NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
1. Description of Business and Basis of Presentation
Description of Business
EnerNOC, Inc. (the Company) is a leading provider of energy intelligence software (EIS) and demand response solutions to enterprises, utilities, and electric power grid operators.
The Company’s EIS provides enterprises with a Software-as-a-Service (SaaS) energy management application that enables them to better manage and control energy costs for their organizations. The Company's EIS provides utilities with a SaaS customer engagement application that enables them to better engage their customers, deliver savings and consumption reductions to help achieve energy efficiency mandates, manage system peaks and grid constraints, and increase demand for utility-provided products and services. In addition, the Company offers premium professional services that support the implementation of its EIS and help its enterprise customers set their energy management strategy; the Company's professional services offerings also include energy audits and retro-commissioning.
The Company’s demand response solutions provide utilities and electric power grid operators with a managed service demand response resource that matches obligation, in the form of megawatts (MWs) that the Company agrees to deliver to utilities and/or electric power grid operators, with supply, in the form of MWs that are curtailed from the electric power grid through the Company's arrangements with commercial and industrial end-users of energy (C&I end‑users). The Company’s demand response solutions are also capable of providing utilities with the underlying technology to manage their own utility-sponsored demand response programs and secure reliable demand-side resources.
Reclassifications
Effective during the first quarter of 2016, the Company began operating as
two
reportable segments: Software and Demand Response. The Company has updated the presentation of the revenue categories on its consolidated statement of operations for the period ended
March 31, 2016
to present revenue for each of these segments. The Company has reclassified prior period revenue categories to conform with the current period presentation. This reclassification had no impact on total revenue or any other income statement result. For further discussion regarding the Company's reorganization and the impact on segment reporting, please refer to Note 2.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries and have been prepared by the Company in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Inter-company transactions and balances are eliminated in consolidation. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements and accompanying notes. The Company owns
60%
of EnerNOC Japan K.K., for which it consolidates the results of operations and financial position in the accompanying financial statements. The remaining
40%
represents a noncontrolling interest in the accompanying unaudited condensed consolidated balance sheets and statements of operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management relate to revenue recognition reserves, allowances for doubtful accounts, expected future cash flows used to evaluate the recoverability of long-lived assets, amortization methods and periods, valuation of cost-method investments, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, may vary from these estimates.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (2015 Form 10-K).
Recently Adopted Accounting Standards
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
(ASU 2015-05)
.
ASU 2015-05 amends Accounting Standards Codification (ASC) 350-40,
Internal Use Software
, to exclude cloud-computing arrangements from its scope. The guidance was effective as of January 1, 2016 for arrangements entered into or materially modified after the effective date. The Company adopted this standard prospectively in the interim period ended March 31, 2016. The adoption of ASU 2015-05 did not have an impact on the Company's consolidated financial statements.
2. Segment Information
Effective in the first quarter of
2016
, the Company began operating as
two
reportable segments: Software and Demand Response. The Company’s Chief Operating Decision Maker (CODM), who the Company has identified as its Chief Executive Officer, primarily evaluates the business and assesses performance based on the revenue and adjusted EBITDA of the Company's Software and Demand Response segments. The Company defines segment adjusted EBITDA as segment income (loss) excluding depreciation and asset impairments, amortization of intangible assets and stock-based compensation. The Company does not allocate interest, taxes, and certain corporate-level costs to its reportable segments, as discussed further below. Management considers adjusted EBITDA to be an important indicator of the segment's operational strength and the performance of its business.
The financial results of each segment are based on revenues from external customers, cost of revenue and operating expenses that are directly attributable to the segment and an allocation of costs from shared functions. These shared functions include, but are not limited to, facilities, human resources, information technology, and engineering. Allocations are made based on management’s judgment of the most relevant factors, such as head count, number of customer sites, or other operational data that contributes to the shared costs. Certain corporate-level costs have not been allocated as they are not attributable to either segment. These costs primarily consist of broad corporate functions, including executive, legal, finance, and costs associated with corporate acquisitions and divestitures. Segment-level asset information has not been provided as such information, other than goodwill, is not reviewed by the CODM for purposes of assessing segment performance and allocating resources. There are
no
inter-segment sales or transactions. The accounting policies of the reportable segments are consistent with those described in Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” in the Company's 2015 Form 10-K.
The following is a description of the Company's
two
reportable segments:
Software Segment
The Software segment provides enterprises and utilities with the Company's EIS, which includes subscription software, energy procurement solutions, and professional services. The Software segment is responsible for developing and maintaining the Company's software platform; selling and marketing to enterprise and utility customers; supporting customer relationships and managing customer projects; delivering software implementations, trainings, and other professional services; and managing contracting, invoicing and collection activities related to Software customer contracts.
Demand Response Segment
The Demand Response segment provides utilities and electric power grid operators with the Company’s demand response solutions. The Demand Response segment is responsible for developing and shaping demand response markets and securing future demand response obligations; procuring MWs that are available for curtailment through arrangements with C&I end-users; installing and maintaining a network of EnerNOC site servers to collect energy data from C&I end-users for use in the management of demand response programs; providing C&I end-users and certain utility customers with software tools to manage their demand response activities; coordinating the curtailment of MWs for delivery to utilities and electric power grid operators when called upon; and financially settling with utilities, electric power grid operators, and C&I end-users.
The following table presents segment revenue and segment adjusted EBITDA, along with the reconciliation of segment adjusted EBITDA to consolidated loss before income tax:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Revenues:
|
2016
|
|
2015
|
Software
|
|
|
|
Subscription software
|
$
|
6,176
|
|
|
$
|
4,487
|
|
Procurement solutions
|
8,933
|
|
|
8,621
|
|
Professional services
|
1,924
|
|
|
4,309
|
|
Total Software Revenues
|
17,033
|
|
|
17,417
|
|
|
|
|
|
Demand Response
|
|
|
|
Grid operator
|
26,812
|
|
|
23,746
|
|
Utility
|
9,535
|
|
|
9,388
|
|
Total Demand Response Segment Revenues
|
36,347
|
|
|
33,134
|
|
|
|
|
|
Consolidated Revenues
|
$
|
53,380
|
|
|
$
|
50,551
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Segment Adjusted EBITDA:
|
|
|
|
Software adjusted EBITDA
|
$
|
(18,007
|
)
|
|
$
|
(20,246
|
)
|
Demand Response adjusted EBITDA
|
(3,484
|
)
|
|
(6,416
|
)
|
Total Segment adjusted EBITDA
|
(21,491
|
)
|
|
(26,662
|
)
|
Corporate unallocated expenses
|
(5,671
|
)
|
|
(3,350
|
)
|
Depreciation and asset impairments
|
(6,402
|
)
|
|
(5,916
|
)
|
Amortization
|
(3,285
|
)
|
|
(3,918
|
)
|
Stock-based compensation expense
|
(3,115
|
)
|
|
(4,409
|
)
|
Direct and incremental expenses of acquisitions, divestitures and restructurings
|
(193
|
)
|
|
(1,382
|
)
|
Noncontrolling interest expense
|
(31
|
)
|
|
(4
|
)
|
Interest and other income (expense), net
|
1,310
|
|
|
(6,949
|
)
|
Consolidated loss before income tax
|
$
|
(38,878
|
)
|
|
$
|
(52,590
|
)
|
3. Goodwill and Intangible Assets
Goodwill
The following table shows the reallocation of goodwill to the new reportable segments and the foreign exchange impact on goodwill for the three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EnerNOC, Inc.
|
|
Demand Response
|
|
Software
|
|
Total Goodwill
1
|
Balance at December 31, 2015
|
$
|
39,747
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39,747
|
|
Transfers
|
(39,747
|
)
|
|
27,391
|
|
|
12,356
|
|
|
—
|
|
Foreign Exchange
|
—
|
|
|
990
|
|
|
140
|
|
|
1,130
|
|
Balance at March 31, 2016
|
$
|
—
|
|
|
$
|
28,381
|
|
|
$
|
12,496
|
|
|
$
|
40,877
|
|
1
Accumulated impairment losses as of December 31, 2015 and March 31, 2016 were
$108,763
.
As discussed in Note 1, in January 2016, the Company reorganized its reporting structure and began operating as
two
reportable segments: Software and Demand Response. Accordingly, goodwill was reallocated from the Company's prior
reporting units, which were defined as i) North America Software and Services and ii) International, to the new reporting units within the Software and Demand Response segments, as shown in the preceding table within "transfers." The reallocation was based on the relative fair value of each business group within its original reporting unit relative to the fair value of that reporting unit as of the date of the realignment. The Company concluded that goodwill was not impaired immediately preceding and following the realignment.
In future periods, the Company may be subject to factors that constitute a change in circumstances, indicating that the carrying value of goodwill could exceed fair value. These changes may consist of, but are not limited to, declines in the Company's stock price and a sustained decline the Company's market capitalization, reduced future cash flow estimates, an adverse action or assessment by a regulator and slower growth rates in the Company's industry. Any of these factors, or others, could require the Company to record a significant charge to earnings in the consolidated financial statements during the period in which any impairment of goodwill is determined, negatively impacting the Company's results of operations.
Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of the Company's definite-lived intangible assets as of
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2016
|
|
As of December 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Customer relationships
|
$
|
61,719
|
|
|
$
|
(28,558
|
)
|
|
$
|
60,938
|
|
|
$
|
(26,043
|
)
|
Customer contracts
|
8,232
|
|
|
(7,231
|
)
|
|
8,042
|
|
|
(6,786
|
)
|
Employment and non-compete agreements
|
3,085
|
|
|
(2,409
|
)
|
|
3,055
|
|
|
(2,283
|
)
|
Software
|
170
|
|
|
(170
|
)
|
|
170
|
|
|
(170
|
)
|
Developed technology
|
24,710
|
|
|
(7,872
|
)
|
|
24,168
|
|
|
(6,867
|
)
|
Trade name
|
1,096
|
|
|
(1,082
|
)
|
|
1,087
|
|
|
(1,035
|
)
|
Patents
|
180
|
|
|
(108
|
)
|
|
180
|
|
|
(104
|
)
|
Total
|
$
|
99,192
|
|
|
$
|
(47,430
|
)
|
|
$
|
97,640
|
|
|
$
|
(43,288
|
)
|
Amortization expense related to definite-lived intangible assets was
$3,285
and
$3,918
for the
three months ended
March 31, 2016
and
2015
, respectively. Amortization expense for acquired developed technology, which was
$861
and
$990
for the
three months ended
March 31, 2016
and
2015
, respectively, is included in cost of revenues in the consolidated statements of operations. Amortization expense for all other intangible assets is included as a component of operating expenses in the consolidated statements of operations. Definite-lived intangible asset lives range from
1
to
15
years and have a weighted average remaining life of
5.7
years at
March 31, 2016
.
4. Net Loss Per Share
Computation of basic and diluted net loss per share is as follows (in thousands, except share and per share information):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
Numerator:
|
2016
|
|
2015
|
Net loss for basic earnings per share
|
$
|
(40,538
|
)
|
|
$
|
(50,301
|
)
|
ADD: Interest expense related to convertible notes
|
—
|
|
|
—
|
|
Net loss for diluted earnings per share
|
$
|
(40,538
|
)
|
|
$
|
(50,301
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
Basic weighted average common shares outstanding
|
28,806,810
|
|
|
28,007,756
|
|
Weighted average common stock equivalents
|
—
|
|
|
—
|
|
Diluted weighted average common shares outstanding
|
28,806,810
|
|
|
28,007,756
|
|
|
|
|
|
Basic net loss per share
|
$
|
(1.41
|
)
|
|
$
|
(1.80
|
)
|
Diluted net loss per share
|
$
|
(1.41
|
)
|
|
$
|
(1.80
|
)
|
|
|
|
|
Weighted average Anti-dilutive shares related to:
|
|
|
|
Incremental shares from assumed conversion of convertible notes
|
4,576,630
|
|
|
5,774,928
|
|
Stock options
|
322,245
|
|
|
402,104
|
|
Nonvested restricted stock
|
1,737,777
|
|
|
1,604,473
|
|
Restricted stock units
|
49,299
|
|
|
45,624
|
|
In reporting periods for which the Company reports a net loss, anti-dilutive shares consist of shares that would have been dilutive had the Company had net income, plus the number of common stock equivalents that would have been anti-dilutive had the Company had net income. In reporting periods for which the Company reports net income, anti-dilutive shares consist of those common stock equivalents that have either an exercise price above the average stock price for the period or the common stock equivalents’ related average unrecognized stock compensation expense is sufficient to “buy back” the entire amount of shares.
On May 27, 2015, the Company received stockholder approval to elect to settle conversions of the aggregate outstanding principal amount of its
2.25%
convertible senior notes due August 15, 2019 (the Notes) by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. Under the applicable accounting standards, if an entity controls the means of settlement and past experience or a stated policy provides a reasonable basis to believe that convertible debt instruments, such as the Notes, will be partially or wholly settled in cash, the shares issuable upon conversion of those convertible debt instruments may be excluded from the calculation of diluted earnings per share. For the
three months ended March 31, 2016
, the Notes are not assumed to be converted as the impact is anti-dilutive. For further information regarding the Notes, please refer to Note
6
contained in this Quarterly Report on Form 10-Q.
The Company excludes shares issued in connection with restricted stock awards from the calculation of basic weighted-average common shares outstanding until such time as those shares vest. In addition, with respect to restricted stock awards that vest based on achievement of performance conditions, because performance conditions are considered contingencies under ASC 260,
Earnings Per Share
, the criteria for contingent shares must first be applied before determining the dilutive effect of these types of share-based payments. Prior to the end of the contingency period, the number of contingently issuable common shares to be included in diluted weighted-average common shares outstanding is based on the number of common shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period were the end of the contingency period (e.g., the number of shares that would be issuable based on current performance criteria) assuming the result would be dilutive.
In connection with certain business combinations, the Company issued common shares that are held in escrow. The Company excludes shares held in escrow from the calculation of basic weighted-average common shares outstanding where the release of such shares is contingent upon an event and not solely subject to the passage of time. As of
March 31, 2016
, the Company excluded the entire
87,483
shares of common stock held in escrow related to the acquisition of Pulse Energy Inc. in 2014.
The Company includes the
254,654
shares related to a component of the deferred purchase price consideration for the acquisition of M2M Communications Corporation in the calculation of both the basic and diluted weighted-average common shares outstanding as the shares are not subject to adjustment and the issuance of such shares is not subject to any contingency.
5. Fair Value Measurements
The Company measures the fair value of financial instruments pursuant to the guidelines of ASC 820,
Fair Value Measurement
, which establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted market prices in active markets for identical assets and liabilities (Level 1); then to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2); and then to model-based techniques that use significant assumptions that are not observable in the market (Level 3).
The Company’s financial instruments mainly consist of cash and cash equivalents, restricted cash, accounts receivable and accounts payable. The carrying amounts of such financial instruments approximate their respective fair value due to their short-term nature. The Company also had
$2,500
of cost-method investments, which are included in "Deposits and Other Assets" on the consolidated balance sheets as of
March 31, 2016
and December 31, 2015. These investments are periodically assessed for indications of a reduction in fair value that is other-than-temporary, of which there have been none to date. The Company had
$126,800
of principal outstanding on the Notes at
March 31, 2016
and December 31, 2015. The fair value of the Notes was approximately
$89,474
and
$73,624
as of
March 31, 2016
and
December 31, 2015
, respectively, and was determined based on the quoted market price of the Notes as of those dates. The fair value of the Notes is classified as a Level 1 measurement.
The table below presents the assets and liabilities measured at fair value on a recurring basis at
March 31, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Unobservable Inputs
(Level 3)
|
Fair Value Measurement at
|
March 31, 2016
|
|
|
|
|
|
|
|
Assets: Money market funds
(1)
|
$
|
75,702
|
|
|
$
|
75,702
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at
|
December 31, 2015
|
|
|
|
|
|
|
|
Assets: Money market funds
(1)
|
$
|
115,847
|
|
|
$
|
115,847
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Liabilities: Contingent purchase price consideration
(2)
|
$
|
840
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
840
|
|
|
|
(1)
|
The money market funds balance included in cash and cash equivalents represents the only asset that the Company measures and records at fair value on a recurring basis. These money market funds represent excess operating cash that is invested daily into an overnight investment account
.
|
|
|
(2)
|
The contingent purchase price consideration as of December 31, 2015 relates to the Company’s 2014 acquisition of Activation Energy DSU Limited and was reflected in accrued expense and other current liabilities as of December 31, 2015. The amount was paid in full in February 2016.
|
The following is a rollforward of the Level 3 liabilities from January 1,
2016
through
March 31, 2016
:
|
|
|
|
|
|
Liabilities
|
Balance January 1, 2016
|
$
|
840
|
|
Cash payment during the period
|
(840
|
)
|
Balance March 31, 2016
|
$
|
—
|
|
6. Borrowings and Credit Arrangements
The following table shows the gross and net carrying amount of the Company's
2.25%
convertible senior notes due August 2019 at March 31, 2016 and December 31, 2015:
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
December 31, 2015
|
Convertible senior notes
|
$
|
126,800
|
|
|
$
|
126,800
|
|
Less: debt discount and issuance costs
|
(14,584
|
)
|
|
(15,546
|
)
|
Convertible senior notes, net
|
$
|
112,216
|
|
|
$
|
111,254
|
|
Credit Agreement
On August 11, 2014, the Company entered into a
$30,000
senior secured revolving credit facility (the 2014 credit facility),
the full amount of which may be available for issuances of letters of credit and revolving loans, pursuant to a loan and security agreement with Silicon Valley Bank (SVB). The 2014 credit facility was subsequently amended on October 23, 2014. On August 6, 2015, the Company and SVB entered into a second amendment to the 2014 credit facility to extend the termination date to August 9, 2016. The 2014 credit facility is subject to continued covenant compliance and borrowing base requirements. As of
March 31, 2016
, the Company was in compliance with all of its covenants, had
no
outstanding borrowings and had outstanding letters of credit totaling
$19,313
under the 2014 credit facility. As of
March 31, 2016
, there was
$10,687
available under the 2014 credit facility for future borrowings or additional issuances of letters of credit. In the event of termination or default, the Company may be required to cash collateralize any outstanding letters of credit up to
105%
of their face amount.
Convertible Notes
On August 12, 2014, the Company sold
$160,000
aggregate principal amount of
2.25%
convertible senior notes due August 15, 2019 (the Notes). The Notes include customary terms and covenants, including certain events of default after which the Notes may be declared or become due and payable immediately. The Notes are convertible at an initial conversion rate of
36.0933
shares of the common stock per
$1
principal amount of Notes (equivalent to an initial conversion price of approximately
$27.71
per share of common stock). The Company may elect to settle conversions of Notes by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock.
Upon issuance of the Notes, the Company accounted for the liability and equity components of the Notes separately to reflect a non-convertible borrowing rate. The estimated fair value of the liability component at issuance of
$137,430
was determined using a discounted cash flow technique. The excess proceeds of
$22,570
were allocated to the conversion feature (equity component) with a corresponding offset recognized as a discount to reduce the net carrying value of the Notes. In addition, debt issuance costs were allocated to the liability and equity components based on their relative percentages and the amounts allocated to the liability component are included as part of the debt discount. The discount is being amortized to interest expense over a
five
-year period ending August 15, 2019 (the expected life of the liability component) using the effective interest method.
In December 2015, in privately negotiated transactions, the Company repurchased in cash
$33,200
in aggregate principal amount of the outstanding Notes for a total purchase price of
$19,733
plus accrued interest. The consideration was allocated to the fair value of the liability component of the repurchased Notes immediately before extinguishment. Following the repurchases, the remaining principal outstanding was
$126,800
.
Interest expense under the Notes is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Accretion net debt discount
|
$
|
962
|
|
|
$
|
1,155
|
|
2.25% accrued interest
|
705
|
|
|
880
|
|
Total interest expense from the Notes
|
$
|
1,667
|
|
|
$
|
2,035
|
|
7. Commitments and Contingencies
As of
March 31, 2016
, the Company was contingently liable under outstanding letters of credit for
$19,313
. The Company is subject to performance guarantee requirements under certain utility and electric power grid operator customer contracts and open market bidding program participation rules, which may be secured by cash or letters of credit. Performance guarantees as
of
March 31, 2016
were
$17,537
and included deposits held by certain customers of
$115
. These amounts primarily represent up-front payments required by utility and electric power grid operator customers as a condition of participation in certain demand response programs and to ensure that the Company will deliver its committed capacity amounts in those programs. If the Company fails to meet its minimum committed capacity requirements, a portion or all of the deposits may be forfeited. The Company assessed the probability of default under these customer contracts and open market bidding programs and has determined the likelihood of default and loss of deposits to be remote. In addition, under certain utility and electric power grid operator customer contracts, if the Company does not achieve the required performance guarantee requirements, the customer can terminate the arrangement and the Company would potentially be subject to termination penalties. Under these arrangements, the Company defers all fees received up to the amount of the potential termination penalty until the Company has concluded that it can reliably determine that the potential termination penalty will not be incurred or the termination penalty lapses. As of
March 31, 2016
, the Company had
$546
in deferred fees for these arrangements which were included in deferred revenues. As of
March 31, 2016
, the maximum termination penalty to which the Company could be subject under these arrangements, which the Company has deemed not probable of being incurred, was approximately
$7,569
.
The Company is currently involved in an ongoing matter related to a review of certain services provided under a contractual arrangement with an enterprise customer. This matter is in initial stages and no lawsuit has currently been filed. The Company does not currently believe it is probable that a loss has been incurred and therefore, no amounts have been accrued related to this matter. However, the Company has determined that it is reasonably possible that it may incur a loss related to this matter. The potential amount of such a loss is not currently estimable because the matter is at an early stage and involves unresolved questions of fact.
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not expect the ultimate costs to resolve such matters to have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
8. Stockholder's Equity
Stock-Based Compensation
The Company grants share-based awards to employees, non-employees, members of the board of directors and advisory board members. All share-based awards granted, including grants of stock options, restricted stock and restricted stock units, are recognized in the statement of operations based on their fair value as of the date of grant.
Stock-based compensation expense recorded in the consolidated statements of operations was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
Selling and marketing expenses
|
$
|
818
|
|
|
$
|
1,643
|
|
General and administrative expenses
|
1,961
|
|
|
2,430
|
|
Research and development expenses
|
336
|
|
|
336
|
|
Total stock-based compensation expense
(1)
|
$
|
3,115
|
|
|
$
|
4,409
|
|
(1)
Stock-based compensation expense for the
three months ended March 31, 2015
includes
$478
related to the acquisition of World Energy that was settled with equivalent cash payments.
The Company’s Chief Executive Officer is required to receive his performance-based bonus, if achieved, in shares of the Company's common stock. During the three months ended
March 31, 2016
and
2015
, the Company recorded
$127
and
$113
of stock-based compensation expense related to this performance-based bonus.
Restricted Stock Units
The following table summarizes the Company’s restricted stock unit activity during the three months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
Nonvested at December 31, 2015
|
258,983
|
|
|
$
|
15.27
|
|
Granted
|
466,000
|
|
|
6.21
|
|
Vested
|
(4,727
|
)
|
|
9.46
|
|
Cancelled
|
(87,225
|
)
|
|
19.33
|
|
Nonvested at March 31, 2016
|
633,031
|
|
|
$
|
9.47
|
|
For non-vested restricted stock units subject to service-based vesting conditions outstanding as of
March 31, 2016
, the Company had
$608
of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of
2.7
years. For non-vested restricted stock units subject to outstanding performance-based vesting conditions that were not probable of vesting at
March 31, 2016
, the Company had
$1,476
of unrecognized stock-based compensation expense. If and when any additional portion of these non-vested restricted stock units are deemed probable to vest, the Company will reflect the effect of the change in estimate in the period of change by recording a cumulative catch-up adjustment to retroactively apply the new estimate.
Restricted Stock Awards
During the three months ended
March 31, 2016
, the Company granted
58,455
shares of restricted stock,
364,574
shares of restricted stock vested and
113,219
were cancelled.
Share Repurchase Activity
On August 6, 2015, the Company's Board of Directors approved a share repurchase program that enables the Company to repurchase up to
$50,000
of the Company’s common stock during the period from August 9, 2015 to August 9, 2016 (the 2015 Repurchase Program). Repurchases under the 2015 Repurchase Program are expected to be made periodically as market and business conditions warrant, or under a Rule 10b5-1 plan. During the three months ended
March 31, 2016
, the Company did not repurchase any of its common stock under the 2015 Repurchase Program.
In connection with the vesting of restricted stock and restricted stock units under its equity incentive plans, the Company withheld
124,436
shares of its common stock during the three months ended
March 31, 2016
to satisfy employee minimum statutory income tax withholding obligations which the Company pays in cash to the appropriate taxing authorities on behalf of its employees. All withheld shares became immediately available for future issuance under the Company's equity incentive plans.
9. Income Taxes
The Company recorded worldwide tax expense of
$1,691
for the
three months ended March 31, 2016
primarily related to tax expense recorded on foreign income for the quarter. The Company recorded a tax benefit of
$2,285
for the
three months ended March 31, 2015
, which included a
$2,268
benefit due to the release of a portion of a U.S. valuation allowance in connection with the World Energy Solutions, Inc. acquisition.
Each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. The Company is required, at the end of each interim reporting period, to make its best estimate of the effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if the Company is unable to make a reliable estimate of its annual effective tax rate, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. For the three months ended March 31, 2016, the Company is able to reliably estimate the annual effective tax rate on its foreign earnings, but it is unable to reliably estimate the annual effective tax rate on its U.S. earnings.
If the Company is able to make a reliable estimate of its annual U.S. effective tax rate as of June 30, 2016, the Company expects to provide for income taxes on a current year-to-date basis. If the Company continues to be unable to make a reliable estimate of its annual effective tax rate as of June 30, 2016, the Company expects to provide for income taxes using a methodology consistent with the approach for the three months ended March 31, 2016.
The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as its ability to generate income in future periods. As of
March 31, 2016
, due to the uncertainty around the realizability of certain domestic and foreign deferred tax assets, the Company continues to maintain a valuation allowance.
10. Concentration of Credit Risk
The Company's significant customers are PJM Interconnection (PJM), the Korea Power Exchange (KPX), and the Australian Energy Market Operator (AEMO), which was formerly known as the Australian Independent Market Operator Wholesale Energy Market. PJM is an electric power grid operator in the mid-Atlantic region of the United States that is comprised of multiple utilities and was formed to control the operation of the regional power system, coordinate the supply of electricity, and establish a fair and efficient market. KPX is an electric power grid operator in South Korea and AEMO is an entity that was established to administer and operate the Western Australia wholesale electricity market. Revenues from all three of these customers are included within the Demand Response operating segment.
The following table presents the Company’s significant customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2016
|
|
2015
|
|
Revenues
|
|
% of Total
Revenues
|
|
Revenues
|
|
% of Total
Revenues
|
AEMO
|
$
|
6,955
|
|
|
13
|
%
|
|
$
|
7,279
|
|
|
14
|
%
|
KPX
|
$
|
6,921
|
|
|
13
|
%
|
|
*
|
|
|
*
|
|
PJM
|
*
|
|
|
*
|
|
|
*
|
|
|
*
|
|
* Represents less than
10%
of total revenues.
PJM, KPX and AEMO were the only customers that comprised
10%
or more of the Company’s accounts receivable balance at
March 31, 2016
, representing
17%
,
13%
and
13%
, respectively.
The Company currently participates in three PJM programs, which the Company refers to as Limited, Extended and Annual. Each program has a different delivery period, but the Company receives payments for all three programs ratably throughout PJM’s fiscal year, which ends May 31. The delivery period for the Limited program is June through September. The delivery period for the Extended program is June through October and then the following May. The delivery period for the Annual program is June through May. In all three programs, revenues earned could potentially be subject to adjustment or refund based on performance during the delivery period, and due to the difficultly of reliably estimating such adjustments or refunds, revenues from all three programs are deferred and recognized at the end of the applicable delivery period.
In the case of the Limited program, because the delivery period ends before the end of PJM’s fiscal year, throughout which the Company receives payments, a portion of the revenues earned are recorded and accrued as unbilled revenue. Unbilled revenue related to PJM was
$27,648
and
$68,859
at March 31, 2016 and December 31, 2015, respectively.
In the event the Company completely eliminates its obligation in a program through portfolio management, including participation in PJM incremental auctions, revenues related to such activity are recognized at the beginning of the delivery period.
11. Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
(ASU 2014-09). ASU 2014-09 provides that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. As amended, the new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted no earlier than the original effective date of the standard, which is the first quarter of fiscal 2017 for the Company. ASU 2014-09 allows for full retrospective adoption applied to all periods presented or retrospective adoption with the cumulative effect of initially applying this update recognized at the date of initial application. The Company has not yet determined the method of adoption. The Company is currently in the process of evaluating the impact of adoption of ASU 2014-09 on its consolidated financial statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(ASU 2014-15). ASU 2014-15 requires that the Company evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is effective for annual and interim periods ending after December 15, 2016, and early
adoption is permitted. The Company does not expect to early adopt ASU 2014-15 and it does not believe the standard will have a material impact on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(ASU 2016-01), which provides new guidance on recognition and measurement of financial assets and financial liabilities. ASU 2016-01 will impact the accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) will generally be measured at fair value with changes in fair value recognized in earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings. This guidance will be effective January 1, 2018. The Company is currently evaluating the effect of the standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02,
Leases
(ASU 2016-02). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. The standard will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the effect of the standard on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers- Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(ASU 2016-08). ASU 2016-08 amends ASC Topic 606,
Revenue from Contracts with Customers
, to provide additional guidance on how an entity should determine whether it should recognize revenue as a principal or as an agent. Once adopted, ASU 2016-08 is applicable for transactions within the scope of ASU 2014-09. The Company is currently evaluating the effect of the standard on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will be effective for the Company's fiscal year ending December 31, 2017, unless the Company decides to early-adopt the ASU. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.
In April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers- Identifying Performance Obligations and Licensing
(ASU 2016-10). ASU 2016-10 amends ASC Topic 606,
Revenue from Contracts with Customers
, to clarify how an entity should identify performance obligations in contracts with customers and to provide implementation guidance on licensing arrangements. Once adopted, ASU 2016-10 is applicable for transactions within the scope of ASU 2014-09. The Company is currently evaluating the effect of the standard on its consolidated financial statements and related disclosures.
12. Subsequent Events
In April 2016, the Company's Board of Directors approved a plan to sell a component of the business that provides professional services to utilities with an emphasis on energy efficiency initiatives. The results of operations of this business component are included within the Software operating segment. A definitive asset purchase agreement was executed on May 3, 2016 and subject to customary closing conditions, the sale of the business component is expected to close during the three months ended June 30, 2016. The sale of the business component is not expected to qualify as a discontinued operation as the disposal of this business component will not represent a strategic shift that will have a major effect on the Company's operations and financial results. The sale of the business component is expected to generate a gain, which will be separately classified on the income statement as part of loss (income) from operations. The Company is not currently able to estimate the amount of the gain.
The net liabilities of the business component, which include accounts receivable, deferred revenue and a preliminary allocation of goodwill, were approximately
$1,200
as of May 3, 2016. The final amount of goodwill assigned to the business component will be based on its relative fair value compared to the overall fair value of the reporting unit that will be retained. The assets and liabilities of the business component will be classified prospectively on the consolidated balance sheet as held for sale and will be periodically measured at fair value at each balance sheet date until the business component is sold.