Northern Power Systems Corp. - FORM 10-K

Northern Power Systems Corp. - FORM 10-K - March 31, 2017

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES 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)		(Zip Code)

Registrant’s telephone number, including area code: (802) - 461-2955

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange On Which Registered
Common Shares. no par value per share		Toronto Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

N/A

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ☐ No ☒

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 last 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-K (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The aggregate market value of common shares held by non-affiliates of the registrant based on the price at which the common shares were last sold as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, and based on an exchange rate of CDN $0.77 per $1.00, was approximately $1.7 million. For purposes of this computation, all executive officers and directors have been deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers and directors are, in fact, affiliates of the Registrant.

As of March 30, 2017, there were 23,613,884 shares of the registrant’s common shares, no par value, outstanding.

Documents Incorporated by Reference

The registrant intends to file a proxy statement pursuant to Regulation 14A not later than 120 days after the close of the fiscal year ended December 31, 2016. Portions of such proxy statement are incorporated by reference into Part III of this Annual Report on Form 10-K.

TABLE OF CONTENTS



Item 1.	Business	3

Item 1A.	Risk Factors	16

Item 1B.	Unresolved Staff Comments	37

Item 2.	Properties	38

Item 3.	Legal Proceedings	38

Item 4.	Mine Safety Disclosures	38

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	39

Item 6.	Selected Financial Data	39

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	61

Item 8.	Financial Statements and Supplementary Data	62

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	90

Item 9A.	Controls and Procedures	90

Item 9B.	Other Information	92

Item 10.	Directors, Executive Officers and Corporate Governance	93

Item 11.	Executive Compensation	93

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	93

Item 13.	Certain Relationships and Related Transactions, and Director Independence	93

Item 14.	Principal Accounting Fees and Services	93

Item 15.	Exhibits, Financial Statement Schedules	94

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition or results of operations. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Accordingly, you should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those projected in the forward-looking statements. Forward-looking statements contained in this Annual Report on Form 10-K include statements about:

•

our ability to compete with other companies that are developing or selling products and services that are competitive with ours;

•

our ability to grow our active customer base;

•

our ability to establish new partnerships;

•

our ability to expand into new markets;

•

our ability to maintain or source third-party manufacturing and supply chains;

•

the timing of expected announcements regarding feed-in-tariff and other governmental programs;

•

our ability to attract and retain key personnel; and

•

other factors discussed elsewhere in this Annual Report on Form 10-K.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Annual Report on Form 10-K. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Annual Report on Form 10-K may not occur.

The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

This Annual Report on Form 10-K also contains statistical data, estimates and forecasts that are based on independent industry publications or other publicly available information, while other information is based on our internal sources. Although we believe that these third-party sources referred to in this Annual Report on Form 10-K are reliable, we have not independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third-party information presented in this Annual Report on Form 10-K, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under “Risk Factors.”

Unless the context otherwise requires, the terms “we,” “us,” “the Company” and “our” in this Annual Report on Form 10-K refer to Northern Power Systems Corp. and its subsidiaries.

PART I

Item 1.

Business

Company Overview

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

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

The substantial majority of our current sales are in the small wind subset of the distributed wind market, which is commonly known to consist of turbines with rated capacities of 500 kW output or smaller. Based on the number of turbines that we have sold and installed to date, we consider ourselves a leader in the U.S., U.K., and Italy in the largest sub-segment of this market in terms of energy output, turbines ranging in size from 50 kW to 100 kW. Since the introduction of our second generation 60 kW and 100 kW PMDD wind turbines in late 2008, we have shipped over 600 of these turbines. To date, these units have run for over fourteen million hours in the aggregate. Our distributed wind customers include financial investors and project developers, but also the end users themselves in application that provide power for farms, schools, municipalities, small business, remote villages, and U.S. military installations.

We had developed a 2 MW turbine platform with three wind-speed regime variants based upon our PMDD technology, of which the 2.3 MW variant is certified to International Electrotechnical Commission, or IEC, standard 61400-1 by Det Norske Veritas, or DNV, a globally recognized certification firm.

On October 26, 2016, we entered into a definitive agreement for WEG Electric Corp. and WEG Equipamentos Elétricos S.A. (collectively, “WEG”), a former licensor of our 2 MW turbine platform to acquire certain of our utility wind assets. Under the agreement, the proven utility scale direct drive technology we developed for applications over 1.5 MW will be solely owned by WEG and its affiliates. All related assets and liabilities, including the patent portfolio for utility wind applications greater than 1.5 MW and the engineering team largely responsible for developing this technology, was acquired by WEG. WEG will continue to compensate us under the existing arrangement paying royalties for sales in South America resulting in future payments of up to approximately $10.0 million, of which a minimum of $3.0 million were guaranteed and have been collected. Additionally, should WEG be successful in its plans to expand it utility wind business internationally, it will pay us up to $17.5 million in royalty payments over the next decade for turbines shipped anywhere outside of its current market in South America.

turbines, and also sold independently for use in microgrids and energy storage projects. Our FlexPhase products are modular in nature allowing for a common platform to service multiple applications. As of December 31, 2016, we have deployed over 155 MW of products based on this technology, primarily in connection with our wind turbine designs. Currently, we are actively commercializing sales of our power converters products as part of integrated battery energy storage systems (“BESS”), working with various battery manufactures and systems integrators.

In addition to wind turbine and productized energy storage solutions, we are capable of providing technology development services to customers for more complex energy storage, microgrid, and grid stabilization situations. While we do not focus on this as a part of our core business, these capabilities and expertise serve as a differentiator for our company with our customers.

For the years ended December 31, 2016 and 2015, we generated $35.9 million and $54.0 million in revenue, respectively. For the years ended December 31, 2016 and 2015 we incurred net losses of $8.9 million and $7.8 million, respectively.

We are headquartered in Barre, Vermont, and lease additional office space in Burlington, 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 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, and the WPHI directors and officers became Mira III’s directors and officers.

Upon completion of the RTO, Northern Power Systems Corp. succeeded to WPHI’s status as a reporting company under the U.S. Securities and 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. Our common shares were listed on the Toronto Stock Exchange under the Symbol “NPS”.

Our Products and Services

We have had three operating business lines, which include product sales and service, technology licensing, and technology development, in addition to a shared services segment.

Product Sales and Service

Distributed Wind

We have developed two wind turbine platforms for the distributed wind market which we manufacture and sell on a global basis. Our 100 kW and 60 kW turbines, which we market under the names NPS 100 and NPS 60, generate electricity for use by farms, remote villages, schools, small businesses and U.S. military installations. These wind turbines are currently generating electricity in the U.S., U.K., Italy, Canada, South Korea, and certain Caribbean nations, including the Bahamas and the U.S. Virgin Islands. The NPS 100-21 is designed for high wind sites and is also available in an Arctic configuration for use in extreme temperatures. The NPS 100-24 is designed to deliver optimal power generation in low to moderate wind speeds. For the European market, we offer the NPS 60 turbine, which is designed to capture optimal power generation at lower wind speeds and targeted at markets where grid connection capacity is a constraint. All of our distributed-class wind turbines are available with three different tower heights to maximize the benefits from siting conditions and comply with permitting requirements.

Our third generation of turbines has a larger swept area and superior aerodynamic blade technology over our previous models, which, based on our engineering modeling, yields improvements in energy capture of approximately 15% over our second generation turbine. It also reduces our customers’ total cost of ownership as the cost of installation has reduced. In addition, we designed the turbine nacelle to be smaller and require fewer components, and as such it reduced our costs to produce the turbines.

Our customers are typically responsible for installing turbines they purchase from us, and we generally perform commissioning services to ensure that the turbine has been properly installed and is ready to begin generating power upon installation. We also provide, through our employees or contract with third-party professional full scope installation as an additional service offering. We typically provide a two-year warranty for our wind turbines that commences after commissioning and offer three more years of extended warranty for an additional charge. During the warranty period, we monitor the turbines 24 hours a day and cover parts and labor for unscheduled repairs and replacement.

We also enter into operations and maintenance, or O&M, agreements with customers under which we provide scheduled and unscheduled maintenance. These O&M agreements typically range from one to three years, and the customer pays us a fixed fee for scheduled maintenance and receives a 20% discount from our commercial rates for unscheduled maintenance. In certain markets, we have begun offering a ten-year O&M agreement under which we provide scheduled and unscheduled maintenance and guarantee the performance of the turbine to particular specifications during the term, and we receive a variable fee based on the electricity generated by the turbines subject to the agreement. We utilize both our employees and certified third-party contractors to provide warranty, maintenance and support services. Our use of a network of certified service partners who are located in geographic proximity to our customers reduces our costs of providing these services and also enables us to quickly dispatch components and technicians to the particular site.

We may offer annual availability guarantees to customers who exceed minimum unit purchase requirements and purchase an O&M agreement. The offer guarantees annual availability as a percentage of total possible availability adjusted based on factors including downtime for scheduled maintenance, grid unavailability, and wind speed and weather conditions falling outside of operation range. We may also guarantee power output levels at varying wind speeds. The settlement of claims against the guaranty may take the form of liquidated damages or discounts on future product purchases. To date, we have not had to pay any significant monetary damages for non-performance or underperformance.

Utility Wind

To serve the utility wind market, we had developed a platform of turbines with different power ratings in the 2 MW range and different rotor sizes designed to meet customer requirements in a range of wind classes, which were marketed under the name NPS 2.X. Two prototypes of our 2.3 MW turbine, which has received type certification to IEC standard 61400-1 from DNV, were sold and installed to operators of a Michigan wind farm. Based on the success of our prototypes, in 2013, we entered into a strategic partnership with WEG pursuant to which we licensed our 2.1 MW, 2.2 MW and 2.3 MW turbine designs to WEG in Brazil on an exclusive basis and in the rest of South America on a non-exclusive basis.

On October 26, 2016, we entered into a definitive agreement for WEG to acquire certain of our utility wind assets. Under the agreement, the proven utility scale direct drive technology we developed for applications over 1.5 MW will be solely owned by WEG and its affiliates. All related assets and liabilities, including the patent portfolio for utility wind applications greater than 1.5 MW and the engineering team largely responsible for developing this technology, was acquired by WEG. WEG will continue to compensate us under the existing arrangement paying royalties for sales in South America resulting in future payments of up to approximately $10.0 million, of which a minimum of $3.0 million were guaranteed and have been collected. Additionally, should WEG be successful in its plans to expand it utility wind business internationally, it will pay us up to $17.5 million in royalty payments over the next decade for turbines shipped anywhere outside of its current market in South America.

Power Converters, Energy Storage Solutions

In addition to wind turbines, we are commercializing sales of our power converters based on our proprietary FlexPhase technology for complex energy applications ranging from 250 kW to over 5 MW. These energy applications include both grid-connected and off-grid energy storage markets as well as microgrid applications, grid stabilization and power quality enhancement. FlexPhase is our modular power converter platform and uses a proprietary architecture to reduce stress on critical power components. We have upgraded our FlexPhase converter platform such that it can better integrated into BESS applications.

In 2016 we commenced commercializing integrated energy storage solutions with certain battery storage technology partners. Our primary focus is to develop integrated solutions involving their battery technology and management software with our FlexPhase converters, controls expertise and ability to provide full-scope installation services. Currently we are seeing areas in the North America market where the demand for such offerings is evolving. This is a more nascent market for us and as such we will continue to evaluate our investment, approach to market and partners in this space.

Services

We provide technical support for our SmartView supervisory control and data acquisition system. SmartView is a remote monitoring and control system which we developed to allow users to monitor and manage system operation, issue control commands, respond to faults and alarms, and capture energy system data.

Technology Licensing

WEG Equipamentos Elétricos S.A.

Before the sale of our utility wind assets in October 2016, we had a license agreement with WEG in which we provided WEG with the designs for our 2.1 MW, 2.2 MW and 2.3 MW wind turbines in the South American market. Our contract with this customer provided for payment of $3.4 million in milestone-based license fees. The Company also expected 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. Prior to the sale that was discussed above, WEG had paid the Company $3.4 million in license fees and approximately $2.4 million in royalties. We completed a number of technology transfer milestones under the agreement, and WEG had accumulated a backlog of orders comprising over 600 MW of turbine installations for the sale of turbines built using our design.

Technology Development Services

Our engineering team has provided technology development services that are targeted to the global wind power market as well as other advanced energy markets. Our team of engineers has expertise in the power systems and wind turbine design, manufacturing and deployment experience with core competencies in power electronics, testing, and diagnostics. Applications of our technology development services have included energy storage, microgrids, and grid stabilization and have been delivered to a wide range of industries. When we have provided these services, our customers have typically owned the developed technology for a limited field of use, but we typically maintain a license for all other applications and all other markets.

In February 2014, we entered into a development agreement with WEG to design and develop a 3.3 MW wind turbine. The development agreement provided for milestone-based development fees payable to us by WEG. This agreement was cancelled as part of the utility asset sale to WEG discussed above.

Shared Services

Our shared services segment represents our general and administrative departments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Conduct Our Business — Shared Services.”

Wind Industry Overview

Wind power has been one of the fastest growing sources of electricity generation globally over the past decade. The Global Wind Energy Council, or GWEC, in its Global Wind Statistics 2016 report, states that installed capacity of wind power deployments globally has increased more than 300% since 2008. Furthermore, according to the U.S. Department of Energy, or the DOE, 2015 Distributed Wind Market Report, between 2003 and the end of 2015, over 75,000 wind turbines were deployed in distributed application across all 50 states, Puerto Rico, and the U.S. Virgin Islands, totaling 934 MW in cumulative capacity. In 2015, 28 states added 28 MW of new distributed wind capacity, representing 1,713 units and $102 million in investment. The growth in the industry is largely attributable to increasing cost competitiveness with other power generation technologies and growing public and governmental support for renewable energy driven by concerns regarding the security of conventional fossil fuel energy supply, as well as the environmental benefits of wind power. National targets for wind and other renewables are also driven by individual countries’ efforts to produce energy domestically, increase employment, build domestic industries, and replace other forms of power generation, such as coal and nuclear.

As global demand for electricity generation from wind power has increased, technology enhancements — supported by government incentives — have yielded increased power output while the cost of wind power has dropped by more than 90% since the 1980s, according to the Revolution Now 2016 Update (September 2016) report, or the Revolution Now report, by the DOE. According to the Renewables 2016 Global Status Report, or the 2016 Renewables Report, published by the Renewable Energy Policy Network, or REN21, wind power is playing a major role in power supply in an increasing number of countries, including: China, the U.S., Germany, India, Spain, the U.K., Canada and France. The majority of this wind power expansion is currently being driven by installations of utility-class wind turbine farms. These farms generate electricity to feed into the electrical grid, supplying a utility company with energy that can be sold to customers. The utilities that purchase such power still have additional costs to deliver the electricity to the source of use. As such, utility-class power costs are measured as only costs to generate power.

Wind power also is expanding in the distributed wind market. This market is made up of turbines connected on the customer side of the power meter, designed to meet onsite electrical loads as well as to feed into distribution or microgrids, thereby reducing energy costs at the site of use. The comparable cost of distributed wind energy is the cost for landed power, which is the cost for other forms of energy generation to be produced as well as delivered to the location of consumption.

A subset of the distributed wind market is the small wind market, with small wind turbines commonly defined as those with rated capacities between 1 kW and 500 kW. We currently sell distributed wind turbines with rated capacities of 60 kW and 100 kW. We estimate that our current target addressable market in distributed wind is approximately 50% of the market in Italy and 20% of the market in the U.K. and in the U.S. We believe there are addressable geographic markets for our distributed wind products outside of these three geographic markets, and to date have sold products in certain of these other geographies such as the Caribbean and South Korea, but we are not able to estimate the size of these markets.

Both utility and distributed wind energy generation have seen comparable improvements in technology driving their cost effectiveness and expanding adoption.

Key Drivers of Demand for Wind Power and Power Systems

We believe the following factors have driven, and will continue to drive, the growth of wind power globally:

Requirement for New Electricity Generating Capacity

The IEA in its World Energy Outlook 2016 Factsheet says that as a result of transformations in the global energy system taking place over the next several decades and with the current low natural gas price environment, along with the increased sensitivity regarding environmental concerns, it is expected that natural gas and renewable energy, including wind power, will be the future choice for new electricity generating capacity.

Governmental Policies and Incentives

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

Currently there are certain feed-in-tariff regimes in Italy, the U.K. and Indiana, U.S. supporting the installation and operation of distributed-class wind turbines. Since these regimes were clarified recently relative to the sales cycles of our distributed-class turbines well suited for these installations, our orders for distributed-class turbines continues to be strong. Published information from the U.K. indicates that the feed-in-tariff rates and deployment caps by rated capacity have declined as recent as January 1, 2017 and 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.

With bipartisan support the Renewable Electricity Production Tax Credit (PTC) phasedown has been enacted. These tax credits are now being phased out on an 80-60-40 schedule, ending after 2019. Eligible properties, generally personal, that begin construction before December 31, 2018, December 31, 2019 and December 31, 2020 will have their Investment Tax Credit (ITC) amounts reduced from 24%, 18% and 12% thereafter.

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.

Continued Improvements in Wind Power Technologies

Wind turbine technology has evolved significantly over the last 20 years and technological advances are expected to continue in the future. These technological advances include:

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advances in wind power generation technology, particularly the introduction and advancement of permanent magnet direct-drive wind turbines, which have increased power production and efficiency per turbine;

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advances in wind turbine blade aerodynamics and development of variable speed generators to improve conversion of wind energy to electricity over a range of wind speeds, resulting in higher capacity factors and increased capacity per turbine;

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advances in turbine height, resulting in the ability to benefit from greater wind speeds at higher elevations;

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advances in remote operation and monitoring systems;

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improvements in wind monitoring and forecasting tools, allowing for more accurate prediction of electricity generation and availability and for better system management and reliability; and

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advances in turbine maintenance, resulting in longer turbine life.

Global Commitment to Reduce Climate Change

Growing Environmental Concerns

The growing concern over the environmental consequences of greenhouse gas emissions has contributed to the growth of wind power generation. According to the World Meteorological Organization, 2016 ranked as the

warmest year on record, and sixteen of the seventeen warmest years have all occurred in the 21^st Century. Among the largest emitters of greenhouse gases in the world, the U.S. and the E.U. have experienced growing awareness of climate change and other effects of greenhouse gas emissions, which has resulted in increased demand for emissions-free electricity generation. As an emissions-free electricity source, wind power is an attractive alternative that is capable of addressing these growing environmental concerns. Globally, GWEC, in its Global Wind Energy Outlook 2016, estimates that annual reductions in CO₂ from existing wind power plants were about 521 million tons in 2015. By 2030 wind power could reach 2,110 GW, and supply up to 20% of global electricity, crating 2.4 million new jobs and reducing CO2 emissions by more than 3.3 billion tons per year, and attract annual investment of about €200 billion.

In December 2015, at the U.N. Framework Convention on Climate Change in Paris, known as COP 21, an agreement was reached creating a fundamentally new course in the global climate control effort. The agreement reaffirmed the goal of limiting the increase in global temperatures to below 2 degrees Celsius, while urging countries to limit the increase to 1.5 degrees Celsius. To achieve this goal, the agreement also addressed establishing binding commitments to achieve the overall goal as well as regular reporting on progress, reaffirmed the obligations of developed countries to support developing countries, extend the annual support to 2025 as well as several other initiatives.

During the U.S. presidential election campaign, President Trump made comments suggesting that he was not supportive of various clean energy programs and initiatives including the U.N. Framework Convention on Climate Change in Paris, designed to curtail global warming. It remains unclear what the Trump Administration will or will not do with respect to these programs and initiatives.

Increasing Obstacles for Conventional Power Projects

Coal and nuclear power projects continue to face significantly increasing capital costs due to steep environmental hurdles and regulatory uncertainty. These hurdles range from complications relating to the disposal of spent fuel to concerns over operational safety and the need to fulfill carbon control requirements. Wind power, in contrast, does not create solid waste by-products, emit greenhouse gases or deplete non-renewable resources during operation, and, as a result, is an attractive alternative to fossil fuel-fired power projects. The USEIA in its Annual Energy Outlook 2016 examined its Reference case and projected that electricity consumption will increase at an average annual rate of 0.4% from 2015 to 2040, nearly in line with expected population growth. Continuing a recent trend toward lower levels of carbon-intensive generation, natural gas and renewable generation meet almost all of the increase.

Wind and solar generation account for nearly two-thirds of the growth in renewable generation. Solar is the fastest-growing renewable generation source, but wind accounts for the largest absolute increase in generation. Wind becomes the single largest source of renewable generation by 2040, supplanting hydropower as the largest renewable generation source.

Outlook for Energy Prices

We expect that increased demand for electricity coupled with a finite supply of fossil fuels, and capacity and distribution constraints, including volatility in fossil-fuel prices, will result in volatility, but generally continued increases, in electricity prices. The recent shale gas boom has kept current natural gas prices in the U.S. relatively low, while the rest of the world continues to see significantly higher prices. Increasing demand from Asia and a future export market for liquefied natural gas from the U.S. is expected to drive gas price increases throughout the world in coming years. The IEA estimates a reversal of excess gas in the U.S. beginning in 2017 as exports pick up, combined with more gas use in transportation, to drive prices steadily higher into the 2020s. Additionally, electricity generation from natural gas is either exposed to volatility in natural gas prices or is priced at a premium for medium-term, fixed-price gas supply contracts. Wind power projects, in contrast, typically contract for long periods (e.g., 20 years) at fixed prices. As a result, and given the lack of fuel costs

associated with wind power projects, we believe that utility-class wind power has become cost competitive with conventional power projects, and that this cost competitiveness will contribute to further growth in wind power.

In the distributed generation market for smaller turbines, we expect that the opportunity for land owners to generate electricity both for personal and business use, as well as to sell net energy produced back to the local utility, will continue to drive demand for wind power. In remote, off-grid locations where a connection to the utility grid is not available, we believe that hybrid systems that combine a wind turbine with an energy source such as a diesel generator, battery energy storage, or photovoltaic system, will continue to proliferate to provide an alternative to higher energy prices.

Price of Other Renewables

As highlighted the Bloomberg New Energy Outlook 2016, LCOE for renewables, including distributed wind and solar, continues to decrease while the same measure for fossil fuel increases. The LCOE — which includes the capital, operating, and any financing costs of an NPS 100 kW wind turbine over at least a 20-year operating life — has reached parity or better with electricity purchased from the grid. As highlighted in the Bloomberg New Energy Outlook 2016, looking out to 2040 wind and solar costs drop. These two technologies become the cheapest ways of producing electricity in many countries during the 2020s and in most of the world in the 2030s. It is expected that onshore wind costs fall by 41% by 2040.

Our Strategy

We are focused on being a leader in the commercialization of distributed-wind turbines, and strategically leveraging our proprietary technology by expanding our product offerings in power generation and power conversion. Key elements of our strategy include:

Continuing to drive sales growth in distributed wind

We intend to expand our business in the growing distributed wind power market, by improving the economics of our product offerings for our customers and deepening our relationships with our existing customers as well as adding new customers. In addition, we plan to capitalize on the growth opportunities for distributed wind power by furthering our technology leadership, assisting in third-party financing solutions, and customizing our offerings to efficiently reach targeted new geographies.

Pursue growth opportunities for power conversion product line

We have developed and qualified our FlexPhase modular power converters to meet varying energy management and storage system needs by engineering a highly flexible, modular system architecture and integrating scalable controls. Since these power converters were developed under constrained spatial specifications, they have greater power density and represent more advanced technology than most utility-scale power converters currently in the market. As a result, we believe that our power converters can be adapted to a wide variety of applications. Going forward, we intend to continue to customize our proprietary power conversion technology for developing applications and market our products to pursue revenue opportunities outside of use in wind turbines, such as the battery energy storage system (BESS) market. With the increase in use of renewable energy coupled with the improved price and performance of batteries, the need for battery energy storage is growing and we are pursuing opportunities to use our FlexPhase technology to address this need. These energy applications include both grid-connected and off-grid energy storage markets, as well as microgrid applications, grid stabilization and power quality enhancement. We are currently working with advanced battery technology suppliers and energy management companies to cost-effectively market our products and technologies in BESS and related markets. As we proceed, we will continue to review our performance within these applications and markets to determine the appropriate level of resources we commit.

Maintain our technology leadership and expand our intellectual property position

We believe that we have established technology leadership through decades of experience in designing, manufacturing, and deploying wind turbines ranging in size from 60 kW to 2.3 MW, all of which utilize our PMDD technology. This technology leadership resulted in over 85 patents and patent applications worldwide covering power electronics, generator and turbine design, turbine servicing, manufacturing methods, energy storage and turbine operation, and further includes significant copyrights, know-how and trade secrets in these fields. As part of the utility wind asset sale on October 26, 2016, WEG acquired the portion of this technology and associated intellectual property directed to utility wind scale products of greater than 1.5 MW, and has licensed us back under patents and other intellectual property assigned for all other uses. We currently own 29 patents and patent applications, throughout the world.

Optimize supply chain management

We will continue to build our supplier network by identifying new suppliers, directly or through relationships established by our strategic partners, and working with our existing suppliers to develop relevant technological advancements. In addition, we intend to continue to target an optimal balance between in-house production and sourcing from external suppliers. We expect that these supply chain initiatives, in combination with our engineering efforts, will continue to reduce the cost to manufacture our products, lower our customers’ overall costs, and permit us to gain access to new markets that are not dependent on incentive programs or other government policies.

Our Competitive Strengths

We believe that the following strengths enable us to compete effectively in the wind power technology and renewable energy industries and to capitalize on the growth of those industries.

Extensive Research and Development Expertise

Over the past several decades, we have developed a broad portfolio of intellectual property. Notable technologies we have developed include our highly efficient, but low cost, permanent magnet generator, our modular turbine design, our full power converter, and our voltage stabilization capabilities. In addition, we have expanded our capabilities by offering development services in the renewable energy sector for a variety of complex energy applications, including energy storage, microgrids, and grid stabilization. Our engineering team has worked together extensively in designing and building turbines ranging in size from 60 kW to 2.3 MW, as well as power conversion systems for turbines and other applications. Going forward, we expect to leverage our core research and development capabilities to pursue continued advances in our current products as well as the development and refinement of new products and applications.

Advanced Product Offerings

Our wind turbines are designed for high availability, high energy output and low energy production cost per kWh in a wide range of wind conditions throughout the world. In our distributed-class wind platforms, we offer a range of power ratings, rotor sizes and tower heights to meet customer and siting requirements in a range of a wind classes. For example, our NPS 100-24 and NPS 60-23 turbines are designed with a larger rotor diameter and longer blades to capture more energy at lower wind speeds, while their lower RPM and tip speed make for quieter operation to comply with permitting restrictions. The longer blades provide our wind turbines a larger swept area and a lower cut-in wind speed, the minimum speed at which the turbine can start rotating and generating power. This feature increases the overall output of our wind turbines, particularly under low wind conditions.

Our FlexPhase power converter technology is based on a modular architecture that is configurable for a wide range of energy storage usages including lithium-ion, lead acid, flow battery chemistry, aqueous chemistries,

flywheel and ultacompacitors. The configurable nature of the platform will enable Northern Power to pursue business with a wide range of OEM’s without incurring excessive R&D expenses to support the different technologies. The FlexPhase platform is also compact, efficient, and serviceable, all of which make it attractive for integration with a broad range of technologies.

Robust Products

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, which have run for over fourteen million hours in the aggregate. Our fleet of warranted turbines is performing at greater than 98% availability. We engineer our wind turbines to withstand a variety of harsh conditions in severe environments, such as those in Alaska, the Caribbean and Scotland, by designing in features such as reinforced blades and a triple braking system. For example, certain turbines of our distributed wind fleet have several million run time hours without incident despite being in locations that have experienced hurricane speed winds, including two of our turbines installed on an island in the Bahamas that withstood winds of over 107 miles per hour during Hurricane Irene in 2011 and again in 2012 during Hurricane Sandy. More recently, several of our turbines continued performance through both Hurricane Matthew in the Caribbean, as well as Typhoon Chaba in the Jeju region of South Korea, and then returned to normal operation, as designed. In addition, the Arctic models of our turbines operate safely in temperatures as low as -40°F during the winter months and have special design and safety features to assure high levels of uptime even at such extreme temperatures. Therefore, we believe that our products are well-suited for reliable operation in nearly all environments.

Established Customer Relationships with Large Developers

We serve a global customer base for our distributed-class wind turbines that includes project developers and financial investors, primarily located in the U.K. and Italy. We have developed deep customer relationships with a number of our customers, each of which has extensive experience developing wind and other renewable energy projects in Europe, and we expect these customers will continue to have strong demand for our products in near- and medium-term to take advantage of the feed-in-tariff programs. With our track record of on-time delivery and our turbines’ successful operating history, which is a direct contributor to our customers’ ability to finance the purchase of our turbines, we believe we will continue to generate substantial orders from existing and future customers.

Our Technology

We believe that our proprietary PMDD and full power converter technology differentiates us from other wind turbine companies and provides us with a competitive advantage. In addition, we believe that our systems engineering approach to advanced power system architectures, combined with real world experience with hybrid energy applications, gives us a competitive advantage in the emerging fields of microgrid, hybrid power, and battery energy storage solutions.

Gearless Direct-Drive Technology

Our turbine’s generator and rotor are directly coupled and move together at the same speed, without the need for a gearbox. By eliminating the gearbox, we have simplified the drivetrain design and reduced the number of moving parts and wear items. We believe that this gearless design benefits our customers with high-reliability turbines that have lower operating costs and greater efficiency. Geared turbines typically operate at high speeds of 1,000 to 1,800 RPM and involve a complex drivetrain with many gears, bearings and ancillary lubrication and cooling systems. By comparison, our direct-drive turbines are simple in design and operate at slow speeds of approximately 10 to 20 RPM for utility wind applications and 50 to 60 RPM for distributed wind applications. The simplicity of the design is demonstrated by the fact that our turbines only have two drive bearings, as

opposed to the more than 50 drive bearings that most geared turbines require. Our turbines outperform traditional gearbox competitor technology in three critical areas:

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Improved reliability: Due to the slower speed of rotating hardware, all critical rotating components and their associated electronics experience much lower physical stress and fewer cycles than those in traditional gearbox turbines. Additionally, the inherently simpler direct-drive construction requires far fewer parts than a traditional turbine design. The substantially lower part count, reduced stress and lower cycle count in the direct-drive platform eliminate many opportunities for part failure while also reducing the complexity of procurement, construction and operation. These elements contribute to our turbines achieving greater than 98% availability, as compared to 95% or lower for traditional turbines.

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Lower operating and maintenance costs: Due to of the simplicity of our drivetrain and the overall lower part count of our turbines, maintenance costs are greatly reduced. Geared turbines typically require gearbox replacement every seven to nine years, which results in both high costs and significant downtime. These costs are avoided with our gearless turbines, the drive trains of which are designed to operate over their full design life without major component replacements.

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Higher efficiency: Directly coupling the generator and rotor increases mechanical efficiency versus traditional geared turbines. Further, there is no friction lost in the meshing of gear teeth. Electrical efficiency is maximized in the generator because the magnetic field is supplied by permanent magnets, which means there is no need to recirculate power from the generator to excite the field. Additionally, the presence of cabling, power conversion and the main transformer inside the nacelle rather than down in the tower reduces copper losses from the long, low voltage cable running down the tower and permits ventilation allowing the wind to help cool electronics. These increased mechanical and electrical efficiencies allow our turbines to yield a higher net energy capture than traditional turbines.

Permanent Magnet Generator

Our proprietary permanent magnet generator is central to our innovative drivetrain design. In addition, our power converters enable our wind turbines to operate at variable speeds for higher energy capture, which we believe provides greater stability to the electrical transmission system than other wind turbines. Our proprietary low speed permanent magnet generator is optimized for efficient energy capture.

Our permanent magnet generator was designed at a systems level in conjunction with our power converter to create an optimized solution tailored for high energy capture and low operating costs. The generator in the NPS 60 and NPS 100 turbine models is cooled directly by the wind.

We continue to be a leading provider of permanent magnet direct-drive turbine in the distributed wind market. Furthermore, we believe that our utility-class permanent magnet generators, now marketed by WEG for applications over 1.5 MW, have three primary advantages over other utility-class permanent magnet technology:

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Advanced cooling systems which improve thermal conditions, thus increasing robustness and extending turbine life;

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Improved electrical efficiency due to our patented power converter as well as a unique turbine architecture with all electronics up-tower; and

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Proprietary modular generator and power converter design, which combined with an on-board crane, greatly reduces operating risk and lowers the cost of service.

Full Power Converter

Another key element of our innovative direct-drive wind turbine design is the power converter used to connect the permanent magnet generator output to the local power system. We currently design and manufacture the power converters for our wind turbines at our Barre, Vermont facility, with complete hardware, control design

and software capabilities. Our full power conversion provides high quality power while also isolating the generator turbine from grid disturbances that could cause damage and downtime, as well as removing the requirement for any external energy for excitation in the energy generation process. Our power converter technology and platform offers these key benefits:

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Our proprietary FlexPhase power converter combines a unique circuit design with a high bandwidth control system to provide generator management, power quality, and grid support features.

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Our power converter has controls that can be tuned to optimize operation in multiple non-wind applications and has a liquid-cooled design that can be adapted to any environment.

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Our FlexPhase circuit architecture lowers ripple current at the DC side of the converter, minimizing battery heat generation in energy storage applications.

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Our liquid-cooled design allows the converters to be environmentally sealed and offer high power density and a smaller footprint.

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The FlexPhase converter also provides improved efficiency over a wide range of power levels and high power quality to support multiple applications. The FlexPhase converter platform offers a modular approach with a small footprint and 20-year design life.

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The NPS 60 and NPS 100 wind turbine power converters use the same advanced control systems platform found in the FlexPhase platform, providing reliable and high efficiency operation even on the weak grid systems found in remote village applications.

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The features and benefits of our FlexPhase power converter platform make it well suited for other non-wind energy applications, including utility-scale energy storage, advanced grid support, and critical load support applications.

Advanced Power Systems Architectures

We believe that through our use of advanced modeling, the incorporation of modern power electronics and rapid prototyping, we are able to effectively and efficiently meet the varied demands of emerging applications for products and services such as energy storage, voltage and frequency regulation, renewable generation integration and other advanced demand response and grid stabilization applications. In addition, our power conversion and controls technologies are well suited to balancing supply with demand, increasing power quality and reliability for the end-use customer, and reducing distribution losses to create a more efficient system. We have applied the same system-level approach that we have mastered in the design of our wind turbines and considered both the generation and the demand side together to engineer a cost-effective, robust system for cost effective stable power generation throughout the grid.

Customers

Our distributed wind customers include financial investors and project developers, but also the end users themselves in applications that provide power for farms, schools, municipalities, small businesses, remote villages, and U.S. military installations.

Financial investors provide equity capital and raise debt capital, typically from a commercial bank, to build and deploy wind turbines. Financial investors typically look to generate a leveraged return by selling the electricity back to the grid in the form of a feed-in-tariff where the regulatory jurisdiction permits, or sell power to end users who can reduce the cost of electricity by switching away from higher priced power sources.

Owners and operators of projects invest in wind power to reduce the cost that they pay for electricity by switching away from higher priced power sources. These project developers tend to finance through commercial banks and hope to generate a payback over the first few years of operation of the asset.

For the year ended December 31, 2016, ElectroGroup accounted for approximately 11% of our total revenues. For the year ended December 31, 2015, WEG and CWE Norwin LTD accounted for approximately 18% and 12%, respectively, of our total revenues.

Competition

In domestic and international markets for renewable energy sources served by wind energy, we face competition from companies offering various types of wind turbines.

Our primary competitors in the distributed wind market are GHRE, ESPE and other emerging market entrants. We also compete with several smaller providers of distributed-class wind products including C&F, Criel, Enerwings, EolArt, Ergo Wind, Greenstorm, Orenda, Polaris, Rago, Stoma, Svecom PE, WES, Xant and Xzeres. We may face increased competition in the future, including from large, multinational companies with significant resources.

In the area of power converter systems (PCS) or inverters for energy storage or for energy storage systems (ESS) which includes controls and other balance of system elements to support batteries Northern Power competes against the following companies; Dynapower, Parker, ABB, Siemens, Ideal Power, Princeton Power, Eaton, S&C Electric, SMA, and others. These competitors are primarily for power electronics or energy storage systems in 250kW to 1000kW configurations which in some cases will be used for multi-megawatt projects.

With respect to our wind turbine products, we also face competition from other sources of renewable energy, such as solar, hydro, biomass, wave and geothermal, and from conventional energy sources, including natural gas, oil, and nuclear.

Intellectual Property

Our intellectual property portfolio includes 29 patents and patent applications worldwide, know-how, copyrights, registered trademarks and trade secrets, covering many aspects of our products including power electronics, generator and turbine design, energy storage and turbine operation. We recently assigned 58 patents and patent applications to WEG as part of the utility wind asset sale, and received a license back to make, use and sell distributed wind products, and utility wind products of 1.5 MW or less, covered by these patents. Our currently issued patents expire on dates ranging from July 2022 to July 2032. We believe our current patent portfolio, our patent license from WEG, and our expected ability to obtain licenses from other parties to the extent necessary, along with our other intellectual property protections noted below, will provide us with sufficient proprietary rights to develop and sell our products.

We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with employees, consultants, partners, vendors and customers. However, policing unauthorized use of our technologies, services and intellectual property is difficult, expensive and time-consuming, particularly in foreign countries where the laws may not be as protective of intellectual property rights as those in the U.S. and where mechanisms for enforcement of intellectual property rights may be weak. We may be unable to determine the extent of any unauthorized use or infringement of our services, technologies or intellectual property rights.

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. We may also be subject to claims by third parties alleging that we infringe upon their intellectual property rights or have misappropriated other proprietary rights. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, operating results and financial condition. If we are unable to protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative services that have enabled us to be successful to date.

We use various trademarks and trade names in our business, including Northern Power Systems, Northern Power, NPS, FlexPhase and SmartView, some of which we have registered in the U.S. and in various other countries. This Annual Report on Form 10-K also contains trademarks and trade names of other businesses that are the property of their respective holders. We have omitted the ^® and ™ designations, as applicable, for the trademarks we name in this Annual Report on Form 10-K.

Employees

As of December 31, 2016, we had 71 full-time employees, a decrease of 24 full-time, or approximately 25%, from December 31, 2015. The major part of this reduction was due to the transfer of engineers to WEG as part of the sale of the utility scale business assets. We also rely on temporary hourly employees to staff our manufacturing operations at levels targeted to meet our production needs during any given period. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We have not experienced any employee-initiated work stoppages and we consider our relations with our employees to be good.

Financial Information

The financial information required under this Item 1 is incorporated herein by reference to Part II, Item 8 of this Annual Report on Form 10-K.

Where You Can Find More Information

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available through the investor relations portion of our website (www.northernpower.com) free of charge as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Information on our investor relations page and on our website is not part of this Annual Report on Form 10-K or any of our other securities filings unless specifically incorporated by reference. In addition, our filings with the SEC may be accessed through the SEC’s EDGAR system at www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information, are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update any of those statements or documents unless we are required to do so by law.

Item 1A.

Risk Factors

You should carefully consider all of the information in this Annual Report on Form 10-K, including the risks and uncertainties described below, any of which could have a material and adverse effect on our business, financial condition, results of operations and prospects.

Risk Factors Related to Our Operating Business

We have incurred significant operating losses since inception and may not be able to achieve, or maintain profitability.

With a few exceptions, we have incurred operating losses each of our previous quarters, including a net loss of $8.9 million for the year ended December 31, 2016 and an accumulated deficit of $177.3 million as of December 31, 2016. We may not be able to generate operating income and we could to continue to incur net losses for the foreseeable future. In the reporting period covered by this Annual Report on Form 10-K and to date, we have encountered business challenges disclosed in these risk factors that have contributed to our operating losses, including currency fluctuations that have made our prices less competitive in certain global markets, uncertainty surrounding certain tariff regimes relied upon by international customers, and challenges

with our suppliers resulting in difficulties getting additional cost out of our products. Our ability to be profitable in the future depends upon the continued implementation of successful strategies to address these business challenges.

Our ability to be profitable further depends upon continued demand for our distributed-class wind and power technology products and services. In addition, our profitability will be affected by, among other things, our ability to develop and commercialize next generation product offerings and enhance existing products. We could incur significant operating costs relating to our research and development initiatives for our new and existing products, and for the expansion of our sales and marketing operations as we add additional sales and business development personnel and increase our marketing efforts. Furthermore, we may incur significant losses in the future for a number of reasons, including the other risks described in this Annual Report on Form 10-K, and we may encounter unforeseen expenses, difficulties, complications, delays and other unknown events. We may fail to generate revenues in the future. If we cannot attract a significant number of purchasers for our distributed wind and power technology products, we will not be able to generate any significant revenues or income. If we continue to incur significant operating losses and fail to generate significant revenues, we will not have the money to pay our ongoing expenses and we may be required to restructure our business or go out of business. These conditions among others raise substantial doubt about our ability to continue as a going concern, unless additional financing is obtained in the near future. The Company evaluated these conditions as well as actions taken in 2016 to improve profitability. These actions included cost reductions by reducing headcount and restructuring management, reducing the cost of our core distributed wind products, optimizing our supply chain, and monetizing certain of our utility wind assets. In addition, we have begun commercializing our sales of our power converters, we are expanding our service offerings to include full turnkey wind turbine installations and have increased sales staff to expand into additional markets, especially the U.S. The Company believes that the actions taken have alleviated the substantial doubt about the Company’s ability to continue as a going concern.

We will require additional financing, including equity or debt offerings, to continue expansion of our operations. Funding from these sources may be limited, unavailable, or not available on favorable terms. There is no assurance that we will be successful developing markets to further monetize our distributed wind and power conversion products and technology. There are no assurances that we will succeed in obtaining funds in sufficient amounts to proceed with our strategy when capital is needed. If such capital and financing cannot be obtained for any reason, we may not be able to proceed with our business plans and may be required to scale back our strategic initiatives or reduce the size of our organization.

Our sales cycles of our distributed turbines and power converters are complex and lengthy and the timing of our distributed wind installations are subject to seasonal variations, each of which may impact operating results from quarter to quarter and make results difficult to predict.

The size and timing of our revenue from sales of products to our customers is difficult to predict and is dependent on many factors, including market conditions, customer financing, permitting and weather conditions, all of which may combine to result in high variability in revenue trends and projections. Our sales efforts in distributed wind markets often require us to educate our customers about the use and benefits of our products, including their technical and performance characteristics. Customers typically undertake a significant evaluation process that has generally resulted in a lengthy sales cycles for us, typically many months. Furthermore, installation of our turbines is often under the direction and control of end users or third-party contractors. The regulatory approval, permitting, construction, startup and operation of turbine sites may involve unanticipated changes or delays that could negatively impact our business and our results of operations and cash flows. The long sales cycles require us to delay revenue recognition until certain milestones or technical or implementation requirements have been met.

We have commenced selling our power converters into the developing battery energy storage market. We face competition in this market by larger and more well established power converter suppliers. Although we believe

that our converters offer superior performance attributes to those of our competitors and we have identified a pipeline of customers, these sales cycles are long and unpredictable making our ability to predict when such sales will occur difficult.

Wind turbine sales in the regions in which we currently sell our turbines are affected by seasonal variations and the timing and availability of government incentive structures. To satisfy the delivery schedules, we generally manufacture and sell 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 variations in the weather conditions in the northern areas where we supply most of our wind turbines.

We maintain a sizable backlog and the timing of our conversion of revenue out of backlog is uncertain.

Our backlog is subject to unexpected adjustments and cancellations and thus may not be timely converted to revenue in any particular fiscal period or be indicative of our actual operating results for any future period. Although we have not experienced significant cancellations in 2015 and 2016, there can be no assurances that customers will not face challenges in the future and cancel some or all of their orders. We have managed past order cancellations by curtailing production at our Barre, Vermont facility and closely monitoring inventory levels to conserve cash, but this left underutilized manufacturing overhead in product cost, which lowered our gross margins. Our inability to convert backlog into revenue, whether or not due to factors within our control, could adversely affect our revenue and profitability.

Because we depend on a limited number of single source suppliers for certain components, third-party business and relationship interruptions could harm our operations.

We currently depend on sole source suppliers for certain precisely manufactured components in our turbines. These components may not be readily available on a cost-effective basis from other sources or on short notice, as some are custom-designed for our turbines. As a result, there can be no assurance that a continuing source of supply of these components will be available on a timely basis or on commercially viable terms in the future. In addition, our supply chain could be negatively impacted in the event one of our key single source suppliers has a business interruption. Any interruptions in our third-party manufacturing suppliers or supply chain, or the refusal or inability by such parties to produce necessary product components, could have an adverse impact on our business or financial results of operations. We have identified the sole source suppliers and are in the process of mitigating the risk by identifying alternative suppliers or negotiating with suppliers to ensure they have sufficient inventory levels to support production.

If our working capital is insufficient to meet customer demand, we may have difficulty arranging for financing.

Wind power companies, and manufacturing companies generally, are capital intensive businesses. To fulfill the product delivery requirements of our customers, we plan for working capital needs in advance of customer orders. If we experience sales in excess of our estimates, our working capital needs may be higher than those currently anticipated. Our ability to meet this excess customer demand depends on our ability to arrange for additional financing for any ongoing working capital shortages, since it is likely that cash flow from sales will lag behind these investment requirements. Our capacity to borrow under our current working line-of-credit, is guaranteed by the U.S. Export-Import bank and is subject to restrictions based upon U.S. content of our products, as well as the balance of our accounts receivables and inventory meeting certain conditions. Our ability to obtain this guarantee would be impacted if we source products in lower cost foreign countries. Our current working line-of-credit with Comerica Bank, or Comerica, expires in December 2017, if we are unable to renew this line-of-credit under similarly favorable terms, this could impact our ability to meet customer demand or pursue other strategic initiatives.

Our international expansion efforts are impacted by foreign currency fluctuations, which could harm our profitability.

As part of our international expansion, a significant amount of our sales transactions in 2016 was euro while the majority of our costs were denominated in U.S. dollars, that trend could continue in 2017. In addition, we have and expect to continue to be entering into extended duration operations and maintenance contracts, which obligate us to perform services in the future based upon currently negotiated non-U.S. dollar denominated pricing terms. Although we have pursued certain economic hedging strategies, including increasing our euro-denominated costs and entering into financial hedging strategies, we may experience negative economic exposure of currency movements and there can be no assurance that we can execute effective strategies to control this exposure in the future. Negative movements in the exchange rate between foreign currencies and the U.S. dollar, such as those recently affecting the euro and sterling, could have an adverse effect on our revenues and delay our achieving profitability.

The distributed wind market is in the early stages of development and its future is uncertain. If the market is not as large as we expect or we are unable to compete effectively in the distributed wind market, our business and operating results could be harmed.

A substantial portion of our revenues have been and continues to be derived from sales of our distributed-class wind turbines. We anticipate that sales of these distributed-class wind turbines will continue to account for a significant portion of our revenue for the foreseeable future. The distributed wind market is still in the early stages of development. Any catastrophic product failure, significant damage, or injury that could arise in this market, whether or not related to our products, may have a disproportionately negative impact on public perception of the efficiency, safety or general merits of distributed-class wind turbines, which could have an adverse effect on our revenues and our business.

We may suffer reputational harm or other damages as a result of unreliable wind resource data. In the distributed wind market, there is at present insufficient reliable data for the wind resource available by geographic location at the tower heights of our turbines. In siting these turbines, purchasers may make decisions based upon insufficiently precise data, which could result in turbines being sited in geographic locations that do not provide optimal wind conditions for the production of electric power. As a result, purchasers may not receive the expected economic benefits of ownership of wind turbines that we produce and our reputation could suffer. We also may be liable for liquidated damages, warranty claims or other costs if our turbines do not perform to contractual requirements or to customer expectations.

We experience significant competition in the distributed wind market, particularly in Italy and the U.K. Our primary competitors in the distributed wind market are GHRE, ESPE and other smaller providers and emerging market entrants. The wind turbines being offered by competitors are typically offered with lower upfront pricing. In early 2014, we introduced a lower cost but higher energy output product in the market to compete more effectively on price while still maintaining high durability and reliability. We may experience lower gross margins than forecast if we cannot maintain a price premium for our products and may be unable to successfully compete against lower-cost competitors. We may also face increased competition in the future, including from large, multinational companies with significant resources who may also be able to scale production and provide similar products at lower costs. Our inability to successfully compete against better capitalized companies or raise sufficient capital in the form of equity or debt to effectively complete may adversely affect our business, operations and revenue.

In addition, if our competitors market products that are more effective, safer, quieter or less expensive than our current or other future products, if any, or that reach the market sooner, we may not achieve commercial success or substantial market penetration. Products developed by our competitors may render our existing technology or any future product candidates obsolete. Any decrease in sales of our distributed-class wind turbines would have an adverse effect on our business, financial condition and results of operations.

Strategic partnerships are essential to our business growth and the inability to secure these relationships could adversely impact revenue and operations.

Expansion of product sales is dependent on our ability to effectively create partnerships to help sell our distributed wind and power converter products. If these partnerships cannot be identified and effectively developed and executed both domestically and internationally, our ability to expand our distributed wind and power converter markets will be impacted.

To gain access to certain target markets and customers, we are pursuing strategic partnerships with various companies with complimentary expertise, particularly in the battery energy storage technology. The aim of such strategic partnerships is to reach and to collaborate on power solutions for potential customers in the U.S. as well as parts of Europe and Asia. By expanding into a new product line, we must divert certain internal resources from our core business of wind turbines to design and produce the power converter line of products and to develop the business channels required to translate into sales. If these strategic partnerships fail to materialize or if our efforts fail to produce the level of sales anticipated, our business could be materially affected.

Our inability to develop new markets for our power converters could adversely impact our business, revenue and operations.

We have been developing our power converter technology since the early 2000s. Historically we have supplied these products as part of our distributed wind and utility class turbines. We are actively seeking to commercialize sales of our power converters outside of the wind industry, such as the battery energy storage system and microgrid project markets. Entering new markets beyond the wind industry involve significant risks and uncertainties, including the possible lack of demand or acceptance of the product, distraction of management from current operations, insufficient revenue to offset liabilities assumed and expenses associated with the strategy, inadequate return of capital, and unidentified issues we have not discovered in evaluating this market opportunity. Because entering new markets is inherently risky, no assurance can be given that our efforts to enter new markets with our power conversion products will be successful and will not materially adversely affect the Company’s financial condition and operating results. We have not traditionally sold products outside of the wind industry. There can be no assurance that our power converters will achieve market acceptance beyond the wind industry. In addition, potential customers for our power converters in the battery energy storage system and microgrid project market generally impose very high quality and reliability standards, which often change and may be difficult or costly to satisfy. Any inability to acquire new customers or satisfy customer quality and reliability standards or comply with standards and technical requirements may adversely affect demand for our power converter products and our results of operations.

The success of our strategic transaction with WEG is dependent on WEG’s ability to operate effectively in South America and other territories.

In 2016, we completed a strategic transaction with WEG pursuant to which WEG acquired some of our utility wind assets, including a patent portfolio for utility wind greater than 1.5 MW. Under the transaction agreement, WEG agreed to pay royalties to us for sales in South America resulting in future payments of up to approximately $10.0 million, of which $3.0 million are fixed payments. Additionally, WEG agreed to pay us up to $17.5 million in royalty payments over the next decade for turbines shipped anywhere outside of South America. The success of this strategic transaction with WEG will depend on WEG’s future success in the manufacture and sale of turbines utilizing this platform in these territories. We have no control over WEG’s decisions regarding investment in manufacturing infrastructure or sales and marketing efforts relating to these designs. Any inability of WEG to manufacture and sell of our turbines in South America or elsewhere may adversely affect our results of operations.

The success of our strategic transaction with WEG, in part, will be subject, to risks associated with WEG’s operating in South America, particularly Brazil. The Brazilian and other South American economies are currently

in recession. The strategic transaction with WEG and our business and its financial performance and prospects may be adversely affected by, among others, political, economic, diplomatic or social instability in or affecting Brazil and other South American nations. Brazilian and other South American economies have recently experienced quarters of slow or negative gross domestic product growth and have experienced high inflation and growing fiscal deficits. We cannot predict whether the current or future Brazilian or other South American governments will implement changes to existing policies on taxation, exchange controls, monetary strategy, labor relations and the like, nor can we estimate the impact of any such changes on the Brazilian or other South American economies or WEG’s operations.

If we fail to expand effectively in international and U.S. markets, our revenue and business will be harmed.

Successful continued advancement and implementation of our plan to sell our products in Europe and Asia Pacific continues to be a strategic priority. European markets, particularly Italy continues to lead growth in the purchase and installation of distributed-class wind turbines. However, we expect the regulatory policies that have driven the growth in European markets such Italy and previously in the U.K to diminish over time and we therefore will need to continue developing and expanding into new markets to supplement our sales in Italy and the U.K. Developing the European and U.S. markets and expanding into new markets for our turbines is expected to entail a number of risks, including the need for appropriate management of our efforts, successful negotiation on terms advantageous to us of agreements facilitating our profitable expansion of this business, including logistics, installation and commissioning, and post-sales support service efforts. Sophisticated engineering, procurement and construction providers are moving into the distributed wind market and demanding that wind turbine manufacturers such as us provide a turnkey offering that includes supply, installation and long-term support of the turbines. Similarly, development companies in the U.K. which have historically been responsible for siting, permitting, installation, and connecting turbines to the utility grid are retreating from providing these services, as the U.K Feed-in Tariff regime is evolving to make such business less financially viable. As a result, we are seeing increased opportunities for turbine sales directly to customers, rather than through a developer. While we have experience in turbine supply, and have experienced some success in winning orders, we have limited experience in installation and long-term international support and may not be able to provide the services required to fulfill them. Failure to obtain or effectively execute a large volume of orders in Italy and the U.K., to develop additional European, U.S. and Asia Pacific markets, and to expand into new markets would have an adverse effect on our ability to reach profitability.

Our international business development efforts generally include risks relating to management of currency exchange rate exposure, international enforceability of contracts, potential exposure of intellectual property to misuse or misappropriation, compliance and operational challenges that may delay or add complexity to sales and support efforts, and the potential of local taxation above that which is currently forecast. If we are unsuccessful in managing these challenges, our efforts to sell our turbines and services on a global basis may expend our resources without significant contribution to the results of our operations and may not contribute to the value of our business.

If we fail to effectively execute a U.S. market strategy our sales in that region may not develop as we have planned.

As part of our strategic plan to grow in regions outside our core markets, we are focusing our sales efforts on selling our distributed class turbines and power conversion products into the U.S. market, leveraging a third-party lease model, and identifying new market opportunities. In the case of leasing, we believe that providing a financing offering in conjunction with the sale of our products is an important component in the overall offering. We have identified a third party leasing partner who is prepared to offer financing to qualified customers, and therefore we are making investments in sales and marketing to identify business that would benefit from this offering. If we are unable to identify customers that meet the lessor’s credit requirements or the lease offering is not viewed as advantageous by customers, our ability to expand in this market will be impacted, as such

potentially harming our profitability. If we are unable to execute on our strategic plans in the power conversion market, or if the market does not develop quickly enough for us to capitalize on opportunities in the near term, our profitability may be impacted.

There are a number of risks associated with our international operations that could harm our business.

We sell products and provide services on a global basis and plan to expand into additional countries. Our ability to grow in international markets could be harmed by a number of factors, including:

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changes in political and economic conditions and potential instability in certain regions;

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currency control and repatriation issues;

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changes in regulatory requirements or in foreign policy, including the adoption of domestic or foreign laws, regulations and interpretations detrimental to our business;

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changes to regulatory incentives to purchase wind turbines or produce or utilize wind energy;

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possible increased costs and additional regulatory burdens imposed on our business;

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burdens of complying with a wide variety of laws and regulations;

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difficulties in managing the staffing of international operations;

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increased financial accounting and reporting burdens and complexities;

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laws and business practices favoring local competitors;

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terrorist attacks and security concerns in general;

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changes to tax laws, compliance costs and challenges to our tax positions that may have adverse tax consequences to us;

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changes, disruptions or delays in shipping or import/export services;

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reduced protection of our intellectual property rights; and

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unfavorable tax rules or trade barriers, including import duties or other import/export restrictions.

In addition, we conduct certain functions, including customer sales and service operations, in regions outside of the U.S. We are subject to both U.S. and local laws and regulations applicable to our offshore activities, and any factors which reduce the anticipated benefits associated with providing these functions outside of the U.S., including cost efficiencies and productivity improvements, could harm our business.

Problems with quality or performance in our products or products based on our technology could have a negative impact on our relationships with customers and our reputation and cause reduced market demand for our products.

Customers for our products regularly expect vendors to have a history of reliable production or creditworthy warranty coverage of meaningful duration. From commencement of our current operations in August 2008, we have received over 800 orders for distributed-class wind turbines to date with more than 600 shipped through December 2016. Of the units shipped, over 600 have been commissioned and are producing power at customer sites. This short history of operating in the field means that it will be some time before we will be able to determine the durability and reliability of our products after sale. We cannot be certain that substantial warranty expense will not occur in the future in our distributed-class wind turbines or in our other products. If our distributed wind or power converter products are not sufficiently durable and reliable or otherwise perform below expectations, we could incur additional substantial warranty expenses, we could be required to pay liquidated or other contractual damages, our reputation could be harmed and our revenues could decline.

Problems with the quality or performance of our products, including those manufactured by third parties, like WEG, could likewise adversely affect us due to warranty claims or other contractual damages. Issues with our products whether manufactured by us, WEG or other parties in the future could result in significant negative publicity and materially and adversely affect the marketability of our products and our reputation.

Any defect, underperformance or problem with our wind turbines or any perception that our products may contain errors or defects, or claims related to errors or defects, may adversely impact our customer relationships and harm our reputation and credibility, resulting in a decrease in market demand for our wind turbines, decrease in our revenue, increase in our expenses and loss of market share.

Our customers’ inability to obtain financing to make purchases from us or maintain their businesses could harm our business, and negatively impact revenue, results of operations, and cash flow.

Some of our customers require substantial financing to finance their business operations, including capital expenditures on new equipment and equipment upgrades, and to make purchases from us. The potential inability of these customers to access the capital needed to finance purchases of our products and to meet their payment obligations to us could adversely impact our financial condition and results of operations. If our customers become insolvent due to market and economic conditions or otherwise, it could have an adverse impact on our business, financial condition and results of operations.

If we fail to successfully develop, expand and introduce new products and technologies, our business, financial condition and results of operations could be adversely affected.

Our success depends, in part, upon our ability to anticipate industry evolution and introduce or acquire new products and technologies to keep pace with technological developments. However, we may not be able to develop, introduce, acquire and integrate new products and technologies in response to our customers’ changing requirements in a timely manner or on a cost-effective basis, or that sufficiently differentiate us from competing solutions such that customers choose to purchase our products and solutions. If any of our competitors implement new technologies before we are able to implement them or better anticipates the innovation opportunities in related industries, those competitors may be able to provide more effective or more cost-effective solutions than ours. In addition, we may experience technical problems and additional costs as we introduce new products and technologies. If any of these problems were to arise, our business, financial condition and results of operations could be adversely affected. We are expanding our product offerings into power converter equipment for hybrid energy solutions, including solutions incorporating battery energy storage systems and micro-grid technology.

If we fail to effectively expand our manufacturing, production and service capacity, our business and operating results could be harmed.

There is risk in our ability to continue to effectively scale production processes and effectively manage our supply chain requirements. If we are unable to maintain our internal manufacturing and production capacity for our turbines in a timely, cost-effective and efficient manner, we may be unable to further expand our business, decrease costs or become profitable. Our ability to further expand production capacity efficiently and on schedule is subject to significant challenges, risks and uncertainties, any one of which could substantially increase costs and delay or reduce production. If we are unable to achieve expected production yields and decrease costs, we could experience considerable operating losses.

Our global service structure is composed of regional support teams that are fully staffed to provide installation, commissioning, performance monitoring, warranty and non-warranty service, and where appropriate site development services. These support teams are currently mapped to our three main installed base geographies in Italy, the U.K. and the U.S. If we are unable to expand our service offerings in a timely and cost effective manner to meet demand, we may be unable to expand our business, be subject to increased warranty obligations and risk our ability to become profitable.

Due to our large customer concentration, a loss of one or more of our significant customers could harm our business, and negatively impact revenue, results of operations, and cash flow.

We are dependent on a relatively small number of customers for our sales, and a small number of customers have historically accounted for a material portion of our revenue. Our largest customer accounted for approximately 11% of revenue for the year ended December 31, 2016, and approximately 18% of revenue for the year ended December 31, 2015. For the near future, we may continue to derive a significant portion of our net sales from a small number of customers. Accordingly, loss of a significant customer or a significant reduction in pricing or order volume from a significant customer could materially reduce net sales and operating results in any reporting period.

Failure to comply with the requirements of certain grant programs may result in a significant financial penalty.

The Defense Contract Audit Agency and an independent auditing firm, each on behalf of the Department of Energy and the National Renewable Energy Laboratory, respectively, are auditing various renewable energy development grant programs previously awarded to us, or which we agreed to assume in our acquisition of certain assets and liabilities from Distributed Energy Systems Corporation, or DESC. These audits are in various stages of completion and will eventually cover all years from 2003 until the grant project was completed or closed. 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.

Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services, and brand.

If we are unable to protect our intellectual property, our competitors could use our intellectual property to market similar products, which could reduce the demand for our products. Our success depends substantially upon the internally developed technology that is incorporated in our products. We rely on a combination of patent, trademark and copyright laws, trade secret protection and confidentiality or license agreements with our employees, customers, strategic partners, suppliers, and others to protect our intellectual property rights. The steps we take to protect our intellectual property rights may, however, be inadequate. Any breach or violation of our intellectual property rights by any of our licensees could adversely affect our competitive position and the value of our assets.

Intellectual property rights claims are expensive and time consuming to defend, and if resolved adversely, could have a significant impact on our business, financial condition, and operating results. In the event of a conflict between our patents or future patent applications and the activities of other parties, infringement proceedings may be pursued by or against us. The legal proceedings necessary to defend the validity of patents and to prevent infringement by others can be complex and costly, and the outcomes of these legal proceedings is often uncertain. These legal proceedings might adversely affect our competitive position and the value of our assets, and there can be no assurance that the outcomes of the proceedings would be successful.

Assertions by third parties of infringement or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

Some companies in the wind power technology and power conversion industries, including some of our competitors, own large numbers of patents, which they may use to assert claims against us. Additionally, we may be subject to patent litigation and may be required to defend our patents against claims of holders of competitive patents. Third parties may assert claims of infringement, misappropriation or other violations of intellectual

property rights against us. As the number of our product offerings in our markets increase and as we expand into additional markets, claims of infringement, misappropriation and other violations of intellectual property rights may increase. Any claim of infringement, misappropriation or other violation of intellectual property rights by a third party — even those without merit — could cause us to incur substantial costs defending against the claim and could distract our management.

The patent portfolios of our most significant competitors in the utility wind manufacturing market are larger than ours and this disparity may increase the risk that they may sue us for patent infringement and may limit our ability to counterclaim for patent infringement or settle through patent cross-licenses. In addition, future assertions of patent rights by third parties, and any resulting litigation, may involve patent holding companies or other adverse patent owners who have no relevant product revenue and against whom our own patents may therefore provide little or no deterrence or protection. We cannot assure you that we are not infringing or otherwise violating any third-party intellectual property rights.

An adverse outcome of a dispute may require us to:

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pay substantial damages, including treble damages, if we are found to have willfully infringed a third party’s patents or copyrights;

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cease making, licensing or using solutions that are alleged to infringe or misappropriate the intellectual property of others;

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expend additional development resources to attempt to redesign our services or otherwise to develop non-infringing technology, which may not be successful;

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enter into potentially unfavorable royalty or license agreements to obtain the right to use necessary technologies or intellectual property rights; or

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indemnify our disbursement partners and other third parties.

An adverse determination may also result in the invalidation of patents that may be valuable to us. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. In addition, some licenses may be non-exclusive, and therefore our competitors may have access to the same technology licensed to us. Any of these events could harm our business, financial condition and results of operations.

We may not be able to receive patents on all of our pending patent applications.

Patent applications in the U.S. are maintained in secrecy until the patents are published or are issued. Since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we are the first creator of inventions covered by pending patent applications or the first to file patent applications on these inventions. Accordingly, we cannot be certain that the patent applications that we file will result in patents being issued.

Our business is subject to the risks of earthquakes, fires, floods and other natural catastrophic events and to interruption by man-made problems such as computer viruses or terrorism, any of which could result in system failures and interruptions that could harm our business.

Although our systems have been designed to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, rolling blackouts, telecommunication failures, terrorist attacks, cyber-attacks, computer viruses, computer denial-of-service attacks, human error, hardware or software defects or malfunctions (including defects or malfunctions of components of our systems that are supplied by third-party service providers) and similar events or disruptions. Despite any precautions we may take, system interruptions and delays could occur if there is a

natural disaster, if a third-party provider closes a facility we use without adequate notice for financial or other reasons, or if there are other unanticipated problems at our facilities. We do not carry business interruption insurance sufficient to compensate us for losses that may result from interruptions in our service as a result of system failures. A system outage or data loss could harm our business, financial condition and results of operations.

Our insurance policies and financial resources may not be sufficient to cover the costs associated with personal injury, property damage, product liability and other types of claims brought against us.

We are exposed to potentially significant risks associated with product liability or other claims if our products or manufacturing activities cause personal injury or property damage, whether by product malfunctions, defects or other causes. If product liability claims are brought against us in the future, any resulting adverse publicity could hurt our competitive standing and reduce revenues from sales of our products. The assertion of product liability, personal injury or property damage claims against us could result in significant legal fees and monetary damages and require us to make large payments. Any business disruption or natural disaster could result in substantial costs, lost revenues and diversion of resources. Our insurance coverage is limited for product liability and other claims against us, as well as for business disruption and natural disasters. Therefore, we may not have adequate insurance and financial resources to pay for our liabilities or losses from any such claim or cause.

Covenants under our credit facility agreements impose significant operating and financial restrictions, and failure to comply with these covenants could have an adverse effect on our business, financial condition, results of operations or cash flows.

Our credit facility with Comerica contains various covenants that limit or prohibit our ability, among other things, to:

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incur or guarantee additional indebtedness;

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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;

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make certain loans, acquisitions, capital expenditures or investments;

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sell certain assets;

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create or incur certain liens;

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

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enter into certain transactions with our affiliates.

The Comerica loan agreement contains a financial covenant that requires us to maintain unencumbered liquid assets having a value of at least $1.0 million at all times. For more information regarding these covenants, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Comerica Credit Facility.”

A violation of loan covenants may result in default or an event of default under the loan agreement. Upon the occurrence of an event of default under the loan agreement, Comerica could elect to declare all indebtedness outstanding under that agreement to be immediately due and payable and terminate any commitments to extend further credit. If we are unable to repay those amounts, Comerica may proceed against the collateral granted to them to secure the indebtedness. Substantially all of our assets are pledged as collateral under the Comerica credit facility. If Comerica were to accelerate the repayment of borrowings, such acceleration would have an adverse effect on our business, financial condition, results of operations, liquidity or cash flows.

Our business is dependent on rare earth metals and other commodities, and volatility in these markets could be harmful to our business and operations.

Our products utilize magnets formulated with rare earth metals. These magnets are supplied by a limited number of producers and have, in the past, been subject to significant price volatility. These components are procured from non-U.S. producers, and as such their pricing is subject to the variability in currency exchange rates, such as those recently affecting the euro. Our products also are comprised of copper, steel and iron components, the prices of which are also subject to market fluctuation. We do not presently hedge either our costs of production or product sales, and as such we may be adversely affected by significant swings in the prices of necessary components between the time of pricing our products for sale and the delivery of completed products. Furthermore, if we implement a hedging strategy in the future, there can be no assurance that these arrangements would be effective. Our failure to obtain in a timely manner sufficient quantities of components that meet our quality, quantity and cost requirements could delay or impair our ability to manufacture products and could increase our manufacturing costs.

We depend on highly skilled personnel to grow and operate our business, and if we are not able to hire, retain and motivate our personnel, we may not be able to grow effectively.

Competition for talented senior management, as well as middle management and engineers, is intense, and our future success will depend to some extent upon the contribution of a small number of key executives and personnel. Moreover, our ability to successfully develop and maintain a competitive market position will depend in part on our ability to attract and retain highly qualified and experienced management. The failure to attract and retain necessary personnel could have an adverse impact on our business, development, financial condition, results of operations and prospects.

Risk Factors Related to Operating as a Public Company

The requirements of being a U.S. public company may strain our resources, divert management’s attention and affect our ability to attract and retain executive management and qualified board members.

As a U.S. public company, we are subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, as well as the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and other applicable securities rules and regulations. We also continue to be subject to the reporting requirements of applicable Canadian securities laws and the rules and policies of the Toronto Stock Exchange, or TSX. Compliance with these rules and policies increases our legal and financial compliance costs, makes some activities more difficult, time consuming or costly and increases demand on our systems and resources — costs that will increase further, particularly after we are no longer considered an “emerging growth company,” as defined in the Jumpstart Our Business Startup Acts of 2012, or the JOBS Act. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty

regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to continue to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

As a U.S. public company subject to these rules and regulations, we may find it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation and corporate governance committee, and qualified executive officers.

Our management team has limited experience managing a U.S. public company. Our management team may not successfully or efficiently manage a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business.

We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in material misstatements in our financial statements.

In connection with our preparation of our financial statements for the period ended December 31, 2016 and 2015, our management identified material weaknesses 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.

As disclosed in Item 9A, the material weaknesses pertained to 1.) 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, 2.) inadequate and ineffective controls for reviewing and analyzing complex or non-routine transactions, and 3.) our inventory reconciliation control was not properly designed as it did not include the reconciliation of all non-system generated entries recorded to the general ledger our inability to process and ensure timely and accurate preparation and reviews of reconciliations necessary to provide reasonable assurance that financial statements and related disclosures was prepared in accordance with generally accepted accounting principles,

Management is committed to continuous improvement of our internal control processes and will continue to diligently review our reporting controls and procedures. We took steps to remediate the underlying causes of the material weakness, primarily through the continued development and implementation of formal policies, improved processes and documented procedures, the implementation of a number of new controls over financial reporting and accounting, the enhancement of our month end close and financial reporting review process, as well as the hiring of additional experienced resources in the accounting department with appropriate accounting and internal control knowledge. We expect our remediation efforts will continue throughout 2017. The actions that were taken are subject to ongoing senior management review, as well as oversight by the Audit Committee of our Board of Directors.

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.

As a result of becoming a U.S. public company, we are obligated to develop and maintain proper and effective internal control over financial reporting, but we may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, either of which may harm investor confidence in us and the value of our common shares.

We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, or Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the year ending December 31, 2016. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S., or GAAP. We have completed the process of documenting, reviewing and improving our internal controls and procedures for compliance with Section 404, which require that we evaluate, test and document our internal controls and, as a part of that evaluation, testing and documentation, identify areas for further attention and improvement. As noted above, management has concluded that our internal controls over financial reporting are not effective as of December 31, 2016 and 2015. As a Canadian public company, we also are required to provide quarterly certification pursuant to Canadian Securities Administrators’ National Instrument 52-109, Certification of Disclosure in Issuers’ Annual and Interim Filings, with respect to, among other things, the design and operation of our internal controls.

We have completed the process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We have used dedicated internal resources, and we have engaged outside consultants, to adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, to identify steps to improve control processes as appropriate, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting. These changes may not, however, be effective in maintaining the adequacy of our internal controls. Any failure to maintain the adequacy of our internal controls, consequent inability to produce accurate financial statements on a timely basis, or identification of one or more material weaknesses could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

We will be required to disclose changes made in our internal control over financial reporting on a quarterly basis. However, as an “emerging growth company”, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 as long as we are an “emerging growth company.” We will remain an “emerging growth company” for up to five years from date of the reverse takeover transaction in April 2014, although if the market value of our common shares that are held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an “emerging growth company” as of the following December 31. After this five-year period, our independent registered public accounting firm will be required to report on our internal controls over financial reporting if the market value of our common shares held by non-affiliates exceeds $75 million. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff.

Financial reporting and applicable regulations are complex, and failure to correctly interpret and abide by these standards could result in inaccurate financial information or reporting delays, which would have a significant impact on our reputation and value.

Our consolidated financial statements are prepared in accordance with GAAP. We adopted multi-element revenue recognition for product sales entered into or materially changed on or after January 1, 2011. Our current contracts are composed of three or four units of accounting: (i) the turbine product; (ii) commissioning services; and (iii) frequently, but not always, installation and/or extended warranty services. Turbine revenue is typically recognized when title and risk of loss transfer to the customer, commissioning service revenue is recognized when performed, and extended warranty revenue is recognized over the extended warranty period when that period begins. Upon entering into licensing and development contracts, complex revenue recognition accounting

issues need to be considered, and could result in us collecting significant cash milestone payments prior to being able to recognize revenue in accordance with GAAP. This could impact our ability to show demonstrated revenue expansion relative to our expected plans.

In addition, GAAP-based revenue recognition rules require a business to be able to reasonably estimate its warranty experience prior to recognizing revenues. The performance of all commissioned units experienced during the year will impact our estimates for our warranty obligations. In the event that we conclude we cannot reasonably estimate our warranty experience, we may not recognize revenues for GAAP purposes in the financial statements for a given period and all revenues and costs associated with units shipped through year end would be deferred on the balance sheet until we determine that we can reasonably estimate warranty costs.

The application of certain elements of GAAP can result in significant non-cash charges. Employee share option plans can require fair-value accounting under GAAP, which can result in such charges.

Changes or modifications in financial accounting standards, including those related to revenue recognition, may harm our results of operations.

From time to time, the Financial Accounting Standards Board, or FASB, either alone or jointly with the International Accounting Standards Board, or IASB, promulgates new accounting principles that could have an adverse impact on our results of operations. For example, the FASB is currently working together with the IASB to converge certain accounting principles and facilitate more comparable financial reporting between companies who are required to follow GAAP, and those who are required to follow International Financial Reporting Standards, or IFRS. These efforts may result in different accounting principles under GAAP, which may have a material impact on the way in which we report financial results in areas including, among others, revenue recognition and financial statement presentation.

For example, in connection with this initiative, the FASB issued a new accounting standard for revenue recognition in May 2014 — Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) — that supersedes nearly all existing GAAP revenue recognition guidance. Furthermore, 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. We have begun evaluating the impact of the new standard on our core revenues, and continue to evaluate its effect on our financial statement disclosures. We expect to have our preliminary evaluation, including the selection of an adoption method, completed by the end of 2017.

We expect the Securities and Exchange Commission, or the SEC, to make a determination in the future regarding the incorporation of IFRS into the financial reporting system for U.S. companies. A change in accounting principles from GAAP to IFRS would be costly to implement and may have a material impact on our financial statements and may retroactively impact previously reported transactions. Implementation of accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could cause us to defer recognition of revenue or recognize lower revenue, which may affect our results of operations.

Our treatment as a U.S. corporation for U.S. federal income tax purposes may result in us being subject to income taxes in both the U.S. and Canada.

On April 16, 2014, we, as Wind Power Holdings, Inc., or WPHI, completed a reverse takeover transaction, or RTO, as described in “Certain U.S. Federal Income Tax Considerations — The Company as a U.S. Corporation for U.S. Federal Income Tax Purposes.” We believe Section 7874(b) of the Internal Revenue Code of 1986, as amended, or the Code, applied to the RTO to treat our company as a U.S. domestic corporation for all U.S. federal income tax purposes. Accordingly, we are subject to U.S. federal income tax as a U.S. domestic corporation on our worldwide income and any dividends paid by us to non-U.S. holders may be subject to U.S.

federal income tax withholding at a 30% rate or such lower rate as provided in an applicable treaty. We currently do not intend to pay any dividends on our securities in the foreseeable future, however. As a Canadian corporation, we are also generally subject to Canadian income taxes on our worldwide income and dividends paid to non-Canadian holders may be subject to Canadian withholding taxes. Our currently anticipated activities and operations as a holding company generally are not expected to result in significant taxable income for Canadian tax purposes. Distributions made to us by our U.S. subsidiaries out of active business income previously taxed in the U.S. generally would not be expected to subject us to additional taxation in Canada. However, in the event that a U.S. subsidiary is sold, or we otherwise earn income from other sources, or if our U.S. subsidiaries earn certain types of passive income, such proceeds or other income, we could be subject to Canadian income tax. Though we do not expect Northern Power Systems Corp. to have significant taxable income for Canadian tax purposes in the foreseeable future, if it did, the combined taxes we may be required to pay in the U.S. and Canada could be significant and could adversely affect our ability to attain or sustain profitable operations going forward.

Our ability to use net operating loss carryforwards and other tax assets to reduce future tax payments may be limited by provisions of the U.S. Tax Code.

As of December 31, 2016, we had net operating loss carryforwards for federal and state income tax purposes of approximately $133.4 million and $79.2 million, respectively, which expire between 2016 and 2028. We also had federal research tax credit carryforwards of approximately $1.5 million, which begin to expire in 2028. These net operating loss and research tax credit carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could adversely affect our profitability.

The annual use of our net operating losses may be limited following certain ownership changes under provisions of the Code and applicable state tax laws. In general, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses, or NOLs, to offset future taxable income. In general, an ownership change occurs if the aggregate share ownership of certain shareholders (generally 5% shareholders, applying certain look-through and aggregation rules) increases by more than 50% over such shareholders’ lowest percentage ownership during the testing period (generally three years). Purchases of our equity securities in amounts greater than specified levels, which will be beyond our control, could create a limitation on our ability to utilize our NOLs for tax purposes in the future. We have completed a Section 382 study, through November 30, 2014, to assess whether an ownership change would have caused limitations to our net operating loss carryforwards. Based on that study, we have concluded an ownership change occurred on September 19, 2008 and therefore there is potential for $2.6 million of net operating loss to be limited. For the period of September 20, 2008 through November 30, 2014, we have determined that it is more likely than not that there has not been an ownership change under Section 382. We have not completed an updated Section 382 study, 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. Accordingly, our ability to use our net operating loss carryforwards to reduce future tax payments may be currently limited or may be limited as a result of any issuance of shares of our common shares. Limitations imposed on our ability to utilize NOLs could cause U.S. federal and state income taxes to be paid earlier than would be paid if such limitations were not in effect and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Furthermore, we may not be able to generate sufficient taxable income to utilize our NOLs before they expire. If any of these events occur, we may not derive some or all of the expected benefits from our NOLs. It is possible that any future ownership change could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could adversely affect our profitability. In addition, at the state level there may be periods during which the use of NOLs is suspended or otherwise limited, which would accelerate or may permanently increase state taxes owed.

Risk Factors Related to Our Industry and its Regulation

We operate in a volatile industry and government-regulated market, which makes it difficult to evaluate our future prospects and may increase the risk that we will not be successful.

The growth and development of the wind power industry in the U.S., as in much of the world, has been supported through a variety of financial incentives and subsidies offered by governmental and regulatory bodies. The reduction or removal of the availability of these incentives would likely have an adverse effect on our business and prospects. The expiration and curtailment of these incentives in the U.S. resulted in significant contraction of our distributed-class wind turbine sales in the last four years. This market is expected to provide modest growth, driven by favorable financing solutions available to our customers, to our sales for the foreseeable future.

Since we commenced operations in August 2008, we have experienced unpredictability in our operating environment, which poses significant risk to our ability to forecast financial results and have a significant impact on our ability to sell products and services. In the distributed wind markets, lack of incentives in the U.S. create challenges in developing a robust market in North American. A delay in an expected announcement by the Italian governmental authorities clarifying the feed-in-tariff applicable to distributed-class turbines during the quarter ended December 31, 2014 caused a delay of our Italian existing order installations and new order negotiations, impacting our 2015 revenue. Incentives across multiple European countries, particularly Italy and the U.K., are currently stimulating demand in the European marketplace. These incentives are each subject to actions of legislative bodies in the respective jurisdictions, and there can be no assurance that incentives effectively enhancing the demand for wind power equipment will remain in place, or that any changes in policy may not serve to clarify the economic return anticipated for new wind power equipment in various jurisdictions. If governmental authorities do not continue to support, or reduce or eliminate their support for, the development of wind energy projects, our revenues may be adversely affected, our financing costs may increase, it may become more difficult to obtain financing, and our business and prospects may otherwise be adversely affected.

The unpredictable changes to government subsidies and financing sources in both the U.S. and global markets requires us to adjust our strategy to keep up with the changing landscape of favorable geographic markets. Because we have to tailor our product features to effectively suit individual target markets, the developing market requirements necessitate a significant and continued investment in design and product offerings and may require us to enter into new markets that we may not have previously considered.

Due to the volatility of the markets, we have a diversified set of products and services, including a suite of wind and power technology products, as well as renewable energy development services. This requires that a minimum level of engineering personnel be maintained, even if all personnel are not fully leveraged at points in time. The cost of maintaining this engineering team is expensive and if we are not able to achieve an adequate amount of business revenues, cash consumption could be significant and profitability delayed.

We are subject to various laws and regulations governing protection of the environment and the use of real property, and the failure to comply with, or a change to, such laws and regulations could adversely affect our business, financial condition, future results and cash flow.

We are subject to numerous federal, regional, state and local statutory and regulatory standards relating to the use, storage and disposal of hazardous substances, and protection of the environment. If we fail to comply with those statutory or regulatory standards (or any changes thereto), we could be subject to civil or criminal liability, the imposition of liens or fines, and large expenditures to bring us into compliance. We use certain substances at our Barre, Vermont facility that are or could become classified as hazardous substances. If any hazardous substances are found to have been released into the environment by us or our predecessors, or if such substances are found at our current facilities, we could become liable for the investigation and removal of those substances, regardless of their source and time of release. Furthermore, we can be held liable for the cleanup of releases of hazardous substances at other locations where we arranged for disposal of those substances, even if we did not cause the release at that location. The cost of any remediation activities in connection with a spill or other release of such substances could be significant.

In addition, private lawsuits or enforcement actions by federal, state, or foreign regulatory agencies may materially increase our costs. Certain environmental laws could make us potentially liable on a joint and several basis for the remediation of contamination at or emanating from properties or facilities that we may acquire. Although we will seek to obtain indemnities against liabilities relating to historical contamination at the facilities we occupy, we cannot provide any assurance that we will not incur liability relating to the remediation of contamination, including contamination we did not cause.

We are also required to obtain and maintain governmental permits and approvals under environmental and other laws for the operation of our Barre, Vermont facility. Some of the governmental permits and approvals contain conditions and restrictions or may have limited terms. We may not at all times comply with all conditions established by existing permits and approvals, and we may not be able to renew, maintain, or obtain all permits and approvals required to operate our facilities. Although we believe we have obtained and are in compliance with all permits and approvals necessary for the operation of our facilities, our failure to renew, maintain, or obtain any required permits or approvals, our inability to satisfy any requirement of any permits, or a change in law requiring new permits or approvals, may result in increased compliance costs (including potential fines or penalties), the need for additional capital expenditures or a suspension of operations.

Our anticipated future generation assets and construction projects will be required to comply with numerous federal, regional, state, provincial and local statutory and regulatory standards and to maintain numerous licenses, permits and governmental approvals required for operation. Some of the licenses, permits and governmental approvals will contain conditions and restrictions, or may have limited terms. If these assets and projects fail to satisfy the conditions or comply with the restrictions imposed by the licenses, permits and governmental approvals, or the restrictions imposed by any statutory or regulatory requirements, they may become subject to regulatory enforcement action and the operation of the assets and projects could be adversely affected or be subject to fines, penalties or additional costs or revocation of regulatory approvals, permits or licenses. In addition, we may not be able to renew, maintain or obtain all necessary licenses, permits and governmental approvals required for the continued operation or further development of our projects, as a result of which the operation or development of our assets may be limited or suspended. Our failure to renew, maintain or obtain all necessary licenses, permits or governmental approvals may have an adverse effect on our assets, liabilities, business, financial condition, results of operations and cash flow.

We and our customers operate in a highly regulated industry.

The market for electricity generating products is heavily affected by government regulations and policies concerning the electric utility industry, as well as policies promulgated by electric utilities. These regulations and policies often relate to electricity pricing and technical interconnection of customer-owned electricity generation with the electric utility power grid, which could result in additional costs to our end-users. These regulations and policies could deter end-user purchases of wind energy products.

As legal requirements frequently change and are subject to interpretation and discretion, we may be unable to predict the demand for our products.

Additionally, we could be subject to new laws or, in certain markets, be subject to certification requirements. Any new law, rule or regulation could require additional expenditure to achieve or maintain compliance or could adversely impact our ability to generate and deliver energy. Also, operations that are not currently regulated may become subject to regulation that could result in additional cost to our business. Further, changes in wholesale market structures or rules, such as generation curtailment requirements or limitations to access the power grid, could have an adverse effect on our ability to generate revenues from our facilities.

The results of the 2016 U.S. presidential and congressional elections may create regulatory uncertainty for the wind energy sector and may materially harm our business, financial condition and results of operations.

Various legislation, regulations and incentives designed to support the growth of wind energy have been implemented or proposed by the U.S. government such as the Production Tax Credit for Renewable Energy

(PTC) and the Clean Power Plan. In addition, states and foreign governments also have adopted various legislations, regulations and incentives also designed to support the growth of wind energy.

Donald Trump’s victory in the U.S. presidential election, as well as the Republican Party maintaining control of both the House of Representatives and Senate of the U.S. in the congressional election, may create regulatory uncertainty with respect to climate change, the clean energy sector and wind energy sector in particular. During the election campaign, President Trump made comments suggesting that he was not supportive of various clean energy programs and initiatives including the U.N. Framework Convention on Climate Change in Paris, designed to curtail global warming. It remains unclear what specifically President Trump will or will not do with respect to these programs and initiatives, and what support the Trump Administration would have for any potential changes to such legislative programs and initiatives in the Unites Nations or U.S. Congress. If the Trump Administration and/or the U.S. Congress take action or publicly speak out about the need to eliminate or further reduce existing programs like the U.N. Framework Convention on Climate Change in Paris the PTC, the Clean Power Plan or other legislation, regulations and incentives supporting wind energy, such actions may result in a decrease in demand for wind energy in the U.S. and other geographical markets and materially harm our business, financial condition and results of operations.

Further, if the Trump Administration or U.S. Congress increases or imposes duties, taxes, tariffs or other cost on our products that include components obtained from foreign suppliers, margin on sale of our products could be materially adversely affected.

Future demand for wind energy may be limited. Wind energy must compete with other renewable energy sources.

While wind has been a leading source of new electrical generation capacity installed in the U.S. and Europe in recent years, the market for products that generate wind energy is still at a relatively early stage of development in the U.S. when compared to conventional sources of energy. Wind energy technology may not be suitable for widespread adoption and the reduction or termination of incentive programs in the U.S. has already had an adverse impact on our future growth in this market. Other market uncertainties may also affect our ability to generate and increase sales, including the future of deregulation of the domestic U.S. electricity market, prevailing and future prices of oil and natural gas, and domestic and international policy responses to environmental issues. If market demand for wind energy products in general, and for our products in particular, fails to develop sufficiently or in the time frame that we expect, or if an oversupply of turbines available to the market from various competitors causes a prolonged decrease in the prevailing prices for turbines, we may be unable to generate sufficient revenues to achieve and maintain profitability.

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, hydroelectric and geothermal power technologies. While factors such as deregulation, legislative mandates for renewable energy, and consumer preference for environmentally more benign energy sources are leading more consumers to choose renewable energy options for their power needs, wind must compete with other sources of renewable energy to derive benefit from these factors. 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.

A material drop in the retail price of utility-generated electricity or electricity from other sources would harm our business, financial condition and results of operations.

We believe that our customers’ decisions to invest in renewable energy technology is driven in part by their desire to reduce the price they pay for electricity over time. The customers’ decisions may be affected by

decreases in the costs of both conventional and renewable energy sources, such as oil, natural gas, or solar energy. If the global price of oil remains at its current prices, or continues to decline, traditional utilities may be able to provide electricity at rates low enough to dissuade businesses and other entities and individuals from seeking alternatives to conventional electricity sources. Such decreases in the price of electricity from utilities and other sources, including other renewable technologies, could harm our ability to offer a competitive return on investment for our customers.

Changes in weather patterns may affect our ability to operate our proposed projects.

Changes in weather patterns may affect our ability to operate our proposed projects. Meteorological data we collect during the development phase of a project may differ from actual results achieved after wind turbines are erected. While long-term wind patterns have not varied significantly, short-term patterns, either on a seasonal or on a year-to-year basis, may vary substantially. These variations may result in lower revenues and higher operating losses.

Risks Related to Ownership of our Common Shares

Existing executive officers, directors and holders of 5% or more of our common shares will continue to have substantial control over us, which will limit your ability to influence the outcome of important transactions, including a change in control.

Our directors, executive officers and holders of more than 5% of our common shares, together with their affiliates, beneficially own, in the aggregate, approximately 65.4% of our outstanding common shares. A limited number of these significant shareholders may have the ability to control or substantially influence all aspects of our business, including decisions regarding mergers, consolidations, the sale of all or substantially all of our assets and other significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company. These actions may be taken even if they are opposed by our other shareholders.

The price of our common shares may fluctuate significantly, which may make it difficult for investors to sell such shares at a time or price they find attractive.

Our share price may fluctuate significantly as a result of a variety of factors, many of which are beyond our control. In addition to those described in “Special Note Regarding Forward-Looking Statements,” these factors include:

•

Actual or anticipated quarterly fluctuations in our operating results and financial condition;

•

Changes in financial estimates or publication of research reports and recommendations by financial analysts with respect to us or other financial institutions;

•

Reports in the press or investment community generally or relating to our reputation or the reputation of the renewable energy industry;

•

Strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions, or financings;

•

Fluctuations in the share price and operating results of our competitors;

•

Future sales of our equity or equity-related securities;

•

Proposed or adopted regulatory changes or developments;

•

Domestic and international economic factors unrelated to our performance; and

•

General market conditions and, in particular, developments related to market conditions for the renewable energy industry.

In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies, including for reasons unrelated to their operating performance. These broad market fluctuations may adversely affect our share price, notwithstanding our operating results. We expect that the market price of our common shares will continue to fluctuate and there can be no assurances about the levels of the market prices for our common shares. Our current low stock price may greatly impair our ability to raise any future necessary capital through equity or debt financing and significantly increase the dilution of our current shareholders cause by any issuance of equity in financing or other transactions. The price at which we would issue shares in such transactions is generally based on the market price of our common shares, and, in the event of further decline, the share price could result in the need to issue a greater number of shares to raise a given amount of funding.

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common shares less attractive to investors.

We are an emerging growth company. For as long as we are an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404, certain reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years from date of the reverse takeover transaction in April 2014, although circumstances could cause us to lose that status earlier, including if the market value of our shares held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case we would no longer be an emerging growth company as of the following December 31. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Emerging Growth Company.” We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such standards apply to private companies. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies. In other words, an emerging growth company can delay the adoption of such accounting standards until those standards would otherwise apply to private companies until the first to occur of the date the subject company (i) is no longer an emerging growth company, or (ii) affirmatively and irrevocably opt outs of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act. We have elected to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards that have different effective dates for public and private companies and, as a result, our financial statements may not be comparable to the financial statements of other public companies. In addition, we have availed ourselves of the exemption from disclosing certain executive compensation information in this Annual Report on Form 10-K pursuant to Title 1, Section 102 of the JOBS Act. We cannot predict if investors will find our common shares less attractive because we will rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price may be more volatile.

The market price of our common shares may decline due to the large number of our authorized common shares eligible for future sale.

Sales of substantial amounts of our common shares in the public market or the perception that such other future sales could occur, could cause the market price of our common shares to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

As of December 31, 2016, we had an aggregate of 23,613,884 common shares outstanding. All of these shares are tradable on the TSX without restriction, subject in some cases to the expiration of lock-up agreements, as described below, and, to volume and other restrictions under the escrow requirements of the TSX.

We may also issue common shares or securities convertible into our common shares from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to our existing shareholders and cause the trading price of our common shares to decline.

We may issue additional equity securities, or engage in other transactions that could dilute our book value or affect the priority of the common shares, which may adversely affect the market price of our common shares.

Our board of directors may determine from time to time that we need to raise additional capital by issuing additional common shares or other securities. Except as otherwise described in this Annual Report on Form 10-K, we are not restricted from issuing additional common shares, including securities that are convertible into or exchangeable for, or that represent the right to receive, common shares. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be affected. Additional equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common shares, or both. Holders of our common shares are not entitled to preemptive rights or other protections against dilution. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, our then-current common shareholders. Additionally, if we raise additional capital by making additional offerings of debt or preferred equity securities, upon liquidation of our company, holders of our debt or preferred equity securities, and lenders with respect to other borrowings, will receive distributions of our available assets before the holders of our common shares. Furthermore, sales of a substantial number of our common shares or other equity-related securities, or the perception that we may sell a substantial number of our common shares, could depress the market price of our common shares and impair our future ability to raise capital through the sale of additional equity securities.

We currently do not intend to pay dividends on our common shares for the foreseeable future.

We currently do not plan to declare dividends on our common shares in the foreseeable future. See “Dividend Policy” for more information. Any determination to pay dividends in the future will be at the discretion of our board of directors. Consequently, an investor’s only opportunity to achieve a return on the investment in us will be if the market price of our common shares appreciates and the investor sells our common shares at a profit. There is no guarantee that the price of our common shares that will prevail in the market will ever exceed the price that an investor pays.

Canadian laws differ from the laws in effect in the U.S. and may afford less protection to holders of our securities.

We are a company that exists under the laws of the Province of British Columbia, Canada and are subject to the provisions of the Business Corporations Act (British Columbia), S.B.C. 2002, c.57, or the BCBCA, and applicable Canadian securities laws, which laws may differ from those governing a company formed under the laws of a U.S. jurisdiction. The provisions under the BCBCA and applicable Canadian securities laws may affect the rights of shareholders differently than those of a company governed by the laws of a U.S. jurisdiction, and may, together with our articles of association, have the effect of delaying, deferring or discouraging another party from acquiring control of our company by means of a tender offer, a proxy contest or otherwise, or may affect the price an acquiring party would be willing to offer in such an instance.

Item 1B.

Unresolved Staff Comments

As a “smaller reporting company”, we are not required to provide the information required by this Item.

Item 2.

Properties

We lease our principal manufacturing and headquarters facility in Barre, Vermont, and lease additional office space for use by certain of our finance, and business development teams in Burlington, Massachusetts, and sales offices in Zurich, Switzerland, and sales and service office in Bari, Italy, and Cornwall, U.K.

Our Barre, Vermont facility comprises approximately 115,000 square feet, including a manufacturing floor serviced by a 90-ton overhead industrial crane and multiple shipping bays. This facility includes executive offices and provides the base of operations for our engineers, manufacturing of certain key components, supply chain and customer service functions. We currently assemble all of our NPS 60 and NPS 100 nacelles in our Barre, Vermont facility which includes equipment and tooling to assemble and test these turbines. In addition, this facility allows us to manufacture generators and power converters both for incorporation into our turbines and on a contract basis. We believe that the current capacity of our Barre, Vermont facility is approximately $100 million in revenue at current prices and assuming one shift of production.

Following our sale of the facility for $1.3 million in June 2014, we entered into a five-year leaseback at $3.00 per square foot plus the cost of certain maintenance expenses, insurance and property taxes. We have the right to extend the lease term for three years, and also have the right to terminate the lease at the end of years two, three and four with six months prior notice. We have exercised the right to cancel the lease as of December 31, 2016 and are in the process of renegotiating a revised lease at the facility for less square footage and lower overall price per square foot.

Item 3.

Legal Proceedings

We are not a party to any material pending legal proceedings. We may be involved from time to time in various legal proceedings in the normal course of business.

Item 4.

Mine Safety Disclosures.

Not applicable.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares began trading on the Toronto Stock Exchange, or TSX on April 22, 2014 under the symbol “NPS” following the reverse takeover transaction described elsewhere in this Annual Report on Form 10-K. Prior to this time, there was no public market for our common stock. The following table sets forth information relating to the trading of our common shares on the TSX:


Year Ended December 31, 2015	High (CDN)		Low (CDN)
First Quarter	$	3.40	$	1.00
Second Quarter	$	1.75	$	0.52
Third Quarter	$	0.85	$	0.10
Fourth Quarter	$	0.46	$	0.25

Year Ended December 31, 2016	High (CDN)		Low (CDN)
First Quarter	$	0.27	$	0.11
Second Quarter	$	0.26	$	0.19
Third Quarter	$	0.31	$	0.21
Fourth Quarter	$	0.28	$	0.15

On March 24, 2017, the last reported sale price for our common stock on the TSX was CDN$0.18 per share or, based on an exchange rate of CDN $0.75 per $1.00, $0.13.

Holders

As of March 24, 2017, there were approximately 50 holders of record of our common shares. The actual number of shareholders is greater than this number of record holders, and includes shareholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include shareholders whose shares may be held in trust by other entities.

Dividends

We have not paid any cash dividends on our common shares since inception and do not anticipate paying cash dividends in the foreseeable future.

Securities authorized for issuance under equity compensation plans

Information about our equity compensation plans is incorporated herein by reference to Item 11 of Part III of this Annual Report on Form 10-K.

Item 6.

Selected Financial Data

As a “smaller reporting company”, we are not required to provide the information required by this Item.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited interim financial statements and audited consolidated financial statements and the related notes included. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere.

Company Overview

Regarding the power electronics side of our business, we have been developing our power converter technology since the early 2000s. Our capabilities in this area resulted from the complex power conversion technology required for wind power generations. We currently sell our MW power converters for a range of applications under the branded name of FlexPhase. Our power electronics products are incorporated into our distributed wind turbines, and also sold independently for use in microgrids and energy storage projects. Our FlexPhase products are modular in nature allowing for a common platform to service multiple applications. As of December 31, 2016, we have deployed over 155 MW of products based on this technology, primarily in connection with our wind turbine designs. Currently, we are actively commercializing sales of our power converters products as part of integrated battery energy storage systems (“BESS”), working with various battery manufactures and systems integrators.

How We Conduct Our Business

We managed 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, power convertors, and other products produced and sold to customers. This business line reflects 96% and 82% of our revenues for the years ended December 31, 2016 and 2015, respectively.

•

Technology Licensing — Included in this business line is the licensing of packages of our developed technology. This business line reflects 1% and 9% of our revenues for the years ended December 31, 2016 and 2015, respectively.

•

Technology Development — Included in this business line is our development of technology for specific customer needs. This business line reflects 3% and 9% of our revenues for the years ended December 31, 2016 and 2015, respectively.

•

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 $30.7 million and $47.4 million for the years ended December 31, 2016 and 2015, respectively, representing 85%, and 88% 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 decreased to 31% of total revenues for the year ended December 31, 2016 as compared to 39% 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 year ended December 31, 2016. There were no foreign currency forward contracts outstanding at December 31, 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 Service — 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 we handle 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, and certain other unusual gains or losses on transactions as applicable.

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, loss from operations, 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:

UK and Italian Government Feed-in-Tariff and Blade Supply Impact

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 and has since seen quarterly reductions based a limited deployment cap of 300kW per quarter. The limited deployment cap and related quarterly reduction of the feed-in-tariff may have a negative impact on orders for distributed class turbines in the U.K. market during the remainder of 2017. The UK government currently considers a re-distribution of the deployment cap across various bands, which may result in an increase of the deployment cap for 50-100kW wind turbines in the second half of 2017.

The Italian governmental authorities published a revision to the law in June 2016, extending 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 29, 2017, and a possibility to connect wind turbines between June 30, 2017 and December 31, 2017 at a reduced feed-in-tariff. It was announced that a new law is drafted and expected to be publicized during the second quarter of 2017. It is expected that the new laws will provide for a feed-in-tariff from January 1, 2018 until December 31, 2019.

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 2017 could 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 euros, Chinese renminbi, Canadian dollars, Swiss francs and British pounds. 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 provided 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 and long-term tariffs to wind power developers. 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.

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 recognize revenue based on the value of the turbine product when title is transferred assuming all other criteria for revenue recognition have been met. For certain international turbine sales, we provide logistics services (including shipment and warehousing), and assistance with customer clearance if requested. These services are integral to meeting delivery and cannot be segregated from the turbine product. We recognize revenue for the turbine product once it has cleared customs and been shipped from the logistics warehouse. 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. In many regions of the world, notable proportions of the population have no access to electrical power, or have access to unstable power. 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 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 2015 revenues. We continue to work with our suppliers to manage the cost, capacity and quality of our major components.

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 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

Basis of Presentation

We present our financial information in accordance with accounting principles generally accepted in the United States, or GAAP. We have three operating segments: Product Sales and Service, Technology Licensing and Technology Development. We also have corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal and finance which are not allocated to our reportable segments. All significant intercompany transactions and balances have been eliminated in consolidation.

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; realizability of 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 Year Ended December 31, 2016 compared to the Year Ended December 31, 2015

Overview

Our general activity during the year ended December 31, 2016 was primarily focused on reducing business cost by selling the utility wind assets, reducing headcount, restructuring management and optimizing our supply chain and operations profile to improve our profit margins. We also focused on increasing our service offerings to include full turnkey wind turbine installations.

Our general activity during the year ended December 31, 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 reducing our cost of the turbine while increasing energy capture; optimizing our supply chain and operating profile to improve our margins; 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 the capital raise at that time.

Revenue, Orders and Deferred Revenue (dollars in millions)

Total revenues from Product Sales and Service, Technology Licensing and Technology Development decreased by $18.1 million to $35.9 million for the year ended December 31, 2016 from $54.0 million at December 31, 2015. Our overall backlog increased $3 million as of December 31, 2016 to $28 million from $25 million at December 31, 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 year ended December 31, 2016 and 2015 is as follows:


	Year Ended December 31,
	2016		2015		Change			% Change
Product Sales and Service	$	34.3	$	44.2	$	(9.9	)		(22	)%
Technology Licensing		0.4		4.7		(4.3	)		(91	)
Technology Development		1.2		5.1		(3.9	)		(76	)

Total	$	35.9	$	54.0	$	(18.1	)		(33.5	)%

Product Sales and Service

Product sales and service revenue decreased by $9.9 million to $34.3 million for the year ended December 31, 2016, from $44.2 million for the same period in 2015. The decrease in our Product Sales and Service revenue was primarily attributed to recognizing lower revenue on sales of our distributed-class turbines which totaled $28.9 million along with a decrease in sales of our non-turbine products which totaled $0.5 million for the year ended December 31, 2016 as compared to $38.6 million and $0.9 million for turbines and non-turbine products,

respectively, for the year ended December 31, 2015. Declines in distributed class and non-turbine revenues were further exacerbated by a non-recurring $0.9 million sale of a prototype 2.2 MW unit during 2015. We recognized revenue on 124 units for the year ended December 31, 2016 as compared to 147 units for the year ended December 31, 2015. Related service revenue totaled $4.9 million for the year ended December 31, 2016 and $3.8 million for the same period in 2015 which is an increase of $1.1 million. 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 year ended December 31, 2016, we executed 134 new distributed-class turbine sales orders. During the year ended December 31, 2015, we executed 130 new distributed-class turbine sales orders. Our deferred revenue balance associated with Product Sales and Service at December 31, 2016 was $4.2 million which is included in the backlog value disclosed above. At December 31, 2015, such balance was $9.6 million.

Technology Licensing Revenue

Technology licensing revenue decreased by $4.3 million to $0.4 million for the year ended December 31, 2016 from $4.7 million for the same period in 2015. This decrease is attributed to the sale of assets previously licensed to a significant customer. For the year ended December 31, 2015 revenues related to our licensing agreement with this customer were $2.7 million in license fees and $2.0 million in royalty revenues. As a result of the asset sale, future royalties will be recorded outside of Revenue as part of the Gain on Sale of Assets. Our deferred revenue balance associated with Technology Licensing was $0 as of December 31, 2016 and 2015.

Technology Development Revenue

Technology development revenue decreased by $3.9 million to $1.2 million for the year ended December 31, 2016 from $5.1 million for the same period in 2015. This decrease is attributed to recognizing $1.2 million of revenue related to a contract with a significant customer to develop a 3.3 MW turbine in 2016 versus recognizing $5.1 million in 2015. Our development of the technology for the 3.3 MW turbine ended due to the sale of the utility wind assets. Our total deferred revenue balance associated with Technology Development was $0 as of December 31, 2016 and 2015.

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

Cost of goods sold and cost of services revenues collectively was $33.1 million for the year ended December 31, 2016 and $43.8 million for the year ended December 31, 2015. A comparison of our costs of goods sold and cost of services for the year ended December 31, 2016 and 2015 is as follows:


	Year Ended December 31,
	2016		2015		Change			% Change
Product Sales and Service	$	31.9	$	41.6	$	(9.7	)		(23	)%
Technology Licensing		0.1		0.5		(0.4	)		(80	)
Technology Development		0.5		0.9		(0.4	)		(44	)
Shared Service		0.1		0.1		—			—
Unallocated		0.5		0.7		(0.2	)		(29	)

Total	$	33.1	$	43.8	$	(10.7	)		(24	)%

Product Sales and Service Cost of Goods and Costs of Service Sold

Product sales and service cost for the year ended December 31, 2016 decreased by $9.7 million to $31.9 million from $41.6 million for the same period in 2015. The decrease is attributed to recognizing revenue on 23 fewer units in 2016 as compared to 2015 partially offset by lower blade costs incurred in 2016 as blade vendor

relationships stabilized in 2016. Our cost of goods sold was $28.7 million for product sales along with $3.2 million of related service costs for the year ended December 31, 2016 and $38.0 million for product sales and $3.6 million for related service costs for the same period in 2015. Lower service cost of sale results from $0.6 million in lower consulting expense partially offset by an increase of $0.2 million in compensation and benefits as the service teams in the U.K. and Italy were expanded to bring provision of services in-house.

Technology Licensing Cost of Service

Technology licensing cost of services for the year ended December 31, 2016 decreased by $0.4 million to $0.1 million from $0.5 million for the same period in 2015. The decrease is due to $0.4 million in lower compensation and benefit expense for the year ended December 31, 2016 as compared to the same period in 2015.

Technology Development Cost of Service

Technology development cost of services for the year ended December 31, 2016 decreased by $0.4 million to $0.5 million from $0.9 million for the same period in 2015. This decrease is related to decreased activity related to development of a 3.3 MW turbine, due to the sale of the utility wind assets.

Shared Service

Shared service cost of services for the year ended December 31, 2016 remained consistent at $0.1 million compared to the same period in 2015.

Unallocated

The costs from unallocated expenses for the year ended December 31, 2016 decreased by $0.2 million to $0.5 million from $0.7 million for the same period in 2015. This reflects lower fixed asset depreciation in 2016 as compared to 2015 as some assets ended their depreciable lives but are still in use.

Segment Gross Profit (Loss) (dollars in millions)


	Year Ended December 31,
	2016			2015			Change			% Change
Product Sales and Service	$	2.4		$	2.5		$	(0.1	)		(8	)%
Technology Licensing		0.3			4.3			(4.0	)		(93	)
Technology Development		0.7			4.2			(3.5	)		(83	)
Shared Service		(0.1	)		(0.1	)		—			—
Unallocated		(0.5	)		(0.7	)		0.2			22

Total	$	2.8		$	10.2		$	(7.4	)		(72	)%

Product Sales and Service

Gross profit from product sales and service for the year ended December 31, 2016 decreased by $0.1 million to $2.4 million compared to $2.5 million for the same period in 2015. This change was principally due to a decrease in sales of distributed-class turbines and non-turbine products of $11.0 million partially offset by lower related costs cost of goods sold of $9.3 million and an increase in service gross profit of $1.6 million in the year ended December 31, 2016 as higher service revenues were complemented by lower cost of service as we reduced our reliance on third parties to provided services in the U.K. and Italian markets.

Technology Licensing

Gross profit from technology licensing for the year ended December 31, 2016 decreased by $4.0 million to $0.3 million from $4.3 million for the same period in 2015. The decline is principally due to lower revenue recognition in 2016 from third party licensing and royalty arrangements along with lower related cost of sales due to the sale of our utility wind assets.

Technology Development

Gross profit from technology development for the year ended December 31, 2016 decreased by $3.5 million to $0.7 million compared to $4.2 million for the same period in 2015, principally due to lower revenues from contract technology development services provided to a significant customer in 2016 due the sale of our utility wind assets.

Shared Service

Gross loss from shared service for the year ended December 31, 2016 remained consistent at $0.1 million as for the same period in 2016.

Unallocated

Gross loss from unallocated expenses for the year ended December 31, 2016 decreased by $0.2 million to $0.5 million from $0.7 million for the same time period in 2015. This decline reflects lower depreciation and amortization expense in 2016.

Operating Expenses

Research and Development Expenses

Research and development expenses decreased by $0.8 million or 24% to $2.6 million for the year ended December 31, 2016 as compared to $3.4 million for the same time period in 2015. The reduction in research and development expense is primarily the result of a decrease in compensation and benefits of $0.8 million and a $0.2 million reduction in other R&D expenses partially offset by a $0.2 million increase in consultant expenses. The decrease in compensation and benefit expense is a result of lower headcount related to our efforts to monetize our utility wind assets.

Sales and Marketing

Sales and marketing expenses decreased by $0.7 million or 17% to $3.5 million for the year ended December 31, 2016 from $4.2 million for the same period in 2015. The decrease in sales and marketing expenses was driven by consolidation of marketing efforts and related reduction in headcount.

General and Administrative Expenses

General and administrative expenses decreased by $2.1 million, or 25% to $6.4 million for the year ended December 31, 2016 from $8.5 million for the same period in 2015. The decrease in our general and administrative expenses is primarily explained by a $0.7 million reduction in compensation and benefits, $0.5 million reduction in consulting, $0.2 million reduction in IT expenses, $0.2 million in human resources expenses, $0.1 million reduction in travel expenses and $0.4 million in other general and administrative.

Gain on sale of assets

Gain on sale of assets was $1.0 million for the year ended December 31, 2016 as compared to $0 for the same period in 2015. This increase reflects the gain on the sale of utility wind assets in 2016.

Impairment of goodwill

As a result of annual impairment testing, we recorded an impairment charge of $0.4 million for the year ended December 31, 2016, relating to the goodwill in our Product Sales and Service segment. There was no such charge in 2015.

Loss from Operations

Our loss from operations increased by $3.1 million to $9.0 million for the year ended December 31, 2016 compared to a loss of $5.9 million for the year ended December 31, 2015.

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


	Year Ended December 31,
	2016			2015			Change			% Change
Product Sales and Service	$	(2.3	)	$	(2.3	)	$	—			—	%
Technology Licensing		1.2			3.7			(2.5	)		(68	)
Technology Development		0.6			4.2			(3.6	)		(88	)
Shared Service		(5.9	)		(8.6	)		2.7			31
Unallocated		(2.6	)		(2.9	)		0.3			10

Loss from operations	$	(9.0	)	$	(5.9	)	$	(3.1	)		(53	)%

Product Sales and Service

Loss from operations from product sales and service for the year ended December 31, 2016 remained consistent at a loss of $2.3 million with the same period in 2015. The decrease in operating expenses of $0.5 million were offset by a decrease in gross profit of $0.1 million from lower sales and the impairment of goodwill of $0.4 million.

Technology Licensing

Income from operations from technology licensing for the year ended December 31, 2016 decreased by $2.5 million to income of $1.2 million compared to $3.7 million for the same period in 2015, due to an decrease in gross profit of $4.0 million from decreased revenue from license fees and royalties under our 2.X license agreement, and flat expenses for research and development expenses attributable to technology licensing, partially offset by a $1.0 million gain on sale of utility wind assets and a $0.5 million reduction in operating expenses in the year ended December 31, 2016.

Technology Development

Income from operations from technology development for the year ended December 31, 2016 decreased by $3.6 million to $0.6 million compared to $4.2 million for the same period in 2015, due to a decrease in gross profit of $3.5 million from decreased development revenue in 2016 and $0.1 million in sales and marketing expense in 2016 as a result of the sale of our utility wind assets.

Shared Services

Corporate shared general and administrative loss for the year ended December 31, 2016 decreased by $2.7 million to $5.9 million compared to $8.6 million for the same period in 2015 principally due to a decrease in other corporate and shared services expenses of $2.7 million as a result of cost cutting initiatives.

Unallocated

The loss from unallocated expenses for the year ended December 31, 2016 decreased by $0.3 million to $2.6 million from $2.9 million as compared to the same period in 2015 due to a decrease of $0.4 million in stock compensation expense and a decrease of $0.1 million in depreciation expense partially offset by an increase of $0.2 million in other unallocated expense for the year ended December 31, 2016.

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


	Year Ended December 31,
	2016			2015			Change			% Change
Depreciation and amortization	$	(0.7	)	$	(0.8	)	$	0.1			13	%
Stock-based compensation		(0.5	)		(0.9	)		0.4			44
Other		(1.4	)		(1.2	)		(0.2	)		(17	)

Total charges	$	(2.6	)	$	(2.9	)	$	(0.3	)		.30	%

Other Income (Expense) and Income Tax Expense

Other income (expense) for the year ended December 31, 2016 improved by $0.5 million to income of $0.3 million from expense of $0.2 million as compared to the same time period in 2015. This improvement is primarily the result of a $0.5 million gain on foreign currency transactions in the year ended December 31, 2016 when compared to the same time period in 2015. Income tax expense decreased to $0.2 million for the year ended December 31, 2016 as compared to $1.6 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 and the goodwill impairment in 2016.

Net Loss

Net loss increased by $1.1 million, or 14%, to $8.9 million for the year ended December 31, 2016 from a net loss of $7.8 million for the same period in 2015. The increase in our net loss for the year ended December 31, 2016 is primarily a result from higher loss from operations partially offset by other income and lower income tax expense in 2016.

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 Annual Report on Form 10-K, 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, and certain other unusual gains or losses on transactions as applicable.

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


	Year ended December 31,
	2016			2015
Net loss	$	(8.9	)	$	(7.8	)
Provision for income tax		0.2			1.6
Interest expense		0.1			0.2
Depreciation and amortization		0.7			0.8
Stock-based compensation		0.5			0.9
Gain on sale of assets		(1.0	)		—
Loss on disposal		0.3			0.2
Impairment of goodwill		0.4			—
Non-cash implied license revenue		—			(0.6	)

Total noncash addbacks, net		1.2			3.1

Non-GAAP Adjusted EBITDA Loss	$	(7.7	)	$	(4.7	)

Non-GAAP adjusted EBITDA was a loss of $7.7 million for the year ended December 31, 2016 and a loss of $4.7 million for the same period in 2015. The change in non-GAAP adjusted EBITDA loss is primarily attributable to an increase in net loss resulting from lower revenues for the period ending December 31, 2016 as compared to the same period in 2015 partially offset by a $1.0 million gain on sale of assets.

Liquidity and Capital Resources

Consolidated Statements of Cash Flows Data (dollars in millions)


	Year ended December 31,
	2016			2015
Net loss	$	(8.9	)	$	(7.8	)
Net cash used in operating activities		(0.8	)		(4.4	)
Net cash (used in) provided by investing activities		1.2			(1.3	)
Net cash used in financing activities		(1.3	)		(1.1	)

Cash and Cash Equivalents

As of December 31, 2016, we had cash and cash equivalents of $5.4 million of which $0.4 million was held by a foreign holding company and subsidiaries. We had cash and cash equivalents of $6.3 million of which $0.4 million was held by a foreign subsidiary for the same period in 2015.

We have experienced recurring operating losses and had an accumulated deficit of $177.3 million as of December 31, 2016. 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. The Company evaluated these conditions as well as actions taken in 2016 to improve profitability. These actions included cost reductions by reducing headcount and restructuring management, reducing the cost of our core distributed wind products, optimizing our supply chain, and monetizing certain of our utility wind assets. In addition, we have begun commercializing our sales of our power converters, we are expanding our service offerings to include full turnkey wind turbine installations and have increased sales staff to expand into additional markets, especially the U.S. The Company believes that the actions taken have alleviated the substantial doubt about the Company’s ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this outcome of this uncertainty.

We expect a substantial amount of our business in 2017 to be non-U.S. dollar denominated sales transactions, which we currently expect to be predominantly denominated in euros. To partially mitigate this risk we have

increased the sourcing of materials in Euro denominated currency, 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 decreased as described below as a result of improvements in managing our working capital needs, specifically inventory management.

For the year ended December 31, 2016, net cash used in operating activities decreased by $3.6 million to $0.8 million from $4.4 million for the year ended December 31, 2015. The decrease in cash used in operating activities for 2016 is primarily due to the net loss incurred partially offset by the effect of changes in assets and liabilities resulting in a cash inflow of $7.1 million. Included in these changes were a $6.0 million decrease in deferred costs, $3.8 million increase in customer deposits, $2.0 million decrease in other assets, $1.8 million decrease in inventories and $0.3 million in other balance sheet accounts, partially offset by a $5.6 million decrease in deferred revenues and $1.2 million decrease in payables and accrued expenses.

Investing Activities

Net cash provided by investing activities was $1.2 million for the year ended December 31, 2016 as compared to net cash used by investing activities of $1.3 million for the same period in 2015. In 2016, we sold our utility wind related assets resulting in proceeds of $1.5 million in cash offset by $0.3 million of property and equipment additions, while 2015 reflects purchases of property and equipment for $1.3 million.

Financing Activities

For the year ended December 31, 2016, net cash used by financing activities was $1.3 million compared to net cash used of $1.1 million for the year ended December 31, 2015. We had repayments of $7.0 million and borrowings of $5.7 million on our working capital revolving line of credit for the period ended December 31, 2016 as compared to repayments of $18.7 million and borrowings of $17.6 million for the same period in 2015.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements and did not have any such arrangements at December 31, 2016.

Contractual Obligations

As described below, our long-term debt obligations were zero as of December 31, 2016 and December 31, 2015. We have $1.6 million outstanding on our working capital revolving line of credit and a $0 outstanding under our performance letter of credit and warranty guarantee, as of December 31, 2016, which is described below in the Comerica Credit Facility section. In addition, we have leased our headquarters and production facility which expires in June of 2019. Effective as of the second anniversary of the lease commencement (June 19, 2014), we have an annual right to terminate the lease without penalty. We have exercised the right to cancel the lease as of December 31, 2016 and are in the process of renegotiating a revised lease at the facility for less square footage and lower overall price per square foot.

Comerica Credit Facility

Our working capital line of credit is $2.0 million, with the available borrowing base being limited to the amount of collateral available at the time the line is drawn. The credit facility is scheduled to mature on December 31,

2017. This line is guaranteed by the U.S. Export-Import Bank, as well as by us. As of December 31, 2016, we had $1.6 million outstanding on the working capital revolving line of credit. At December 31, 2016, we had a net maximum supported borrowing base of $0.4 remaining. 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 December 31, 2016, we had $0 of such performance and warranty guarantees outstanding and on December 31, 2015, 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 $1.0 million at all times. At December 31, 2016, we had unencumbered liquid assets having a value of $5.4 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.

As of December 31, 2016, we were in compliance with the covenants contained in our loan agreement.

Our current line of credit expires on December 31, 2017. Based on our relationship with our lender we believe that we will be able to renew our line of credit prior to December 31, 2017 or obtain alternative financing. However, we cannot guarantee that we will be able to procure additional financing upon favorable terms, if at all.

Summary of Critical Accounting Policies

In our financial statements, as included in this filing, we discuss various significant accounting policies. In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we highlight certain of our most critical policies along with certain other critical disclosure as it relates to these policies, including:

Use of Estimates — The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Periodically, we evaluate our estimates, including those related to our accounts receivable, valuation allowance for inventories, useful lives of property and equipment and intangible assets, goodwill and long-lived assets, accruals for product warranty, estimates of fair value for share-based compensation, income taxes and contingencies, among others. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable at the time they are made, the results of which form the basis for making judgments about the carrying values of our assets and liabilities.

Revenue Recognition — We generate revenue from three principal sources: product sales and services, technology licensing and technology development. Related accounts receivables are stated at their estimated net realizable value. Accounts receivable are charged to the allowance for doubtful accounts when deemed uncollectible.

We recognize revenues from product sales when delivery has occurred under completely executed sales agreements with selling prices fixed or determinable, and for which collectability is reasonably assured. For certain international turbine sales, we provide logistics services (including shipment and warehousing), and assistance with customer clearance if requested. These services are integral to meeting delivery and cannot be segregated from the turbine product. We recognize revenue for the turbine product once it has cleared customs and has been shipped from the logistics warehouse.

Revenues from service, design activities, and repair time are recognized as our work is performed and collectability is reasonably assured. Our service revenues were related primarily to commissioning activities as well as revenue generated from extended warranties and maintenance and service contracts.

Virtually all of our turbine sales contracts include multiple elements that are delivered at different points of time. A deliverable element in an arrangement qualifies as a separate unit of accounting if the delivered item has value to our customer on a stand-alone basis. Our contracts are composed of three or four units of accounting: the turbine product, commissioning services, and frequently, but not always, installation and/or extended warranty services. Typically, the final 10% – 30% of the turbine value for billing is due subsequent to the shipping/delivery of a turbine to the customer. Our current policy states that, to the extent that the value ascribed to the product value at shipment (delivery) is greater than the value billed to date the difference is recognized as unbilled revenue if no collectability questions exist.

For these arrangements, our revenue is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy. We have determined that vendor-specific objective evidence, or VSOE, and third-party evidence, or TPE, are not currently available for our elements and therefore management’s best estimate of selling price, or BESP, is currently used. VSOE is the price at which we independently sell each unit of accounting to our customers. TPE is the price of any competitor’s largely interchangeable products or services in stand-alone sales to similarly situated customers. BESP is the price at which we would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors. We re-evaluate the existence of VSOE and TPE in each reporting period and utilize the highest-level available pricing method in the hierarchy at any time.

Revenue related to our licensing intellectual property is recognized per ASC Topic 605-25-3, “Revenue Recognition, Multiple Element Arrangements, Units of Accounting” which refers to SAB 100 Subtopic 13.A.3(d), “License Fee Revenue”, which states that delivery for revenue recognition purposes does not occur until the license term begins. Therefore, we do not recognize revenue from the licensed intellectual property until the customer has the right to use the intellectual property per the terms of the contract, physical delivery of the intellectual property has occurred and all other revenue recognition criteria have been met. There may be instances in which the intellectual property has been delivered but other services such as training, installation support, or supply chain certification are necessary for the customer to fully benefit from the intellectual property. In those cases, revenue recognition may be deferred until such services are delivered. For contracts to perform development services we record revenues using the percentage-of-completion method when applicable, if the percentage-of-completion method is not applicable we recognize revenue when all four revenue recognition criteria have been met.

For all product sales that have not yet been delivered by us, the related revenue and product costs are deferred until our delivery occurs. Customers may also elect to purchase extended warranty agreements that are deferred and recognized over the covering years, generally years three through five of the turbine’s life.

Inventories — Inventories are stated at the lower of cost, determined by the standard cost method, or market value. Excess inventory is carried at its estimated net realizable value. Excess inventory is estimated using assumptions regarding forecasted customer demand, market conditions, the age of the inventory items, and likely technological obsolescence. If any of the current estimates are significantly inaccurate, losses may result, which could be material. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Accounts Receivable — Our customers operate primarily in the distributed energy market place and include wind developers and end users that cover multiple industries and geographic locations. Our products and services are sold under contracts with varying terms including contracts denominated in foreign currencies. As of December 31, 2016, 80% of our accounts receivable was denominated in euro, compared to 41% as of December 31, 2015. We expect the proportion of foreign denominated account receivable to increase as we expand sales internationally. We record all accounts receivable in U.S. dollars and adjust the U.S. dollar amount monthly to account for changes in exchange rates. 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 the value of our accounts receivable. We do not currently engage in any hedging strategies, but we may consider hedging strategies in the future.

Warranty Costs — Our warranty contract with customers of our distributed-class wind turbine products is sometimes limited to repair or replacement of parts and typically expires two years from the date of shipment or commissioning. In such cases, we have typically provided non-warranty obligated services at no charge during the initial two-year period. Customers may elect to purchase from us extended warranty coverage for repair or replacement of parts for a period covering year’s three to five of the product life. Extended warranties typically cover the same scope as initial warranties. Customers may also purchase a Performance Guaranty Program (PGP) which also provides maintenance and repair services over a ten-year period beginning at commissioning. The program is billed annually at a base amount with a premium for production in excess of a floor which depends on location and wind speeds. Revenues are recognized when billed and expensed as a cost of sale as incurred.

Our warranty contracts with customers of non-turbine products typically expire upon the earlier of 18 months after shipment or 12 months after commissioning by the customers and typically cover parts and labor. We record estimated warranty obligations in the earlier period of: (i) the period in which the related revenue is recognized or, (ii) the period in which the obligation is established. Warranty liabilities are based on estimated future repair costs incurred during the warranty period using historical labor, travel, shipping, and material costs, as well as estimated costs for performance warranty failures, when applicable, based upon historical performance experience. The accounting for warranties requires us to make assumptions and apply judgments when estimating product failure rates and expected costs. Adjustments are made to warranty accruals based on claim data and experience. If actual results are not consistent with the assumptions and judgments used to estimate warranty obligations, because either failure rates or repair costs differ from our assumptions, our resulting change in estimate could be material.

We also offer performance guarantees to certain customers related to minimum uptime and power generation performance. The guarantees are within the normal operating performance of similar turbines in the deployed fleet. To date we have not recorded any expense or liability related to such guarantees, as the turbines have met the performance requirement.

Income Taxes — We use the liability method of accounting for income taxes. Under this method, income taxes are provided for amounts currently payable and for deferred tax assets and liabilities, which are determined based on the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income taxes are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established for any deferred tax asset for which realization is not more likely than not.

We account for uncertain tax positions by determining a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We do not believe material uncertain tax positions have arisen to date, and as a result, no reserves for these matters have been recorded and no interest or penalties have been recognized. Assessment of

uncertain tax positions requires significant judgments relating to the amounts, timing, and likelihood of ultimate resolution. Our actual results could differ materially from these estimates.

Share-based Compensation — For equity awards, share-based compensation expense is recognized based on the fair value of the awards on the grant date and amortized on a straight-line basis over their vesting terms Share-based compensation expense is recognized as the greater of the fair value of the awards on the grant date or reporting date, amortized on the straight-line basis over their vesting terms. For awards initially issued as liability-based awards, we revalue the awards at each reporting period until settlement of the awards, with share-based compensation expense recognized based upon the fair value of the awards as of the reporting date, amortized on the straight-line basis over their vesting terms. Awards that have vested but are not settled are revalued at each reporting date and any excess of the current fair value over the grant-date fair value is recognized as share compensation expense in such period. We present our liability for applicable option awards based upon reporting-date fair market value for such awards.

Share-based compensation expense is recorded based on the fair value of the award at the grant date net of anticipated forfeiture rates, using the Black Scholes option pricing model. We consider many factors when estimating the share-based compensation forfeiture rate including employee class, economic environment, historical data, and anticipated future employee turnover. We review our forfeiture rate when changes in business circumstances warrant a review, and perform a full analysis annually as of December 31.

We account for share-based compensation issued to nonemployees at the fair value of equity instruments given as consideration for services rendered as a noncash expense to operations. The equity instruments are revalued on each subsequent reporting date, until the measurement date is determined. We follow modification accounting guidance under ASC Topic No. 718, “Stock Compensation”, when changes in the terms of granted options occur.

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). We have initiated an assessment of our revenue streams and are engaging outside consultants to perform a full assessment of the impact for implementing these standards. We have begun evaluating the impact of the new standard on our core revenues, and continue to evaluate its effect on our financial statement disclosures. We expect to have our preliminary evaluation, including the selection of an adoption method, completed by the end of 2017.

by making changes to the guidance originally included in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in ASC 606 (as revised) is effective in the quarter and year beginning January 1, 2018, for public entities with a calendar year-end. We are 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. We are currently evaluating the impact this ASU will have on our 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. We adopted this standard in the fourth quarter of 2016. In accordance with the guidance, we have expanded our disclosures to include the conditions that gave rise to the substantial doubt about the Company’s ability to continue as a going concern as well as the actions taken to alleviate those concerns, as described in Note 1 of the accompanying notes to the consolidated financial statements.

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 that fiscal year. 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 within that 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. We are currently evaluating the potential impact of adopting this guidance on our 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 within that fiscal year. The application of this ASU did not have an impact on our 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 within that fiscal year. The application of this ASU will not have an impact on our 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 within that fiscal year. The application of this ASU will not have a material impact on our financial statements and we will not change our accounting policy in regards to forfeitures.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This updates indicates that there is diversity in the practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230. This amendment provides guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice. Public business entities should apply the guidance in Update 2016-15 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We are currently evaluating the impact this ASU will have on our consolidated financial statements.

Emerging Growth Company

Accounting Standards Applicable to Emerging Growth Companies: We qualify as an “emerging growth company” pursuant to the provisions of the JOBS Act, enacted on April 5, 2012. Section 102(b)(1) of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. An “emerging growth company” can delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period, and as a result of this election, our financial statements may not be comparable to those of companies that comply with public company effective dates for new or revised accounting standards for U.S. public companies.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

As a “smaller reporting company”, we are not required to provide the information required by this Item.

Item 8.

Financial Statements and Supplementary Data

Index to the Consolidated Financial Statements


	Page
Report of Independent Registered Public Accounting Firm		63
Consolidated Balance Sheets as of December 31, 2016 and 2015		64
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2016 and 2015		66
Consolidated Statements of Changes in Shareholders’ Equity (Deficiency) for the Years Ended December 31, 2016 and 2015		67
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015		68
Notes to Consolidated Financial Statements		69

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Northern Power Systems Corp.

We have audited the accompanying consolidated balance sheets of Northern Power Systems Corp. and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity (deficiency) and cash flows for the years then ended. Our audits also included the financial statement schedules of Northern Power Systems Corp. listed in Item 15(a)(2) as of and for the years ended December 31, 2016 and 2015. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Northern Power Systems Corp. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules as of and for the years ended December 31, 2016 and 2015, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ RSM US LLP

Boston, Massachusetts

March 31, 2017

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2016 AND 2015

(In thousands, except share and per share amounts)


	December 31, 2016		December 31, 2015
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	5,423	$	6,333
Accounts receivable — net of allowance for doubtful accounts of $0 and $350 at December 31, 2016 and 2015, respectively		674		3,046
Unbilled revenue		2,576		759
Inventories — net (Note 4)		7,159		9,233
Deferred costs		351		6,379
Prepaid expenses and other current assets		627		850
Assets held for sale		—		2,428

Total Current Assets		16,810		29,028
Property, plant and equipment — net (Note 5)		1,485		2,046
Intangible assets — net (Note 6)		9		80
Goodwill		361		722

Total Assets	$	18,665	$	31,876

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

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2016 AND 2015

(In thousands, except share and per share amounts)


	December 31, 2016			December 31, 2015
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Working capital revolving line of credit (Note 8)	$	1,600		$	2,892
Accounts payable		3,354			3,838
Accrued expenses (Note 9)		2,940			4,005
Accrued compensation		1,586			1,253
Deferred revenue		1,821			6,888
Customer deposits		7,419			3,596
Other current liabilities		92			196
Liabilities held for sale		—			406

Total Current Liabilities		18,812			23,074

Deferred revenue, less current portion		2,332			2,718
Deferred income taxes (Note 13)		79			175

Total Liabilities		21,223			25,967

Commitments and Contingencies (Note 16)
SHAREHOLDERS’ EQUITY (DEFICIENCY):
Voting common shares, no par value — Unlimited shares authorized; 23,613,884 and 23,173,884 shares issued and outstanding as of December 31, 2016 and 2015, respectively.		165,642			165,568
Additional paid-in capital		9,158			8,713
Accumulated other comprehensive loss		(50	)		(13	)
Accumulated deficit		(177,308	)		(168,359	)

Total Shareholders’ Equity (Deficiency)		(2,558	)		5,909

Total Liabilities and Shareholders’ Equity (Deficiency)	$	18,665		$	31,876

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

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

(In thousands, except share and per share amounts)


	December 31, 2016			December 31, 2015
REVENUES:
Product	$	29,358		$	40,387
License		441			4,748
Design service		1,212			5,111
Service		4,890			3,769

Total revenues		35,901			54,015

Cost of product revenues		29,210			38,547
Cost of service revenues		3,858			5,271

Gross profit		2,833			10,197
OPERATING EXPENSES:
Sales and marketing		3,464			4,151
Research and development		2,575			3,390
General and administrative		6,374			8,536
Gain on sale of assets		(973	)		—
Impairment of goodwill		361			—

Total operating expenses		11,801			16,077

Loss from operations		(8,968	)		(5,880	)
Interest expense		(113	)		(193	)
Other income (expense)		305			(152	)

Loss before provision for income taxes		(8,776	)		(6,225	)
Provision for income taxes		173			1,571

NET LOSS		(8,949	)		(7,796	)
Other comprehensive loss
Change in cumulative translation adjustment		(37	)		(13	)

COMPREHENSIVE LOSS	$	(8,986	)	$	(7,809	)

Net loss applicable to common shareholders (Note 2)	$	(8,949	)	$	(7,796	)
Net loss per common share
Basic and diluted	$	(0.39	)	$	(0.34	)
Weighted average number of common shares outstanding
Basic and diluted		23,212,299			22,871,717

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

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIENCY)

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

(In thousands, except share and per share amounts)


	Voting Common Shares — No Par				Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders’ Equity (Deficiency)
	Shares		Amount
BALANCE — December 31, 2014		22,764,353	$	165,386	$	7,972		$	—		$	(160,563	)	$	12,795
Stock based compensation expense		—		—		920			—			—			920
Issuance of common stock – restricted shares		407,935		179		(179	)		—			—			—
Proceeds from exercise of stock options		1,596		3		—			—			—			3
Cumulative translation adjustment		—		—		—			(13	)		—			(13	)
Net loss		—		—		—						(7,796	)		(7,796	)

BALANCE — December 31, 2015		23,173,884	$	165,568	$	8,713		$	(13	)	$	(168,359	)	$	5,909
Stock based compensation expense		—		—		519			—			—			519
Issuance of common stock – restricted shares		440,000		74		(74	)		—			—			—
Cumulative translation adjustment		—		—		—			(37	)		—			(37	)
Net loss		—		—		—						(8,949	)		(8,949	)

BALANCE — December 31, 2016		23,613,884	$	165,642	$	9,158		$	(50	)	$	(177,308	)	$	(2,558	)

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

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015

(All amounts in thousands)


	December 31, 2016			December 31, 2015
OPERATING ACTIVITIES:
Net loss	$	(8,949	)	$	(7,796	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for inventory obsolescence		259			202
Provision for (recovery of) doubtful accounts		(28	)		31
Stock-based compensation expense		519			920
Depreciation and amortization		659			790
Noncash implied license revenue		—			(640	)
Loss on disposal of assets		338			252
Impairment of goodwill		361			—
Gain on sale of assets		(973	)		—
Deferred income taxes		(96	)		14
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue		631			1,383
Other current and noncurrent assets		1,999			591
Inventories		1,816			7,019
Deferred costs		6,028			(2,048	)
Accounts payable		(484	)		(315	)
Accrued expenses		(736	)		(2,183	)
Customer deposits		3,824			(2,047	)
Deferred revenue and other short term liabilities		(5,559	)		(531	)
Other liabilities		(406	)		—

Net cash used in operating activities		(797	)		(4,358	)

INVESTING ACTIVITIES:
Proceeds from sale of assets		1,501			—
Purchases of property and equipment		(285	)		(1,333	)

Net cash provided by (used in) investing activities		1,216			(1,333	)

FINANCING ACTIVITIES:
Payments of revolving line of credit, net of borrowings		(1,292	)		(1,108	)
Proceeds from the exercise of stock options		—			3

Net cash used in financing activities		(1,292	)		(1,105	)

Effect of exchange rate change on cash		(37	)		(13	)
Change in cash and cash equivalents		(910	)		(6,809	)
Cash and cash equivalent — Beginning of Year		6,333			13,142

Cash and cash equivalent — End of Year	$	5,423		$	6,333

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest	$	57		$	53

Cash paid for income taxes	$	22		$	45

Noncash financing activity:
Restricted stock awards	$	74		$	179

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

NORTHERN POWER SYSTEMS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

(In thousands except share and per share amounts)

1.	DESCRIPTION OF BUSINESS

Northern Power Systems Corp. (together with its consolidated subsidiaries, “we”, “us”, “our”, “Northern Power Systems” or the “Company”) is a provider of advanced renewable power generation and power conversion technology for the distributed energy sector. We design, manufacture and service a suite of proven permanent magnet direct-drive (“PMDD”) wind turbine platforms for the distributed wind market, as well as power converters for battery energy storage applications. We are now developing integrated energy storage solutions to provide end users with turn-key distributed energy solutions. Historically we licensed our utility-class wind turbine platform, which uses the same PMDD technology as our distributed turbines, to large manufacturers. In October 2016 we completed the transfer of these technology rights to one of our partners, which will enable us to focus our efforts on the distributed energy segment. With our predecessor companies dating back to 1974 we have decades of experience in developing proven innovative energy solutions in the power generation and conversion space.

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

The Company was 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., a Canadian capital pool company incorporated in British Columbia, Canada, or Mira III, whereby all of the equity securities of WPHI were exchanged 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, and the WPHI directors and officers became Mira III’s directors and officers.

Liquidity — The Company has incurred operating losses since its inception, including a net loss of $8.9 million for the year ended December 31, 2016. 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 December 31, 2016, the Company has cash of $5.4 million and an accumulated deficit of $177.3 million. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company evaluated these conditions as well as actions taken in 2016 to improve profitability. These actions included cost reductions by reducing headcount and restructuring management, reducing the cost of our core distributed wind products, optimizing our supply chain, and monetizing certain of our utility wind assets. In addition, we have begun commercializing our sales of our power converters, we are expanding our service offerings to include full turnkey wind turbine installations and have increased sales staff to expand into additional markets, especially the U.S. The Company believes that the actions taken have alleviated the 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.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies followed in the preparation of these consolidated financial statements are as follows:

Basis of Presentation — The Company presents its financial information in accordance with accounting principles generally accepted in the United States, U.S. GAAP (or “GAAP”). The Company has three

operating segments: Product Sales and Service, Technology Licensing and Technology Development. The Company also has corporate-level activity, which consists primarily of costs associated with certain corporate administrative functions such as legal and finance which are not allocated to the Company’s reportable segments.

All significant intercompany transactions and balances have been eliminated in consolidation.

Principles of Consolidation — The consolidated financial statements include the accounts of Northern Power Systems Corp. (formerly known as Wind Power Holdings, Inc.) and its wholly owned subsidiaries after elimination of all intercompany transactions and balances.

Use of Estimates — The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Periodically, the Company evaluates its estimates, including those related to the accounts receivable, valuation allowance for inventories, useful lives of property and equipment and intangible assets, goodwill and long lived assets, accruals for product warranty, estimates of fair value for stock-based compensation, income taxes and contingencies, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable at the time they are made, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

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

Cash and Cash Equivalents — The Company considers all highly liquid investments that are readily convertible to cash with original maturity dates of three months or less as of the purchase date to be cash equivalents.

Accounts Receivable — Accounts receivable are stated at their estimated net realizable value. Accounts receivable are charged to the allowance for doubtful accounts when deemed uncollectible. The Company evaluates the collectability of accounts receivable based on the following factors:

•

Age of past due receivables and specific customer circumstances;

•

Probability of recoverability based on historical collection and write-off experience; and,

•

Current economic trends

If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances may be required.

Revenue Recognition — The Company generates revenue from three principal sources: product sales and services, technology licensing, and technology development. Revenues from product sales are recognized when delivery has occurred under completely executed sales agreements with selling prices fixed or determinable, and for which collectability is reasonably assured. Revenues from service, design activities, and repair time are recognized as work is performed and collectability is reasonably assured. For certain international turbine sales, the Company provides logistics services (including shipment and warehousing), and assistance with customer clearance if requested. These services are integral to meeting delivery and cannot be segregated from the turbine product. The Company recognizes revenue for the turbine product once it has cleared customs and been shipped from the logistics warehouse. During 2016 and 2015, service revenues were related primarily to commissioning activities as well as revenue generated from extended warranties and maintenance and service contracts.

Virtually all of the Company’s turbine sales contracts include multiple elements that are delivered at different points of time. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. The Company’s contracts are composed of three or four units of accounting: the turbine product, commissioning services, and sometimes installation

and/or extended warranty services. Typically, the final 10%-30% of the turbine value for billing is due subsequent to the shipping/delivery of a turbine to the customer. Our current policy states that, to the extent that the value ascribed to the product value at shipment (delivery) is greater than the value billed to date the difference is recognized as unbilled revenue if no collectability questions exist.

For these arrangements, the revenue is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy. The Company has determined that vendor-specific objective evidence (“VSOE”) and third-party evidence (“TPE”) are not available for its elements and therefore management’s best estimate of selling price (“BESP”) is currently used. VSOE is the price at which the Company independently sells each unit of accounting to its customers. TPE is the price of any competitor’s largely interchangeable products or services in stand-alone sales to similarly situated customers. BESP is the price at which the Company would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors. The Company will re-evaluate the existence of VSOE and TPE in each reporting period and utilize the highest-level available pricing method in the hierarchy at any time.

Revenue recognition for product sales is deferred until all revenue recognition criteria have been met. The Company seeks to make the timing for which the criteria are met consistent across sales agreements; however, the timing may differ as a result of contract negotiations. As of December 31, 2016 and 2015, deferred revenue totaled $4,153 and $9,606, respectively. Costs deferred related to product sales as of December 31, 2016 and 2015, were $351 and $6,379, respectively. Amounts received from customers in advance of shipment of $7,419 and $3,596, as of December 31, 2016 and 2015, respectively, are recorded as customer deposits. Customers may also elect to purchase extended warranty agreements that are deferred and recognized over the third through the fifth year of a turbine’s life.

The Company follows Accounting Standards Codification (“ASC”) 605-25, Revenue Recognition Multiple Element Arrangements, for recognizing revenue on the value of prototype and pilot products when title is transferred. Payments received prior to title transfer are recorded as customer deposits or deferred revenue until recognition is achieved. The Company follows ASC 330 Inventory for classifying costs related to producing the products as inventory until the sale is recognized at which point they are expensed as cost of goods sold.

Revenue related to the licensing of intellectual property is recognized per ASC 605-25, which states that delivery for revenue recognition purposes does not occur until the license term begins. Therefore, the Company does not recognize revenue from the licensed intellectual property until the customer has the right to use the intellectual property per the terms of the contract, physical delivery of the intellectual property has occurred and all other revenue recognition criteria have been met. There may be instances in which the intellectual property has been delivered but other services such as training, installation support or supply chain certification are necessary for the customer to fully benefit from the intellectual property. In those cases, revenue recognition may be deferred until such services are delivered. For contracts to perform development services the Company records revenues using the percentage-of-completion method when applicable, if the percentage-of-completion method is not applicable revenue is recognized when all four revenue recognition criteria have been met.

Inventories — Inventories include material, direct labor and related manufacturing overhead, and are accounted for at the lower of cost or market value. Excess and obsolete inventory is estimated using assumptions regarding forecasted customer demand, market conditions, the age of the inventory items, and likely technological obsolescence. If any of the current estimates are significantly inaccurate, losses may result, which could be material.

Property, Plant, and Equipment — Property, plant, and equipment are accounted for at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. When assets are retired or otherwise disposed of, the related costs and accumulated depreciation are removed from their respective accounts and any resulting gain or loss is included in operations. Expenditures for repairs and maintenance not considered to substantially lengthen useful lives are charged to expense as incurred.

Estimated useful lives of the assets are as follows:


Asset Classification		Estimated Useful Life
Machinery and equipment		5 to 10 years
Patterns and tooling		5 to 7 years
Field service spare parts		3 to 10 years
Office furniture and equipment		3 to 7 years
IT equipment and software		3 to 5 years
Leasehold improvements		Shorter of the estimated useful life or remaining lease term

Recoverability of long lived assets is assessed when events have occurred that may give rise to impairment. The Company determined that an impairment indicator existed during the fourth quarter of 2016, which necessitated an impairment review of long-lived assets. The Company compared the estimated undiscounted net cash flows of the asset groups to the current carrying value of the assets groups and concluded that there was no impairment of the asset groups as the fair value (determined by using the future undiscounted cash flows) exceeded its carrying value as of December 31, 2016

Goodwill and Other Intangible Assets — Intangible assets consist of (1) goodwill, which is not subject to amortization; and (2) amortizing intangibles, consisting of core technology, trade name, and royalty license which are being amortized over the estimated life of each item. Goodwill and intangible assets are allocated to the Company’s asset groups when testing for impairment.

Goodwill represents the excess of the fair value of the consideration exchanged in a business combination over the fair value of the net assets acquired, and is tested for impairment at least annually. Goodwill of $361 and $722 as reported on the December 31, 2016 and 2015 balance sheets, respectively, is a result of the purchase of the assets and the assumption of certain specified liabilities as part of the acquisition on August 15, 2008.

During the fourth quarter of 2016, the Company performed its annual impairment analysis. As a result of the Product, Sales and Services reporting segment having a negative carrying value, the Company performed a quantitative, step-one and step two, analysis of goodwill. Based on this analysis the Company concluded that the goodwill associated with the Product Sales and Services reporting unit was impaired, and as a result, recorded an impairment charge of $0.4 million.

Warranty Costs — The Company’s warranty contract with customers of the NPS 100 or 60 products is sometimes limited to repair or replacement of parts and typically expires two years from the date of shipment or commissioning. In such cases, the Company has typically provided non-warranty obligated services at no charge during the initial two-year period. The obligation to provide warranty services is deemed a contingency because it meets the probable and estimate criteria of ASC 460-10-25-2 and as such required accrual at the inception of the warranty period per ASC 460-10-25-5.

The Company’s warranty contracts with customers of non-turbine products typically expire upon the earlier of 18 months after shipment or 12 months after commissioning by the customers and typically cover parts and labor.

The Company estimates the accrual on a per turbine basis based on historical warranty experience of the installed turbine base as a group consistent with ASC 460-10-25-6. The history is evaluated annually or when circumstances warrant an interim review and the per turbine accrual is adjusted as appropriate to reflect changes in actual warranty experience. Estimated warranty obligations are recorded in the earlier period of: (i) the period in which the related revenue is recognized or, (ii) the period in which the obligation is established. Warranty liabilities are based on estimated future repair costs incurred during the warranty period using historical labor, travel, shipping, and material costs, as well as estimated costs for performance warranty failures, when applicable, based upon historical performance experience. The accounting for warranties requires management to make assumptions and apply judgments when estimating product failure

rates and expected costs. Adjustments are made to warranty accruals based on claim data and experience. Such adjustments have typically resulted in reductions to the Company’s estimated warranty obligation as the products have matured and improved in quality. Further, if actual results are not consistent with the assumptions and judgments used to estimate warranty obligations, because either failure rates or repair costs differ from management’s assumptions, the resulting change in estimate could be material.

Customers may elect to purchase extended warranty coverage for repair or replacement of parts for a period covering years three through five of the product life. These extended warranties are considered services and are accounted for under the guidance of ASC 605-20-25. Revenues are deferred and recognized ratably over the service term consistent with ASC 605-20-25-3. Costs associated with these extended warranty contracts are expensed to cost of sales as incurred. Customers may also purchase a Performance Guaranty Program (PGP) which also provides maintenance and repair services over a ten-year period beginning at commissioning. This program is billed annually at a base amount with a premium for production in excess of a floor which depends on location and wind speeds. Revenues are recognized when billed and expenses as a cost of sale as incurred.

Research and Development — Research and development costs are expensed as incurred. Research and development expenses consist primarily of salaries, benefits and related overhead, as well as consulting costs related to design and development of new products.

Income Taxes — The Company uses the liability method of accounting for income taxes. Under this method, income taxes are provided for amounts currently payable and for deferred tax assets and liabilities, which are determined based on the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Deferred income taxes are measured using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is established for any deferred tax asset for which realization is not more likely than not. The net tax accounts are presented as long term.

The Company accounts for uncertain tax positions by determining a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company does not believe material uncertain tax positions have arisen to date, and as a result, no reserves for these matters have been recorded and no interest or penalties have been recognized. Assessment of uncertain tax positions requires significant judgments relating to the amounts, timing, and likelihood of ultimate resolution. The Company’s actual results could differ materially from these estimates.

Stock-Based Compensation — Stock-based compensation expense is recorded based on the fair value of the award at the grant date net of anticipated forfeiture rates, using the Black Scholes option pricing model. The Company considers many factors when estimating the stock-based compensation forfeiture rate including employee class, economic environment, historical data, and anticipated future employee turnover. The Company reviews its forfeiture rate when changes in business circumstances warrant a review, and performs a full analysis annually as of December 31. Other assumptions, such as expected term, expected volatility, risk-free interest rate, dividend rate, and the fair value of the Company’s common shares impact the fair value estimate. The Company uses the simplified method for estimating expected term representing the midpoint between the vesting period and the contractual term. The Company estimates volatility based on the historical volatility of a peer group of publicly-traded companies. The risk-free interest rate is the implied yield currently available on U.S. treasury zero-coupon issues with a term equal to the expected vesting term.

Concentration of Credit Risk — The Company’s customers operate primarily in the distributed energy market and include wind developers and end users that cover multiple industries and geographic locations. The Company’s products and services are sold under contracts with varying terms including contracts

denominated in foreign currencies. For the years ended December 31, 2016 and 2015, 69% and 39%, respectively, of the Company’s revenues were denominated in foreign currency, primarily in euros. If the Company continues to increase the percentage of contracts denominated in foreign currencies, gains or losses due to fluctuations in currency exchange rates could become increasingly material.

Financial instruments which potentially subject the Company to concentrations of credit risk are cash and cash equivalents, time deposits when held, and accounts receivable. At times, cash balances in financial institutions may exceed federally insured deposit limits, however, management periodically evaluates the creditworthiness of those institutions, and the Company has not experienced any losses on such deposits.

During the year ended December 31, 2016, one customer accounted for 11% of revenue. The Company had no other customers representing more than 10% of revenue. One customer accounted for 18% and another for 12% of total revenue for year the ended December 31, 2015.

As of December 31, 2016 the Company had one customer representing 15% and two customers representing 10% of accounts receivable. As of December 31, 2015, the Company had one customer representing 24% and a second customer representing 17% of accounts receivable.

Shipping and Handling — Shipping and handling costs for wind turbine products are included in cost of product revenues.

Net Loss per Share — The Company determines basic loss per share 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 years ended December 31, 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:


	December 31, 2016			December 31, 2015
Basic earnings per share calculation Numerator
Net loss	$	(8,949	)	$	(7,796	)

Net loss attributable to common shareholders	$	(8,949	)	$	(7,796	)

Denominator
Weighted average common shares outstanding — Basic and diluted		23,212,299			22,871,717
Net loss per share-Basic and diluted	$	(0.39	)	$	(0.34	)

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:


	December 31, 2016		December 31, 2015
Common share options		2,834,060		2,900,211

Total potentially dilutive securities		2,834,060		2,900,211

The Company had 367,500 placement agent options that expired unexercised on March 17, 2016. In addition, as described in Note 11, the Company has 2,834,060 options outstanding as of December 31, 2016 related to the 2014 NPS Corp. Plan. As of December 31, 2015 there were 367,500 placement agent options outstanding and 2,532,711 options outstanding related to the 2014 NPS Corp. Plan. Such options are considered to be potentially dilutive securities.

Recent Accounting Pronouncements

In May 2016, the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients which addresses various issues by making changes to the guidance originally included in ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in ASC 606 (as revised) is effective in the quarter and year beginning January 1, 2018, for public entities with a calendar year-end. We are currently evaluating the potential impact of adopting this guidance on the consolidated financial statements.

thereafter, with early adoption permitted. The Company adopted this standard in the fourth quarter of 2016. In accordance with the guidance, the Company has expanded its disclosures to include the conditions that gave rise to the substantial doubt about the Company’s ability to continue as a going concern as well as the actions taken to alleviate those concerns, as described in Note 1.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This updates indicates that there is diversity in the practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230.This amendment provides guidance on eight specific cash flow issues with the objective of reducing the existing diversity in practice. Public business entities should apply the guidance in Update 2016-15to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. We are currently evaluating the impact this ASU will have on our consolidated financial statements.

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 December 31, 2016 and 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 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 was accreting to full value over the development period of the contract and was subsequently to be amortized over is estimated useful life at the time. The license asset was sold on October 26, 2016, as part of the utility wind asset sale. The value assigned to the license at December 31, 2016 and December 31, 2015 is $0 and $792, respectfully, represents a fair value measurement on a nonrecurring basis, and is included in assets held for sale, as of December 31, 2015, on the accompanying consolidated balance sheet.

In 2016, the Company performed a quantitative, step-one and step two, analysis of goodwill. The two-step goodwill impairment test involves fair value measurements that are based on significant inputs not observable in the market and thus represent Level 3 measurements as defined by ASC 820. In the two-step assessment, management primarily uses a discounted cash flow analysis. Key assumptions in the discounted cash flow analysis include an appropriate discount rate, estimated revenue, terminal year multiples, and operating costs. In estimating cash flows, management incorporates current market information, as well as historical and other factors into the forecasted results. The value assigned to the goodwill for the Company’s Product, Sales and Services segment at December 31, 2016 and December 31, 2015 is $0 and $361, respectively, represents a fair value measurement on a nonrecurring basis as it was fully impaired in year ended December 31, 2016.

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. We have not elected hedge accounting for these transactions.

There were no foreign currently forward contracts entered into during 2016 and there were no foreign currency forward contracts outstanding at December 31, 2016 and 2015. Net losses of $21 thousand and net gains of $13 thousand related to these contracts were recognized as a component of other expense, net for the year ended December 31, 2015.

4.	INVENTORIES

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


	December 31, 2016			December 31, 2015
Raw materials	$	2,897		$	3,298
Work in process		1,304			1,170
Finished goods		3,469			5,081
Allowance for obsolescence		(511	)		(316	)

Total inventory — net	$	7,159		$	9,233

For the year ended December 31, 2016 and 2015, the Company recorded an inventory provision of approximately $259 and $202, respectively.

5.	PROPERTY, PLANT, AND EQUIPMENT

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


	December 31, 2016			December 31, 2015
Lease improvements	$	59		$	48
Machinery and equipment		2,232			2,390
Patterns and tooling		1,042			1,615
Office furniture and equipment		424			424
Information technology equipment and software		677			848

		4,434			5,325
Less accumulated depreciation		(2,949	)		(3,279	)

Total property, plant and equipment, net of depreciation	$	1,485		$	2,046

Depreciation expense was $531 and $603 for the years ending December 31, 2016 and 2015, respectively.

In 2016, the Company disposed of equipment, patterns and tooling with a cost of $1,176 and a net book value of $315.

In 2015, the Company disposed of equipment, patterns and tooling with a cost of $1,128 and a net book value of $252.

6.	INTANGIBLE ASSETS AND GOODWILL

Intangible assets consist of:


	December 31, 2016
	Average Remaining Amortization Period		Cost		Accumulated Amortization			Net Carrying Amount End of Year
Core technology		0.0 years	$	490	$	(490	)	$	—
Trade name		0.7 years		89		(80	)		9

			$	579	$	(570	)	$	9


	December 31, 2015
	Average Remaining Amortization Period		Cost		Accumulated Amortization			Net Carrying Amount End of Year
Core technology		0.7 years	$	490	$	(433	)	$	57
Trade name		1.7 years		89		(66	)		23

			$	579	$	(499	)	$	80

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 $0 and $792 as of December 31, 2016 and 2015, respectively, 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 was being capitalized over the period of the development project. Amortization of the intangible asset was to commence when the Company completed the project and had the ability to license/sell the 3.3 MW wind turbine. The license asset was sold on October 26, 2016, as part of the utility wind asset sale.

Amortization expense as of December 31, 2016 and 2015 totaled $128, which included $57 related to amortization on intangibles prior to utility wind asset sale, and $187, respectively.

The expected aggregate future amortization expense is as follows.


Years	Amortization
2017	$	9

	$	9

Goodwill consists of:


	December 31, 2016
	Beginning Balance		Impairment Loss			Ending Balance
Product Sales and Service	$	361	$	(361	)	$	—
Technology Licensing		361		—			361

Total	$	722	$	(361	)	$	361


	December 31, 2015
	Beginning Balance		Impairment Loss			Ending Balance
Product Sales and Service	$	361	$	—		$	361
Technology Licensing		361		—			361

Total	$	722	$	—		$	722

During the fourth quarter of 2016, the Company performed its annual impairment analysis. As a result of the Product, Sales and Services reporting segment having a carrying value in excess of its estimated fair value, the Company performed a quantitative, step-one and step two, analysis of goodwill. The first step of the goodwill impairment analysis identifies potential impairment and determines a fair value for the reporting segment. The second step of the goodwill impairment test involved allocating the estimated fair value of the reporting unit among the assets and liabilities of the reporting unit in a hypothetical purchase price allocation. The results of the hypothetical purchase price allocation indicated there was no fair value was attributable to goodwill. As a result, we recognized a goodwill impairment charge of $0.4 million. There was no impairment in 2015.

7.	GAIN ON SALE OF ASSETS

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

The gain on the disposition is included in loss from continuing operations before income taxes in the statement of operations in accordance with ASC 360-10-45-5. Any future royalty payments will be considered additional proceeds from sale and will be recorded as gain on sale of assets in the consolidated statements of operations. The net book value of all items transferred or retired total $2.1 million and the guaranteed consideration totaled $3 million. This results in a gain on sale of assets totaling $973 thousand in Q4 2016.

8.	REVOLVING LINE OF CREDIT

Debt at December 31, 2016 and 2015 consists of:


	December 31, 2016		December 31, 2015
Working capital revolving line of credit	$	1,600	$	2,892

In September 2016, the Company amended its foreign working capital revolving line of credit with Comerica to extend the maturity date of September 30, 2016 to December 31, 2017. The line of credit was reduced from $6,000 to $2,000, 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 $1,000 at all times.

At December 31, 2016, there was $1,600 outstanding on the revolving line of credit as well as $0 outstanding in performance and warranty letters of credit and the Company had a net maximum supported borrowing base, in excess of loans outstanding, of $0.4 million.

9.	ACCRUED EXPENSES

Accrued expenses consist of:


	December 31, 2016		December 31, 2015
Accrued warranties	$	1,912	$	2,171
Accrued rebates, allowances and discounts		65		20
Other accrued expenses		963		1,814

Total accrued expenses	$	2,940	$	4,005

Changes in the Company’s product warranty accrual during 2016 and 2015 consisted of the following:


	December 31, 2016			December 31, 2015
Beginning balance	$	2,171		$	1,637
Provisions, net of reversals		1,238			1,802
Settlements		(1,497	)		(1,268	)

Ending balance	$	1,912		$	2,171

10.

CAPITAL STRUCTURE

Common Shares-No Par — The Company’s authorized capital consists of an unlimited number of voting common shares and an unlimited number of class B restricted voting shares. As of December 31, 2016, there were 23,613,884 voting common shares issued and outstanding.

11.

STOCK BASED COMPENSATION AND EMPLOYEE BENEFIT PLANS

The Company had four equity incentive plans. As a result of the RTO 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. 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 December 31, 2016 is as follows:


	Shares			Weighted- Average Exercise Price		Average Remaining Weighted-Average Contractual Term (in Years)		Aggregate Intrinsic Value
Outstanding — December 31, 2014		2,403,347		$	2.20		6.0 years	$	2,151
Granted		413,625		$	0.49
Exercised		(1,596	)	$	1.59
Canceled		(282,665	)	$	2.38

Outstanding — December 31, 2015		2,532,711		$	1.90		5.2 years	$	—
Granted		705,000		$	0.19
Canceled		(403,651	)	$	2.67

Outstanding — December 31, 2016		2,834,060		$	1.37		3.6 years	$	—

Exercisable — December 31, 2016		1,966,614		$	1.82		2.3 years	$	—

Shares vested and expected to vest December 31, 2016		2,707,901		$	1.42		3.5 years	$	—

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 year ended December 31, 2016 and 2015 was $0.11 and $0.29 per share, respectively. At December 31, 2016, unrecognized stock-based compensation expense related to non-vested stock options is $182 which is expected to be recognized over the weighted-average remaining vesting period of 1.9 years.

The Company calculates the fair value of stock-based payment awards on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods. Option pricing model input assumptions such as expected term, expected volatility, risk-free interest rate, dividend rate, and the fair value of the Company’s common shares impact the fair value estimate. Further, the forfeiture rate impacts the amount of aggregate compensation. These assumptions are subjective and generally require significant analysis and judgment to develop. The Company uses the simplified method for estimating expected term representing the midpoint between the vesting period and the contractual term. The Company estimates volatility based on the historical volatility of a peer group of publicly-traded companies. The risk-free interest rate is the implied yield currently available on U.S. treasury zero-coupon issues with a term equal to the expected vesting term. Estimated forfeitures are adjusted over the requisite service period based on the extent to which actual forfeitures differ from estimated forfeitures.

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


	2016	2015
Expected volatility	73.0% – 77.0%	76.0%
Risk-free interest rate	1.40% – 1.98%	1.09% – 1.59%
Expected life (years)	4.5	4.5
Dividend yield	0.0%	0.0%

As of December 31, 2016, 268,560 options were available for grant. The Company had 367,500 placement agent options that expired on March 17, 2016.

In November 2016, the Company granted 210,000 restricted common shares, with a fair value per share of $0.15 to its non-employee directors under the 2014 NPS Corp Plan as part of each such director’s

compensation for service on the Company’s Board of Directors. In addition, in November 2016, the non-employee directors also elected to receive 50% of their annual retainer compensation in restricted shares, rather than cash. As such, the Company granted 230,000 restricted common shares, with a fair value per share of $0.19. Both restricted common share grants vested 100% on the grant date.

During the year ended December 31, 2015, the Company granted 407,935 restricted common shares to its non-employee directors under the 2014 NPS Corp Plan as part of each such director’s compensation for service on the Company’s Board of Directors. The fair value per share for each grant was $0.44. Each non-employee director received a grant of 15,000 restricted common shares, of which (for all but one director), 75% of the shares vested on September 30, 2015 with the remaining 25% vesting on December 31, 2015. For the other non-employee director, 50% of the shares vested on September 30, 2015 with the remaining 50% vesting on December 31, 2015. Several non-employee directors also elected to receive their annual retainer compensation in restricted shares, rather than cash. For each such grant, 50% of the total stock granted vested on the grant date of August 25, 2015, with the remaining 50% vesting in two equal installments on September 30, 2015 and December 31, 2015.

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 years ended December 31, 2016 and 2015. Stock-based compensation expense, a non-cash expense, is included in each respective expense category as follows, for the years ended December 31, 2016 and 2015:


	December 31, 2016		December 31, 2015
Cost of revenue	$	10	$	31
Sales and marketing		65		68
Research and development		11		20
General and administrative		433		801

	$	519	$	920

12.

401(k) PLAN

The Company has a defined contribution plan covering substantially all of its employees, subject to certain eligibility requirements. Under the plan, participating employees may defer up to 15% of their pre-tax compensation, as defined. 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 2016 and 2015 were $68 and $207, respectively.

13.

INCOME TAXES

Income (loss) before provision for income taxes consists of the following:


	December 31, 2016			December 31, 2015
United States	$	(8,905	)	$	(6,494	)
Foreign		129			269

Total	$	(8,776	)	$	(6,225	)

The provision for income taxes for the years ended December 31, 2016 and 2015, consists of the following:


	December 31, 2016			December 31, 2015
Current Provision
Federal	$	—		$	—
State		6			4
Foreign		263			1,553

Total current provision		269			1,557

Deferred provision
Federal		(84	)		12
State		(12	)		2

Total deferred provision		(96	)		14

Total provision for income taxes	$	173		$	1,571

Components of deferred income tax assets and liabilities at December 31, 2016 and, 2015 are as follows:


	December 31, 2016			December 31, 2015
Deferred income tax assets:
Net operating losses	$	49,736		$	47,618
Research and development tax credits		1,462			1,462
Bad debts		—			133
Deferred revenue		2,458			3,647
Inventories		238			174
Intangible assets and property		2,043			2,302
Stock-based compensation		3,555			3,358
Accrued expenses and other		1,241			1,485

		60,733			60,179

Deferred income tax liabilities:
Goodwill		52			175
Prepaid expenses		143			177
Deferred costs		133			2,421
Unremitted Earnings of Foreign Subsidiaries		27			—

		355			2,773

Net deferred income tax assets		60,378			57,406
Valuation allowance		(60,457	)		(57,581	)

Carrying value of net deferred liability	$	(79	)	$	(175	)

A reconciliation of the U.S. statutory federal income tax rate and the Company’s effective income tax rate for the years ended December 31, 2016 and 2015 is as follows:


	December 31, 2016			December 31, 2015
Federal statutory rate		34.00	%		34.00	%
State taxes — net of federal benefit		0.12			(0.06	)
Tax credits		—			2.40
Other permanent items		(2.35	)		(1.45	)
Unremitted Earnings of Foreign Subs		(2.08	)		—
Foreign withholding tax		(1.88	)		(15.93	)
Valuation allowance		(29.78	)		(44.19	)

Effective income tax rate		(1.97	)%		(25.23	)%

As of December 31, 2016, the Company had $133,398 of federal net operating loss carryforwards that begin to expire in 2028, approximately $79,177 of state net operating loss carryforwards that expire from 2016 through 2028, and approximately $1,462 of research and development tax credits that begin to expire 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 and 383 of the Internal Revenue Code.

The Company has completed a Section 382 study, through November 30, 2014, to assess if any ownership changes would have caused limitations to our net operating loss carryforwards. Based on that study, the Company has concluded an ownership change occurred on September 19, 2008 and therefore there is potential for $2,600 of net operating loss to be limited. For the period September 20, 2008 through 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. We have not completed an updated Section 382 study for periods after November 30, 2014, and as such are not able to assess whether and ownership change has occurred that could cause limitations to our net operating loss carryforwards.

The net increase in the valuation allowance was $2,876 and $3,015 at December 31, 2016 and 2015, respectively. In assessing the realizability of carryforwards and other deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We adjust the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized. In determining the need for a valuation allowance, we have assessed the available means of recovering deferred tax assets, including the ability to carryback net operating losses, the existence of reversing temporary differences, the availability of tax planning strategies, and available sources of future taxable income. Based upon this analysis, it is not more likely than not that some portion or all of the deferred tax assets will be realized. The net deferred tax liability as of December 31, 2016 and 2015 includes deferred tax liabilities related to amortizable goodwill, which are anticipated to reverse in an indefinite future 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. The Company performed a comprehensive review of its material tax positions in accordance with recognition and measurement standards. Based on this review, the Company has concluded that there are no uncertain tax positions that would require recognition or disclosure within the consolidated financial statements, as of December 31, 2016 and 2015. In addition, there are no amounts required to be included in the financial statements for interest or penalties on uncertain tax positions.

The Company files federal and various state income tax returns. Due to federal and state net operating loss carryforwards, income tax returns from 2008 through 2015 remain open for examination, with limited exceptions. The Company’s 2009 federal return has been audited and the audit was closed without any changes to the return positions. In addition, the statute of limitations remains open for the Company’s Switzerland-based subsidiary for 2009 and subsequent periods.

14.

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, power convertors, 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 four business segments are shown as follows:


	December 31, 2016		December 31, 2015
Product Sales and Services	$	34,248	$	44,156
Technology Licensing		441		4,748
Technology Development		1,212		5,111

Total	$	35,901	$	54,015

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


	December 31, 2016			December 31, 2015
Product Sales and Services	$	(2,299	)	$	(2,291	)
Technology Licensing		1,180			3,652
Technology Development		584			4,244
Shared Services		(5,894	)		(8,580	)
Unallocated costs and expenses		(2,539	)		(2,905	)

Loss from operations	$	(8,968	)	$	(5,880	)

Unallocated costs and expenses consist of:


	December 31, 2016			December 31, 2015
Depreciation and amortization	$	(659	)	$	(790	)
Stock-based compensation expense		(519	)		(920	)
Other		(1,361	)		(1,195	)

	$	(2,539	)	$	(2,905	)

Total business segment assets are as follow:


	December 31, 2016		December 31, 2015
Product Sales and Services	$	15,755	$	27,033
Technology Licensing		1,915		1,222
Technology Development		—		1,477
Shared Services		247		381
Unallocated assets		748		1,763

Total	$	18,665	$	31,876

Unallocated assets consist of the following:


	December 31, 2016		December 31, 2015
Cash	$	705	$	1,746
Prepaid other		33		—
Property, plant and equipment, net		10		17

Total	$	748	$	1,763

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


	December 31, 2016		December 31, 2015
United States	$	5,237	$	6,635
United Kingdom		6,501		17,321
Italy		22,411		20,235
Brazil		1,629		9,755
Asia		3		64
Rest of the world		120		5

Total	$	35,901	$	54,015

For the years ended December 31, 2016 and 2015, 85% and 88% of revenues, respectively, were recognized from sales to customers outside the United States.

Geographic information about property, plant, equipment as well as intangible assets and goodwill associated with particular regions is as follows:


	December 31, 2016		December 31, 2015
United States		1,260	$	2,758
Rest of the world		595		90

Consolidated Total	$	1,855	$	2,848

15.

SUBSEQUENT EVENTS

The company evaluated subsequent events through the date of the filing and had no additional subsequent events to report.

16.

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 under ASC 460 Guarantees, which requires that the measurement of a guarantee liability be the fair value of the obligation at each 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 total liability related to this exposure was transferred to WEG as part of the sale agreement. The total liability related to this exposure, as of December 31, 2016 and 2015 is $0 and $406, respectively, of which $0 and $160, respectively, is recorded as a current liability.

The Defense Contract Auditing Agency (“DCAA”) completed field work on the 2004 audit and issued a final report to the National Renewable Energy Laboratory (“NREL”). NREL has not issued a final determination related to the findings as of December 31, 2016. The DCAA considers the years 2005 through 2007 and 2010 open for audit, however, there has been no audit activity related to these years and the Company has not received formal notification that such audits are on hold. Management believes that as of the date of these financial statements these audits have been delayed or placed on hold. Based upon the lack of a final determination from NREL on the 2004 audit and lack of activity on later audits, the Company does not have adequate information at the date of issuance of these financial statements to determine if the outcome of any of these remaining open audits will result in a cost to the Company. The Company, however, does not expect a material impact based on the results of previous audits.

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 years ended December 31, 2016 and 2015 was $410 and $415, 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. We have exercised the right to cancel the lease as of December 31, 2016 and are in the process of renegotiating a revised ease at the facility for less square footage and lower overall price per square foot. Therefore, only six months (January 2017 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,
2017		243
2018		69
2019		7

Total	$	319

17.

SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)

The following tables set forth selected quarterly financial information for the fiscal years ended December 31, 2016 and 2015. The operating results for any given quarter are not necessarily indicative of results for any future period.


	Three Months Ending
	March 31						June 30						September 30						December 31
	2016			2015			2016			2015			2016			2015			2016			2015
Revenue	$	5.2		$	9.2		$	8.7		$	13.0		$	12.1		$	13.4		$	9.9		$	18.4
Loss from operations	$	(4.1	)	$	(3.5	)	$	(2.2	)	$	(2.2	)	$	(1.2	)	$	—		$	(1.4	)	$	(0.2	)
Net loss	$	(4.2	)	$	(4.0	)	$	(2.5	)	$	(2.7	)	$	(1.4	)	$	(0.5	)	$	(0.8	)	$	(0.6	)
Net loss per common share — Basic and diluted	$	(0.18	)	$	(0.17	)	$	(0.11	)	$	(0.11	)	$	(0.06	)	$	(0.02	)	$	(0.04	)	$	(0.04	)

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is accumulated and communicated to management, including principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

As of December 31, 2016, we have carried out an evaluation under the supervision of, and with the participation of our management, including our Chief Operating Officer and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on our evaluation, our Chief Operating Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were not effective in ensuring that (a) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported appropriately and within the time periods specified in the SEC’s rules and forms, and (b) such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control and procedures objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by a company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:

•

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls

may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its 2013 Internal Control — Integrated Framework.

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.

As of December 31, 2016, we identified three material weaknesses in our internal control over financial reporting. Specifically, 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 effective controls for reviewing and analyzing complex or non-routine transactions. These material weaknesses existed at December 31, 2015 and remained unremediated. 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 control was not properly designed as it did not include the reconciliation of all non-system generated entries recorded to the general ledger. The material weaknesses resulted in material misstatements of our consolidated financial statements or disclosures, which have been corrected in previous filings. Until remediated, the matters described above will continue to constitute material weaknesses in our internal control over financial reporting that could result in material misstatements in our financial statements not being prevented or detected.

As a result of the material weaknesses, our management concluded that, as of December 31, 2016, our internal controls over financial reporting was not effective.

Plan for Remediation of the Material Weakness in Internal Control Over Financial Reporting

Management is engaged in the planning for, and implementation of, remediation efforts to address the material weakness. These remediation efforts, outlined below, are intended both to address the identified material weakness and to enhance the Company’s overall financial control.

•

enhance the formality and rigor of the reconciliation procedures and the evaluation of certain accounts and transactions;

•

enhance the design of existing monitoring controls;

•

enhancement and formation of our month end close and financial reporting review process to ensure that complex or significant transactions are thoroughly analyzed with the accounting and finance management team;

•

engage outside technical accounting consultants to provide assistance and guidance in determining accounting conclusions for non-routine, complex transactions;

•

enhancement of our existing policies and procedures relating to the preparation and review of general ledger reconciliations, including establishment of a formal escalation method to notify when accounts that have gone un-reconciled or unadjusted variances; and we have and plan to continue to improve the quality and timing of our accounting close process and financial reporting to allow for increase time for review.

We will continue to implement these and other improvements until our material weaknesses are fully remediated.

Changes in Internal Control over Financial Reporting

Other than the changes resulting from the remediation activities described above, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.

Other Information

None.

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

The information required under this item is incorporated herein by reference to our 2017 Proxy Statement, which proxy statement will be filed with the Securities and Exchange Commission not later than 120 days after the close of our fiscal year ended December 31, 2016.

Item 11.

Executive Compensation

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13.

Certain Relationships and Related Transactions, and Director Independence

Item 14.

Principal Accounting Fees and Services

PART IV

Item 15.

Exhibits, Financial Statement Schedules

(a) The following is filed as part of this Annual Report on Form 10-K:

1. Financial Statements.


	Page
Consolidated Balance Sheets as of December 31, 2016 and 2015		64
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2016 and 2015		66
Consolidated Statements of Changes in Shareholders’ Equity (Deficiency) for the Years Ended December 31, 2016 and 2015		67
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015		68
Notes to Consolidated Financial Statements		69

2. Financial Statement Schedules.

Schedule II — Valuation and Qualifying Accounts		95

NORTHERN POWER SYSTEMS CORP.

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

(In thousands)


	Balance Beginning of Year		Charged to Expense			Write- Offs			Recoveries and Other Adjustments		Balance End of Year
Allowance for doubtful accounts receivable:
Fiscal year ended December 31, 2016	$	350	$	(28	)	$	(322	)	$	—	$	—
Fiscal year ended December 31, 2015	$	187	$	31		$	(36	)	$	168	$	350

	Balance Beginning of Year		Additions			Write- Offs			Recoveries		Balance End of Year
Deferred tax asset valuation allowance:
Fiscal year ended December 31, 2016	$	57,581	$	2,876		$	—		$	—	$	60,457
Fiscal year ended December 31, 2015	$	54,566	$	3,015		$	—		$	—	$	57,581

(b) Exhibits.

See the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K. The exhibits listed in the Exhibit Index below are filed or incorporated by reference as part of this Annual Report on Form 10-K

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

POWER OF ATTORNEY

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ciel R. Caldwell and Eric Larson, and each of them, his or her true and lawful attorneys in fact and agents, each with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that each of said attorneys in fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated


Signature	Title	Date

/s/ Ciel R. Caldwell Ciel R. Caldwell	President and Chief Operating Officer (Principal Executive Officer)	March 31, 2017

/s/ Eric Larson Eric Larson	Vice President and Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer)	March 31, 2017

/s/ Kevin R. Kopczynski	Director	March 31, 2017
Kevin R. Kopczynski	Director	March 31, 2017

/s/ Alexander Ellis, III	Director	March 31, 2017
Alexander Ellis, III	Director	March 31, 2017

/s/ Richard Hokin	Director	March 31, 2017
Richard Hokin	Director	March 31, 2017

/s/ John Simon	Director	March 31, 2017
John Simon	Director	March 31, 2017


Signature	Title	Date

/s/ William F. Leimkuhler	Director	March 31, 2017
William F. Leimkuhler	Director	March 31, 2017

/s/ Robert L. Lentz	Director	March 31, 2017
Robert L. Lentz	Director	March 31, 2017

/s/ Gregory Wolf	Director	March 31, 2017
Gregory Wolf	Director	March 31, 2017

/s/ Troy C. Patton	Director	March 31, 2017
Troy C. Patton	Director	March 31, 2017

EXHIBIT INDEX


Number		Description

2.1		Merger Agreement by and between Wind Power Holdings, Inc., Mira III Acquisition Corp (now known as Northern Power Systems, Corp), Mira Subco, Inc. and Mira Subco, LLC dated as of March 3, 2014. (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (File No. 000-55184) on April 23, 2014 and incorporated herein by reference)

3.1		Articles of Association of the Registrant, as amended (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 000-55184) on April 23, 2014 and incorporated herein by reference)

4.1		Form of Common Share Certificate of Registrant (filed as Exhibit 4.1 to Amendment No. 3 to the Registrant’s Registration Statement on Form 10 (File No. 001-36317), filed by Wind Power Holdings, Inc., the predecessor to the Registrant, on May 12, 2014 and incorporated herein by reference)

4.2		Form of Class B Restricted Voting Share Certificate of the Registrant (filed as Exhibit 4.1A to Amendment No. 3 to the Registrant’s Registration Statement on Form 10 (File No. 001-36317) by Wind Power Holdings, Inc., the predecessor to the Registrant, on May 12, 2014 and incorporated herein by reference)

4.3		Fifth Amended and Restated Investors’ Rights Agreement by and between Wind Power Holdings, Inc. and certain of its shareholders dated as of April 14, 2014 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 000-55184) on April 23, 2014 and incorporated herein by reference)

10.1#		Northern Power Systems Corp. 2014 Stock Option and Incentive Plan (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 000-55184) on April 23, 2014 and incorporated herein by reference)

10.2		Northern Power Systems Corp. 2014 Stock Option and Incentive Plan Form of Non-Qualified Stock Option Grant (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K (File No. 000-55184) on April 23, 2014 and incorporated herein by reference)

10.3		Employment Agreement by and between the Registrant and Troy C. Patton (filed as Exhibit 10.5 to the Registrant’s Registration Statement on Form 10 (File No. 001-36317) by Wind Power Holdings, Inc., the predecessor to the Registrant, on February 12, 2014 and incorporated herein by reference

10.4#		Employment Agreement by and between the Registrant and Ciel R. Caldwell (filed as Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333- 201372) on January 5, 2015 and incorporated herein by reference)

10.5#		Employment Agreement by and between the Registrant and Jonathan A. Lynch (filed as Exhibit 10.5 to the Registrant’s Registration Statement on Form S-1 (File No. 333- 201372) on January 5, 2015 and incorporated herein by reference)

10.6#		Employment Agreement dated as of May 5, 2014 by and between Northern Power Systems, Inc. and Lawrence D. Willey (filed as Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-55184) on August 14, 2014 and incorporated herein by reference)

10.8		Amended and Restated Loan and Security Agreement by and between the Registrant and Comerica Bank, dated December 31, 2013, as amended June 30, 2014 (filed as Exhibit 10.8 to the Registrant’s Registration Statement on Form S-1 (File No. 333- 201372) on January 5, 2015 and incorporated herein by reference)


Number		Description

10.9†		Technological Know-How Transfer Agreement for NPS 2.X by and between the Registrant and WEG Equipamentos Elétricos S.A. dated March 20, 2013 (filed as Exhibit 10.8 to Amendment No. 3 to the Registrant’s Registration Statement on Form 10 (File No. 001-36317) by Wind Power Holdings, Inc., the predecessor to the Registrant, on May 12, 2014 and incorporated herein by reference)

10.10†		Turbine Design and Development Agreement for 3.3 MW by and between Registrant and WEG Equipamentos Elétricos S.A. dated February 28, 2014 (filed as Exhibit 10.12 to Amendment No. 3 to the Registrant’s Registration Statement on Form 10 (File No. 001-36317) by Wind Power Holdings, Inc., the predecessor to the Registrant, on May 12, 2014 and incorporated herein by reference)

10.11		Lease Agreement dated as of June 19, 2014 by and between Northern Power Systems, Inc. and Malone 29 Pitman Road Properties, LLC (filed as Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-55184) on August 14, 2014 and incorporated herein by reference)

10.12		Purchase and Sale Agreement dated as of March 5, 2014 by and between Wind Power Holdings, Inc. and Malone Properties, Inc. (filed as Exhibit 10.16 to Amendment No. 3 to the Registrant’s Registration Statement on Form 10 (File No. 001-36317) by Wind Power Holdings, Inc., the predecessor to the Registrant, on May 12, 2014 and incorporated herein by reference)

10.13		Escrow Agreement made and entered into as of April 16, 2014, by and among Northern Power Systems Corp., Equity Financial Trust Company, as escrow agent, and the shareholders named therein (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K (File No. 000-55184) on April 23, 2014 and incorporated herein by reference)

10.14*		Amendment No. 2 to Amended and Restated Loan and Security Agreement by and between the Registrant and Comerica Bank, dated April 30, 2015

10.15*		Amendment No. 3 to Amended and Restated Loan and Security Agreement by and between the Registrant and Comerica Bank, dated September 30, 2016

10.16*		Amendment No. 2 to Master Revolving Note by and between the Registrant and Comerica Bank, dated September 30, 2016

10.17*		Borrower Agreement by and between the Registrant and the Export-Import Bank of the United States dated September 30, 2016

10.18#*		Employment Agreement dated as of October 5, 2016, by and between Northern Power Systems, Inc. and June M. Morris

10.19*††		Asset Purchase Agreement, dated October 26, 2016, by and among the Registrant and WEG Electric Corp. and WEG Equipamentos Elétricos S.A

10.20*		First Amendment to the Technological Know-How Agreement for NPS2.X by and between WEG Equipamentos Electricos S.A. and Northern Power Systems, Inc. dated October 26, 2016

21.1*		Subsidiaries of the Registrant

23.1*		Consent of RSM US LLP, Independent Registered Accounting Firm

24.1*		Power of Attorney (included on signature page)

31.1*		Principal Executive Officer — Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


Number		Description

31.2*		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**		Certification of the Principal Executive Officer and the Principal Financial Officer 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

*	Filed herewith.

**	Furnished herewith.

#	Indicates management contract or compensatory plan, contract or agreement.

†	Portions of this exhibit (indicated by asterisks) have been omitted pursuant to a request for confidential treatment previously granted by the SEC.

††	Schedules (or similar attachments) have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish supplementally copies of any of the omitted schedules (or similar attachments) upon request by the SEC.

Attached as Exhibits 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2016 and December 31, 2015, and (ii) Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, and (iii) Consolidated Statements of Changes in Shareholders’ Equity (Deficiency) for the years ended December 31, 2016 and 2015, and (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015 and (v) Notes to Consolidated Financial Statements.

100

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company