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 demand response solutions and energy intelligence software (EIS) to enterprises, utilities, and electric power grid operators.
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 (MW) that the Company agrees to deliver to utility customers and electric power grid operators, with supply, in the form of MW 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). When called upon by utilities and electric power grid operators to deliver contracted capacity, the Company uses its global Network Operations Center (NOC) to remotely manage and reduce electricity consumption across its network of C&I end-user sites, making demand response capacity available to utilities and electric power grid operators on demand, while helping C&I end-users achieve energy savings, improve financial results and realize environmental benefits.
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 offers premium professional services that support the implementation of its EIS and help its enterprise customers set their energy management strategies. The Company's energy procurement solutions provide customers with the ability to more effectively manage their energy supplier selection and energy procurement process by providing highly-structured auction events.
Reclassifications
In 2016, the Company adopted Accounting Standards Update (ASU) 2016-18,
Restricted Cash
and ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
retrospectively. In addition, the Company condensed certain lines on the current period cash flow. Accordingly, the condensed consolidated statement of cash flow for the three month period ended March 31, 2016 has been restated to conform with the current period presentation under this new guidance. The Company adopted ASU 2016-18 by renaming the line item within cash flows from investing activities from "change in restricted cash and deposits" to "change in deposits" for all periods presented and restating the amounts in this line from
$622
to
$680
for the
three months ended March 31, 2016
. This resulted in an increase in net cash used in investing activities of
$58
, reflecting the reclassification of the change in restricted cash. As a result of the adoption of ASU 2016-15, the Company reclassified
$840
of cash outflows previously presented within investing activities for the
three months ended March 31, 2016
; specifically,
$195
and
$645
were reclassified to financing and operating activity, respectively.
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 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. Intercompany transactions and balances are eliminated in consolidation. The Company owns
60%
of EnerNOC Japan K.K., (ENOC Japan) and
67%
of EnerNOC Taiwan Limited (ENOC Taiwan), which are each consolidated in accordance with Accounting Standards Codification 810,
Consolidation
(ASC 810). The Company
accounts for the remaining
40%
and
33%
ownership interests in these entities as a non-controlling interest on the consolidated financial statements.
Use of Estimates
The preparation of these 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, including determining the transaction price and associated constraint on variable consideration; allowance for doubtful accounts; the value of accrued liabilities associated with accrued capacity payments; the fair value of its reporting units, including forecasted cash flows and the weighted average cost of capital used to calculate the impairment of goodwill; expected future cash flows used to evaluate the recoverability of long-lived assets; amortization methods and the useful lives of long-lived assets; the valuation of cost-method investments; the fair value of stock-based awards, which determines stock-based compensation; contingent liabilities; tax reserves and recoverability of 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 statements taken as a whole, the actual amounts of such items, when known, could differ 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, 2016 (2016 Form 10-K). Summarized below are the accounting pronouncements adopted subsequent to December 31, 2016.
In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09). The Company adopted ASU 2014-09 and its related amendments (collectively known as ASC 606) effective on January 1, 2017 using the modified retrospective method. Please see Note
2
"Revenue from Contracts with Customers" for the required disclosures related to the impact of adopting this standard and a discussion of the Company's updated policies related to revenue recognition and accounting for costs to obtain and fulfill a customer contract.
On January 1, 2017, the Company adopted ASU 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04), which is effective for goodwill tests performed after January 1, 2017. ASU 2017-04 eliminates Step 2 from the goodwill impairment test and, alternatively, requires that an entity measure the impairment of goodwill assigned to a reporting unit as the amount in which the carrying value of assets and liabilities assigned to the reporting unit, including goodwill, exceed the reporting unit's fair value. Please see Note
6
"Goodwill and Intangible Assets" for further discussion of the Company's application of this standard in 2017.
On January 1, 2017, the Company adopted ASU 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
(ASU 2017-05) and ASC 610-20,
Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets
(Subtopic 610-20), which was issued as part of ASC 606 in May 2014 and provides guidance for the recognition of gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The Company adopted this guidance using the modified retrospective method. The adoption of these updates did not have an impact on the condensed consolidated financial statements.
On January 1, 2017, the Company adopted ASU 2017-01,
Clarifying the Definition of a Business
(ASU 2017-01), which clarifies the definition of a business for purposes of determining whether transactions should be accounted for as the acquisition or disposal of a business, and impacts all standards applicable to entities that meet the definition of a business. The Company applied this new guidance to a transaction completed in the first quarter of 2017 related to the sale of the its Energy Service Group operations, as discussed further in Note
4
"Gain on Sale of Businesses".
Effective January 1, 2017, the Company adopted ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09) using the modified retrospective method. The adoption of the new guidance had no net impact on the Company's condensed consolidated financial statements. However, as a result of the adoption, the Company increased its deferred tax asset related to its net operating loss carryforwards related to previously deducted amounts for excess stock compensation. Under the previous guidance, such amounts could not be recognized until the amounts resulted in a reduction in the current tax liability. This increase was offset by an increase in the valuation allowance. ASU 2016-09 permits an entity to elect to record forfeitures of stock-based compensation as incurred or continue to estimate these forfeitures at grant date. The Company has elected to continue to estimate forfeitures under the current guidance.
Accounting Standards Issued and Not Yet Adopted
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 does not anticipate that it will early adopt the new standard. The Company expects that the new guidance will require a material increase in the Company's long-lived assets, and a corresponding increase to long-term obligations, associated with its leased office space.
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 primarily impact the accounting for equity investments whereby 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 through earnings. The Company has equity investments that do not have a readily determinable fair value and have a carrying value of
$736
as of March 31, 2017. Under ASU 2016-01, these investments will be measured at cost, less any impairment, plus or minus any change resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. 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 for the Company. The Company does not anticipate that the adoption of this guidance will have a material effect on its consolidated statements and related disclosures.
2. Revenue from Contracts with Customers
The Company adopted ASC 606 on January 1, 2017 using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the adjustment to accumulated deficit. The reported results for 2017 reflect the application of ASC 606 guidance while the reported results for 2016 were prepared under the guidance of ASC 605,
Revenue Recognition
(ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps:
|
|
|
|
1)
|
Identify the contract with a customer
|
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
|
|
|
|
2)
|
Identify the performance obligations in the contract
|
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
|
|
|
|
3)
|
Determine the transaction price
|
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company's contracts as of March 31, 2017 contained a significant financing component. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below.
|
|
|
|
4)
|
Allocate the transaction price to performance obligations in the contract
|
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
|
|
|
|
5)
|
Recognize revenue when or as the Company satisfies a performance obligation
|
The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
Disaggregation of Revenue
The following table summarizes revenue from contracts with customers for the three month period ended March 31, 2017:
|
|
|
|
|
|
|
|
Demand response
|
$
|
34,484
|
|
|
Subscription software
|
4,499
|
|
|
Procurement solutions
|
6,757
|
|
|
Professional services
|
2,369
|
|
|
Total Revenues
|
$
|
48,109
|
|
All of the Company's performance obligations, and associated revenue, are generally transferred to customers over time, with the exception of procurement solutions, which are generally transferred to the customer at a point in time.
Demand Response Solutions
The Company provides demand response solutions to grid operators and utility customers pursuant to contractual commitments over defined service delivery periods. These contracts typically include a single promise to stand ready, on a monthly basis, to deliver a set amount of curtailment (committed capacity) per month when and if called upon by the grid operator or utility. The Company has concluded this represents a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer. Accordingly, the monthly promise to stand ready is accounted for as a single performance obligation. In order to provide this stand ready service, the Company utilizes a portfolio of C&I end-users that have the ability to curtail MW when called upon. The Company is the principal in these arrangements as it has control over the services prior to those services being transferred to the customer.
Capacity fees are paid to the Company by the grid operators and utilities for its stand ready commitment to curtail MWs and are typically based on the Company's ability to deliver the committed capacity throughout the contractual delivery period. In general, if the Company fails to curtail the contracted MW during energy or test dispatches, the MW shortfall results in a penalty that could require the Company to reduce, or in some cases refund, fees paid by the customer during the contract period. Depending on the contract, penalties are limited to the particular month in which the shortfall occurs, or they are applied retrospectively, prospectively, or both retrospectively and prospectively. Due to these penalty provisions, capacity fees represent variable consideration. Certain contracts also provide additional consideration in the form of energy fees for actual curtailment of MW during an emergency dispatch. As energy fees are only paid in the event of an emergency dispatch, these fees also represent variable consideration.
In order to determine the transaction price, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. These estimates consider i) the contractual rate per MW, ii) penalty rates iii) the maturity of the C&I portfolio, iv) historical performance and v) the probability of future dispatch events. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required. Due to the uncertainty relating to energy fees, these amounts are fully constrained until an emergency event occurs. In the event of an emergency dispatch, any earned energy fees are associated and allocated to the specific month of performance, as these fees meet the criteria to allocate variable consideration to a distinct monthly service within a series of distinct services that comprise the single performance obligation. Therefore, energy fees are recognized in the month in which the Company is called upon to deliver on its stand-ready obligation to curtail capacity.
The Company has concluded that contracts that do not include retrospective and/or prospective penalty provisions generally meet the allocation of variable consideration exception criteria. As such, the variable consideration for these contracts is allocated to each distinct month in the series within the contract. However, the Company has concluded that contracts that contain retrospective and/or prospective penalty provisions do not meet the allocation of variable consideration exception such that the transaction price can be allocated to a distinct monthly service. The Company believes that a output measure based on the monthly contractual MW stand-ready obligation is the best representation of the "transfer of value" to the customer. Accordingly, the Company recognizes monthly revenue based on the proportion of committed stand-ready capacity obligation that has been fulfilled to date.
The Company's largest customer, PJM Interconnection (PJM), is an electric power grid operator serving the mid-Atlantic region of the United States. The Company currently participates in three PJM programs, referred to as Limited, Extended and Annual. Although each program has a different delivery period, 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 plus the following May. The delivery period for the Annual program is June through the following May. This payment pattern relative to the delivery of services and associated revenue recognition has the ability to generate significant contract assets or contract liabilities. The Company refers to contract liabilities as "deferred revenue" on the condensed consolidated financial statements and related disclosures.
Procurement Solutions
The Company operates an on-line auction platform that streamlines the competitive bidding process between energy suppliers and end-users of energy. Contracts are executed with an energy supplier that entitles the Company to a commission once an auction is complete. These contracts include a single promise, which is the facilitation of a procurement contract between an energy supplier and an end-user, which generally range from one to four years. This is deemed to be a single performance obligation, which is satisfied when an auction is completed. Once an auction is complete, the Company’s performance obligation has been satisfied, and the Company has no further obligations under the contract. The Company is the agent in this transaction as it does not have control over the energy being provided to the end-users prior to the good being transferred to the customer.
Consideration paid to the Company (by the energy supplier) is based on the end-user's energy consumption throughout the duration of the procured contract. The Company is only entitled to compensation if the energy supplier is paid by the end-user. As the consideration is dependent on energy consumption and payments made by the end-user, all consideration related to these contracts is variable. The Company estimates the amount of variable consideration to be included in the transaction price based on i) historical usage by the end-user, ii) contracted fees, iii) historical payment trends and iv) geographic trends throughout a class of similar end-users. The Company then constrains the variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the duration of the procurement contact.
In order to determine if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments the Company considers the likelihood and magnitude of a potential reversal of revenue. The revenue recorded upon the close of the auction is reflected as a contract asset that is realized over the contract period, subject to adjustments between actual usage and the original estimate.
Subscription Software and Services
The Company’s EIS provides a software-as-a-service energy management application that enables the customer to address energy challenges, including energy cost visualization and budgeting, utility bill validation and payment, facility optimization, energy project tracking, reporting on sustainability and compliance, and peak energy demand and cost assessments. The Company generally offers these services under one to three year subscription agreements. These agreements typically include the following services: the access to the SaaS platform, solution features and general support and maintenance. The Company has concluded that each promised service is delivered concurrently with all other promised service over the contract term and, as such, has concluded these promises are a single performance obligation that includes a series of distinct services that have the same pattern of transfer to the customer.
Consideration for the Company’s subscription arrangements consist of fixed, variable and usage based fees. The Company invoices a portion of the fees at the outset of the contract and then monthly or quarterly thereafter. Advance non-refundable fees, which are deemed to be fixed, are not separate performance obligations and are recognized as the performance obligation in the customer contract is satisfied. Monthly subscription fees are generally based on the number of sites and the level of services selected by the customer. These monthly fees are subject to a service level agreement (SLA), which requires that the services are available to the customer based on a predefined performance criteria. If the services do not meet these criteria, monthly fees are subject to adjustment or refund. As a result, the monthly subscription fees represent variable consideration. The Company has concluded that these the monthly promised services generally meet the allocation of variable consideration exception criteria. As such, the variable consideration for these contracts is allocated to each distinct month in the series within the contract as the monthly services are delivered to the customer. In addition, certain fees are unit-based and are calculated on the number of transactions processed monthly. Usage based fees are deemed to be variable consideration that meet the allocation exception for variable consideration as they are specific to the month that the usage occurs. Usage based fees are fully constrained until the related usage occurs.
The Company satisfies its performance obligation by providing access to its software-as-a-service over time, and processing transactions for usage based contracts. For non-usage based fees, the period of time over which the Company is performing is commensurate with the contract term because that is the period during which the Company has an obligation to provide the service. The performance obligation is recognized on time elapsed basis, by month for which the services are provided, once
enablement/implementation is complete. For usage-based fees, revenue is recognized in the month in which the Company provides the usage to the customer.
Professional Services
The Company offers premium professional services that support the implementation of its EIS, including training and integration services, and professional service engagements to assist customers with their energy management strategy. These contracts generally have terms of one year or less. Services are either billed on a rate per hour or on a fixed monthly retainer basis. For the majority of these contacts, the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, the Company recognizes revenue based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes and input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation.
Contracts with Multiple Performance Obligations
The Company periodically enters into contracts, or multiple contracts at or near the same time, with its customers in which a customer may purchase a combination of EIS and other services, such as procurement solutions or professional services. These contracts include multiple promises that the Company evaluates to determine if the promises are separate performance obligations. Once the Company determines the performance obligations, the Company determines the transaction price, which includes estimating the amount of variable consideration to be included in the transaction price, if any. The Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method or using the variable consideration allocation exception if the required criteria are met. The corresponding revenues are recognized as the related performance obligations are satisfied as discussed in the revenue categories above.
Costs to Obtain and Fulfill a Contract
The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred in “prepaid expenses and other current assets”, net of any long term portion included in “other noncurrent assets”. The judgments made in determining the amount of costs incurred include whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as sales and marketing expense on a straight line basis over the expected period of benefit. These costs are periodically reviewed for impairment.
The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to cost of revenue as the Company satisfies its performance obligations by transferring the service to the customer. These costs, which are classified in "capitalized fulfillment costs" on the condensed consolidated balance sheets, principally relate to direct costs that enhance resources under the Company’s demand response contracts that will be used in satisfying future performance obligations.
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2017 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to accounts on the condensed consolidated balance sheet as of January 1, 2017:
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|
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|
|
As Reported
|
|
Adjustments
|
|
Adjusted
|
|
|
December 31, 2016
|
|
Demand Response
|
|
Procurement
|
|
Professional Services & Other
|
|
Cost to Obtain or Fulfill a Contract
|
|
January 1, 2017
|
|
Cash, cash equivalent and restricted cash
|
$
|
99,055
|
|
|
|
|
|
|
|
|
|
|
$
|
99,055
|
|
|
Accounts receivable, net
|
36,722
|
|
|
|
|
$
|
(5,551
|
)
|
|
|
|
|
|
31,171
|
|
|
Unbilled receivables
|
45,430
|
|
|
|
|
|
|
|
|
|
|
45,430
|
|
|
Contract assets
|
—
|
|
|
$
|
1,719
|
|
|
23,359
|
|
|
|
|
|
|
25,078
|
|
|
Capitalized fulfillment costs
|
2,290
|
|
|
(1,613
|
)
|
|
|
|
|
|
|
|
677
|
|
|
Prepaid expenses and other current assets
|
14,321
|
|
|
|
|
|
|
|
|
$
|
2,007
|
|
|
16,328
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Long lived assets
|
111,261
|
|
|
|
|
|
|
|
|
|
|
111,261
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|
|
Other noncurrent assets
|
3,223
|
|
|
|
|
|
|
|
|
2,405
|
|
|
5,628
|
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Contract assets, long term
|
—
|
|
|
|
|
16,206
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|
|
|
|
|
|
16,206
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Total assets
|
$
|
312,302
|
|
|
$
|
106
|
|
|
$
|
34,014
|
|
|
$
|
—
|
|
|
$
|
4,412
|
|
|
$
|
350,834
|
|
|
Accounts payable, accrued expenses, and other current liabilities
|
$
|
34,846
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|
|
|
|
|
|
|
|
$
|
2,624
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|
|
$
|
37,470
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Accrued capacity payments
|
63,943
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|
|
$
|
1,630
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|
|
|
|
|
|
|
|
65,573
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|
Deferred revenue, current
|
8,193
|
|
|
(2,089
|
)
|
|
$
|
(413
|
)
|
|
$
|
1,171
|
|
|
|
|
6,862
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Deferred revenue, long term
|
2,665
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|
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|
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|
|
|
|
|
|
2,665
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Other noncurrent liabilities
|
7,521
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|
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|
|
|
|
|
2,710
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|
|
10,231
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Convertible senior notes
|
115,223
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|
|
|
|
|
|
|
|
|
|
115,223
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|
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Total liabilities
|
232,391
|
|
|
(459
|
)
|
|
(413
|
)
|
|
1,171
|
|
|
5,334
|
|
|
238,024
|
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Accumulated deficit
|
(304,745
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)
|
|
565
|
|
|
34,427
|
|
|
(1,171
|
)
|
|
(922
|
)
|
|
(271,846
|
)
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Additional paid-in capital, accumulated other comprehensive loss, and non-controlling interest
|
384,656
|
|
|
|
|
|
|
|
|
|
|
384,656
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|
|
Total stockholders’ equity
|
79,911
|
|
|
565
|
|
|
34,427
|
|
|
(1,171
|
)
|
|
(922
|
)
|
|
112,810
|
|
|
Total liabilities and stockholders’ equity
|
$
|
312,302
|
|
|
$
|
106
|
|
|
$
|
34,014
|
|
|
$
|
—
|
|
|
$
|
4,412
|
|
|
$
|
350,834
|
|
Demand Response
Several of the Company's demand response contracts provide customers with a right of refund based on the Company's performance. Under the previous guidance, certain of these fees were not fixed or determinable and, as a result, the associated revenue was deferred until the completion of the contract. Under ASC 606, the Company estimates the variable consideration to be received and recognizes those amounts, subject to constraint, as the Company satisfies its performance obligation. In conjunction with the January 1, 2017 adoption of ASC 606, the Company adjusted accumulated deficit by
$565
, reflecting the recognition of
$3,808
of revenue and
$3,243
of cost of revenues, for contracts that were not complete as of the date of adoption.
Procurement
Under the previous guidance, the fee for procurement services was not considered fixed or determinable until the associated energy usage occurred and, accordingly, revenue was recognized as the end-user consumed energy and fees became payable to the Company. Under ASC 606, the Company has satisfied its performance obligation upon completion of the auction, requiring the Company to estimate and recognize the variable consideration to be paid over the life of the contract, subject to constraint. In conjunction with the January 1, 2017 adoption of ASC 606, the Company reduced accumulated deficit by
$34,427
, reflecting the revenue recognition for open contracts related to auctions completed prior to the adoption. Amounts recorded as accounts receivable under the previous guidance were reclassified to contract assets as the Company does not have an unconditional right to these amounts until the end-user utilizes energy and makes payment to the energy supplier. Please refer to Note
6
for further discussion of the indirect impact to goodwill as a result of the increased net assets of the Procurement reporting unit.
Professional Services and Other
Under the previous guidance, fees collected for training and integration services were deferred over the life of the corresponding subscription contract. Under ASC 606, these services are deemed distinct performance obligations and thus recognized as the Company satisfies its performance obligations. In addition, under ASC 605 certain multi-element contracts with resellers contained exclusivity clauses that the Company had recognized over the exclusivity term. Under ASC 606 the Company has determined exclusivity is not a distinct promised service. The net impact of these changes resulted in a
$1,171
adjustment to accumulated deficit with an associated adjustment to deferred revenue.
Cost to Obtain a Customer Contract
Prior to the adoption of ASC 606, the Company expensed commissions paid to internal sales representatives for obtaining subscription software and professional service contracts. Under ASC 606, the Company currently capitalizes these incremental costs of obtaining customer contracts. In addition, commissions paid to external channel partners to secure procurement contracts were previously deferred and expensed under the previous guidance upon cash receipt from energy suppliers, which closely aligned with the related patter of revenue recognition. Under ASC 606, these commissions are estimated and recognized concurrently with the respective revenues upon successful completion of an auction. The net impact of these changes resulted in a
$922
adjustment to accumulated deficit.
Income Taxes
The adoption of ASC 606 primarily resulted in an acceleration of revenue as of December 31, 2016, which in turn generated additional deferred tax liabilities that ultimately reduced the Company's net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding reduction to the valuation allowance.
Impact of New Revenue Guidance on Financial Statement Line Items
The following table compares the reported condensed consolidated balance sheet, statement of operations and cash flows, as of and for the three months ended March 31, 2017, to the pro-forma amounts had the previous guidance been in effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
Balance Sheet
|
|
As reported
|
|
Pro forma as if
the previous accounting
guidance was in effect
|
|
Cash, cash equivalent and restricted cash
|
|
$
|
74,367
|
|
|
$
|
74,367
|
|
|
Accounts receivable, net
|
|
31,075
|
|
|
36,935
|
|
|
Unbilled receivables
|
|
18,952
|
|
|
22,400
|
|
|
Contract assets
|
|
27,580
|
|
|
—
|
|
|
Capitalized fulfillment costs
|
|
989
|
|
|
4,967
|
|
|
Prepaid expenses and other current assets
|
|
14,582
|
|
|
12,490
|
|
|
Contract assets, long term
|
|
15,962
|
|
|
—
|
|
|
Long lived assets
|
|
101,629
|
|
|
101,629
|
|
|
Other noncurrent assets
|
|
5,573
|
|
|
3,622
|
|
|
Total assets
|
|
$
|
290,709
|
|
|
$
|
256,410
|
|
|
Accounts payable, accrued expenses, and other current liabilities
|
|
$
|
28,113
|
|
|
$
|
26,408
|
|
|
Accrued capacity payments
|
|
45,732
|
|
|
45,732
|
|
|
Deferred revenue, current
|
|
6,329
|
|
|
8,744
|
|
|
Deferred revenue, long term
|
|
3,420
|
|
|
3,420
|
|
|
Other noncurrent liabilities
|
|
8,931
|
|
|
5,914
|
|
|
Convertible senior notes
|
|
116,248
|
|
|
116,248
|
|
|
Total liabilities
|
|
208,773
|
|
|
206,466
|
|
|
Accumulated deficit
|
|
(303,856
|
)
|
|
(335,848
|
)
|
|
Additional paid-in capital, accumulated other comprehensive loss, and noncontrolling interest
|
|
385,792
|
|
|
385,792
|
|
|
Total stockholders’ equity
|
|
81,936
|
|
|
49,944
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
290,709
|
|
|
$
|
256,410
|
|
Total reported assets were
$34,299
greater than the pro-forma balance sheet, which assumes the previous guidance remained in effect as of March 31, 2017. This was largely due to contract assets recognized in connection with the Company’s energy procurement services and capitalized cost to obtain contracts.
Total reported liabilities were
$2,307
greater than the pro-forma balance sheet, which assumes the previous guidance remained in effect as of March 31, 2017. This was largely due to accrued fees due to procurement channel partners, partially offset by the ability to recognize certain deferred revenues associated with various demand response programs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, 2017
|
|
Statement of Operations
|
|
As reported
|
|
Pro forma as if
the previous accounting
guidance was in effect
|
|
Demand Response
|
|
$
|
34,484
|
|
|
$
|
33,196
|
|
|
Software
|
|
13,625
|
|
|
15,128
|
|
|
Total revenues
|
|
48,109
|
|
|
48,324
|
|
|
Cost of revenue
|
|
33,403
|
|
|
32,668
|
|
|
Gross profit
|
|
14,706
|
|
|
15,656
|
|
|
Selling and marketing
|
|
13,874
|
|
|
13,917
|
|
|
Other operating expenses
|
|
29,182
|
|
|
29,182
|
|
|
Total operating expenses
|
|
43,056
|
|
|
43,099
|
|
|
Loss from operations
|
|
(28,350
|
)
|
|
(27,443
|
)
|
|
Non operating expenses and noncontrolling interest
|
|
178
|
|
|
178
|
|
|
Income tax provision
|
|
(3,838
|
)
|
|
(3,838
|
)
|
|
Net loss attributable to EnerNOC, Inc.
|
|
$
|
(32,010
|
)
|
|
$
|
(31,103
|
)
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
Basic
|
|
$
|
(1.08
|
)
|
|
$
|
(1.05
|
)
|
|
Diluted
|
|
$
|
(1.08
|
)
|
|
$
|
(1.05
|
)
|
The following summarizes the significant changes on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2017 as a result of the adoption of ASC 606 on January 1, 2017 compared to if the Company had continued to recognize revenues under ASC 605:
|
|
|
|
•
|
ASC 606 accelerated the recognition of revenue and fulfillment costs related to certain demand response contracts in which recognition was previously deferred until the end of the applicable contract term due to the fees not being fixed or determinable. This resulted in demand response revenues and related cost of revenues that were approximately
$1,288
and
$735
higher, respectively, for the three months ended March 31, 2017 than they would have been under legacy GAAP.
|
|
|
|
|
•
|
The primary difference between software revenue under ASC 606 as compared to the previous guidance relates to energy procurement solutions. Under the previous guidance, energy procurement revenue would have been approximately
$1,300
higher than under ASC 606, where energy procurement revenue is now recorded upon the completion of procurement auctions as opposed to when actual energy usage occurs.
|
|
|
|
|
•
|
ASC 606 resulted in the amortization of capitalized commission costs that were recorded as part of the cumulative effect adjustment upon adoption. Amortization of these capitalized costs to selling and marketing expenses, net of commission costs that were capitalized in the quarter resulted in no meaningful impact on selling and marketing expenses in the quarter.
|
The net impact of accounting for revenue under the new guidance increased net loss and net loss per share by
$907
and
$0.03
per basic and diluted share, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, 2017
|
|
Statement of Cash Flows
|
|
As reported
|
|
Pro forma as if
the previous accounting
guidance was in effect
|
|
Net loss
|
|
$
|
(32,139
|
)
|
|
$
|
(31,232
|
)
|
|
Non cash adjustments to reconcile net loss to net cash flows from operating activities
|
|
13,388
|
|
|
13,085
|
|
|
Changes in operating assets and liabilities
|
|
|
|
|
|
Accounts receivable, unbilled receivables and contract assets
|
|
24,913
|
|
|
25,133
|
|
|
Prepaid expenses and other assets
|
|
496
|
|
|
(1,304
|
)
|
|
Capitalized fulfillment costs
|
|
(634
|
)
|
|
(1,011
|
)
|
|
Deferred revenue
|
|
(1,372
|
)
|
|
1,140
|
|
|
Accounts payable, accrued expenses and other current liabilities and accrued compensation
|
|
(7,373
|
)
|
|
(6,646
|
)
|
|
Accrued capacity payments
|
|
(22,125
|
)
|
|
(22,125
|
)
|
|
Other noncurrent liabilities
|
|
207
|
|
|
(1,679
|
)
|
|
Cash flows from operating activities
|
|
$
|
(24,639
|
)
|
|
$
|
(24,639
|
)
|
The adoption of ASC 606 had no impact on the Company’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net loss and various changes in working capital balances.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
Deferred Revenue
|
|
|
|
Current
|
|
Non-Current
|
|
Current
|
|
Non-Current
|
|
Balance at January 1, 2017
|
|
$
|
25,078
|
|
|
$
|
16,206
|
|
|
$
|
6,862
|
|
|
$
|
2,665
|
|
|
Balance at March 31, 2017
|
|
27,580
|
|
|
15,962
|
|
|
6,329
|
|
|
3,420
|
|
Revenue recognized during the three months ended March 31, 2017 from amounts included in deferred revenue at the beginning of the period was approximately
$2,400
. Revenue recognized during the three month ended March 31, 2017 from performance obligations satisfied or partially satisfied in previous periods was approximately
$1,600
. During the three months ended March 31, 2017, the Company reclassified approximately
$1,300
of contract assets to receivables as a result of the right to the transaction consideration becoming unconditional. The contract modifications entered into during the three months ended March 31,2017, which principally related to the Company’s demand response customer contracts, did not have a significant impact on the Company’s contract assets or deferred revenues.
Transaction Price Allocated to Future Performance Obligations
ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as March 31, 2017. The guidance provides certain practical expedients that limit this requirement. The Company has various contracts that meet the following practical expedients provided by ASC 606:
|
|
|
|
1.
|
The performance obligation is part of a contract that has an original expected duration of one year or less.
|
|
|
|
|
2.
|
Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18.
|
|
|
|
|
3.
|
The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met.
|
The following provides a discussion of the transaction price allocated to future performance obligations by service line as well as practical expedients applied by the Company.
Demand Response Solutions
As discussed above, each demand response program has unique contract delivery periods and penalty structures for which revenue may be reduced or refunded. Certain programs have an original expected duration less than one year (exception 1 above) or are comprised of variable consideration that meets the criteria in exception 3 above. The nature of the remaining performance obligations as well as nature of the variability and how it will be resolved is described above.
After considering the above practical expedients, the Company had approximately 30 demand response contracts as of March 31, 2017, with unsatisfied performance obligations extending throughout 2024. The total aggregate transaction price allocated to the unsatisfied performance obligations of these contracts was approximately
$230,000
, of which
$130,000
is expected to be realized in 2017. This amount is presented net of any constraint and as a result, is lower than the potential contractual revenues. Specifically, certain contracts in which the performance delivery obligation does not commence within 12 months, the Company is required to undertake numerous activities to fulfill these performance obligations, including various activities that are dependent on actions outside of the Company’s control. Accordingly, the Company has concluded that the related transaction consideration would be fully constrained at this time.
Procurement Solutions
The Company’s procurement solutions do not require material future performance obligations. Procurement solution obligations are generally satisfied once the auction is run and the energy supplier and energy consumer enter into a supply contract.
Subscription Services
As of March 31, 2017, the Company had EIS subscription contracts with unsatisfied performance obligations extending throughout 2020. The total aggregate transaction price allocated to the unsatisfied performance obligations was approximately
$40,000
, of which approximately
$15,000
is expected to be recognized over the next 12 months. In addition, the Company had approximately
$10,000
of contract backlog related to its UBM subscription service. These usage based fees are deemed to be variable consideration and are fully constrained until the related usage occurs.
Professional Services
The Company does not have material future performance obligations associated with professional services that extend beyond one year. Accordingly, the Company has applied practical expedient 1 above for all contracts with an original expected duration less than one year. The nature of the remaining performance obligations as well as nature of the variability and how it will be resolved is described above.
Concentrations of Credit Risk
The Company's significant customers largely include PJM, the Korea Power Exchange (KPX), and the Australian Energy Market Operator (AEMO). PJM, is an electric power grid operator serving the mid-Atlantic region of the United States. 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.
KPX and AEMO were the only customers that comprised more than
10%
of the Company's revenue for
three months ended March 31, 2017
representing
$11,648
(
24%
) and
$5,957
(
12%
), respectively. This compares to
$6,921
(
13%
) and
$6,955
(
13%
) in
2016
, respectively.
As of
March 31, 2017
, the Company's significant customers that comprised more than
10%
of accounts receivable were KPX and PJM, representing
26%
and
14%
, respectively. Unbilled receivables related to PJM was
93%
of the Company's total balance as of
March 31, 2017
.
Contract assets are largely related to the Company's energy procurement solutions. As of
March 31, 2017
there were two customers that each comprised
17%
, or
34%
in the aggregate, of the contract asset balance.
3. Segment Information
The Company operates
two
reportable segments: Demand Response and Software. The Company’s chief operating decision maker (CODM), who is the Company's Chief Executive Officer, primarily evaluates the business and assesses performance based on the revenue and segment adjusted EBITDA of the Company's Demand Response and Software segments. The Company defines segment adjusted EBITDA as segment income (loss) from operations excluding depreciation, amortization and asset impairments; stock-based compensation and restructuring charges. In addition, the Company does not allocate to its operating segments certain corporate level expenses; gains and losses on the sale of businesses; impairment of goodwill as well as direct and incremental expenses and gains associated with acquisitions, divestitures, and reorganizations. Management considers segment adjusted EBITDA to be an important indicator of the segments' operational strength and the performance of its businesses.
The financial results of each segment are based on revenues from external customers, cost of revenues 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 cost drivers, such as headcount, number of customer sites, or other operational data that contributes to the shared costs. Certain corporate level expenses, including executive, legal, and finance, have not been allocated as they are not attributable to either segment. Segment level asset information has not been provided as such information is not reviewed by the CODM for purposes of assessing segment performance and allocating resources. There are
no
intersegment 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 2016 Form 10-K.
Reportable Segments
The Demand Response segment provides utilities and electric power grid operators with the Company’s demand response solutions. The Software segment provides enterprises with the Company's EIS, which includes subscription software, energy procurement solutions, and professional services.
The following table presents segment revenue and adjusted EBITDA, along with the reconciliation of segment adjusted EBITDA to consolidated loss before income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Revenues:
|
|
|
|
|
Demand Response
|
|
|
|
|
Grid Operator
|
$
|
26,392
|
|
|
$
|
26,812
|
|
|
Utility
|
8,092
|
|
|
9,535
|
|
|
Demand Response Revenue
|
34,484
|
|
|
36,347
|
|
|
|
|
|
|
|
Software
|
|
|
|
|
Subscription software
|
4,499
|
|
|
6,176
|
|
|
Procurement solutions
|
6,757
|
|
|
8,933
|
|
|
Professional services
|
2,369
|
|
|
1,924
|
|
|
Software Revenue
|
13,625
|
|
|
17,033
|
|
|
|
|
|
|
|
Total Revenues
|
$
|
48,109
|
|
|
$
|
53,380
|
|
|
|
|
|
|
|
Segment Adjusted EBITDA:
|
|
|
|
|
Demand Response adjusted EBITDA
|
$
|
(3,456
|
)
|
|
$
|
(3,484
|
)
|
|
Software adjusted EBITDA
|
(5,038
|
)
|
|
(18,007
|
)
|
|
Total Segment adjusted EBITDA
|
(8,494
|
)
|
|
(21,491
|
)
|
|
Reconciliation to consolidated loss before income tax
|
|
|
|
|
Corporate unallocated expenses
|
(5,817
|
)
|
|
(5,671
|
)
|
|
Depreciation, amortization and asset impairments
(1)
|
(7,541
|
)
|
|
(9,687
|
)
|
|
Stock-based compensation
|
(2,031
|
)
|
|
(3,115
|
)
|
|
Gains on sale of businesses (Note 4)
|
1,726
|
|
|
—
|
|
|
Direct and incremental expenses associated with divestitures
(2)
|
(178
|
)
|
|
(193
|
)
|
|
Impairment of goodwill (Note 5)
|
(5,886
|
)
|
|
—
|
|
|
Noncontrolling interest expense
|
(129
|
)
|
|
(31
|
)
|
|
Interest and other income (expense), net
|
49
|
|
|
1,310
|
|
|
Consolidated loss before income tax
|
$
|
(28,301
|
)
|
|
$
|
(38,878
|
)
|
(1)
Includes impairments of production equipment no longer in operation.
(2)
Includes expenses that are direct and incremental to business divestitures, including third-party professional fees for legal, accounting and valuation services.
4. Gains on Sale of Businesses
German Demand Response Operations (DACH)
In December 2016, the Company entered into an agreement to sell its German business operations (DACH), which was a component of the Demand Response segment. The carrying value of business, including long-lived assets of
$2,034
, current assets of
$1,381
and current liabilities of
$1,780
, were classified as "held for sale" on the consolidated balance sheet as of December 31, 2016. In January 2017, the Company completed the sale of the DACH business for nominal consideration. The preliminary working capital value may be adjusted upon finalization of the working capital balance. As a result of the complete liquidation of a foreign entity, the cumulative translation adjustments associated with the business, which were in an unrealized gain position of
$2,348
prior to the closing of the transaction, were recognized and included in "gains on sale of businesses".
Energy Services Group
In March 2017, the Company sold its Energy Service Group (ESG) for
$2,000
in cash plus adjustments for working capital balances sold. ESG was a component of the Software segment and provides professional services with a focus on energy audits
and facility commissioning and retro-commissioning services. The Company concluded that the service line met the definition of a business in accordance with ASU 2017-01: accordingly, goodwill of
$231
was allocated to the asset group. The transaction was structured as an asset purchase agreement and was intended to transfer control of the business, including certain ongoing customer contracts, to the buyer. Certain customer contracts (the "non-assigned contracts") had not been transferred to the buyer as of March 31, 2017 as required customer consents had not been obtained. However, the agreement entered into between the Company and the buyer transferred all economic risks and rewards of the ESG business, including ownership of the non-assigned contracts, to the buyer on the closing date. As a result, a gain on the sale of the business was recognized upon closing.
The following table summarizes the sale price, net assets sold and gain on sale of businesses closed in the quarter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DACH
|
|
ESG
|
|
Total
|
|
Sale price, net of cash divested
|
$
|
(625
|
)
|
|
$
|
2,238
|
|
|
$
|
1,613
|
|
|
Less:
|
|
|
|
|
|
|
Net working capital (deficit)
|
(400
|
)
|
|
238
|
|
|
(162
|
)
|
|
Fixed assets
|
398
|
|
|
28
|
|
|
426
|
|
|
Intangible assets
|
1,636
|
|
|
—
|
|
|
1,636
|
|
|
Goodwill
|
—
|
|
|
231
|
|
|
231
|
|
|
Net assets sold
|
1,634
|
|
|
497
|
|
|
2,131
|
|
|
Cumulative translation adjustments reclassified from accumulated other comprehensive loss
|
(2,348
|
)
|
|
—
|
|
|
(2,348
|
)
|
|
Direct and incremental transaction costs
|
89
|
|
|
15
|
|
|
104
|
|
|
Gains on sale of businesses
|
$
|
—
|
|
|
$
|
1,726
|
|
|
$
|
1,726
|
|
Net working capital deficit related to DACH primarily includes accounts receivable and accrued capacity payments. Net working capital related to ESG includes accounts receivable and accrued subcontractor fees.
5. Restructuring Activities
During the year ended December 31, 2016, the Company implemented a series of restructuring plans that resulted in workforce reductions, the sale of businesses, the consolidation of leased office space and the termination of vendor and customer contracts. Accrued severance liabilities are included within "accrued compensation and related expenses" on the condensed consolidated balance sheets. The following table rolls forward the accrued restructuring liabilities for the period ended March 31, 2017. Unpaid severance benefits are expected to be settled in the first half of 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Related
|
|
Contract Terminations
|
|
Total
|
|
Accrued restructuring liability at December 31, 2016
|
$
|
1,024
|
|
|
$
|
29
|
|
|
$
|
1,053
|
|
|
Cash payments
|
(322
|
)
|
|
(13
|
)
|
|
(335
|
)
|
|
Accrued restructuring liability at March 31, 2017
|
$
|
702
|
|
|
$
|
16
|
|
|
$
|
718
|
|
6. Goodwill and Intangible Assets
Goodwill
The Company operates
two
reportable segments, for which the allocation of goodwill is shown in the following table. During the three months ended March 31, 2017, the Company sold business components that were part of each segment, as discussed in Note
4
. Goodwill was allocated to these business components based on their fair value relative to the overall reporting unit prior to the divestiture.
The following table rolls forward goodwill for the
three months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand Response
|
|
Software
|
|
Total Goodwill
1
|
|
Balance at December 31, 2016
|
$
|
26,760
|
|
|
$
|
9,902
|
|
|
$
|
36,662
|
|
|
Foreign exchange
|
606
|
|
|
17
|
|
|
623
|
|
|
Impairment
|
—
|
|
|
(5,886
|
)
|
|
(5,886
|
)
|
|
Sale of business component (Note 4)
|
—
|
|
|
(231
|
)
|
|
(231
|
)
|
|
Balance at March 31, 2017
|
$
|
27,366
|
|
|
$
|
3,802
|
|
|
$
|
31,168
|
|
1
Accumulated impairment losses as of
March 31, 2017
and December 31, 2016 were
$114,649
and
$108,763
, respectively.
The Company performs its annual goodwill impairment test as of November 30. The goodwill test is performed at the reporting unit level, which is one level below the operating segment level and is generally based on how segment management reviews financial results of the business. For purposes of the annual goodwill impairment test conducted as of November 30, 2016, management concluded that it had three reporting units for which the fair value of each reporting unit was determined to be in excess of the carrying amount of its net assets.
As discussed in Note
2
, the Company adopted the new revenue guidance under ASC 606 using the modified retrospective method as of January 1, 2017. In connection with the adoption of ASC 606, the Company recorded significant contract assets associated with its Energy Procurement Solutions reporting unit, which triggered an interim goodwill impairment test for the first quarter of 2017. As discussed in Note 1, the Company adopted the new goodwill impairment guidance of ASU 2017-04, which measures goodwill impairment as the amount in which the current value of net assets exceeds the respective fair value. Based on the estimated fair value of the Energy Procurement Solutions reporting unit, the Company recorded an impairment charge of
$5,886
, which represented all of the goodwill assigned to this reporting unit. The Company reviewed qualitative and quantitative information with respect to its other reporting units and concluded that goodwill was not impaired for these reporting units.
In order to determine the fair value of its reporting units, which are classified as Level 3 on the fair value hierarchy, the Company utilizes a discounted cash flow model. The key assumptions that drive fair value in the discounted cash flow model are the discount rates, terminal values, growth and profitability rates, and the amount and timing of expected future cash flows based on management's projected financial information. The Company ensures that the collective fair value of the reporting units reconciles to its market capitalization, which is calculated as the market price per share of the Company's common stock multiplied by common shares outstanding, while taking into consideration a reasonable premium that a market participant would pay to obtain control of the Company, which is also referred to as the control premium.
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, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
As of December 31, 2016
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Customer relationships
|
$
|
50,323
|
|
|
$
|
(26,894
|
)
|
|
$
|
51,029
|
|
|
$
|
(26,231
|
)
|
|
Customer contracts
|
8,212
|
|
|
(8,112
|
)
|
|
7,993
|
|
|
(7,789
|
)
|
|
Employment and non-compete agreements
|
951
|
|
|
(915
|
)
|
|
941
|
|
|
(844
|
)
|
|
Software
|
536
|
|
|
(222
|
)
|
|
536
|
|
|
(212
|
)
|
|
Developed technology
|
15,622
|
|
|
(5,694
|
)
|
|
15,597
|
|
|
(5,307
|
)
|
|
Trade name
|
346
|
|
|
(346
|
)
|
|
344
|
|
|
(344
|
)
|
|
Patents
|
180
|
|
|
(126
|
)
|
|
180
|
|
|
(122
|
)
|
|
Total
|
$
|
76,170
|
|
|
$
|
(42,309
|
)
|
|
$
|
76,620
|
|
|
$
|
(40,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Amortization expense included in cost of revenues
|
$
|
368
|
|
|
$
|
861
|
|
|
Amortization expense included in operating expenses
|
1,676
|
|
|
3,285
|
|
|
Total amortization expense
|
$
|
2,044
|
|
|
$
|
4,146
|
|
Definite-lived intangible asset lives range from
1
to
14
years and have a weighted average remaining life of
5.4
years at
March 31, 2017
.
7. 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).
Financial Instruments and Investments
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 fair value due to their short-term nature. In addition, the Company has long-term investments in non-marketable equity securities that are accounted for as cost-method investments. These investments are not adjusted to fair value on a recurring basis but are periodically assessed for indications of a reduction in fair value that is other-than-temporary. The Company's financial instruments also include its Convertible Notes for which fair value is disclosed.
Recurring Fair Value Measurements
The table below presents the assets and liabilities measured at fair value on a recurring basis at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measured and Recorded Using
|
|
|
Totals
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Unobservable Inputs
(Level 3)
|
|
As of March 31, 2017
|
|
|
|
|
|
|
|
|
Assets: Money market funds
|
$
|
49,596
|
|
|
$
|
49,596
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
Assets: Money market funds
|
$
|
76,008
|
|
|
$
|
76,008
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-Recurring Fair Value Measurements
Cost method investments and non-financial assets, such as intangible assets, property and equipment, and assets and liabilities held for sale, are adjusted to fair value only if an impairment is recognized. During the three months ended March 31, 2017, the Company recorded impairment charges of
$305
related to the retirement of production equipment and the sale of furniture, fixtures and leasehold improvements associated with sublease arrangements. Other than these impairments, the Company did not measure any assets at fair value on a non-recurring basis during the three months ended
March 31, 2017
.
Assets and Liabilities for which Fair Value Disclosure is Required
The following table shows the gross and net carrying amount of the Company's
2.25%
convertible senior notes due August 15, 2019 (the Convertible Notes) at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Principal amount outstanding
|
$
|
126,800
|
|
|
$
|
126,800
|
|
|
Less: debt discount and issuance costs
|
(10,552
|
)
|
|
(11,577
|
)
|
|
Carrying value, including unamortized debt discount and issuance costs
|
$
|
116,248
|
|
|
$
|
115,223
|
|
|
Fair Value
|
$
|
108,097
|
|
|
$
|
100,648
|
|
The fair value was determined based on the quoted market price of the Convertible Notes as of those dates and is classified as a Level 1 measurement.
8. Borrowings and Credit Arrangements
Credit Agreement
In August 2014, the Company entered into a
$30,000
senior secured revolving credit facility (the 2014 credit facility) with Silicon Valley Bank (SVB) pursuant to a loan and security agreement, as amended, which is available for issuances of letters of credit and revolving loans. In August 2016, the Company and SVB entered into a third amendment to the 2014 credit facility to extend the maturity date from August 9, 2016 to August 8, 2017. The 2014 credit facility is subject to continued covenant compliance and borrowing base requirements. As of
March 31, 2017
, the Company was in compliance with all of its covenants, had
no
outstanding borrowings, and had outstanding letters of credit totaling
$22,504
under the 2014 credit facility. As of
March 31, 2017
, there was
$7,496
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 Convertible Notes due August 15, 2019. The Convertible Notes include customary terms and covenants, including certain events of default after which they may be declared or become due and payable immediately. The Convertible Notes are convertible at an initial conversion rate of
36.0933
shares of common stock per
one thousand
dollar principal amount (equivalent to an initial conversion price of approximately
$27.71
per share of common stock). The Company may elect to settle conversions by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock.
In December 2015, in privately negotiated transactions, the Company repurchased in cash
$33,200
in aggregate principal amount of the outstanding Convertible Notes. Following the repurchases, the remaining principal outstanding was
$126,800
, which is reflected as convertible senior notes of
$116,248
, net of unamortized debt discount and issuance cost of
$10,552
, on the condensed consolidated balance sheet as of
March 31, 2017
.
Interest expense under the Convertible Notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Accretion of debt discount and issuance costs
|
$
|
1,025
|
|
|
$
|
962
|
|
|
2.25% accrued interest
|
713
|
|
|
705
|
|
|
Total interest expense from Convertible Notes
|
$
|
1,738
|
|
|
$
|
1,667
|
|
9. Commitments and Contingencies
Performance Guarantees
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, 2017
were
$21,007
and reflected in the outstanding letters of credit.
These amounts primarily represent financial assurance 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 assurance may be forfeited. The Company assessed the probability of default under these customer contracts and open market bidding programs and determined the likelihood of default 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. As of
March 31, 2017
, the maximum termination penalty to which the Company could be subject under these arrangements, which the Company has deemed not probable, was approximately
$3,259
.
Lease Arrangements
The Company leases office space under various operating leases, including its corporate headquarters in Boston, Massachusetts. The Company has entered into sublease arrangements for certain excess space related to these leased facilities. As of
March 31, 2017
, total future non-cancelable sublease payments for all subleases are
$12,516
over the next four years.
Contingencies and Indemnifications
In August 2016, a former employee filed a complaint and demand for a trial jury in state court in the Commonwealth of Massachusetts against the Company related to the payment of commissions and other claims. In September 2016, the Company answered the complaint, denying the claims. 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 a loss may have been incurred related to this matter. The potential amount of such a loss is not currently estimable because the matter is in its early stages and involves unresolved questions of fact.
On April 28, 2017, the Company received a letter from counsel to CLEAResult Consulting Inc. (CLEAResult) making claims for indemnification under an Asset Purchase Agreement among the Company, Global Energy Partners, Inc., Global Energy Partners, LLC and CLEAResult, dated as of May 3, 2016 (the CLEAResult SPA) relating to the sale of the UPG business. The total amount claimed by CLEAResult is approximately
$13,460
. The Company has determined that it is reasonably possible that a loss may have been incurred. However, the Company believes that CLEAResult’s assertions are without merit and do not support valid indemnification claims under the terms of the CLEAResult SPA. Therefore, the Company has concluded that it is not probable that a loss has been incurred.
General Contingencies
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.
10. Stockholder's Equity
Stock-Based Compensation
The Company grants share-based awards to employees, consultants, 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 recorded in the condensed consolidated statements of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
|
Selling and marketing
|
$
|
385
|
|
|
$
|
818
|
|
|
General and administrative
|
1,387
|
|
|
1,961
|
|
|
Research and development
|
259
|
|
|
336
|
|
|
Total stock-based compensation
|
$
|
2,031
|
|
|
$
|
3,115
|
|
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, 2017
and
2016
, the Company recorded
$126
and
$127
of stock based compensation, respectively, related to this performance based bonus.
Stock Options
The following is a summary of the Company’s stock option activity during the
three months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
Number of
Shares
Underlying
Options
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
Aggregate
Intrinsic
Value
|
|
Weighted Average Remaining Life (in years)
|
|
Outstanding at December 31, 2016
|
397,244
|
|
|
$
|
22.30
|
|
|
|
|
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
|
Cancelled
|
(47,034
|
)
|
|
18.10
|
|
|
|
|
|
|
Outstanding at March 31, 2017
|
350,210
|
|
|
$
|
22.88
|
|
|
$
|
—
|
|
|
|
|
Exercisable at end of period
|
347,209
|
|
|
$
|
23.29
|
|
|
$
|
—
|
|
|
1.9
|
|
Vested or expected to vest at March 31, 2017
|
349,922
|
|
|
$
|
23.12
|
|
|
$
|
—
|
|
|
1.9
|
The total number of shares issuable upon the exercise of vested "in-the-money" options as of
March 31, 2017
was approximately
198
, the aggregated intrinsic value of which was not material. As of
March 31, 2017
, there was
$3
of unrecognized stock-based compensation expense related to stock options, which will be recognized over a period of less than
1
year.
Restricted Stock
The following table summarizes the Company’s restricted stock activity during the
three months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
|
Nonvested at December 31, 2016
|
1,374,967
|
|
|
$
|
11.71
|
|
|
Granted
|
893,108
|
|
|
5.55
|
|
|
Vested
|
(235,127
|
)
|
|
11.96
|
|
|
Cancelled
|
(170,995
|
)
|
|
12.16
|
|
|
Nonvested at March 31, 2017
|
1,861,953
|
|
|
$
|
8.68
|
|
For unvested restricted stock outstanding as of
March 31, 2017
, the Company had
$11,548
of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of
2.1
years.
Restricted Stock Units
The following table summarizes the Company’s restricted stock unit activity during the
three months ended March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
|
Nonvested at December 31, 2016
|
705,851
|
|
|
$
|
8.90
|
|
|
Granted
|
738,500
|
|
|
5.55
|
|
|
Vested
|
(2,325
|
)
|
|
9.30
|
|
|
Cancelled
|
(154,848
|
)
|
|
12.62
|
|
|
Nonvested at March 31, 2017
|
1,287,178
|
|
|
$
|
6.53
|
|
For non-vested restricted stock units subject to service-based vesting conditions outstanding as of
March 31, 2017
, the Company had
$5,644
of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of
2.6
years. The Company had
no
unrecognized stock-based compensation expense related to restricted stock units subject to outstanding performance-based vesting conditions as of
March 31, 2017
.
Share Repurchase Activity
In connection with the vesting of restricted stock and restricted stock units under its equity incentive plans, the Company withheld
79,854
shares of its common stock during the
three months ended March 31, 2017
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.
Accumulated Other Comprehensive Loss
Changes in accumulated other comprehensive loss, which are entirely comprised of foreign currency translation adjustments, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Balance at December 31, 2016
|
$
|
2,477
|
|
|
Other comprehensive loss before reclassifications
|
(557
|
)
|
|
Reclassification due to liquidation of a foreign entity (Note 4)
|
2,348
|
|
|
Balance at March 31, 2017
|
$
|
4,268
|
|
11. Net Loss Per Share
The 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:
|
2017
|
|
2016
|
|
Net loss for basic earnings per share
|
$
|
(32,010
|
)
|
|
$
|
(40,538
|
)
|
|
ADD: Interest expense related to Convertible Notes
|
—
|
|
|
—
|
|
|
Net loss for diluted earnings per share
|
$
|
(32,010
|
)
|
|
$
|
(40,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Basic weighted average common shares outstanding
|
29,671,109
|
|
|
28,806,810
|
|
|
Weighted average common stock equivalents
|
—
|
|
|
—
|
|
|
Diluted weighted average common shares outstanding
|
29,671,109
|
|
|
28,806,810
|
|
|
|
|
|
|
|
Basic net loss per share
|
$
|
(1.08
|
)
|
|
$
|
(1.41
|
)
|
|
Diluted net loss per share
|
$
|
(1.08
|
)
|
|
$
|
(1.41
|
)
|
|
|
|
|
|
|
Weighted average anti-dilutive shares related to:
|
|
|
|
|
Incremental shares from assumed conversion of Convertible Notes
|
4,576,630
|
|
|
4,576,630
|
|
|
Stock options
|
197,012
|
|
|
322,245
|
|
|
Nonvested restricted stock
|
1,363,659
|
|
|
1,737,777
|
|
|
Restricted stock units
|
743,049
|
|
|
49,299
|
|
On May 27, 2015, the Company received stockholder approval to elect to settle conversions of the aggregate outstanding principal amount of its Convertible Notes by paying or delivering cash, shares of common stock or a combination of cash and shares of common stock. However, for purposes of the calculation of diluted net income per share, it is assumed that conversion would be settled entirely in shares of common stock. For the
three months ended March 31, 2017
, the Convertible Notes are not assumed to be converted as the impact of conversion is anti-dilutive
.
For further information regarding the Convertible Notes, please refer to Note
8
.
Restricted stock awards are excluded from the calculation of basic weighted-average common shares outstanding until they vest. For restricted stock awards that vest based on achievement of performance conditions, the number of contingently issuable common shares 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, assuming the result would be dilutive.
The Company includes
254,654
shares of common stock related to a component of the deferred purchase price consideration for a business acquired in 2011 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. These shares are issuable no later than January 2018.
12. Income Taxes
The quarterly income tax provision is measured using an estimated annual effective tax rate applied to the pre-tax income of certain entities within the Company's global consolidated group. 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 to 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, 2017
, the Company determined that it was able to reliably estimate its annual effective tax rate in all jurisdictions in which it operates.
The Company recorded a consolidated income tax expense of
$3,838
for the
three months ended March 31, 2017
, reflecting an effective tax rate of
(13.6)%
on consolidated profit before tax. The income tax expense for the
three months ended March 31, 2017
is driven by the mix of earnings from foreign operations, the composition of entities that are included or excluded from the calculation of annual effective tax rate, changes relating to valuation allowances associated with deferred tax assets for certain foreign entities, and discrete items, of which there were none in the quarter ended March 31, 2017. The Company recorded an income tax expense of
$1,691
for the
three months ended March 31, 2016
.
ASC 740,
Income Taxes
, provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits. During the
three months ended March 31, 2017
, there were no material changes in the Company’s uncertain tax positions.
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, 2017
, due to the uncertainty around the realizability of certain domestic and foreign deferred tax assets, the Company continues to maintain a valuation allowance.