United States

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

x

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

 

For the quarterly period ended September 30, 2017

OR

 

¨

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

 

For the transition period from                       to                     

 

Commission File Number 000-55184

 

NORTHERN POWER SYSTEMS CORP.

(Exact name of registrant as specified in its charter)

 

British Columbia, Canada	98-1181717
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

29 Pitman Road

Barre, Vermont 05641

(Address of principal executive offices)

 

(802) 461-2955

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Common Shares, no par value per share	23,793,884
Class	Outstanding at November 13, 2017

 

Table of Contents

Northern Power Systems Corp.

 

FORM 10-Q

INDEX

 

		Page No.
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited)	3
	Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 (unaudited)	5
	Consolidated Statement of Changes in Shareholders’ Deficiency for the nine months ended September 30, 2017 (unaudited)	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
Signatures		26

 

PART I – FINANCIAL INFORMATION

 

Item  1.

Financial Statements

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

(In thousands, except share amounts)

(unaudited)

 

 

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

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

(In thousands, except share amounts)

(unaudited)

 

LIABILITIES AND SHAREHOLDERS’ DEFICIENCY		September 30, 2017				December 31, 2016
CURRENT LIABILITIES:
Working capital revolving line of credit (Note 8)		$	1,875			$	1,600
Accounts payable			6,792				3,354
Accrued expenses (Note 9)			2,668				2,940
Accrued compensation			918				1,586
Deferred revenue			3,907				1,821
Customer deposits			4,410				7,419
Other current liabilities			230				92
Total Current Liabilities			20,800				18,812
Deferred revenue, less current portion			1,585				2,332
Deferred income taxes, net of current portion (Note 13)			89				79
Total Liabilities			22,474				21,223
Commitments and Contingencies (Note 16)
SHAREHOLDERS’ DEFICIENCY:
Voting common shares, no par value — Unlimited shares authorized; 23,793,884 and 23,613,884 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively.			165,671				165,642
Additional paid-in capital			9,243				9,158
Accumulated other comprehensive loss			—				(50	)
Accumulated deficit			(178,383	)			(177,308	)
Total Shareholders’ Deficiency			(3,469	)			(2,558	)
Total Liabilities and Shareholders’ Deficiency		$	19,005			$	18,665

 

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

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(In thousands, except share and per share amounts)

(unaudited) 

 

		For the three months ended								For the nine months ended
		September 30, 2017				September 30, 2016				September 30, 2017				September 30, 2016
REVENUES:
Product		$	2,419			$	10,084			$	23,628			$	21,018
Service			1,040				1,640				3,798				3,624
Design service			—				417				—				945
License			—				—				—				441
Total revenues			3,459				12,141				27,426				26,028
Cost of product revenues			2,136				9,035				19,934				20,888
Cost of service revenues			682				1,082				2,492				2,820
Gross profit			641				2,024				5,000				2,320
OPERATING EXPENSES:
Sales and marketing			667				821				1,989				2,644
Research and development			464				592				1,598				2,213
General and administrative			818				1,837				3,205				5,063
Gain on sale of assets			(675	)			—				(1,050	)			—
Total operating expenses			1,274				3,250				5,742				9,920
Loss from operations			(633	)			(1,226	)			(742	)			(7,600	)
Interest expense			(20	)			(15	)			(46	)			(94	)
Other expense			(91	)			(54	)			(239	)			(170	)
Loss before provision for income taxes			(744	)			(1,295	)			(1,027	)			(7,864	)
Provision for income taxes			14				62				48				250
NET LOSS			(758	)			(1,357	)			(1,075	)			(8,114	)
Other comprehensive loss
Change in cumulative translation adjustment			(1	)			2				50				15
COMPREHENSIVE LOSS		$	(759	)		$	(1,355	)		$	(1,025	)		$	(8,099	)
Net loss applicable to common shareholders (Note 2)		$	(758	)		$	(1,357	)		$	(1,075	)		$	(8,114	)
Net loss per common share
Basic and dilutive		$	(0.03	)		$	(0.06	)		$	(0.05	)		$	(0.35	)
Weighted average number of common shares outstanding:
Basic and diluted			23,733,884				23,173,884				23,670,148				23,173,884

 

 

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

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ DEFICIENCY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017

(In thousands except share amounts)

(unaudited)

 

 

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

 

NORTHERN POWER SYSTEMS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

(All amounts in thousands)

(unaudited)

 

 

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

 

NORTHERN POWER SYSTEMS CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K (“Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2017.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the views of our management regarding current expectations and projections about future events and are based on currently available information. Actual results could differ materially from those contained in these forward-looking statements for a variety of reasons, including those described in this discussion and analysis and elsewhere in this Quarterly Report on Form 10-Q and those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016. Other unknown or unpredictable factors also could have a material adverse effect on our business, financial condition and results of operations. Accordingly, readers should not place undue reliance on these forward-looking statements. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” among others, generally identify forward-looking statements; however, these words are not the exclusive means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. We are not under any obligation to, and do not intend to, publicly update or review any of these forward-looking statements, whether as a result of new information, future events or otherwise, even if experience or future events make it clear that any expected results expressed or implied by those forward-looking statements will not be realized. Please carefully review and consider the various disclosures made in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

 

Overview

 

We are a provider of advanced renewable power generation and power conversion technology for the distributed energy sector. We design, manufacture and service a suite of proven permanent magnet direct-drive (“PMDD”) wind turbine platforms for the distributed wind market, 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 sale of these technology rights, 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 800 of these turbines. To date, these units have run for over seventeen 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 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, 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.

 

Regarding the power electronics product line, we have been developing our power converter technology since the early 2000s. Our capabilities in this area resulted from the complex power conversion technology required for wind power 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 September 30, 2017, we have deployed over 170 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 three months ended September 30, 2017 and 2016, respectively, we generated $3.5 million, and $12.1 million in revenue. For the three months ended September 30, 2017 and 2016 we incurred net losses of $0.8 million, and $1.4 million, respectively. We have an accumulated deficit of $178.4 million as of September 30, 2017.

 

We are headquartered and our principal manufacturing is in Barre, Vermont, with 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 warehousing and manufacturing in Bisaccia, Italy, and Cornwall, U.K. We previously operated under the name Wind Power Holdings, Inc. and was originally incorporated in Delaware on August 12, 2008. Our common shares are listed on the Toronto Stock Exchange under the symbol “NPS”.

 

Currently there are certain feed-in-tariff regimes in Italy and the U.K. supporting the installation and operation of distributed-class wind turbines. 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 on a limited deployment cap of 300kW per quarter. Published information from the U.K. indicates that the feed-in-tariff rates and deployment caps by rated capacity have declined as recent as October 1, 2017 and will decline further on a quarterly basis. 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 may consider 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 fourth quarter of 2017.

 

The Italian governmental authorities published a revision to the Italian feed-in-tariff regulation in June 2016, granting the ability to grid connect turbines and be eligible to the prior feed-in-tariff until June 30, 2017. Under the same revision an extension to the law was provided to connect wind turbines between June 30, 2017 and December 31, 2017 at a reduced feed-in-tariff. In order to be eligible for the current Italian feed-in-tariff a turbine is required to be grid-connected by the local utility by December 31, 2017. Few of our customers have turbines that were delayed for grid connection beyond June 30, 2017 based upon the timing and limited availability of 3^rd party grid connection personnel. Our standard business terms entitle us to bill our customer for the final ten percent of the sale value at the commissioning milestone, which is commensurate to grid connection. Based upon these delays we continue to experience delayed payment on some proportion of our sales.

 

Recently, the Italian authorities announced that a new draft law is currently under consultation and expected to be publicized during the fourth quarter of 2017.  The delayed publication of the new law has slowed down order closure in Italy during the third quarter and likely to continue during the fourth quarter. It is expected that the new law will provide for a new feed-in-tariff from the first quarter of 2018 until December 31, 2020.

 

In the U.S., 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 that begin construction before December 31, 2018, December 31, 2019 and December 31, 2020 will have their Investment Tax Credit (ITC) amounts reduced to 24%, 18% and 12% thereafter, respectively.

 

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

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, should be read in conjunction with the Company’s 2016 consolidated financial statements and related notes included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (File No. 000-55184). The consolidated balance sheet as of December 31, 2016 was derived from the Company’s annual audited financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the timing and amount of assets, liabilities, equity, revenue, and expenses reported and disclosed. Actual amounts could differ from these estimates. All adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods, have been recorded. Actual amounts could differ from these estimates. Due to differing business conditions and seasonality, operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected in subsequent quarters or for the full year ending December 31, 2017.

 

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: ability to realize accounts receivable; and valuation of inventory, goodwill and long-lived assets, warranty reserves, deferred income tax assets, share-based compensation and contingencies.

 

Results of Operations of the three months ended September 30, 2017 compared to the three months ended September 30, 2016

 

Overview

 

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

 

Our general activity during the three months ended September 30, 2016 was primarily focused on: growing revenue, orders and backlog of distributed wind turbines in key markets, especially Italy and the United States; continued expansion of order backlog for FlexPhase power conversion technology used in battery-energy-storage and microgrid applications; expansion of services offerings to include full turnkey wind turbine installations, optimizing our supply chain and operating profile to improve our margins, and monetizing our utility assets.

 

Revenue, Orders and Deferred Revenue (dollars in millions)

 

Total revenues decreased by $8.6 million, or 71%, to $3.5 million for the three months ended September 30, 2017 from $12.1 million for the three months ended September 30, 2016. Our overall backlog decreased to approximately $14 million at September 30, 2017 as compared to approximately $25 million at September 30, 2016. Our backlog of orders generally, but not always, converts to revenue for us within a one-year period. The timing of such revenue recognition is impacted by customer specific installation conditions such as site preparation and readiness by local utilities for grid connection.

 

The decrease in revenue was primarily attributed to $7.7 million decrease in distributed-class turbines sales along with a $0.5 million decrease in service revenue and $0.4 million decrease in other revenue. We recognized revenue on 11 units for the three months ended September 30, 2017 as compared to 41 units for the three months ended September 30, 2016. The reduction of the feed-in-tariff, together with the delay and uncertainty surrounding establishing a new Italian law regarding feed-in-tariff programs has slowed down Italian orders during the third quarter of this year.

 

Our international revenue was $2.9 million for the three months ended September 30, 2017 as compared to $10.0 million for the three months ended September 30, 2016, representing 85% and, 83% of our revenues for those periods, respectively. We expect the majority of our revenue to continue to be outside of the U.S. for the foreseeable future. A portion of our revenues continue to be denominated in currencies other than our reporting currency, the U.S. dollar, which increased to 77% of total revenues for the three months ended September 30, 2017 as compared to 66% of total revenues for the same period in 2016. We expect to see a continued significant proportion of our revenues denominated in euro and other non-U.S. dollar currencies as we expect international sales to exceed domestic. We are currently experiencing positive movement between the euro and the U.S. dollar, which had a favorable effect on our revenue.

 

During the three months ended September 30, 2017, we executed 11 new distributed-class turbine sales orders. During the three months ended September 30, 2016, we executed 21 new distributed-class turbine sales orders. Our deferred revenues balance at September 30, 2017 was $5.5 million which is included in the backlog value disclosed above. At December 31, 2016, such balance was $4.2 million.

 

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

 

Cost of product revenues and cost of services revenues collectively decreased by $7.3 million or 72% in the three months ended September 30, 2017 to $2.8 million as compared to $10.1 million in the three months ended September 30, 2016. The lower cost of sales is the result of a decrease in the number of units sold for the three months ended September 30, 2017 as compared to the same period in 2016. Our cost of product revenues was $2.1 million along with $0.7 million of related service cost for the three months ended September 30, 2017 compared to $9.0 million for product sales and $1.1 million for related service cost for the same period in 2016.

 

Gross Profit (dollars in millions)

 

Gross profit decreased $1.4 million in the three months ended September 30, 2017 to $0.6 as compared to $2.0 million in the three months ended September 30, 2016. This change was due to a decrease in the volume of sales.

 

Operating Expenses

 

Sales and Marketing

 

Sales and marketing expenses decreased by $0.1 million or 13% to $0.7 million for the three months ended September 30, 2017 from $0.8 million for the same period in 2016. This decrease is principally due to $0.1 million reduction in other sales and marketing expenses resulting from cost cutting efforts enacted during 2016.

 

Research and Development Expenses

 

Research and development expenses decreased by $0.1 million or 17% to $0.5 million for the three months ended September 30, 2017 from $0.6 million for the same period in 2016. The reduction in research and development expense is primarily the result of a decrease in compensation and benefits of $0.2 million, as a result of lower headcount related to our sale of utility wind assets in the fourth quarter of 2016 offset by an increase in consulting of $0.1 million.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $1.0 million or 56% to $0.8 million for the three months ended September 30, 2017 from $1.8 million for the same period in 2016. This decrease is principally due to $0.4 million lower compensation and benefits expense and $0.6 million reduction in severance resulting from successful cost cutting efforts.

 

Gain on Sale of Assets

 

Gain on sale of assets was $0.7 million for the three months ended September 30, 2017 as compared to $0 for the same period in 2016. The gain on sale of assets reflects royalty payments related to the sale of certain utility wind assets in the fourth quarter of 2016.

 

Loss from Operations

 

Our loss from operations decreased by $0.6 million to $0.6 million for the three months ended September 30, 2017 compared to an operating loss of $1.2 million for the same period in 2016. The improvement to loss from operations reflects a reduction in operating expenses and gain on sale offset by a decrease in gross profit.

 

Other Expense and Interest Expense

 

Other expenses for the three months ended September 30, 2017 was unchanged at $0.1 million compared to the same period in 2016. Foreign exchange loss increased $0.1 million and was partially offset by a decrease in other expenses and interest expense in the three months ended September 30, 2017 when compared to the same time period in 2016.

 

Income Tax Expense

 

Income tax expense was $0 million for the three months ended September 30, 2017 and $0.1 million for the same period in 2016. The decrease is the result of lower Brazilian income tax expense incurred on certain license and royalty revenue earned in Brazil in 2016.

 

Net Loss

 

Net loss decreased by $0.6 million or 43%, to $0.8 million for the three months ended September 30, 2017 compared to a net loss of $1.4 million for the same period in 2016. The improvement to net income for the three months ended September 30, 2017, is primarily due to the decrease in loss from operations.

 

Results of Operations of the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016

 

Overview

 

Our general activity during the nine months ended September 30, 2017 was primarily focused on: expansion of our order backlog of distributed wind turbines in key markets, especially Italy and the United States; expansion of order backlog for FlexPhase power conversion technology used in battery-energy-storage and microgrid applications; expansion of services offerings to include full turnkey wind turbine installations, and optimizing our supply chain and operating profile to improve our margins.

 

Our general activity during the nine months ended September 30, 2016 was primarily focused on: growing revenue, orders and backlog of distributed wind turbines in key markets, especially Italy and the United States; continued expansion of order backlog for FlexPhase power conversion technology used in battery-energy-storage and microgrid applications; expansion of services offerings to include full turnkey wind turbine installations, and optimizing our supply chain and operating profile to improve our margins, and monetizing our utility assets.

 

Revenue, Orders and Deferred Revenue (dollars in millions)

 

Total revenues increased by $1.4 million, or 5%, to $27.4 million for the nine months ended September 30, 2017 from $26.0 million for the nine months ended September 30, 2016. Our overall backlog decreased to approximately $14 million at September 30, 2017 as compared to approximately $25 million at September 30, 2016. Our backlog of orders generally, but not always, converts to revenue for us within a one year period. The timing of such revenue recognition is impacted by customer specific installation conditions such as site preparation and readiness by local utilities for grid connection.

 

The increase in revenue was primarily attributed to $2.6 million increase in distributed-class turbines sales along with a $0.2 million increase in service revenue partially offset by $1.4 million decrease in other revenue. We recognized revenue on 109 units for the nine months ended September 30, 2017 as compared to 85 units for the nine months ended September 30, 2016. The increase in turbine sales was driven by demand in the Italian market in the first half of the year as customers were seeking to grid connect prior to the June 30, 2017 reduction in the feed-in-tariff. The reduction of the feed-in-tariff, together with the delay and uncertainty surrounding establishing a new Italian law regarding feed-in-tariff programs has slowed down Italian orders during the third quarter of the year.

 

Our international revenue was $25.8 million for the nine months ended September 30, 2017 as compared to $22.6 million for the nine months ended September 30, 2016, representing 94% and 87% of our revenues for those periods, respectively. We expect the majority of our revenue to continue to be outside of the U.S. for the foreseeable future. A portion of our revenues continue to be denominated in currencies other than our reporting currency, the U.S. dollar, which increased to 93% of total revenues for the nine months ended September 30, 2017 as compared to 65% of total revenues for the same period in 2016. We expect to see a continued significant proportion of our revenues denominated in euro and other non-U.S. dollar currencies as we expect international sales to exceed domestic. We are currently experiencing positive movement between the euro and the U.S. dollar, which has a favorable effect on our revenue.

 

During the nine months ended September 30, 2017, we executed 46 new distributed-class turbine sales orders. During the nine months ended September 30, 2016, we executed 86 new distributed-class turbine sales orders. Our deferred revenues balance at September 30, 2017 was $5.5 million which is included in the backlog value disclosed above. At December 31, 2016, such balance was $4.2 million.

 

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

 

Cost of product revenues and cost of services revenues collectively decreased by $1.3 million or 5% in the nine months ended September 30, 2017 to $22.4 million as compared to $23.7 million in the nine months ended September 30, 2016. The lower cost of revenue is the result of reductions in freight costs, turbine warranty and manufacturing expenses offset by the higher number of units sold for the nine months ended September 30, 2017 as compared to the same period in 2016. Our cost of product revenues was $19.9 million along with $2.5 million of related service cost for the nine months ended September 30, 2017 compared to $20.9 million for product sales and $2.8 million for related service cost for the same period in 2016.

 

Gross Profit (dollars in millions)

 

Gross profit increased $2.7 million in the nine months ended September 30, 2017 to $5.0 as compared to $2.3 million during the nine months ended September 30, 2016. This change was due to an increase in the volume of sales combined with a reduction in product costs.

 

Operating Expenses

 

Sales and Marketing

 

Sales and marketing expenses decreased by $0.6 million or 23% to $2.0 million for the nine months ended September 30, 2017 from $2.6 million for the same period in 2016. This decrease is principally due to $0.2 million reduction in compensation and benefits, $0.1 million in travel and $0.3 million in other sales and marketing expenses resulting from cost cutting efforts enacted during 2016.

 

Research and Development Expenses

 

Research and development expenses decreased by $0.6 million or 27% to $1.6 million for the nine months ended September 30, 2017 from $2.2 million for the same period in 2016. The reduction in research and development expense is primarily from a decrease in compensation and benefits of $0.8 million as a result of lower headcount related to our sale of utility wind assets in the fourth quarter of 2016 offset by $0.2 million increase in consulting expenses during 2017.

 

General and Administrative Expenses

 

General and administrative expenses decreased by $1.9 million or 37% to $3.2 million for the nine months ended September 30, 2017 from $5.1 million for the same period in 2016. This decrease is principally due to $1.0 million lower compensation and benefits from reduced head count, $0.8 million in severance, $0.2 million in legal expense and $0.1 million in consulting expense resulting from successful cost cutting efforts in 2016 offset by an increase in professional fees of $0.1 million and other G&A expenses of $0.1 million.

 

Gain on Sale of Assets

 

Gain on sale of assets was $1.1 million for the nine months ended September 30, 2017 as compared to $0 million for the same period in 2016. The gain on sale of assets reflects royalty payments related to the sale of certain utility wind assets in the fourth quarter of 2016.

 

Loss from Operations

 

Our loss from operations decreased by $6.9 million to $0.7 million for the nine months ended September 30, 2017 compared to $7.6 million for the same period in 2016. The decrease in loss from operations is due to an increase in gross profit, a reduction in operating expenses and increase in gain on sale.

 

Other Expense and Interest Expense

 

Other expenses for the nine months ending September 30, 2017 was unchanged at $0.3 million compared to the same period in 2016. Foreign exchange loss increased $0.2 million offset by a decrease in other expenses and interest in the nine months ended September 30, 2017 when compared to the same time period in 2016.

 

Income Tax Expense

 

Income tax expense was $0.1 million for the nine months ended September 30, 2017 and $0.3 million for the same period in 2016. The decrease is the result of lower Brazilian income tax expense incurred on certain license and royalty revenue earned in Brazil in 2016.

 

Net Loss

 

Net loss decreased by $7.0 million or 86%, to $1.1 million for the nine months ended September 30, 2017 from a net loss of $8.1 million for the same period in 2016. The improvement in our net loss for the nine months ended September 30, 2017, is primarily due to the decrease improvement in margin, cost cutting efforts and decrease in income tax expense as noted above.

 

Cash and Cash Equivalents

 

As of September 30, 2017, we had cash and cash equivalents of $5.8 million of which $1.0 million was held by a foreign holding company and subsidiaries. We had cash and cash equivalents of $5.4 million of which $0.4 million was held by a foreign subsidiary as of December 31, 2016.

 

We have historically experienced recurring operating losses and had an accumulated deficit of $178.4 million as of September 30, 2017. We have experienced recurring negative operating cash flows, which has resulted in decreases in our cash balance. In addition, the Company’s line of credit is scheduled to mature on December 31, 2017. 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 and 2017 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. We have begun negotiating an extention and 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. The Company believes that the actions taken have alleviated the substantial doubt about the Company’s ability to continue as a going concern. The Company has sufficient resources to operate through at least November of 2018. 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, share-based compensation, and changes in working capital and other activities. In addition to the decrease in net loss, cash used in operations increased as described below as a result of working capital needs.

 

For the nine months ended September 30, 2017, net cash used in operating activities increased by $0.2 million to $2.2 million from $2.0 million for the nine months ended September 30, 2016. Cash used in operating activities for 2017 is primarily due to the net loss, net of non-cash adjustments of $1.6 million and the effects of changes in operating assets and liabilities resulting in a cash outflow of $0.6 million. Included in these changes in operating assets and liabilities was an increase in deferred cost of $1.2 million, inventory increased $0.6 million, $0.9 reduction in accrued expenses and a decrease of $3.0 million in customer deposits, offset by an increase in accounts payable of $3.4 million, an increase of $1.5 million in deferred revenue and other short term liability, and a decrease of $0.2 million in other balance sheet accounts. These changes in cash from operations were funded in part by the draw on the line of credit noted below.

 

Investing Activities

 

Net cash provided by investing activities was $2.3 million for the nine months ended September 30, 2017 as compared to $0.2 million used in investing activities for the same period in 2016. During the nine months ended September 30, 2017, we received proceeds related to the sale of certain utility wind assets of $2.6 million offset by $0.3 million of property and equipment additions, while the same period of 2016 reflects purchases of property and equipment of $0.2 million.

 

Financing Activities

 

For the nine months ended September 30, 2017, net cash provided by financing activities was $0.3 compared to net cash used of $1.0 million for the nine months ended September 30, 2016. We had repayments of $6.4 million and borrowings of $6.7 million on our working capital revolving line of credit for the period ended September 30, 2017.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements and did not have any such arrangements at September 30, 2017.

 

Contractual Obligations

 

As described below, our long-term debt obligations were zero as of September 30, 2017 and December 31, 2016. We have $1.9 million outstanding on our working capital revolving line of credit and a $0.1 million outstanding performance letter of credit and warranty guarantee, as of September 30, 2017, which is described below in the Comerica Credit Facility section. In June 2017, the Company entered into a new lease agreement for its headquarters and production facility in Barre, Vermont, with a reduction in rent payments and rented square footage. The lease term commenced on August 1, 2017 and expires July 31, 2020.

 

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 September 30, 2017 and December 31, 2016, we had $1.9 million and $1.6 million, respectively, outstanding on the working capital revolving line of credit. At September 30, 2017, we had a net maximum supported borrowing base of $0.1 million remaining. To facilitate certain financing arrangements that our Italian customers have with third parties, we may 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 decrease 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 decrease the borrowing base by 100% less the amount of cash collateral held by the bank to secure warranty letters of credit. At September 30, 2017, we had $0.1 million of guarantees outstanding with one customer.

 

The working capital line of credit 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 September 30, 2017, we had unencumbered liquid assets having a value of $5.8 million.

 

As of September 30, 2017, we were in compliance with the covenants contained in our working capital line of credit.

 

Our current line of credit expires on December 31, 2017. We have begun negotiating an extention and 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.

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

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

 

Item 4.

Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Operating Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As more fully set forth in Part II Item 9A, “Controls and Procedures,” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2016 because we identified three material weaknesses. 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. In addition, 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 Company made enhancements to existing internal controls, improved the quality and timing of the accounting close process and continues to assess the resource needs of the department while engaging the appropriate accounting and financial expertise. We believe we have developed the appropriate operational and procedural controls in our review process to provide reasonable assurance that our financial controls over financial reporting are designed in the most effective and efficient manner possible to reduce the risk of financial statement misstatement. However, we are currently performing our test of controls and we need to complete our testing in order for us to conclude with reasonable assurance that the controls are operating effectively and in a timely manner. We expect to complete the testing during the remainder of 2017.

 

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

 

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

 

Based on the evaluation of our financial reporting controls, our Principal Executive Officer and Principal Financial Officer concluded that, our financial reporting controls were not effective as of September 30, 2017. The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

 

Changes in Internal Control over Financial Reporting

 

There have been no material changes in the Company’s internal control over financial reporting during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item  1.

Legal Proceedings

 

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

 

Item  1A.

Risk Factors

 

There are no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 000-55184) filed with the SEC on March 31, 2017.

 

Item  2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.

Defaults Upon Senior Securities

 

None

 

Item  4.

Mine Safety Disclosures

 

Not applicable

 

Item  5.

Other Information

 

None

 

Item  6.

Exhibits

 

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

 

SIGNATURES

 

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

 

		Northern Power Systems Corp.
		(Registrant)
Date: November 13, 2017		By:	/s/ Ciel R. Caldwell
			Ciel R. Caldwell
			President and Chief Operating Officer (Principal Executive Officer)

 

Date: November 13, 2017		By:	/s/ Eric Larson
			Eric Larson
			Vice President and Chief Accounting Officer (Principal Financial Officer)

 

 

 

EXHIBIT INDEX

 

Exhibit Number	Exhibit Description
10.1 (1)	Lease, dated June 22, 2017 between Northern Power Systems Corp and Malone 29 Pitman Road Properties, LLC
31.1 X	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.
31.2 X	Principal Financial Officer — Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 *	Principal Executive Officer — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 *	Principal Financial Officer— Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS **	XBRL Instance Document.
101.SCH **	XBRL Taxonomy Extension Schema Document.
101.CAL **	XBRL Taxonomy Calculation Linkbase Document.
101.DEF **	XBRL Definition Linkbase Document.
101.LAB **	XBRL Taxonomy Label Linkbase Document.
101.PRE **	XBRL Taxonomy Presentation Linkbase Document.

 

X

Filed herewith

*

Furnished herewith

**

Submitted electronically herewith

(1)

Incorporated herein by reference to Exhibit 10.1 to the registrant’s current report Form 8-K filed June 23, 2017

 

Attached as Exhibits 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i)  Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016 (unaudited) and (ii)  Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016 (unaudited), (iii)  Consolidated Statements of Changes in Shareholders’ Deficiency for the nine months ended September 30, 2017 (unaudited), (iv)  Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

 

 

 

 

 

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