash addbacks		1.1			1.4

Adjusted EBITDA	$	(5.7	)	$	(5.3	)

Non-GAAP adjusted EBITDA was a loss of $5.7 million for the six months ended June 30, 2016 and $5.3 million for the same period in 2015. The change in non-GAAP adjusted EBITDA loss is primarily attributable to an increase in net loss of $0.1 million for the period ending June 30, 2016 as compared to the same period in 2015.

Liquidity and Capital Resources

Consolidated Statements of Cash Flows Data (dollars in millions)


	Six Months Ended June 30,
	2016			2015
Net loss	$	(6.8	)	$	(6.7	)
Net cash used in operating activities		(2.6	)		(5.4	)
Net cash (used in) provided by investing activities		(0.1	)		(0.6	)
Net cash (used in) provided by financing activities		(0.4	)		(1.0	)

Cash and Cash Equivalents

As of June 30, 2016, we had cash and cash equivalents of $3.3 million of which $0.1 million was held by a foreign holding company and subsidiaries. We had cash and cash equivalents of $6.1 million of which $0.5 million was held by a foreign subsidiary for the same period in 2015.

Prior to April 16, 2014, our principal source of liquidity had been private sales of convertible preferred stock. From inception to December 31, 2013, we completed four rounds of equity financing through issuance of our convertible preferred stock with total cash proceeds to us of $123.0 million. We also issued convertible notes totaling $6.5 million in two offerings during the year ended December 31, 2013. We closed a private equity placement in connection with the RTO. The private placement provided gross proceeds of CDN$24,500 (USD$22,273) received on April 16, 2014. Proceeds from our financing transactions have been used primarily to fund working capital needs and our operations. We have experienced recurring operating losses, had an accumulated deficit of $175.1 million, and the current line of credit is set to expire on September 30, 2016. We are in discussions with our lender to renew our line of credit prior to September 30, 2016 or obtain alternative financing. However, we cannot guarantee that we will be able to procure additional financing upon favorable terms, if at all. In addition, we have experienced recurring negative operating cash flows, which have resulted in a decrease in our cash balance. These factors 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.

A substantial amount of our business in 2016 is expected to be non-U.S. dollar denominated sales transactions, which we currently expect to be predominantly denominated in euros. We are pursuing economic hedging strategies, including increasing our euro-denominated costs and entering into euro-based forward contracts, however there can be no assurance that we can execute these strategies to effectively control the economic exposure of currency movements.

Operating Activities

Cash used in operating activities consists of net loss adjusted for certain non-cash items including depreciation and amortization, impairment losses, share-based compensation, and changes in working capital and other activities. In addition to the increase 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, 2016, net cash used in operating activities decreased by $2.8 million to $2.6 million from $5.4 million for the six months ended June 30, 2015. The decrease in cash used in operating activities for 2016 is primarily due to the effect of changes in operating assets and liabilities resulting in a cash inflow of $3.3 million. Included in these changes were a decrease of $2.2 million in deferred costs, an increase of $2.0 million in customer deposits, and a decrease of $1.3 million in accounts receivable partially offset by a $1.3 million decrease in deferred revenue, a $1.6 million increase in accounts payable and other liabilities, and $0.7 million decrease in inventory and other balance sheet accounts. These changes in cash from operations were funded in part by the draw on the line of credit noted below.

Investing Activities

Net cash used in investing activities was $0.1 million for the six months ended June 30, 2016 as compared to $0.6 million for the same period in 2015. Cash used in investing activities consisted of purchasing certain equipment required to maintain operations.

Financing Activities

For the six months ended June 30, 2016, net cash used in financing activities was $0.4 compared to net cash used of $1.0 million for the six months ended June 30, 2015. We had repayments of $4.5 million and borrowings of $4.1 million on our working capital revolving line of credit for the period ended June 30, 2016.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements and did not have any such arrangements at June 30, 2016.

Contractual Obligations

As described below, our long-term debt obligations were zero as of June 30, 2016 and December 31, 2015. We have $2.5 million outstanding on our working capital revolving line of credit and a $0.6 million outstanding performance letter of credit and warranty guarantee, as of June 30, 2016, which is described below in the Comerica Credit Facility section. In addition, the Company has leased its headquarters and production facility which expires in June of 2019. Effective as of the second anniversary of the lease commencement (June 19, 2014), the Company has an annual right to terminate the lease without penalty. If the Company does not exercise its right to terminate the lease they have a total outstanding obligation of $2.1 million. The Company has not exercised the right to cancel the lease as of June 30, 2016.

Comerica Credit Facility

Our working capital line of credit is $6.0 million. This line is guaranteed by the U.S. Export-Import Bank, as well as by certain collateralized assets. As of June 30, 2016, we had $2.5 million outstanding on the working capital revolving line of credit. At June 30, 2016, we had a net maximum supported borrowing base of $0.4 remaining. Our current line of credit expires on September 30, 2016. Based on our relationship with our lender we believe that we will be able to renew our line of credit prior to September 30, 2016 or obtain alternative financing. However, we cannot guarantee that we will be able to procure additional financing upon favorable terms, if at all. The line of credit remains at $6.0 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. To facilitate certain financing arrangements that our Italian customers have with third parties, we have agreed to provide performance and warranty letters of credit to such customers. The performance letters of credit are payable if we fail to meet contractual terms such as delivery schedules. Such letters of credit decreased the borrowing base by 25% of the face value. The warranty letter of credit guarantees uptime and power curve performance over a one year period starting at commissioning date. Such letters of credit decreased the borrowing base by 100% less the amount of cash collateral held by the bank to secure warranty letters of credit. At June 30, 2016, we had $0.6 million of such performance and warranty guarantees outstanding with two customers.

The loan agreement with Comerica contains a financial covenant which requires us to maintain unencumbered liquid assets having a value of at least $1.5 million at all times. At June 30, 2016, we had unencumbered liquid assets having a value of $2.8 million.

The loan agreement also contains various covenants that limit or prohibit our ability, among other things, to:

•

incur or guarantee additional indebtedness;

•

pay dividends on our capital shares or redeem, repurchase, retire or make distributions in respect of our capital shares or subordinated indebtedness or make certain other restricted payments;

•

make certain loans, acquisitions, capital expenditures or investments;

•

create or incur certain liens;

•

consolidate, merge, sell, transfer or otherwise dispose of all or substantially all of our assets; and

•

enter into certain transactions with our affiliates.

A delay in filing our 2015 Form 10-K and our Quarterly Financial Reports on Form 10-Q for the quarters ended March 31, 2016 and June 30, 2016, resulted in a violation of the reporting covenants of the Comerica loan agreement. Comerica has been informed of the delay and has approved a waiver of the applicable reporting requirements until July 31, 2016 (filed July 25, 2016) for the 2015 form 10-K and September 15, 2016 for the March 31, 2016 and June 30, 2016 Form 10-Q.

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 Principal Executive Officer and Principal Financial Officer, Ciel R. Caldwell, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2016. 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.

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, 2015, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2015 because we had 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. We also had inadequate and ineffective controls for reviewing and analyzing complex or non-routine transactions. The Company continues to make enhancements to existing internal controls, 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 believe these changes reduce the risk of financial statement misstatement, there continues to be additional work required for us to conclude that reasonable assurance has been obtained that certain controls are operating effectively and in a timely manner. We expect to continue to undertake these actions as appropriate throughout 2016.

In connection with the closing of our second quarter of 2016, we identified a material weakness in our internal control over financial reporting. Specifically, our inventory reconciliation was not properly designed as it did not include the reconciliation of all non-system generated entries recorded to the general ledger. The material weakness resulted in a material misstatement of our inventory and costs of revenues balances and related disclosures, which have been corrected in this filing. We have implemented changes to remediate this control deficiency, but for the near-term future, the matter described above will continue to constitute a material weakness in our internal control over financial reporting that could result in material misstatements in our financial statements not being prevented or detected.

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.

Management is committed to continuous improvement of our internal control processes and will continue to diligently review our reporting controls and procedures. As management continues to evaluate and work to improve internal control over financial reporting, we may determine to take additional measures to address control deficiencies to modify, or in appropriate circumstances not to complete, certain of the remediation measures. We expect our remediation efforts will continue throughout 2016.

Based on the evaluation of our financial reporting controls, our Principal Executive Officer and Principal Financial Officer concluded that, our financial reporting controls were not effective as of June 30, 2016. 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

There have been no material changes in the Company’s internal control over financial reporting during the three months ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2015 (the “2015 Form 10-K”) (File No.000-55184) filed with the SEC on July 25, 2016, the Company discloses that, on account of the delays in filing the 2015 Form 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016 (the “Q1-2016 10-Q”) and June 30, 2016 (the “Q2-2015 10-Q”) (together, the “Delinquent Filings”), the staff of the Ontario Securities Commission issued a Failure to File Cease Trade Order (“FFCTO”), which halts all trading in the Company’s shares on the Toronto Stock Exchange until such time as the FFCTO is lifted. We have been informed that the act of filing the Delinquent Filings on SEDAR, along with the related management’s discussion and analysis and CEO and CFO certifications, serves as an automatic application to lift the FFCTO, and that the FFCTO will be lifted within four to five business days thereafter. The Company filed its 2015 Form 10-K on July 25, 2016 and its Q1-2016 Form 10-Q on August 31, 2016. Upon this filing of the Q2-2016 Form 10-Q, we will be up to date with our filings, such that the FFCTO can be lifted.

Furthermore, in connection with our preparation of our financial statements for the period ended June 30, 2016, our management identified a material weakness in our internal control over financial reporting. A material weakness is defined as a deficiency or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

The material weakness pertained to our inventory reconciliation which was not properly designed as it did not include the reconciliation of all non-system generated entries recorded to the general ledger. The material weakness resulted in a material misstatement of our inventory and costs of revenues balances and related disclosures, which have been corrected in this filing. If additional significant deficiencies or material weaknesses in our internal control over financial reporting are discovered or occur in the future, we may be unable to report our financial results accurately or on a timely basis, which could cause our reported financial results to be materially misstated and result in the loss of investor confidence or delisting and adversely affect the market price of our common shares.

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

On April 13, 2016, on account of the Company’s delay in filing its Annual Report on Form 10-K for the fiscal year ending December 31, 2015 (2015 Form 10-K”), the Ontario Securities Commission (“OSC”) issued a Management Cease Trade Order (“MCTO”) temporarily halting trading in the Company’s shares by its CEO and CFO until such time as the Company’s filings were up to date and the MCTO was lifted. On August 25, 2016, the staff of the OSC informed the Company that it would recommend converting the MCTO to a Failure to File Cease Trading Order (“FFCTO”) if the Company did not, by August 31, 2016, file its Quarterly Reports on Form 10-Q for the periods ended March 31, 2016 and June 30, 2016 (together, the “Quarterly Reports”), each of which were delayed due to the delays in filing the 2015 Form 10-K. The Company filed its Quarterly Report for the quarter ending Mach 31, 2016 on August 31, 2016, but was unable to complete its Quarterly Report for the quarter ending June 30, 2016 (“Q2 Quarterly Filing”) by that date. As a result, on September 2, 2016, the OSC issued an order converting the MCTO to a temporary Failure to File Cease Trading Order (“FFCTO”) pursuant to which all trading of the Company shares will be suspended for as long as the FFCTO is in effect. Today’s filing of the Q2 Quarterly Filings, including the related Management’s discussion and analysis and certifications, constitutes an application to lift the FFCTO pursuant to National Policy 11-207—Failure to File Cease Trade Orders and Revocations in Multiple Jurisdictions. The Company expects the FFCTO to be lifted within four to five business days, at which point trading in the Company’s securities will resume.

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.

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.

EXHIBIT INDEX

Incorporated by Reference

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing

Date

Filed

Herewith

31.1

Principal Executive 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.

32.1

Principal Executive Officer and 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) Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015 and (ii) Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2016 and 2015 (unaudited), (iii) Condensed Consolidated Statements of Changes in Shareholders’ Equity for the six months ended June 30, 2016 (unaudited), (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited), and (v) Notes to Condensed Consolidated Financial Statements (unaudited).

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company