TPI COMPOSITES, INC (Form: 10-Q, Received: 11/09/2016 16:45:16)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2016

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

Commission File Number 001-37839

TPI Composites, Inc.

(Exact name of registrant as specified in its charter)

Delaware

20-1590775

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

8501 N. Scottsdale Rd.

Gainey Center II, Suite 100

Scottsdale, AZ 85253

(480) 305-8910

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

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

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

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

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒ (Do not check if a smaller reporting company)	Smaller reporting company	☐

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

As of October 31, 2016, there were 33,736,863 shares of common stock outstanding.

TPI COMPOSITES, INC. AND SUBSIDIARIES

INDEX

		Page

PART I. FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	1

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015	2

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015	3

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Nine Months Ended September 30, 2016	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	5

	Notes to Condensed Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	34

ITEM 4.	Controls and Procedures	35

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	36

ITEM 1A.	Risk Factors	36

ITEM 2.	Unregistered Sales of Securities and Use of Proceeds	37

ITEM 3.	Defaults Upon Senior Securities	37

ITEM 4.	Mine Safety Disclosures	37

ITEM 5.	Other Information	37

ITEM 6.	Exhibits	38

SIGNATURES		39

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

•

growth of the wind energy market and our addressable market;

•

the potential impact of General Electric’s pending acquisition of LM Wind Power upon our business;

•

our future financial performance, including our net sales, cost of goods sold, gross profit or gross margin, operating expenses, ability to generate positive cash flow, and ability to achieve or maintain profitability;

•

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

•

our ability to attract and retain customers for our products, and to optimize product pricing;

•

competition from other wind blade manufacturers;

•

the discovery of defects in our products;

•

our ability to successfully expand in our existing markets and into new international markets;

•

worldwide economic conditions and their impact on customer demand;

•

our ability to effectively manage our growth strategy and future expenses;

•

our ability to maintain, protect and enhance our intellectual property;

•

our ability to comply with existing, modified or new laws and regulations applying to our business; and

•

the attraction and retention of qualified employees and key personnel.

These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We have described in the “Risk Factors” section of our Registration Statement on Form S-1 the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to update any forward-looking statement to reflect events or developments after the date on which the statement is made or to reflect the occurrence of unanticipated events except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

PART I—FINANCI AL INFORMATION

ITEM l. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

	September 30, 2016			December 31, 2015
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	106,802		$	45,917
Restricted cash		2,409			1,760
Accounts receivable		100,150			72,913
Inventories		58,824			50,841
Inventories held for customer orders		48,203			49,594
Prepaid expenses and other current assets		26,415			31,337
Total current assets		342,803			252,362
Property, plant, and equipment, net		78,635			67,732
Other noncurrent assets		17,655			9,826
Total assets	$	439,093		$	329,920
Liabilities and Shareholders’ Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses	$	107,319		$	101,108
Accrued warranty		31,057			13,596
Deferred revenue		61,949			65,520
Customer deposits and customer advances		13,775			8,905
Current maturities of long-term debt		27,171			52,065
Total current liabilities		241,271			241,194
Long-term debt, net of debt issuance costs, discount and current maturities		83,751			77,281
Other noncurrent liabilities		4,287			3,812
Total liabilities		329,309			322,287
Commitments and contingencies (Note 11)
Convertible and senior redeemable preferred shares and warrants		—			198,830
Shareholders’ equity (deficit):
Preferred shares, $0.01 par value, 5,500 shares authorized, no shares issued or outstanding at September 30, 2016; no shares issued, outstanding or authorized at December 31, 2015		—			—
Common shares, $0.01 par value, 100,000 shares authorized and 33,737 shares issued and outstanding at September 30, 2016; 31,104 shares authorized and 4,238 shares issued and outstanding at December 31, 2015		337			—
Paid-in capital		291,186			—
Accumulated other comprehensive loss		(1,194	)		(25	)
Accumulated deficit		(180,545	)		(191,172	)
Total shareholders’ equity (deficit)		109,784			(191,197	)
Total liabilities and shareholders’ equity (deficit)	$	439,093		$	329,920

See accompanying notes to unaudited condensed consolidated financial statements.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

		Three Months Ended September 30,						Nine Months Ended September 30,
		2016			2015			2016			2015
	(Unaudited)
Net sales		$	198,938		$	161,578		$	569,303		$	406,906
Cost of sales			171,648			150,732			499,896			370,824
Startup and transition costs			5,088			3,011			11,449			15,546
Total cost of goods sold			176,736			153,743			511,345			386,370
Gross profit			22,202			7,835			57,958			20,536
General and administrative expenses			14,065			3,423			24,154			9,530
Income from operations			8,137			4,412			33,804			11,006
Other income (expense):
Interest income			27			11			76			149
Interest expense			(4,663	)		(3,620	)		(12,709	)		(10,894	)
Realized loss on foreign currency remeasurement			(243	)		(1,351	)		(700	)		(1,621	)
Miscellaneous income (expense)			(152	)		31			192			300
Total other expense			(5,031	)		(4,929	)		(13,141	)		(12,066	)
Income (loss) before income taxes			3,106			(517	)		20,663			(1,060	)
Income tax provision			(309	)		(1,630	)		(4,565	)		(2,734	)
Net income (loss)			2,797			(2,147	)		16,098			(3,794	)
Net income attributable to preferred shareholders			596			2,355			5,471			7,067
Net income (loss) attributable to common shareholders		$	2,201		$	(4,502	)	$	10,627		$	(10,861	)
Weighted-average common shares outstanding:
Basic			27,284			4,238			12,042			4,238
Diluted			27,375			4,238			12,133			4,238
Net income (loss) per common share:
Basic		$	0.08		$	(1.06	)	$	0.88		$	(2.56	)
Diluted		$	0.08		$	(1.06	)	$	0.88		$	(2.56	)

See accompanying notes to unaudited condensed consolidated financial statements.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(Unaudited)
Net income (loss)	$	2,797		$	(2,147	)	$	16,098		$	(3,794	)
Other comprehensive loss:
Foreign currency translation adjustments		(344	)		(1,678	)		(1,169	)		(3,311	)
Comprehensive income (loss)	$	2,453		$	(3,825	)	$	14,929		$	(7,105	)

See accompanying notes to unaudited condensed consolidated financial statements.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit)

(In thousands)

	Common				Paid-in		Accumulated Other Comprehensive			Accumulated
	Shares		Amount		Capital		Loss			Deficit			Total
	(Unaudited)
Balance at December 31, 2015		4,238	$	—	$	—	$	(25	)	$	(191,172	)	$	(191,197	)
Net income		—		—		—		—			16,098			16,098
Other comprehensive loss		—		—		—		(1,169	)		—			(1,169	)
Redeemable preferred shares fair value adjustment		—		—		—		—			(5,471	)		(5,471	)
Issuance of common stock sold in initial public offering (IPO), net of underwriters discount and offering costs		7,188		72		67,127		—			—			67,199
Conversion of convertible preferred shares into common stock upon consummation of IPO		21,110		253		202,993		—			—			203,246
Conversion of subordinated convertible promissory notes into common stock upon consummation of IPO		1,080		11		11,866		—			—			11,877
Conversion of redeemable preferred share warrants into common stock upon consummation of IPO		121		1		1,083		—			—			1,084
Share-based compensation expense		—		—		8,117		—			—			8,117
Balance at September 30, 2016		33,737	$	337	$	291,186	$	(1,194	)	$	(180,545	)	$	109,784

See accompanying notes to unaudited condensed consolidated financial statements.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

	Nine Months Ended September 30,
	2016			2015
	(Unaudited)
Cash flows from operating activities:
Net income (loss)	$	16,098		$	(3,794	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		9,703			8,471
Share-based compensation expense		8,117			—
Amortization of debt discount		3,018			2,264
Amortization of debt issuance costs		1,273			949
Changes in assets and liabilities:
Accounts receivable		(27,237	)		(30,779	)
Inventories		(6,592	)		4,627
Prepaid expenses and other current assets		4,922			(4,608	)
Other noncurrent assets		(6,900	)		5,558
Accounts payable and accrued expenses		6,339			25,528
Accrued warranty		17,461			3,672
Customer deposits		4,870			(5,336	)
Deferred revenue		(3,571	)		(3,387	)
Other noncurrent liabilities		475			345
Net cash provided by operating activities		27,976			3,510
Cash flows from investing activities:
Purchase of property and equipment		(18,917	)		(25,161	)
Net cash used in investing activities		(18,917	)		(25,161	)
Cash flows from financing activities:
Proceeds from issuance of common stock in initial public offering, net of underwriters discount and offering costs		67,199			—
Repayment of term loan		(617	)		(625	)
Net repayments of accounts receivable financing		(6,050	)		(4,738	)
Net repayments of working capital loans		(4,097	)		(7,972	)
Net proceeds from (repayments of) other debt		(3,415	)		1,131
Payments for acquisition of noncontrolling interest		—			(1,875	)
Restricted cash		(649	)		(642	)
Net cash provided by (used in) financing activities		52,371			(14,721	)
Impact of foreign exchange rates on cash and cash equivalents		(545	)		(263	)
Net change in cash and cash equivalents		60,885			(36,635	)
Cash and cash equivalents, beginning of year		45,917			43,592
Cash and cash equivalents, end of period	$	106,802		$	6,957
Supplemental disclosures of cash flow information:
Cash paid for interest	$	9,505		$	6,803
Cash paid for income taxes, net		5,191			2,786
Supplemental disclosures of noncash investing and financing activities:
Conversion of subordinated convertible promissory notes into common stock		11,877			—
Equipment acquired through capital lease and financing obligations		1,464			2,506
Accrued capital expenditures in accounts payable		3,610			733

See accompanying notes to unaudited condensed consolidated financial statements.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1. Summary of Operations and Significant Accounting Policies

Description of Business

TPI Composites, Inc. is the holding company that conducts substantially all of its business operations through its direct and indirect subsidiaries (collectively, the Company). The Company was founded in 1968 and has been producing composite wind blades since 2001. The Company’s knowledge and experience of composite materials and manufacturing originates with its predecessor company, Tillotson Pearson Inc., a leading manufacturer of high-performance sail and powerboats along with a wide range of composite structures used in other industrial applications. Following the separation from the boat building business in 2004, the Company reorganized in Delaware as LCSI Holding, Inc. and then changed its corporate name to TPI Composites, Inc. in 2008. Today, the Company is headquartered in Scottsdale, Arizona and has expanded its global footprint to include domestic facilities in Newton, Iowa; Fall River, Massachusetts; Warren, Rhode Island and Santa Teresa, New Mexico and international facilities in Dafeng, China; Taicang Port, China; Taicang City, China; Juárez, Mexico and Izmir, Turkey.

Initial Public Offering and Stock Split

In July 2016, the Company completed an initial public offering (IPO) of 7,187,500 shares of the Company’s common stock at a price of $11.00 per share, which included 937,500 shares issued pursuant to the underwriters’ over-allotment option. Certain of the Company’s existing shareholders, a director and executive officers purchased an aggregate of 1,250,000 shares of common stock in the IPO included in the total issuance above. The net proceeds from the IPO were $67.2 million after deducting underwriting discounts and offering expenses. Immediately prior to the closing of the IPO, all shares of the then-outstanding redeemable preferred shares converted into an aggregate of 21,110,204 shares of common stock and the redeemable preferred share warrants converted on a net issuance basis into 120,923 shares of common stock. In addition, concurrent with the closing of the IPO, certain subordinated convertible promissory notes in the aggregate principal and interest amount of $11.9 million were converted into 1,079,749 shares of common stock at the public offering price of $11.00 per share.

Prior to the IPO, in July 2016 the Company amended its amended and restated certificate of incorporation to effect a 360-for-1 forward stock split of its common stock. As a result of the stock split, the Company has adjusted the share amounts authorized and issuable under the share-based compensation plans. All share and per share common stock information (including the share-based compensation plans) referenced throughout the unaudited condensed consolidated financial statements and notes thereto have been retroactively adjusted to reflect this stock split. The stock split did not cause an adjustment to the par value of the authorized shares of common stock.

Basis of Presentation

The Company divides its business operations into four geographic operating segments—the United States, Asia, Mexico and EMEA, as follows:

•

The U.S. segment includes (1) the manufacturing of wind blades at the Newton, Iowa plant, (2) the manufacturing of precision molding and assembly systems used for the manufacture of wind blades in the Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry, which the Company also conducts in its Rhode Island and Massachusetts facilities and (4) its corporate headquarters, the costs of which are included in general and administrative expenses.

•

The Asia segment includes (1) the manufacturing of wind blades at a facility in Taicang Port, China and in two facilities in Dafeng, China, (2) the manufacturing of precision molding and assembly systems in the Taicang City, China facility, (3) the manufacture of components in a second Taicang Port, China facility and (4) wind blade inspection and repair services.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

•

The Mexico segment manufactures wind blades from two facilities in Juárez, Mexico , one of which commenced operations in early 2014 and the second during the third quarter of 2016 . The Mexico segment has also entered into a new lease agreement with a third party for a third manufacturing facility in Juárez, Mexico , and expects to commence operations in this new facility in the first quarter of 2017.

•

The EMEA segment manufactures wind blades from two facilities in Izmir, Turkey. The Company entered into a joint venture with ALKE Insaat Sanayive Ticaret A.S. (ALKE) in March 2012 to produce wind blades in the first Turkey plant and in December 2013 became the sole owner of the Turkey operation with the acquisition of the remaining 25% interest owned primarily by ALKE. The EMEA segment commenced operations in the second facility during the third quarter of 2016.

The accompanying consolidated financial statements include the accounts of TPI Composites, Inc. and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015 included in the Company’s Registration Statement on Form S-1. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted, as permitted by the SEC, although the Company believes the disclosures that are made are adequate to make the information presented herein not misleading. The accompanying condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at September 30, 2016, and the results of the Company’s operations, comprehensive income (loss) and cash flows for the periods presented. The Company derived the December 31, 2015 condensed consolidated balance sheet data from audited financial statements, but does not include all disclosures required by GAAP. Interim results for the three and nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results to be expected for the full years.

Warranty Expense

The Company provides a limited warranty for its precision molding and assembly systems and wind blade products, including parts and labor, with terms and conditions that vary depending on the product sold, for periods that range from two to five years. Warranty expense is recorded based upon estimates of future repairs using a probability-based methodology. Once the warranty period has expired, any remaining unused warranty accrual for the specific products is reversed against the current year warranty expense amount.

Warranty accrual consisted of the following (in thousands):

	2016
Warranty accrual at beginning of year	$	13,596
Accrual during the period		19,132
Cost of warranty services provided during the period		(385	)
Reduction of reserves		(1,286	)
Warranty accrual at end of the period	$	31,057

In June 2016, the Company entered into a settlement agreement and release with one of its customers to resolve a potential warranty claim related to wind blades primarily manufactured in 2014 in the Company’s Turkey facility. The settlement agreement and release requires the Company to make a cash payment to the customer, replace or repair a specified number of wind blades and provide margin concessions on certain products to be produced by the Company. The expected aggregate cost to the Company of fulfilling its obligations under the settlement agreement and release is estimated to be $15.0 million, all of which has been accrued.

Net Income Per Share Calculation

The basic net income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during a period. Diluted net income per common share is computed by dividing the net income, adjusted on an as-if-converted basis, by the weighted-average number of common shares outstanding plus potentially dilutive securities. The table below

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

reflects the calculation of the weighted-average number of common shares outstanding, on an as if converted basis, used in computin g basic and diluted earnings per common share (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Basic weighted-average shares outstanding		27,284		4,238		12,042		4,238
Effect of dilutive stock options and warrants		91		—		91		—
Diluted weighted-average shares outstanding		27,375		4,238		12,133		4,238

The Company has potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect would be anti-dilutive for the three and nine months ended September 30, 2015. The potentially dilutive securities excluded from the calculation include common shares issued upon conversion or exercise of options and warrants.

Assuming that the IPO had occurred on January 1, 2015, diluted earnings per share would have been $0.08 and a loss of $0.06 for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, diluted earnings per share would have been $0.48 and a loss of $0.11, respectively.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers , (Topic 606), which provides new recognition and disclosure requirements for revenue from contracts with customers that supersedes the existing revenue recognition guidance. The new recognition requirements focus on when the customer obtains control of the goods or services, rather than the current risks and rewards model of recognition. The core principle of the new standard is that an entity will recognize revenue when it transfers goods or services to its customers in an amount that reflects the consideration an entity expects to be entitled to for those goods or services. The new disclosure requirements will include information intended to communicate the nature, amount, timing and any uncertainty of revenue and cash flows from the applicable contracts, including any significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. Entities will generally be required to make more estimates and use more judgment under the new standard.

The new requirements are effective for the Company beginning January 1, 2018, and may be implemented either retrospectively for all periods presented, or as a cumulative-effect adjustment as of the date of adoption. Adoption as of January 1, 2017 is permitted.

The Company expects to adopt Topic 606 as of January 1, 2017 with retrospective application to January 1, 2015 through December 31, 2016. Based on the Company’s preliminary evaluation of the new standard, revenue recognition in accordance with Topic 606 differs from the current guidance provided by GAAP as outlined in the SEC’s Staff Accounting Bulletin 104, which requires the Company to defer recognition of revenue until the risk of loss has passed to the customer and delivery has been made or a fixed delivery schedule has been provided by the customer. Since the Company’s products have no alternative use to the Company due to contractual restrictions placed by each customer on the technical specifications and design of the products, the Company’s preliminary assessment is that revenue upon adoption of Topic 606 will likely be recognized over time during the course of the production process and before the product is delivered to the customer.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

The Company expects that the adoption of Topic 606 will have a material impact on the amount of net sales, cost of goods sold and income from operations reported in the Statements of Operations in future periods. In accordance with Topic 606, revenues will be recognize d over the time period of the production p rocess , whereas currently it is recognize d upon delivery to the client. Further, since revenue will be recognized over time for manufacturing contracts, future net sales will include amounts related to products that are in production as of the period end. Finally, the gross margin realized in the period may be impact ed by the changes related to the timing and amount of revenue recognized for products in the production process .

The changes noted above involving the timing of revenue recognition will materially impact the amount of reported assets and liabilities associated with our manufacturing contracts. Upon adoption of Topic 606, the Company will include amounts recognized in revenue for products in production in contract assets, which differs from the current practice of including the balances in inventory and will include an amount for the margin recognized to date. The Company believes that it will no longer report inventory held for customer orders since revenue will be recognized over time during the course of the production process and before the product is delivered to the customer. Contract liabilities will be reported for amounts collected from customers in advance of the production of products. The amount of deferred revenue will be substantially reduced as revenue for products will be recognized over time.

The Company does not anticipate a change in the timing of cash receipts and payments from customers as customers will continue to be invoiced as products are completed; however, the impact to the amounts reported in the statements of cash flows operating activities upon application of Topic 606 is expected to be material.

The Company has a project plan in place for the transition to revenue recognition in accordance with Topic 606 including necessary changes to accounting processes and procedures, the chart of accounts, the system of internal control and retrospective application of the standard to periods beginning December 31, 2014 through December 31, 2016. The Company expects to complete the plan in time to report in accordance with Topic 606 for the first quarterly filing on Form 10-Q for the period ended March 31, 2017.

Share-Based Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting . ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This standard is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating if the impact of ASU 2016-09 will have a material effect on the Company’s financial positions or results of operations.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases , (Topic 842). ASU 2016-02 is a comprehensive new recognition model for leases requiring a lessee to recognize the asset and liability that arise from leases. For public companies, the amendment is effective for financial statements issued for annual periods beginning after December 16, 2018. Entities may elect to early adopt the lease standard in 2016. In adopting ASU 2016-02, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. Management is evaluating the provisions of ASU 2016-02 and has not yet selected a transition method nor determined what impact the adoption of ASU 2016-02 will have on the Company’s financial position or results of operations.

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments . ASU 2016-13 revises the accounting requirements related to the measurement of credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years and interim periods within those years, beginning after December 15, 2018. Accordingly, ASU 2016-13 is effective for the Company on January 1, 2020 using a modified retrospective approach, and the Company is currently evaluating the impact that the standard will have on the Company’s financial positions and results of operations.

Note 2. Significant Risks and Uncertainties

The Company’s revenues and receivables are from a small number of customers. As such, the Company’s production levels are dependent on these customers’ orders. See note 12, Concentration of Customers.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

The Company maintains its U.S. cash in bank deposit accounts that, at times, exceed U.S. federally insured limits. U.S. bank accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) in an amount up to $250,000 d uring 2016 and 2015. At September 30, 2016 and December 31, 2015, the Company had $ 89.8 million and $33.2 million, respectively, of cash in deposit accounts in U.S. banks, which was in excess of FDIC limits. The Company has not experienced losses in any such accounts in the past.

The Company also maintains cash in bank deposit accounts outside the U.S. with no deposit insurance. This includes $10.6 million in China, $5.8 million in Turkey and $0.6 million in Mexico as of September 30, 2016. The Company has not experienced losses in these accounts in the past.

Note 3. Related-Party Transactions

Related party transactions include transactions between the Company and certain of its affiliates. The following transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the parties.

The Company has entered into several agreements with subsidiaries of General Electric Company and consolidated affiliates (GE) for the manufacture and supply of wind blades. In October 2016, the Company extended the term of certain of its supply agreements with GE through December 31, 2020 and entered into a new supply agreement as described in note 14, Subsequent Events . GE currently owns 8.4% of the Company’s common stock outstanding as of September 30, 2016.

For the three months ended September 30, 2016 and 2015, the Company recorded related-party sales with GE of $98.1 million and $82.2 million, respectively, and for the nine months ended September 30, 2016 and 2015, the Company recorded related-party sales with GE of $292.4 million and $213.9 million, respectively. The Company has entered into five separate supply agreements with GE to manufacture wind blades in Newton, Iowa; Taicang Port, China; Juárez, Mexico (2) and Izmir, Turkey. As a result of the supply agreements, GE is the Company’s largest customer. As of September 30, 2016 and December 31, 2015, the Company had accounts receivables related to sales to GE of approximately $29.2 million and $19.0 million, respectively.

In January 2016, the Company entered into an agreement with GE and received an advance of $2.0 million, which the Company repaid in full in August 2016.

Certain of the Company’s existing stockholders, consisting of entities associated with Element Partners, Angeleno Group and Landmark Partners, each of which is an affiliate of a member of the board of directors, as well as certain executive officers and a director, purchased an aggregate of 1,250,000 shares of common stock in the IPO. In addition, all outstanding obligations under the Company’s subordinated convertible promissory notes, including accrued interest, held by certain existing stockholders, including Element Partners, Angeleno Group and Landmark Partners, were converted into an aggregate of 1,079,749 shares of common stock concurrent with the closing of the IPO at the public offering price of $11.00 per share.

Note 4. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

	September 30, 2016		December 31, 2015
Trade accounts receivable	$	99,139	$	71,588
Other accounts receivable		1,011		1,325
Total accounts receivable	$	100,150	$	72,913

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Note 5. Inventories

Inventories consisted of the following (in thousands):

	September 30, 2016		December 31, 2015
Raw materials	$	29,934	$	29,022
Work in process		20,359		16,630
Finished goods		8,531		5,189
Total inventories	$	58,824	$	50,841

Note 6. Property, Plant, and Equipment, Net

Property, plant and equipment, net consisted of the following (in thousands):

	September 30, 2016			December 31, 2015
Machinery and equipment	$	54,771		$	49,078
Buildings		13,867			14,047
Leasehold improvements		17,656			14,259
Office equipment and software		3,960			3,691
Furniture		16,032			15,140
Vehicles		345			279
Construction in progress		14,513			4,660
Total		121,144			101,154
Accumulated depreciation and amortization		(42,509	)		(33,422	)
Property, plant and equipment, net	$	78,635		$	67,732

Total depreciation and amortization for the three months ended September 30, 2016 and 2015 was $3.5 million and $3.2 million, respectively, and for the nine months ended September 30, 2016 and 2015 was $9.7 million and $8.5 million, respectively.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7. Long-Term Debt, Net of Debt Issuance Costs and Discount

Long-term debt, net of debt issuance costs and discount, consisted of the following (in thousands):

	September 30, 2016			December 31, 2015
Senior term loan—U.S.	$	73,758		$	74,375
Accounts receivable financing—Turkey		21,077			20,505
Working capital loans—Turkey		14,022			—
Equipment capital lease—U.S.		2,903			2,678
Equipment capital lease—Turkey		1,801			2,879
Equipment loan—Mexico		117			164
Construction financing—Mexico		100			1,204
Equipment capital lease—Mexico		91			37
Subordinated convertible promissory notes—U.S.		—			10,000
Working capital loans—China		—			9,548
Unsecured financing—Turkey		—			8,572
Accounts receivable financing—China		—			6,622
Total long-term debt		113,869			136,584
Less: Debt issuance costs		(2,947	)		(4,220	)
Less: Discount on debt		—			(3,018	)
Total long-term debt, net of debt issuance costs and discount		110,922			129,346
Less: Current maturities of long-term debt		(27,171	)		(52,065	)
Long-term debt, net of debt issuance costs, discount and current maturities	$	83,751		$	77,281

As discussed in note 1, concurrent with the closing of the Company’s IPO, the principal and accrued interest on the outstanding subordinated convertible promissory notes were converted into an aggregate of 1,079,749 shares of common stock at the public offering price of $11.00 per share. In connection with this conversion, the remaining beneficial conversion feature, debt discount and debt issuance costs totaling $1.3 million were fully expensed as interest expense in the accompanying condensed consolidated statements of operations.

TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

Note 8. Convertible and Senior Redeemable Preferred Shares and Warrants

The convertible and senior redeemable preferred shares and warrants outstanding as of December 31, 2015 automatically converted to common shares immediately prior to the closing of the IPO, consisted of the following (in thousands, except share and par value data):

	December 31, 2015
Series A convertible preferred shares (convertible at 1 share to 3.4974 shares of common stock), $0.01 par value; liquidation preference equal to $50,901; 3,551 shares authorized; 3,551 shares issued and outstanding at December 31, 2015	$	50,901
Series B convertible preferred shares (convertible at 1 share to 3.5636 shares of common stock), $0.01 par value; liquidation preference equal to $41,200; 2,813 shares authorized; 2,287 shares issued and outstanding at December 31, 2015		41,200
Series B-1 convertible preferred shares (convertible at 1 share to 5.0243 shares of common stock), $0.01 par value; liquidation preference equal to $52,510; 2,972 shares authorized; 2,972 shares issued and outstanding at December 31, 2015		52,510
Series C convertible preferred shares (convertible at 1 share to 3.2817 shares of common stock), $0.01 par value; liquidation preference equal to $17,490; 2,944 shares authorized; 2,944 shares issued and outstanding at December 31, 2015		17,490
Senior redeemable preferred shares (convertible at 1 share to 13.2211 shares of common stock), $0.01 par value; liquidation preference equal to $64,722; 740 shares authorized; 740 shares issued and outstanding December 31, 2015		27,585
Super senior redeemable preferred shares (convertible at 1 share to 13.2211 shares of common stock), $0.01 par value; liquidation preference equal to $22,141; 1,024 shares authorized; 280 shares issued and outstanding at December 31, 2015		8,060