Our business is subject to many risks and uncertainties, which may affect our future
financial performance. If any of the events or circumstances described below occurs, our business and financial performance could be harmed, our actual results could differ materially from our expectations and the market value of our stock could
decline. The risks and uncertainties discussed below are not the only ones we face. There may be additional risks and uncertainties not currently known to us or that we currently do not believe are material that may harm our business and financial
performance.
We have a history of losses and anticipate continued losses and may incur negative operating cash flow in future periods, and we may
not achieve or sustain profitability on a quarterly or annual basis.
We have incurred significant losses to date, with an
accumulated deficit of $617.6 million as of September 30, 2013. For the years ended December 31, 2010, 2011 and 2012, and for the nine months ended September 30, 2013, we incurred net loss of $(148.4) million, $(92.4) million, $(89.7)
million and $(67.2) million, respectively. We expect these losses to continue. We may incur negative operating cash flow in future periods, as we expect to incur significant operating expenses in connection with the continued development and
expansion of our business. Our expenses include research and development expenses, general and administrative expenses, selling and marketing expenses and customer service and support expenses. Many of these expenses relate to prospective utility
customers that may never place any orders and products that may not be introduced or generate revenue until later periods, if at all. There can be no assurance that we will ever achieve or sustain profitability on a quarterly or annual basis.
Our quarterly results are inherently unpredictable and subject to substantial fluctuations, and, as a result, we may fail to meet the expectations of
securities analysts and investors, which could adversely affect the trading price of our common stock.
Our revenue, non-GAAP
revenue (billings) and other operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. While our revenue and non-GAAP revenue (billings) have increased in recent periods,
there can be no assurances that our revenue and non-GAAP revenue (billings) will continue to increase or will not decrease on a quarterly or annual basis. For example, we had lower revenue for the three months ended March 31, 2013 compared to
the three months ended March 31, 2012. We expect revenue, non-GAAP revenue (billings), gross margin on non-GAAP revenue (billings) and adjusted EBITDA to fluctuate from period to period throughout the remainder of 2013 and beyond. We also
expect operating losses in certain future periods. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Non-GAAP Financial Measures” above.
The factors that may affect the unpredictability of our quarterly results and cause our stock price to fluctuate include, but are not limited
to:
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long, and sometimes unpredictable, sales and customer deployment cycles;
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changes in the mix of products and services sold;
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our dependence on a limited number of utility customers;
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the timing of acceptance of our products and services by our utility customers, which can have a material impact on when we recognize related revenue under our revenue recognition policies;
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changing market conditions;
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failures of our products, components that we use in our products or third-party devices containing our products that delay deployments, harm our reputation or result in high warranty costs, contractual penalties or
terminations;
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product or project failures by third-party vendors, utility customers or competitors that result in the cancellation, slowing down or deferring of projects;
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liquidated damages provisions in our contracts, which could result in significant financial penalties if triggered or, even if not triggered, could affect our ability to recognize revenue in a given period;
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the ability of our suppliers and manufacturers to deliver supplies and products to us on a timely basis;
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delays associated with government funding programs for smart grid projects;
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delays in regulatory approvals for our utility customers and utility customer deployments;
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political and consumer sentiment and the related impact on the scope and timing of smart grid deployment; and
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economic, regulatory and political conditions in the markets where we operate or anticipate operating.
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As a result, we believe that quarter to quarter comparisons of operating results are not necessarily a good indication of what our future
performance will be. It is likely that in some future quarters our operating results may be below the expectations of securities analysts or investors, in which case the price of our common stock may decline.
Sales cycles to utility customers can be lengthy and unpredictable and require significant employee time and financial resources with no assurances that
a prospective customer will select our products and services.
Sales cycles with utilities, our potential customers, tend to be
long and unpredictable. Utilities generally have extensive budgeting, procurement, competitive bidding, technical and performance review, and regulatory approval processes that can take up to several years to complete. Utilities may choose, and many
historically have often chosen, to follow industry trends rather than be early adopters of new products or services, which can extend the lead time for or prevent acceptance of more recently introduced products or services such as ours. In addition,
in many instances, a utility may require one or more pilot programs to test our new products and services before committing to a larger deployment. These pilot programs may be quite lengthy and further delay the sales cycle with no assurance that
they will lead to a larger deployment or future sales. Furthermore, to the extent our products are required to be deployed with the products of others, such as meters, delays related to such third-party products will further lengthen the sales
cycle.
This extended sales process requires us to dedicate significant time by our senior management, and sales and marketing and
customer services personnel, and to use significant financial resources without any assurance of success or recovery of our related expenses. Similarly, we are likely to incur these significant operating expenses well ahead of recognizing the
related revenue because our ability to recognize revenue is typically dependent on meeting contractual customer acceptance and other requirements.
The lengthy sales cycles of our products and services also make it difficult to forecast new customer deployments, as well as the volume and
timing of orders, which, in turn makes forecasting our future results of operations challenging. In the event that we publicly disclose any forecasts of our future results of operations or other performance metrics and those forecasts ultimately
turn out to be inaccurate, the value of our common stock could significantly decline.
In addition, our agreement with our primary
contract manufacturer provides for tiered volume-based pricing. To the extent our volumes decrease below specific thresholds, our gross profit and gross margins will be negatively impacted, which has occurred previously. Alternatively, in order to
take advantage of the tiered volume-based pricing in any one quarter, we may purchase, and have previously purchased, additional inventory exposing us to the risk that we may incur costs for excess and obsolete inventory.
Our revenue is not predictable and recognition of a significant portion of it will be deferred into future periods.
Once a utility decides to move forward with a large-scale deployment of our products and services, the timing of and our ability to recognize
related revenue will depend on several factors, some of which may not be under our control. These factors include shipment schedules that may be delayed or subject to modification, the rate at which our utility customers choose to deploy our
Smart Energy Platform
, customer acceptance of all or any part of our products and services, our contractual commitments to provide new or enhanced functionality at some point in the future, other contractual provisions such as liquidated
damages, our manufacturers’ ability to provide an adequate supply of components, the requirement to obtain regulatory approval, and our ability to deliver quality products according to expected schedules. In light of these factors, the
application of complex revenue recognition rules to our products and services has required us to defer, and in the future will likely continue to require us to defer, a significant amount of revenue until undetermined future periods. As of
September 30, 2013, we had $532.5 million in deferred revenue. It may be difficult to predict the amount of revenue that we will recognize in any given period, and amounts recognized may fluctuate significantly from one period to the next.
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Amounts included in our total backlog and order backlog may not result in actual non-GAAP revenue
(billings) or revenue or translate into profits.
Our total backlog disclosed in the prospectus filed with the SEC pursuant to
Rule 424(b) under the Securities Act on March 13, 2013 (the “Prospectus”), represents future product and service non-GAAP revenue (billings) that we expect to generate pursuant to contracts that we have entered into with our utility
customers and meter manufacturers. Our total backlog includes our order backlog, also disclosed in the Prospectus, which represents future non-GAAP revenue (billings) for open purchase orders and other firm commitments. We anticipate that our total
backlog and order backlog will fluctuate from period to period throughout 2013 and beyond.
We cannot guarantee that our total backlog or
order backlog will result in actual non-GAAP revenue (billings) in the originally anticipated period or at all. In addition, the contracts reflected in our total backlog and order backlog may not generate margins equal to or better than our
historical operating results. We only recently began to track total backlog and order backlog on a consistent basis as performance measures and as a result, we do not have significant experience in determining the level of realization that we will
actually achieve on our total backlog and order backlog. Our customer contracts are typically structured as master purchase and service agreements, or MSAs, under which the customer may place purchase orders over the course of a deployment. These
deployments can extend for a number of years. Because our MSAs do not typically require a customer or meter partner to purchase a minimum amount of product or services, total backlog is an estimate based upon contractual terms, existing purchase
orders and other available information regarding the amount and timing of expected future purchase orders to be placed by our utility customers and meter manufacturers, including non-binding forecasts. No assurance can be made that firm purchase
orders will be placed under these MSAs in the amounts we estimate, within the time period we expect, or at all. Total backlog is subject to adjustments due to the long-term nature of our customer deployments. Adjustments can result from a variety of
factors, including changes in the nature or scope of customer deployments, the impact of contingency provisions related to future delivery or performance, customer cancellations, market conditions, delayed regulatory approvals and customer defaults.
Delays due to external market factors or delays in deployments and required regulatory approvals have in the past and may in the future cause us to extend the deployment schedule or make modifications under customer contracts. For example, ongoing
regulatory uncertainties previously delayed the timing of the planned deployment schedule of Commonwealth Edison Company, or ComEd. In addition, under our MSAs, our utility customers generally have the right to terminate the MSA for any reason,
including for their sole convenience, a material breach or insolvency on our part or their inability to obtain required regulatory approval. The occurrence of such adjustments or terminations could materially reduce the amount of, or delay the
fulfillment of, our total and order backlog. If our total backlog or order backlog fails to materialize as expected, we could experience a material reduction in future non-GAAP revenue (billings), revenue, operating results or cash flow.
We are dependent on the utility industry, which has experienced volatility in capital spending. This volatility could cause our results of operations to
vary significantly from period to period.
Similar to other industries, the utility industry has been affected by recent economic
factors, including continued global economic uncertainty, concerns over the downgrade of U.S. sovereign debt and continued sovereign debt, monetary and financial uncertainties in European and other foreign countries. We derive substantially all of
our revenue from sales of products and services directly and indirectly to utilities. Purchases of our products and services may be reduced or deferred as a result of many factors including economic downturns and uncertainty, slowdowns in new
residential and commercial construction, a utility’s access to capital on acceptable terms, the timing and availability of government grants or incentives, utility specific financial circumstances, mergers and acquisitions, regulatory
decisions, weather conditions, consumer opposition and fluctuating interest rates. Even with economic recovery, it may take time for our utility customers to establish new budgets and return to normal purchasing patterns. We cannot predict the
reoccurrence of any economic slowdown or the strength or sustainability of the economic recovery, worldwide, in the United States or in our industry. We have experienced, and may in the future experience, variability in operating results on an
annual and a quarterly basis as a result of these factors. Because a significant portion of our expenses is fixed in the short term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to
offset any shortfall of sales. This could materially and adversely affect our operating results, financial condition and cash flows.
Substantially
all of our current products depend on the availability and are subject to the regulation of radio spectrum in the United States and abroad.
Substantially all of our current hardware products are designed to communicate wirelessly via radio frequencies and therefore depend on the
availability of adequate radio spectrum in order to operate. While these products could be designed to operate in a variety of different frequencies or by using other technologies such as cellular, in the United States they are primarily designed to
form a wireless RF mesh using the unlicensed 902-928 megahertz, or MHz, band. The 902-928 MHz band is available for a wide variety of uses and requires us to manage interference by other users who operate in accordance with the Federal
Communications Commission, or FCC, rules. The unlicensed frequencies are also often the subject of proposals to the FCC requesting a change in the rules under which such frequencies may be used. In the past, the FCC has re-allocated spectrum for new
or additional uses, and has adopted
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changes to the requirements for equipment using radio spectrum. It is possible that the FCC or the U.S. Congress could adopt additional changes, which may be incompatible with our current or
future product offerings, as well as products currently installed in the field, or require them to be modified at significant, or even prohibitive, cost. If the unlicensed frequencies become unacceptably crowded, restrictive or subject to changed
laws, regulations or rules governing their use, our business, financial condition and results of operations could be materially and adversely affected.
Our international growth and future success also depend on the availability of radio spectrum that is compatible with our products or on our
ability to develop products that use alternative communications technology, such as Gen4, our next-generation networking technology, which is available to utility customers in some products today and will support cellular communications, with more
products coming to market as we continue to integrate it with products from additional device partners. In Australia, we primarily use unlicensed spectrum in the 915-928 MHz band with relatively minimal modifications needed to our products. In
many other countries, however, there may not be spectrum available or we may be required to obtain a license to operate in any frequency band that is compatible with our products, including, but not limited to, the 902-928 MHz band. Licenses to
appropriate spectrum in these countries may be unavailable or only available at unreasonably high prices. Similarly, in the event that we were only able to obtain a license outside of the 902-928 MHz band, the cost of modifying or redesigning our
products to make them compatible with available spectrum could be significant or even cost-prohibitive. Alternatively, if we are not able to obtain available spectrum on financially advantageous terms, we may not be able to compete without investing
in alternative communication technology. If limitations on the availability of spectrum or the cost of making necessary modifications or investments in new technology preclude us from selling our products in markets outside of the United States, our
growth, prospects, financial condition and results of operations could be materially and adversely affected.
A limited number of our utility
customers are responsible for a significant portion of our non-GAAP revenue ( billings), revenue and cash flow. A decrease in sales to these utility customers or delays in customer deployments could have a material adverse effect on our operating
results and financial condition.
A substantial majority of our revenue, non-GAAP revenue (billings) and cash flow depends on
relatively large sales to a limited number of utility customers. The combination of lengthy sales cycles and relatively large sales to a small number of utility customers increases the risk of quarterly fluctuations in our non-GAAP revenue
(billings), revenue and operating results. Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Overview” above for further information regarding customer concentration. Our
master purchase and service agreements, or MSAs, do not impose purchase obligations on our utility customers until we have received a purchase order or agreed to a statement of work. Further, the MSAs are typically subject to termination for any
reason, including for convenience following a specified notice period. We expect that a limited number of utility customers will continue to account for a substantial portion of our revenue in future periods. Changes in the business requirements,
vendor selection, or purchasing behavior of our utility customers could significantly decrease our sales. In addition, our MSAs are complex, often requiring close coordination with our customers over extended preparation and deployment periods and
involving large-scale delivery of our products and services. From time to time we have experienced and may in the future experience challenges in satisfying our customers throughout these preparation and deployment periods regarding all aspects
of our performance. Additionally, we have, in the past, received correspondence from customers claiming that there have been deficiencies in our timeliness and coordination regarding hardware, software and services for deployment, and requesting
that we remedy the deficiencies noted. If we are unable to address customers’ concerns, we could be required to pay penalties, liquidated damages or other expenses, the customer could terminate our MSA and our reputation could be damaged.
Additionally, delays in customer deployments can affect our results of operations. For example, ongoing regulatory uncertainties previously delayed the timing of ComEd’s planned deployment schedule. Any of these factors could materially and
adversely affect our business, financial condition, and results of operations.
Our marketing efforts depend significantly on our ability to receive
positive references from our existing utility customers.
Our marketing efforts depend significantly on our ability to call on our
current utility customers to provide positive references to new, potential utility customers. Given our limited number of utility customers, the loss or dissatisfaction of any customer could substantially harm our brand and reputation, inhibit the
market acceptance of our products and services, and impair our ability to attract new utility customers and maintain existing utility customers. Any of these consequences could have a material adverse effect on our business, financial condition and
results of operations.
The market for our products and services, and smart grid technology generally, is still developing. If the market develops
less extensively or more slowly than we expect, our business could be harmed.
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The market for our products and services, and smart grid technology generally, is still
developing, and it is uncertain whether our products and services will achieve and sustain high levels of demand and market acceptance. Our near-term and long-term success will depend to a substantial extent on the willingness and ability of
utilities to implement smart grid technology. Many utilities lack the financial resources and/or technical expertise required to evaluate, deploy and operate smart grid technology. Utilities’ activities are governed by regulatory agencies,
including public utility commissions, which may not create a regulatory environment that is conducive to the implementation of smart grid technologies in a particular jurisdiction. Furthermore, some utilities may be reluctant or unwilling to adopt
smart grid technology because they do not perceive the benefits or are unable to develop a business case to justify the up-front and ongoing expenditures. If utilities do not implement smart grid technology or do so in fewer numbers or more slowly
than we expect, our business and operating results would be adversely affected. For example, in 2010, the rate of smart grid adoption slowed due to uncertainty surrounding the timing and tax treatment of U.S. government stimulus funding, negative
publicity and consumer opposition, and regulatory investigations. These uncertainties caused many potential utility customers that had been considering smart grid programs in the United States to further evaluate their smart grid initiatives and
delay their procurement processes or extend their deployment schedules. Smart grid adoption in international markets has trailed adoption in the United States as international markets continue to explore the technology and define the benefits and
regulatory requirements for the smart grid.
Similarly, our success depends on our ability to expand beyond advanced metering sales and
sell additional products and services, such as distribution automation and demand-side management solutions, to our existing utility customers. There can be no assurance that these products and services will be accepted by utilities or consumers.
Other competing products and services may emerge and may be more successful.
Adverse publicity about, or consumer or political opposition to, the
smart grid could inhibit the growth of the overall market.
The safety and security of the power grid, the accuracy and protection
of the data collected by meters and transmitted via the smart grid, and concerns about the safety and perceived health risks of using radio frequency communications have been the focus of recent adverse publicity. For example, in Northern
California, PG&E’s full-scale deployment of our networking platform and advanced metering solution has been subject to continued scrutiny following allegations of inaccurate bills generated by newly-installed “smart meters” and
safety concerns about the levels of radio frequency electromagnetic fields emitted by the wireless communications technology used by the meters. As a result, the California State Senate created a special committee and the California Public Utilities
Commission, or CPUC, hired an independent investigator to review the installation and use of advanced metering products. Negative publicity and consumer opposition in California, Maine and elsewhere have caused other utilities or their regulators to
respond by delaying or modifying planned smart grid initiatives, mandating that utilities allow their customers to opt out of smart metering programs, or calling for investigations and/or implementation of unfavorable regulations and legislation.
For example, in January 2012, the CPUC ruled that PG&E must let its customers retain or receive an analog meter, for nominal initial and monthly fees, if they, for any reason, opt out of PG&E’s deployment of PG&E’s smart
meters. Similarly, outside the United States, public concern over smart grid projects in places such as Victoria, Australia has resulted in increased government scrutiny. Additionally, testing commissioned by the CPUC and other organizations could,
in the future, contain negative information regarding the accuracy and safety of smart grid solutions. Finally, smart grid projects by other companies may be, or could be viewed by the public as, unsuccessful. Any of the foregoing factors could
directly impact our current or future deployments, as well as inhibit the growth of the overall smart grid market, either of which could cause our business to suffer.
Security breaches involving our smart grid products or services, publicized breaches in smart grid products and services offered by others, or the
public perception of security risks or vulnerability created by the deployment of the smart grid in general, whether or not valid, could harm our business.
The security technologies we have integrated into our networking platform and solutions that are designed to detect unauthorized activity and
prevent or minimize security breaches may not function as expected and there can be no assurance that our products and services, those of other companies with whose products our products and services are integrated or interact, or even the products
of other smart grid solutions providers will not be subject to significant real or perceived security breaches.
Our networking platform
allows utilities to collect, monitor, store, compile and analyze sensitive information related to consumers’ energy usage, as well as the performance of different parts of the power grid. As part of our data transfer and managed services and
SaaS, we may store and/or come into contact with sensitive consumer information and data when we perform operational, installation or maintenance functions for our utility customers. If, in handling this information, we, our partners or our utility
customers fail to comply with privacy or security laws, we could face significant legal and financial exposure to claims of government agencies, utility customers and consumers whose privacy is compromised. Even the perception that we, our
partners or our utility customers have improperly handled sensitive, confidential information could have a negative effect on our business. In addition, third parties may attempt to breach our security measures or inappropriately use or access our
network services or the network hardware and software we have in the field through computer viruses, physical or electronic break-ins, and other means. If a breach is successful, sensitive information may be improperly obtained, manipulated or
corrupted, and we may face legal and financial exposure. In addition, a breach could lead to a loss of confidence in our products and services and our business could suffer.
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Our current and anticipated future products and services allow authorized personnel to remotely
control equipment at residential and commercial locations, as well as at various points on the power grid. For example, our software allows a utility to remotely connect and disconnect electricity at specific customer locations. If an unauthorized
third party were to breach our security measures and disrupt, gain access to or take control of any of our products or services, our business and reputation could be severely harmed.
Our products and services may also be integrated or interface with products and services sold by third parties, and rely on the security of
those products and their secure transmission of proprietary data over the Internet and cellular networks. Because we do not have control over the security measures implemented by third parties in their products or in the transmission of data over
the Internet and cellular networks, we cannot ensure the complete integrity or security of such third-party products and transmissions.
Concerns about security or customer privacy may result in the adoption of state or federal legislation that restricts the implementation of
smart grid technology or requires us to make modifications to our products, which could significantly limit the deployment of our technologies or result in significant expense to modify our products.
Any real or perceived security breach could seriously harm our reputation and result in significant legal and financial exposure, including
increased remediation costs and security protection costs, inhibit market acceptance of our products and services, halt or delay the deployment by utilities of our products and services, cause us to lose customers, harm our reputation, trigger
unfavorable legislation and regulatory action, and inhibit the growth of the overall market for smart grid products and services. Any of these risks could have a material adverse effect on our business, financial condition and results of operations.
If our products contain defects or otherwise fail to perform as expected, we could be liable for damages and incur unanticipated warranty, recall
and other related expenses, our reputation could be damaged, we could lose market share and, as a result, our financial condition or results of operations could suffer.
Our products are complex and may contain defects or experience failures due to any number of issues in design, materials, deployment and/or
use. If any of our products contain a defect, compatibility or interoperability issue or other error, we may have to devote significant time and resources to find and correct the issue. Such efforts could divert the attention of our management team
and other relevant personnel from other important tasks. A product recall or a significant number of product returns could: be expensive; damage our reputation and relationships with utilities, meter vendors and other third-party vendors; result in
the loss of business to competitors; and result in litigation against us. Costs associated with field replacement labor, hardware replacement, re-integration with third-party products, handling charges, correcting defects, errors and bugs, or other
issues could be significant and could materially harm our financial results. For example, in March 2010, we discovered that a faulty capacitor from a third-party supplier was used in a discrete number of our communications modules. We recorded costs
associated with this faulty capacitor of $6.3 million for the year ended December 31, 2009, which represented the write-off of deferred costs associated with returned products of $2.4 million and $3.9 million related to estimated future
product warranty claims. In the first quarter of 2010, we recorded product warranty costs associated with this faulty capacitor of $12.5 million, which represented $8.2 million in costs associated with returned product and $4.3 million related
to the estimated future product warranty claims. In addition, due to a product repair program we implemented for one of our customers, in the second quarter of 2011, we recorded a $2.5 million charge against billings for estimated amounts payable to
a customer in connection with the product repair program and a $1.0 million increase to cost of product revenue and warranty liability.
Estimated future product warranty claims are based on the expected number of field failures over the warranty commitment period, the term of
the product warranty period, and the costs for repair, replacement and other associated costs. Our warranty obligations are affected by product failure rates, claims levels, material usage and product re-integration and handling costs. Because our
products are relatively new and we do not yet have the benefit of long-term experience observing the products’ performance in the field, our estimates of a product’s lifespan and incidence of claims may be inaccurate. Should actual product
failure rates, claims levels, material usage, product re-integration and handling costs, defects, errors, bugs or other issues differ from the original estimates, we could end up incurring materially higher warranty or recall expenses than we
anticipate.
Our utility customer contracts typically contain provisions that could cause us to incur penalties, be liable for damages, and/or incur
unanticipated expenses with respect to the functionality, deployment, operation and availability of our products and services, and that provide the customer with the right to terminate the contract for any reason.
In addition to the risk of unanticipated warranty or recall expenses, our utility customer contracts typically contain provisions that could
cause us to incur penalties, be liable for damages, including liquidated damages, or incur other expenses, if we experience
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difficulties with respect to the functionality, deployment, operation and availability of our products and services. In the event of late deliveries, late or improper installations or
operations, failure to meet product or performance specifications or other product defects, interruptions or delays in our managed service offerings, our customer contracts may expose us to penalties, significant damages and other
liabilities. For example, we have in the past agreed to reimburse utility customers for their costs and incurred liquidated damages by failing to timely meet contractual milestones or other contractual requirements. In addition, our utility
customer contracts are typically subject to termination for any reason, including for convenience following a specified notice period, our material breach or insolvency, or the failure to obtain required regulatory approval. If a customer terminates
its customer contract for any reason, our estimates of total backlog and order backlog will be reduced. Reductions in total backlog and order backlog may have a negative effect on future revenue, non-GAAP revenue (billings), profitability and
liquidity. In the event we were to incur contractual penalties, such as liquidated damages or other related costs that exceed our expectations, or our utility customers terminate their contracts with us, our business, financial condition and
operating results could be materially and adversely affected.
Our success depends in part on our ability to integrate our technology into meters
and our relationship with meter manufacturers.
Our business depends on our ability to integrate our communications modules with
electricity meters that are manufactured by third parties such as General Electric Company, Landis+Gyr AG, which was acquired by Toshiba Corporation, and Secure Meters Limited, or Secure Meters. In a typical smart grid deployment, our utility
customer purchases our communications modules from one or more meter manufacturers after integration into the meters. Accordingly, even if demand for our products is strong, we have in the past and may in the future be constrained by the production
capacity and priorities of the meter manufacturers. In addition, several of these meter manufacturers offer competing smart grid products, partner with other smart grid providers or may otherwise choose not to integrate our communications modules
with their meters. If for technical or any other reason we were to lose the ability to integrate our communications modules with meters manufactured by third parties, or if our relationships with meter manufacturers were to be terminated or
renegotiated on unfavorable terms, our business, financial condition, and operating results could suffer. Further, there have been instances where meters with which our technology had been integrated experienced defects or had other problems that
were unrelated to our technology. If this occurs in the future and the defects or problems are more significant or occur more frequently, our reputation could suffer and our business could be harmed.
From time to time, we have worked and expect to continue to work with third parties to pursue smart grid market opportunities. If we were unable to
establish and maintain these relationships, or if our initiatives with these third parties are unsuccessful, our business may suffer.
For some of our existing and anticipated future products and services, we expect to maintain and may seek to establish relationships with
third parties in order to take advantage of smart grid market opportunities. For example, we have designed our products to interface with electric vehicle charging stations, in-home devices and data analytics products, and will need to work with
third parties to successfully deploy these products. Before a utility is willing to move forward with a deployment of our products, they may require that we partner with third-party vendors and/or obtain a certification from these vendors that our
products will function as intended when integrated with their products. In addition, third-party vendors may offer competing products, partner with other networking providers or otherwise choose not to partner with us. In the event that we are
unable to establish or maintain new relationships on favorable terms, or at all, our ability to successfully sell our existing and anticipated future products and services could be jeopardized.
We may not be able to identify adequate strategic relationship opportunities, or form strategic relationships, in the future.
Strategic business relationships may be an important factor in the growth and success of our business. For example, we entered into a
memorandum of understanding and, following negotiation, entered into a master collaboration agreement with Hitachi based on such memorandum of understanding. However, there are no assurances that we will be able to identify or secure suitable
business relationship opportunities in the future and our competitors may capitalize on such opportunities before we do. Concurrently with the execution of the memorandums of understanding, Hitachi made significant investments in us pursuant to
convertible notes that converted into shares of our common stock in connection with our IPO. We may not be able to offer similar benefits to other companies, which could impair our ability to establish such relationships. Moreover, identifying such
opportunities could demand substantial management time and resources and involves significant costs and uncertainties. If we are unable to successfully source and execute on strategic relationship opportunities in the future, our business and
results of operations could be significantly harmed.
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Our technology, products and services have only been developed in the last several years and we have had
only limited opportunities to deploy and assess their performance in the field at full scale.
The current generation of our
networking platform and solutions has only been developed in the last several years and is continuing to evolve. Deploying and operating our technology is a complex endeavor and, until recently, had been done primarily in small pilot programs. As
the size, complexity and scope of our deployments have expanded, we have been able to test product performance at a greater scale and in a variety of new geographic settings and environmental conditions. These larger deployments have presented a
number of unforeseen operational and technical challenges, which in some cases have caused delays and required us to commit significant resources to address these challenges. As the number, size and complexity of our deployments grow, we may
continue to encounter unforeseen operational, technical and other challenges, some of which could cause significant delays, trigger contractual penalties, result in unanticipated expenses, and/or damage to our reputation, each of which could
materially and adversely affect our business, financial condition and results of operations.
If we fail to respond to evolving technological
changes, our products and services could become obsolete or less competitive.
Our industry is highly competitive and
characterized by new and rapidly evolving technologies, standards, regulations, customer requirements, and frequent product introductions. Accordingly, our operating results depend upon, among other things, our ability to develop and introduce new
products and services, as well as our ability to reduce production costs of our existing products. For example, in January 2012, we announced Gen4, our next-generation networking technology, which is available in some products today, with more
products coming to market as we continue to integrate it with products from additional device partners. The process of developing new technologies and products is complex, and if we are unable to develop enhancements to, and new features for, our
existing products or acceptable new products that keep pace with technological developments or industry standards, our products may become obsolete, less marketable and less competitive and our business could be significantly harmed.
We depend on our ability to develop new products and to enhance and sustain the quality of existing products.
Most of our current non-GAAP revenue (billings) and revenue are derived from our networking platform and advanced metering solution, but our
growth and future success will depend, in part, on our ability to continue to design and manufacture new competitive products and to enhance and sustain the quality and marketability of our existing products. As such, we have made, and expect to
continue to make, substantial investments in technology development. For example, in January 2012, we announced Gen4, our next-generation networking technology, which is available in some products today, with more products coming to market as we
continue to integrate it with products from additional device partners. In the future, we may not have the necessary capital, or access to capital on acceptable terms, to fund necessary levels of research and development. Even with adequate capital
resources, we may nonetheless experience unforeseen problems in the development or performance of our technologies or products. The market for smart grid technology products is still in its early stages, and we cannot assure you that we will be
successful in developing or selling new products in this market. In addition, we may not meet our product development schedules and, even if we do, we may not develop new products fast enough to provide sufficient differentiation from our
competitors’ products, which may be more successful.
We and our utility customers operate in a highly regulated business environment and
changes in regulation could impose costs on us or make our products less economical.
Our products and our utility customers are
subject to federal, state, local and foreign laws and regulations. Laws and regulations applicable to us and our products govern, among other things, the manner in which our products communicate, and the environmental impact and electrical
reliability of our products. Additionally, our utility customers are often regulated by national, state and/or local bodies, including public utility commissions, the Department of Energy, the Federal Energy Regulatory Commission and other bodies.
Prospective utility customers may be required to gain approval from any or all of these organizations prior to implementing our products and services, including specific permissions related to the cost recovery of these systems. Regulatory agencies
may impose special requirements for implementation and operation of our products. We may incur material costs or liabilities in complying with government regulations applicable to us or our utility customers. In addition, potentially significant
expenditures could be required in order to comply with evolving regulations and requirements that may be adopted or imposed on us or our utility customers in the future. Such costs could make our products less economical and could impact our utility
customers’ willingness to adopt our products, which could materially and adversely affect our revenue, results of operations and financial condition.
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Furthermore, changes in the underlying regulatory conditions that affect utilities could have a
potentially adverse effect on a utility’s interest or ability to implement smart grid technologies. For example, ongoing regulatory uncertainties previously delayed the timing of ComEd’s planned deployment schedule. Many regulatory
jurisdictions have implemented rules that provide financial incentives for the implementation of energy efficiency and demand response technologies, often by providing rebates or through the restructuring of utility rates. If these programs were to
cease, or if they were restructured in a manner inconsistent with the capabilities enabled by our products and services, our business, financial condition and results of operations could be significantly harmed.
The adoption of industry standards applicable to our products or services could limit our ability to compete in the marketplace.
Standards bodies, which are formal and informal associations that seek to establish voluntary, non-governmental product and technology
standards, are influential in the United States and abroad. We participate in voluntary standards organizations in order to both help promote non-proprietary, open standards for interoperability with our products and prevent the adoption of
exclusionary standards. However, we are not able to control the content of adopted voluntary standards and do not have the resources to participate in all voluntary standards processes that may affect our markets. Some of the standards bodies and
alliances in which we participate may require that we license to other participants including competitors certain of our patent claims that are necessary or essential to practice a particular standard, who elect to produce products compliant with
that standard. These obligations to license our necessary patent claims may allow our competitors to use our patents to develop and sell products that compete with our products without spending the time and expense that we incurred to develop the
technology covered by the patents, thereby potentially reducing any time to market advantage we might have as a result of these patents. These obligations could also substantially restrict and may eliminate our ability to use our patents as a
barrier to entry or as a significant source of revenue. Moreover, because the specifications for these industry standards are generally available to members of the applicable standards bodies and alliances for little or no cost, competitors might be
able to more easily create products that compete with our products.
The adoption, or expected adoption, of voluntary standards that are
incompatible with our products or technology or that favor our competitors’ products or technology could limit the market opportunity for our products and services or render them obsolete, any of which could materially and adversely affect our
revenue, results of operations, and financial condition.
Some of our customers and potential customers have applied for government grants and may
also seek to participate in other government incentive programs, and if those grants or other incentives are not received or are significantly delayed, our results of operations could suffer.
Many utilities, including some of our customers and potential customers, apply for grants and may seek to participate in other government
incentive programs, designed to stimulate the economy and support environmental initiatives, including smart grid technologies. Our customers and potential customers who apply for these government grants or incentives may delay or condition the
purchase of our products and services upon receipt of such funds or upon their confidence in the future disbursement of those funds. If our customers and potential customers do not receive these funds or if receipt is significantly delayed, our
results of operations could suffer. Similarly, the receipt of government funds or incentives may be conditioned upon utilities meeting milestones and other requirements, some of which may not be known until a future point in time. In addition, if
our products and services do not meet the requirements necessary for receipt of government funds or other incentives, or if third parties fail to meet their obligations, our customers and potential customers may delay or condition the purchase of
our products and services until they meet these requirements and our results of operations could suffer. Furthermore, there can be no assurance of government funds or incentives for utilities in future periods, either in the United States or in
other countries where we may pursue business. As a result, our customers and potential customers may not have the resources or incentives to purchase our products and services.
If our products do not interoperate with our utility customers’ other systems, the purchase or deployment of our products and services may be
delayed or cancelled.
Our products are designed to interface with our utility customers’ back office billing and other
systems, each of which may have different specifications and utilize multiple protocol standards and products from other vendors. Our products will be required to interoperate with many or all of these products as well as future products in order to
meet our utility customers’ requirements. If we find errors in the existing software or defects in the hardware used in our utility customers’ systems, we may need to modify our products or services to fix or overcome these errors so that
our products will interoperate with the existing software and hardware, which could be costly and negatively affect our business, financial condition, and results of operations. In addition, if our products and services do not interoperate with our
utility customers’ systems, utility customers may seek to hold us liable, demand for our products could be adversely affected or orders for our products could be delayed or cancelled. This could hurt our operating results, damage our
reputation, and seriously harm our business and prospects.
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Interruptions or delays in service from our third-party data center facilities, or problems with the
third-party hardware or software that we employ, could impair the delivery of our service and harm our business.
We currently
offer managed services and SaaS, including disaster recovery services, utilizing two data center facilities operated by separate third parties in California and Nevada. These facilities may be vulnerable to damage or interruption from, among other
things, fire, natural disaster, power loss, telecommunications failure, war, acts of terrorism, unauthorized entry, human error, and computer viruses or other defects. They may also be subject to break-ins, sabotage, intentional acts of vandalism
and similar misconduct. We rely on software and hardware technology provided by third parties to enable us to provide these services. Any damage to, or failure of, these third-party data centers or the third-party hardware and software we
employ, could result in significant and lengthy interruptions in the services we provide to our utility customers. Such interruptions could reduce our revenue and non-GAAP revenue (billings), cause us to issue credits or pay penalties, cause
customers to terminate their service, harm our reputation and adversely affect our ability to attract new utility customers.
We do not control
certain critical aspects of the manufacture of our products and depend on a limited number of contract manufacturers.
Our future
success will depend significantly on our ability to manufacture our products timely and cost-effectively, in sufficient volumes, and in accordance with quality standards. Our primary manufacturing relationship is with Plexus Corp., who provides us
with a wide range of operational and manufacturing services, including material procurement, final assembly, test quality control, warranty repair, and shipment to our utility customers and third-party vendors.
Our reliance on our contract manufacturers reduces our control over the manufacturing process, exposing us to risks, including reduced control
over quality assurance, product costs and product supply. Any manufacturing disruption by our contract manufacturers could impair our ability to fulfill orders. We may be unable to manage our relationships with contract manufacturers effectively as
they may experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations or otherwise fail to meet our future requirements for timely delivery. Similarly, to the extent that our contract
manufacturers procure materials on our behalf, we may not benefit from any warranties received by the contract manufacturers from the suppliers or otherwise have recourse against the original supplier of the materials or even the contract
manufacturer. In such circumstances, if the original supplier were to provide us or our contract manufacturers with faulty materials, we might not be able to recover the costs of such materials or be compensated for any damages that arise as a
result of the inclusion of the faulty components in our products. For example, in March 2010, we discovered that a faulty capacitor from a third-party supplier was used in a discrete number of our communications modules.
One or more of our contract manufacturers may suffer an interruption in its business, or experience delays, disruptions or quality control
problems in its manufacturing operations, or seek to terminate its relationship with us, or we may choose to change or add additional contract manufacturers for other reasons. Additionally, we do not have long-term supply agreements with our
contract manufacturers. As a result, we may be unable to renew or extend our agreement on terms favorable to us, if at all. Although the contract manufacturing services required to manufacture and assemble our products may be readily available from
a number of established manufacturers, it is risky, time consuming and costly to qualify and implement contract manufacturer relationships.
Any of these risks could have a material adverse effect on our business, financial condition and results of operations.
We depend on a limited number of key suppliers and if such suppliers fail to provide us with sufficient quantities of components at acceptable levels of
quality and at anticipated costs, our revenue and operating results could be materially and adversely affected.
Several of the
components used in our products come from sole, limited source or geographically concentrated suppliers, such as Analog Devices and Renesas Electronics America Inc. Additionally, our suppliers are not typically contractually obligated to supply us
with components in minimum quantities or at predetermined prices over the long term. Accordingly, we may be vulnerable to price increases, component quality issues, financial, natural disasters, or other difficulties faced by our suppliers, causing
shortages or interruptions in supply of components and materials, including components that have been or will be discontinued, which could cause us to delay shipments to our utility customers. For example, some of our key suppliers are located in
Japan and their ability to timely provide us with the necessary components used in our products was compromised as a result of the catastrophic earthquake and tsunami in March 2011. To help address these issues, we may purchase quantities of these
items that are in excess of our estimated requirements. As a result, we could be forced to record excess and obsolete inventory charges to provide for these excess quantities and we may also be subject to pricing risk or carrying charges, which
could harm our operating results.
If we experience any shortages due to reliance on a limited number of suppliers, commodity supply
constraints, capacity constraints, natural disasters or price fluctuations related to the raw materials used, or if we are not able to procure components from
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alternate sources at acceptable prices and within a reasonable period of time, our reputation could suffer and our business, financial condition and results of operations could be materially and
adversely effected. In addition, we may also be subject to contractual penalties if we fail to deliver our products and services on time.
Further, our utility customers may reschedule or cancel orders on relatively short notice. If our utility customers cancel orders after we
have ordered the corresponding product from our suppliers, we may be forced to incur cancellation fees or to purchase products that we may not be able to resell, which could have a material adverse effect on our business, financial condition and
results of operations.
Our business could be severely harmed by natural disasters or other catastrophes.
A significant catastrophic event such as war, acts of terrorism, natural disasters, such as earthquakes, or global threats, including, but not
limited to, the outbreak of epidemic disease, could disrupt our operations and impair deployment of our
Smart Energy Platform
by our utility customers, interrupt critical functions, cause our suppliers to be unable to meet our demand for
parts and equipment, reduce demand for our products, prevent our utility customers from honoring their contractual obligations to us or otherwise affect our business negatively. To the extent that such disruptions or uncertainties result in delays
or cancellations of customer orders or the deployment of our products, or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.
We operate in a highly competitive industry and we compete against many companies with substantially greater financial and other resources, and our
market share and results of operations may be reduced if we are unable to respond to our competitors effectively.
Competition in
our market is intense and involves rapidly changing technologies, evolving industry standards, frequent new product introductions, and changes in customer requirements. To maintain and improve our competitive position, we must keep pace with the
evolving needs of our utility customers and continue to develop and introduce new products, features and services in a timely and efficient manner. Our competitors range from small companies to very large and established companies. These competitors
offer a variety of products and services related to the smart grid, and come from a number of industries, including traditional meter manufacturers, application developers, telecommunications and other service providers. We compete with traditional
meter manufacturers that incorporate various communications technologies that provide some level of connectivity to the utility’s back office. Our key competitors currently include Echelon Corporation, Elster Group SE, Itron Inc., Landis+Gyr
AG, which was acquired by Toshiba Corporation, Sensus Metering Systems Inc. and Trilliant Holdings, Inc. Similarly, we compete with traditional providers of distribution automation equipment, such as S&C Electric Company and Schweitzer
Engineering Laboratories, Inc. We also face competition from newer entrants that are providing specific narrowly focused products for the smart grid, including Coulomb Technologies Inc., Grid Net Inc., OPOWER Inc. and Tendril Networks Inc.
Furthermore, other large companies such as Alcatel-Lucent, AT&T Inc., Cisco Systems, Inc., Enel SpA, Électricité Réseau Distribution France, Fujitsu Limited, General Electric Company, International Business Machines
Corporation, Mitsubishi Corporation, Motorola Solutions, Inc., Siemens AG, Sprint Nextel Corporation and Verizon Communications Inc. have announced plans to pursue business opportunities related to the smart grid. As we look to expand into new
international markets, we expect to face additional competitors that may be more established in specific geographies. We anticipate that in the future, additional competitors will emerge that offer a broad range of competing products and services
related to the smart grid.
Several of our competitors enjoy substantial competitive advantages such as:
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greater name recognition and longer operating histories;
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larger sales and marketing budgets and resources;
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greater ability to integrate their products with existing systems;
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broader distribution channels;
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established relationships with existing and potential partners and utility customers;
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lower labor and development costs; and
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significantly greater financial, technical, customer support and other resources.
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Some of these larger competitors have substantially broader product offerings and may be able to
leverage the existing relationships they have with utilities. In some cases, our larger competitors are also currently vendors of ours, and they could decide in the future to develop their own products instead of working with us. Any inability to
effectively manage these relationships could have a material adverse effect on our business, operating results, and financial condition, and accordingly affect our chances of success. In addition, some of our competitors may have larger patent
portfolios than we have, which may provide them with a competitive advantage and may require us to engage in costly litigation to protect and defend our freedom to operate and/or intellectual property rights.
Conditions in our market could change rapidly and significantly as a result of technological advancements or market consolidation. The
development and market acceptance of alternative technologies could decrease the demand for our products or render them obsolete. Our competitors may introduce products and services that are less costly, provide superior performance or achieve
greater market acceptance than our products and services. In order to remain competitive, we may need to lower prices or attempt to add incremental features and functionality, which could negatively impact our revenue, non-GAAP revenue (billings),
gross margin and financial condition. In addition, our larger competitors often have broader product lines and are in a better position to withstand any significant reduction in capital spending by utilities, and will therefore not be as susceptible
to downturns in a particular market. If we are unable to compete successfully in the future, our business may be harmed.
We have experienced rapid
growth in recent periods. If we fail to manage our growth effectively, our financial performance may suffer.
We have
substantially expanded our overall business, customer base, employee headcount and operations in recent periods both domestically and internationally. We increased our total number of regular full-time employee headcount from 394 employees as of
December 31, 2009 to 608 as of September 30, 2013. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our managerial, customer operations, research and development, sales and marketing,
manufacturing, administrative, financial and other resources. If we are unable to manage our growth successfully, our operating results will suffer.
We rely on our management team and need additional personnel to grow our business, and the loss of one or more key employees or our inability to attract
and retain qualified personnel could harm our business.
Our success and future growth depend on the skills, working relationships
and continued services of our management team and other key personnel. The loss of any member of our senior management team, and in particular our Chief Executive Officer, could adversely affect our business. In addition, our current senior
management team has worked together for a relatively short period of time.
Our future success will also depend on our ability to attract,
retain and motivate highly skilled management, product development, operations, sales, technical and other personnel in the United States and abroad. Even in today’s economic climate, competition for these types of personnel is intense,
particularly in the Silicon Valley, where our headquarters are located. All of our employees in the United States work for us on an at-will basis. Given the lengthy sales cycles with utilities and deployment periods of our networking platform and
solutions, the loss of key personnel could adversely affect our business.
Volatility or lack of performance in our stock price may also
affect our ability to attract and retain our senior management and key personnel. Many of our longest-tenured employees, including members of our senior management and key personnel with deep institutional knowledge, hold significant vested stock
options and shares of our common stock. Employees may be more likely to leave us if the shares they own or the shares underlying their vested stock options have significantly appreciated in value relative to the original purchase prices of the
shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. As a result of these factors, we may be unable to attract or retain qualified
personnel. Our inability to attract and retain the necessary personnel could adversely affect our business.
Our ability to provide bid bonds,
performance bonds or letters of credit is limited and could negatively affect our ability to bid on or enter into significant long-term agreements.
We have in the past been, and may in the future be, required to provide bid bonds or performance bonds to secure our performance under
customer contracts or, in some cases, as a pre-requisite to submit a bid on a potential project. Our ability to obtain such bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and
external factors beyond our control, including the overall capacity of the surety market. Surety companies consider those factors in relation to the amount of our tangible net worth and other underwriting standards that may change from time to time.
Surety companies may require that we collateralize a percentage of the bond with our cash or other form of credit enhancement. Events that
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affect surety markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. In addition, some of our utility
customers also require collateral guarantees in the form of letters of credit to secure performance or to fund possible damages as the result of an event of default under our contracts with them. If we enter into significant long-term agreements
that require the issuance of letters of credit, our liquidity could be negatively impacted. Our inability to obtain adequate bonding or letters of credit to meet bid requirements or enter into significant long-term agreements could have a material
adverse effect on our future revenues and business prospects.
We are subject to international business uncertainties.
Our ability to grow our business and our future success will depend to a significant extent on our ability to expand our operations and
customer base worldwide. Operating in international markets requires significant resources and management attention, and other than our operations in Australia and Brazil, we have limited experience entering new geographic markets. There can be no
assurance that our international efforts will be successful. International sales and operations may be subject to risks such as:
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technology compatibility;
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the imposition of government controls;
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government expropriation of facilities;
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lack of a well-established system of laws and enforcement of those laws;
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lack of a legal system free of undue influence or corruption;
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exposure to a business culture in which improper sales practices may be prevalent;
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restrictions on the import or export of critical technology;
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currency exchange rate fluctuations;
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lack of availability of qualified third-party financing;
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difficulties in staffing and managing foreign operations;
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preference for local vendors;
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burdens of complying with different permitting standards; and
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a wide variety of foreign laws and obstacles to the repatriation of earnings and cash.
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Fluctuations in the value of the U.S. dollar may impact our ability to compete in international
markets. International expansion and market acceptance depend on our ability to modify our business approach and technology to take into account such factors as differing customer business models, product requirements and needs, the applicable
regulatory and business environment, labor costs and other economic conditions. In addition, the laws of certain countries do not protect our intellectual property to the same extent as do the laws of the United States. There can be no assurance
that these factors will not have a material adverse effect on our future international sales and, consequently, on our business, financial condition and results of operations.
Developments in data protection laws and regulations may affect technology relating to smart grid products and solutions, which could adversely affect
the demand for our products and solutions.
Our products and services may be subject to data protection laws and regulations that
impose a general framework for the collection, processing and use of personal data. Our networking platform and solutions rely on the transfer of data relating to individual energy use and may be affected by these laws and regulations. It is unclear
how the regulations governing the transfer of personal data in connection with privacy requirements will further develop in the United States and internationally, and to what extent this may affect technology relating to smart grid products and
solutions. This could have a material adverse effect on our business, financial condition and results of operations.
Adverse changes in general
economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.
Our business can be affected by a number of factors that are beyond our control, such as general geopolitical, economic, and business
conditions. The continued global economic uncertainty, concerns over the downgrade of U.S. sovereign debt and continued monetary, financial and sovereign debt uncertainties in European and other foreign countries continue to have a negative effect
on our business. Further, the recent worldwide financial and credit crisis has reduced the availability of liquidity and credit to fund the continuation and expansion of business operations worldwide. Even with economic recovery, it may take time
for our utility customers or potential utility customers to establish new budgets and return to normal purchasing patterns. We cannot predict the reoccurrence of any economic slowdown or the strength or sustainability of the economic recovery,
worldwide, in the United States or in our industry. These and other economic factors could adversely affect the demand for our products and services and, consequently, on our business, financial condition and results of operations.
There can be no assurance that a deterioration in financial markets will not impair our ability or our utility customers’ ability to
obtain financing in the future, including, but not limited to, our or our utility customers’ ability to incur indebtedness if that became necessary. In addition, there could be a number of follow-on effects from the credit crisis on our
business, including insolvency of certain of our key utility customers or suppliers, which could result in the inability of our utility customers to obtain credit to finance purchases of our products.
Our inability to acquire and integrate other businesses, products or technologies could seriously harm our competitive position.
In order to remain competitive, obtain key competencies or accelerate our time to market, we may seek to acquire additional businesses,
products or technologies. To date, we have completed only one small acquisition, and we therefore have limited experience in successfully acquiring and integrating additional businesses, products or technologies. If we identify an appropriate
acquisition candidate, we may not be successful in negotiating the terms of the acquisition, financing the acquisition, or effectively integrating the acquired business, product or technology into our existing business and operations. We may have
difficulty integrating acquired technologies or products with our existing products and services. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or
technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues. If we finance acquisitions by
issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. In addition, any acquisitions we are able to complete may not result in the synergies or any other benefits we
had expected to achieve, which could result in substantial write-offs. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology will significantly divert management and employee time and
resources.
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Our business may suffer if it is alleged or found that our products infringe the intellectual property
rights of others.
Our industry is characterized by the existence of a large number of patents and by litigation based on
allegations of infringement or other violations of intellectual property rights. Moreover, in recent years, individuals and groups have purchased patents and other intellectual property assets for the purpose of making claims of infringement in
order to extract settlements from companies like ours. From time to time, third parties have claimed and may continue to claim that we are infringing upon their patents or other intellectual property rights. For example, we are currently engaged in
litigation as further described in “Legal Proceedings.” In addition, we may be contractually obligated to indemnify our utility customers or other third parties that use or resell our products in the event our products are alleged to
infringe a third party’s intellectual property rights. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and
brand, and cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations. Further, claims of intellectual property infringement might require us to
redesign affected products, delay affected product offerings, enter into costly settlement or license agreements or pay costly damage awards or face a temporary or permanent injunction prohibiting us from marketing, selling or distributing the
affected products. If we cannot or do not license the alleged infringed technology on reasonable terms or at all, or substitute similar technology from another source, our revenue and earnings could be adversely impacted. Additionally, our utility
customers may not purchase our products if they are concerned that our products infringe third-party intellectual property rights. This could reduce the market opportunity for the sale of our products and services. The occurrence of any of these
events may have a material adverse effect on our business, financial condition and results of operations.
The success of our business depends on
our ability to protect and enforce our intellectual property rights.
We rely on a combination of patent, trademark, trade dress,
copyright, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and any
of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and,
therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third-party copying, infringement or use, which could adversely affect our competitive position.
As of September 30, 2013, we had 57 patents issued and 87 patent applications pending in the United States and, in foreign
jurisdictions, we had 70 patents granted and 143 patent applications pending, which are collectively based on 57 U.S. patent applications. Our patents expire at various times between 2015 and 2031. We cannot ensure that any of our pending
applications will be granted or that any of our issued patents will adequately protect our intellectual property. In addition, third parties have in the past and could in the future bring infringement, invalidity, co-inventorship, re-examination, or
similar claims with respect to any of our currently issued patents or any patents that may be issued to us in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s attention and
resources, damage our reputation and brand, and substantially harm our business and results of operations.
In order to protect or enforce
our patent rights, protect our trade secrets or know-how, or determine the enforceability, scope and validity of the proprietary rights of others, we may initiate patent litigation or other proceedings against third parties, such as infringement
suits or interference proceedings. Any lawsuits or proceedings that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation and other proceedings also put our patents at
risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits or other proceedings that we initiate
and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may have a material adverse effect on our business, financial condition and results of operations.
Some of our products rely on technologies developed or licensed by third parties. We may seek to license technology from third parties for
future products and services. We may not be able to obtain or continue to obtain licenses and technologies from these third parties on commercially reasonable terms or at all. Our inability to retain our current third-party licenses or obtain
third-party licenses required to develop new products or product enhancements could require us to obtain alternate technology that may be of lower quality or performance standards or at greater cost, or could require that we change our product and
design plans, any of which could limit or delay our ability to manufacture and sell our products.
If we are unable to protect the confidentiality
of our proprietary information, the value of our technology and products could be adversely affected.
In addition to patented
technology, we rely on our unpatented technology and trade secrets. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees and contractors and with parties with
which we do business. These agreements may be breached and we may not have adequate remedies for any such breach. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, our
trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that
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our employees, contractors, or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or
resulting know-how and inventions. If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and have a material adverse effect on our business, financial condition,
and results of operations.
We use open source software in our products and services that may subject our products and services to general release
or require us to re-engineer our products and services, which may cause harm to our business.
We use open source software in
connection with our products and services. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and/or compliance with open source license terms.
Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source
software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. While we monitor the use of open source
software in our products and services and try to ensure that none is used in a manner that would require us to disclose the source code to the related product or that would otherwise breach the terms of an open source agreement, such use could
inadvertently occur and we may be required to release our proprietary source code, pay damages for breach of contract, re-engineer our products, discontinue the sale of our products in the event re-engineering cannot be accomplished on a timely
basis or take other remedial action that may divert resources away from our development efforts, any of which could adversely affect our business, operating results and financial condition.
We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to
emerging growth companies could make our common stock less attractive to investors.
We are an “emerging growth
company,” as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements
applicable to other public companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive
compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We
could be an emerging growth company for up to five years, although, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year before the end of that five-year period, we would cease to
be an “emerging growth company” as of December 31 of that year. We cannot predict if investors will find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less
attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may decline or be more volatile.
Under Section 107(b) of the Jumpstart Our Business Startups Act, emerging growth companies can delay adopting new or revised accounting
standards until such time as those standards apply to private companies. We have irrevocably elected not to avail our company of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised
accounting standards as other public companies that are not emerging growth companies.
Our business is subject to changing regulations regarding
corporate governance and public disclosure that will increase both our costs and the risk of noncompliance.
As a public company,
we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the rules and regulations of the New York Stock Exchange.
Achieving and maintaining compliance with these rules and regulations, particularly after we cease to be an emerging growth company, will increase our legal, accounting and financial compliance costs, will make some activities more difficult,
time-consuming and costly and may also place undue strain on our personnel, systems and resources.
The Sarbanes-Oxley Act requires, among
other things, that we maintain effective disclosure controls and procedures and, in the future, internal control over financial reporting. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation
or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our prior period financial statements. Any failure to implement and maintain effective internal controls also
could adversely affect the results of periodic management evaluations regarding the effectiveness of our internal control over financial reporting that we will be required to include in our periodic reports filed with the SEC, beginning for the year
ending December 31, 2014 under Section 404(a) of the Sarbanes-Oxley Act or the annual auditor attestation reports regarding effectiveness of our internal controls over financial reporting that we will be required to include in our annual
reports filed with the SEC, beginning for the year ending December 31, 2018, unless, under the Jumpstart Our Business Startups Act, we meet certain
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criteria that would require such reports to be included prior to then, under Section 404(b) of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures and internal control
over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock.
In order to maintain the effectiveness of our disclosure controls and procedures and internal control over financial reporting, we will need
to expend significant resources and provide significant management oversight. We have a substantial effort ahead of us to implement appropriate processes, document our system of internal control over relevant processes, assess their design,
remediate any deficiencies identified and test their operation. As a result, management’s attention may be diverted from other business concerns, which could harm our business, operating results and financial condition. These efforts will also
involve substantial accounting-related costs. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on the New York Stock Exchange.
Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and
employees, entail substantial costs in order to modify our existing accounting systems, and take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any
failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In the event that we are not
able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that our internal controls are perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose
confidence in our operating results and our stock price could decline.
The Sarbanes-Oxley Act and the rules and regulations of the New
York Stock Exchange will make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain or
increase coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be considered independent for purposes of the New York
Stock Exchange rules, and officers may be curtailed.
We may not be able to secure additional financing on favorable terms, or at all, to meet our
future capital needs.
In the future, we may require additional capital to respond to business opportunities, challenges,
acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. For example, in December 2011, we issued a convertible note with an aggregate principal amount of
$24.0 million and in February 2012, we issued a convertible note with an aggregate principal amount of $30.0 million, both of which converted into shares of our common stock at the closing of our IPO. In the future, we may not be able to timely
secure additional debt or equity financing on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters,
which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other
securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of
holders of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be
significantly limited.
Our investment portfolio may become impaired by deterioration of the capital markets.
Our cash equivalent and short-term investment portfolio as of September 30, 2013 consisted of $82.0 million of money market mutual funds,
highly liquid debt instruments of the U.S. government and its agencies, foreign government and agency securities, and U.S. and foreign corporate debt securities.
Should financial market conditions worsen in the future, investments in some financial instruments may pose risks arising from market
liquidity and credit concerns. In addition, any deterioration of the capital markets could cause our other income and expense to vary from expectations. As of September 30, 2013, we had no impairment charges associated with our short-term
investment portfolio, and although we believe our current investment portfolio has little risk of material impairment, we cannot predict future market conditions or market liquidity, or credit availability, and can provide no assurance that our
investment portfolio will remain materially unimpaired.
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We may not be able to utilize a significant portion of our net operating loss or research tax credit
carryforwards, which could adversely affect our operating results.
As of December 31, 2012, we had federal and state net
operating loss carryforwards due to prior period losses, which if not utilized will begin to expire in 2027 and 2016 for federal and state purposes, respectively. We also have federal research tax credit carryforwards that will begin to expire in
2024. Realization of these net operating loss and research tax credit carryforwards is dependent upon future income, and there is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities,
which could adversely affect our operating results.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended,
or the Code, our ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if we experience an “ownership change.” A Section 382 “ownership
change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year
period. Similar rules may apply under state tax laws. It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could
adversely affect our operating results.
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Our business and financial performance could be negatively impacted by changes in tax laws or regulations.
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Those
enactments could adversely affect our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or
applied adversely to us. These events could require us or our utility customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our utility customers to pay fines and/or penalties and interest for past
amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future utility customers may elect not to continue or purchase our products and services in the future. Additionally, new, changed,
modified or newly interpreted or applied tax laws could increase our utility customers’ and our compliance, operating and other costs, as well as the costs of our products. Further, these events could decrease the capital we have available to
operate our business. Any or all of these events could adversely impact our business and financial performance.
Our stock price has been and may
continue to be volatile and may decline regardless of our operating performance.
Prior to our IPO in March 2013, there had not
been a public market for our common stock. If you purchase shares of our common stock, you may not be able to resell those shares at or above your purchase price. An active or liquid market in our common stock may not be sustainable. The trading
prices of the securities of technology companies have been highly volatile and the trading price of our common stock has been and may continue to be volatile. The market price of our common stock may fluctuate significantly in response to numerous
factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our non-GAAP revenue (billings), revenue and other operating results or our backlog;
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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;
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delays in regulatory approvals for our utility customers and utility customer deployments;
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failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of
investors;
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ratings changes by any securities analysts who follow our company;
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announcements by us or our competitors of significant customer wins, technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;
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changes in operating performance and stock market valuations of utilities, technology companies generally, or those in our industry in particular;
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political and consumer sentiment, including concerns over accuracy of advanced metering technology, economic impact on consumers, privacy, security, consumer choice and the safety, health and environmental aspects of
smart grid technology;
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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;
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lawsuits threatened or filed against us; and
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other events or factors, including those resulting from war, incidents of terrorism or responses to these events.
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In addition, the stock markets, and in particular the New York Stock Exchange on which our common stock is listed, have experienced extreme
price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many technology companies have fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. During the three months ended September 30, 2013, the closing price of our common stock on the New York Stock Exchange ranged from $15.26 to $32.99 per share. In the past, stockholders have instituted
securities class action litigation following
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periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business
and adversely affect our business, operating results and financial condition.
If there are substantial sales of shares of our common stock, the
price of our common stock could decline.
Sales of a substantial number of shares of our common stock in the public market, or the
perception that these sales might occur could depress the market price of our common stock and may make it more difficult for you to sell your common stock at a time and price that you deem appropriate. We are unable to predict the effect that sales
may have on the prevailing market price of our common stock. In addition, the holders of an aggregate of 32,973,595 shares of our common stock have rights, subject to some conditions, to require us to file registration statements covering their
shares or to include their shares in registration statements that we may file for ourselves or our stockholders. Registration of the resale of these shares under the Securities Act would generally result in the shares becoming freely tradable
without restriction. Any sales of securities by existing stockholders could adversely effect the trading price of our common stock.
We have broad
discretion in the use of the net proceeds from our IPO and may not use them effectively.
We cannot specify with any certainty the
particular uses of the net proceeds that we received from our IPO. Our management has broad discretion in the application of the net proceeds, including working capital, possible acquisitions and other general corporate purposes, and we may spend or
invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from our IPO in a
manner that does not produce income or that loses value. These investments may not yield a favorable return to our investors.
If securities or
industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or
our business. Industry analysts that currently cover us may cease to do so. If industry analysts cease coverage of our company, or if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about
our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume
to decline.
Our directors, executive officers and their respective affiliates have substantial control over us and could delay or prevent a change
in corporate control.
As of September 30, 2013 our directors, executive officers and their respective affiliates
beneficially owned in the aggregate 30.0% of our outstanding common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election
of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this
concentration of ownership might harm the market price of our common stock by:
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delaying, deferring or preventing a change in control of us;
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impeding a merger, consolidation, takeover or other business combination involving us; or
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discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of us.
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We do not intend to pay dividends for the foreseeable future.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to finance the operation
and expansion of our business, and we do not expect to declare or pay any dividends in the foreseeable future. In addition, the terms of our credit facility with Silicon Valley Bank currently restricts our ability to pay dividends. As a result, you
may only receive a return on your investment in our common stock if the market price of our common stock increases.
Delaware law and provisions in
our amended and restated certificate of incorporation and bylaws could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our common stock.
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a
change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our
existing stockholders. In addition, our restated certificate of incorporation and restated bylaws contain provisions that may make the acquisition of our company more difficult without the approval of our Board of Directors, including the following:
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our Board of Directors is classified into three classes of directors with staggered three-year terms;
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only our chairman of the board, our lead independent director, our chief executive officer, our president or a majority of our Board of Directors is authorized to call a special meeting of stockholders;
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our stockholders are only able to take action at a meeting of stockholders and not by written consent;
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vacancies on our Board of Directors are able to be filled only by our Board of Directors and not by stockholders;
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directors may be removed from office only for cause;
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our restated certificate of incorporation authorizes undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval; and
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advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.
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