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

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

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

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

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

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

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

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

Recent Accounting Pronouncements

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

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

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

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

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

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

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

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

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

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

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Performance obligations -

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

Allocation of contract value -

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

Timing of revenue recognition -

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

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

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

Contract balances –

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

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

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

Practical Expedients and Exemptions –

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

Disaggregation of Revenue –

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Accrued expenses consist of:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The Company recognizes in its consolidated financial statements only those tax positions that are “more likely than not” of being sustained upon examination by taxing authorities, based on the technical merits of the position. As of June 30, 2018, there are no uncertain tax positions. In addition, there are no amounts required to be included in the financial statements for interest or penalties on uncertain tax positions.

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

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

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

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

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

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

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

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

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