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ENERNOC INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following discussion and analysis of our financial condition
and results of operations together with our "Selected Financial Data" and
consolidated financial statements and accompanying notes thereto included
elsewhere in this Annual Report on Form 10-K. In addition to the historical
information, the discussion contains certain forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from
those expressed or implied by the forward-looking statements due to applications
of our critical accounting policies and factors including, but not limited to,
those set forth under the caption "Risk Factors" in Item 1A of Part I of this
Annual Report on Form 10-K.
Overview
We are a leading provider of energy management applications, services and
products for the smart grid, which include comprehensive demand response,
data-driven energy efficiency and energy price and risk management applications,
services and products. Our energy management applications, services and products
enable cost effective energy management strategies for our C&I, electric power
grid operator and utility customers by reducing real-time demand for
electricity, increasing energy efficiency and improving energy supply
transparency.
We believe that we are the world's leading provider of demand response
applications and services. Demand response is an alternative to traditional
power generation and transmission infrastructure projects that enables electric
power grid operators and utilities to reduce the likelihood of service
disruptions, such as brownouts and blackouts, during periods of peak electricity
demand, and otherwise manage the electric power grid during short-term
imbalances of supply and demand or during periods when energy prices are high.
We build on our position as a leading demand response services provider by using
our NOC and energy management application platform to deliver a portfolio of
additional energy management applications, services and products to new and
existing C&I, electric power grid operator and utility customers. These
additional energy management applications, services and products include our
EfficiencySMART and SupplySMART applications and services, and certain wireless
energy management products. EfficiencySMART is our data-driven energy efficiency
suite that includes energy efficiency planning, audits, assessments,
commissioning and retro-commissioning authority services, and a cloud-based
energy analytics application used for managing energy across a C&I customer's
portfolio of sites. The cloud-based energy analytics application also includes
the ability to integrate with a C&I customer's existing energy management
system, provide utility bill management and tools for measurement, tracking,
analysis, reporting and management of greenhouse gas emissions. SupplySMART is
our energy price and risk management application that provides our C&I customers
located in restructured or deregulated markets throughout the United States with
the ability to more effectively manage the energy supplier selection process,
including energy supply product procurement and implementation, budget
forecasting, and utility bill management. Our wireless energy management
products are designed to ensure that our C&I customers can connect their
equipment remotely and access meter data securely, and include both cellular
modems and an agricultural specific wireless technology solution acquired as
part of our acquisition of M2M in January 2011.
Since inception, our business has grown substantially. We began by providing
demand response services in one state in 2003 and have expanded to providing our
portfolio of energy management applications, services and products in several
regions throughout the United States, as well as internationally in Australia,
Canada, New Zealand and the United Kingdom.
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Revenues and Expense Components
Revenues
We derive recurring revenues from the sale of our energy management
applications, services and products. We do not recognize any revenues until
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and we deem collection to be reasonably assured.
Our revenues from our demand response services primarily consist of capacity and
energy payments, including ancillary services payments, and revenues derived
from the effective management of our portfolio of demand response capacity,
including our participation in capacity auctions and bilateral contracts. We
derive revenues from demand response capacity that we make available in open
market programs and pursuant to contracts that we enter into with electric power
grid operators and utilities. In certain markets, we enter into contracts with
electric power grid operators and utilities, generally ranging from three to ten
years in duration, to deploy our demand response services. We refer to these
contracts as utility contracts.
Where we operate in open market programs, our revenues from demand response
capacity payments may vary month-to-month based upon our enrolled capacity and
the market payment rate. Where we have a utility contract, we receive periodic
capacity payments, which may vary monthly or seasonally, based upon enrolled
capacity and predetermined payment rates. Under both open market programs and
utility contracts, we receive capacity payments regardless of whether we are
called upon to reduce demand for electricity from the electric power grid; and
we recognize revenue over the applicable delivery period, even when payments are
made over a different period. We generally demonstrate our capacity either
through a demand response event or a measurement and verification test. This
demonstrated capacity is typically used to calculate the continuing periodic
capacity payments to be made to us until the next demand response event or
measurement and verification test establishes a new demonstrated capacity
amount. In most cases, we also receive an additional payment for the amount of
energy usage that we actually curtail from the grid during a demand response
event. We refer to this as an energy payment.
As program rules may differ for each open market program in which we participate
and for each utility contract, we assess whether or not we have met the specific
service requirements under the program rules and recognize or defer revenues as
necessary. We recognize demand response capacity revenues when we have provided
verification to the electric power grid operator or utility of our ability to
deliver the committed capacity under the open market program or utility
contract. Committed capacity is verified through the results of an actual demand
response event or a measurement and verification test. Once the capacity amount
has been verified, the revenues are recognized and future revenues become fixed
or determinable and are recognized monthly over the performance period until the
next demand response event or measurement and verification test. In subsequent
demand response events or measurement and verification tests, if our verified
capacity is below the previously verified amount, the electric power grid
operator or utility customer will reduce future payments based on the adjusted
verified capacity amounts. Under certain utility contracts and open market
program participation rules, our performance and related fees are measured and
determined over a period of time. If we can reliably estimate our performance
for the applicable performance period, we will reserve the entire amount of
estimated penalties that will be incurred, if any, as a result of estimated
underperformance prior to the commencement of revenue recognition. If we are
unable to reliably estimate the performance and any related penalties, we defer
the recognition of revenues until the fee is fixed or determinable. Any changes
to our original estimates of net revenues are recognized as a change in
accounting estimate in the earliest reporting period that such a change is
determined.
As of December 31, 2012, we had over 8,600 MW in our demand response network,
meaning that we had entered into definitive contracts with our C&I customers
representing over 8,600 MW of demand response capacity. In determining our MW in
the seasonal demand response programs in which we participate, we typically
count the maximum determinable amount of curtailable load for a C&I customer
site over a trailing twelve-month period as the MW for that C&I customer site.
However, the trailing period could be longer in certain programs under which
significant rule changes have occurred or under which we do not have enough
obligation to enroll all of our MW in a given program period, but have enough
obligation in a future program
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period to enroll those MW. We generally begin earning revenues from our MW
within approximately one to three months from the date on which we enable the
MW, or the date on which we can reduce the MW from the electric power grid if
called upon to do so. The most significant exception is the PJM forward capacity
market, which is a market from which we derive a substantial portion of our
revenues. Because PJM operates on a June to May program-year basis, the revenues
associated with a MW that we enable after June of each year will typically not
be recognized until September of the following year. Certain other markets in
which we currently participate, such as the Western Australia market and ISO-NE
market, or may choose to participate in the future, operate or may operate in a
manner that could create a delay in recognizing revenue from the MW that we
enable in those markets.
In the PJM open market program in which we participate, the program year
operates on a June to May basis and performance is measured based on the
aggregate performance during the months of June through September. As a result,
fees received for the month of June could potentially be subject to adjustment
or refund based on performance during the months of July through September.
Based on changes to certain PJM program rules during the year ended December 31,
2012, or fiscal 2012, we concluded that we no longer had the ability to reliably
estimate the amount of fees potentially subject to adjustment or refund until
the performance period ends on September 30th of each year. Therefore,
commencing in fiscal 2012, all demand response capacity revenues related to our
participation in the PJM open market program are being recognized at the end of
the performance period, or during the three months ended September 30th of each
year. As a result of the fact that the period during which we are required to
perform (June through September) is shorter than the period over which we
receive payments under the program (June through May), a portion of the revenues
that have been earned will be recorded and accrued as unbilled revenue.
Our revenues have historically been higher in the second and third quarters of
our fiscal year due to seasonality related to the demand response market. We
expect, based on the fact that we recognize demand response capacity revenue
related to our participation in the PJM open market program during the three
months ended September 30th of each year, that our revenues will typically be
higher in the third quarter as compared to any other quarter in our fiscal year.
Revenues generated from open market sales to PJM accounted for 40%, 53% and 60%
respectively, of our total revenues for the years ended December 31, 2012, 2011
and 2010. Under certain utility contracts and open market programs, such as
PJM's Emergency Load Response Program, the period during which we are required
to perform may be shorter than the period over which we receive payments under
that contract or program. In these cases, we record revenue, net of reserves for
estimated penalties related to potential delivered capacity shortfalls, over the
mandatory performance obligation period, and a portion of the revenues that have
been earned is recorded and accrued as unbilled revenue. Our unbilled revenue of
$44.9 million from PJM as of December 31, 2012 will be billed and collected
through June 2013. Our unbilled revenue of $64.1 million as of December 31, 2011
was collected through June 2012.
Revenues generated from open market sales to ISO-NE accounted for 8%, 13% and
18%, respectively, of our total revenues for the years ended December 31, 2012,
2011 and 2010. Other than PJM and ISO-NE, no individual electric power grid
operator or utility customers accounted for more than 10% of our total revenues
for the years ended December 31, 2012, 2011 and 2010. If we choose to
participate in additional or different markets in the future, the contribution
of our current electric power grid operator and utility customers to total
revenues will change.
With respect to our EfficiencySMART and SupplySMART applications and services,
these applications and services generally represent ongoing service arrangements
where the revenues are recognized ratably over the service period commencing
upon delivery of the contracted service to the customer. Under certain of our
arrangements, in particular certain EfficiencySMART arrangements with our
utility customers, a portion of the fees received may be subject to adjustment
or refund based on the validation of the energy savings delivered after the
implementation is complete. As a result, we defer the portion of the fees that
are subject to adjustment or refund until such time as the right of adjustment
or refund lapses, which is generally upon completion and validation of the
implementation. In addition, under certain of our other arrangements, in
particular those arrangements entered into by our wholly-owned subsidiary, M2M,
we sell proprietary equipment to C&I
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customers that is utilized to provide the ongoing services that we deliver.
Currently, this equipment has been determined to not have stand-alone value. As
a result, we defer the fees associated with the equipment and begin recognizing
those fees ratably over the expected C&I customer relationship period, which is
generally 3 years, once the C&I customer is receiving the ongoing services from
us. In addition, we capitalize the associated direct and incremental costs,
which primarily represent the equipment and third-party installation costs, and
recognize such costs over the expected C&I customer relationship period.
Revenues derived from EfficiencySMART and SupplySMART applications and services,
and certain other wireless energy management products were $33.1 million,
$27.5 million and $15.5 million, respectively, for the years ended December 31,
2012, 2011 and 2010.
Cost of Revenues
Cost of revenues for our demand response services primarily consists of amounts
owed to our C&I customers for their participation in our demand response network
and are generally recognized over the same performance period as the
corresponding revenue. We enter into contracts with our C&I customers under
which we deliver recurring cash payments to them for the capacity they commit to
make available on demand. We also generally make an energy payment when a C&I
customer reduces consumption of energy from the electric power grid during a
demand response event. The equipment and installation costs for our devices
located at our C&I customer sites, which monitor energy usage, communicate with
C&I customer sites and, in certain instances, remotely control energy usage to
achieve committed capacity are capitalized and depreciated over the lesser of
the remaining estimated customer relationship period or the estimated useful
life of the equipment, and this depreciation is reflected in cost of revenues.
We also include in cost of revenues our amortization of acquired developed
technology, amortization of capitalized internal-use software costs related to
our DemandSMART application, the monthly telecommunications and data costs we
incur as a result of being connected to C&I customer sites, and our internal
payroll and related costs allocated to a C&I customer site. Certain costs, such
as equipment depreciation and telecommunications and data costs, are fixed and
do not vary based on revenues recognized. These fixed costs could impact our
gross margin trends described elsewhere in this Annual Report on Form 10-K
during interim periods. Cost of revenues for our EfficiencySMART and SupplySMART
applications and services, and certain other wireless energy management products
includes our amortization of capitalized internal-use software costs related to
those applications, services and products, third-party services, equipment
costs, equipment depreciation, and the wages and associated benefits that we pay
to our project managers for the performance of their services.
We defer incremental direct costs incurred related to the acquisition or
origination of a utility contract or open market program in a transaction that
results in the deferral or delay of revenue recognition. As of December 31, 2012
and 2011, we had no incremental direct costs deferred related to the acquisition
or origination of a utility contract or open market program and during the years
ended December 31, 2012, 2011 and 2010, no contract origination costs were
deferred. During the year ended December 31, 2011, as a result of the
termination of a certain contract, $0.9 million of previously deferred
incremental direct costs were expensed. In addition, we defer incremental direct
costs incurred related to customer contracts where the associated revenues have
been deferred as long as the deferred incremental direct costs are deemed
realizable. During the years ended December 31, 2012, 2011 and 2010, we deferred
$17.7 million, $8.1 million and $3.9 million, respectively, of incremental
direct costs associated with customer contracts. These deferred expenses would
not have been incurred without our participation in a certain open market
program and will be expensed in proportion to the related revenue being
recognized. During the years ended December 31, 2012, 2011 and 2010, we expensed
$10.8 million, $1.0 million and $4.9 million, respectively, of deferred
incremental direct costs to cost of revenues. As of December 31, 2012, there had
been no material realizability issues related to deferred incremental direct
costs. We also capitalize the costs of our production and generation equipment
utilized in the delivery of our demand response services and expense this
equipment over the lesser of its estimated useful life or the term of the
contractual arrangement. During the years ended December 31, 2012, 2011 and
2010, we capitalized $7.0 million, $9.5 million and $8.9 million, respectively,
of production and generation equipment costs. We believe that the above
accounting treatments appropriately match expenses with the associated revenue.
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Gross Profit and Gross Margin
Gross profit consists of our total revenues less our cost of revenues. Our gross
profit has been, and will be, affected by many factors, including (a) the demand
for our energy management applications, services and products, (b) the selling
price of our energy management applications, services and products, (c) our cost
of revenues, (d) the way in which we manage, or are permitted to manage by the
relevant electric power grid operator or utility, our portfolio of demand
response capacity, (e) the introduction of new energy management applications,
services and products, (f) our demand response event performance and (g) our
ability to open and enter new markets and regions and expand deeper into markets
we already serve. The effective management of our portfolio of demand response
capacity, including our outcomes in negotiating favorable contracts with our
customers and our participation in capacity auctions and bilateral contracts,
and our demand response event performance, are the primary determinants of our
gross profit and gross margin.
Operating Expenses
Operating expenses consist of selling and marketing, general and administrative,
and research and development expenses. Personnel-related costs are the most
significant component of each of these expense categories. We grew from 599
full-time employees at December 31, 2011 to 685 full-time employees at
December 31, 2012 primarily as a result of our overall growth and expansion into
new markets during this period. We expect to continue to hire employees to
support our growth for the foreseeable future. In addition, we incur significant
up-front costs associated with the expansion of the number of MW under our
management, which we expect to continue for the foreseeable future. We expect
our overall operating expenses to increase in absolute dollar terms for the
foreseeable future as we continue to enable new C&I customer sites, further
increase our headcount and expand the development of our energy management
applications, services and products. In addition, amortization expense from
intangible assets acquired in possible future acquisitions could potentially
increase our operating expenses in future periods. Although we expect an
increase in operating expenses in absolute dollar terms for the foreseeable
future, we expect that operating expenses as a percentage of revenues will
decrease as we continue to realize improvements in our operating leverage and
overall cost management.
Selling and Marketing
Selling and marketing expenses consist primarily of (a) salaries and related
personnel costs, including costs associated with share-based payment awards,
related to our sales and marketing organization, (b) commissions, (c) travel,
lodging and other out-of-pocket expenses, (d) marketing programs such as trade
shows and (e) other related overhead. Commissions are recorded as an expense
when earned by the employee. We expect an increase in selling and marketing
expenses in absolute dollar terms for the foreseeable future as we further
increase the number of sales professionals and, to a lesser extent, increase our
marketing activities; however, we expect that selling and marketing expenses as
a percentage of revenues will decrease for the foreseeable future.
General and Administrative
General and administrative expenses consist primarily of (a) salaries and
related personnel costs, including costs associated with share-based payment
awards and bonuses, related to our executive, finance, human resource,
information technology and operations organizations, (b) facilities expenses,
(c) accounting and legal professional fees, (d) depreciation and amortization
and (e) other related overhead. We expect general and administrative expenses to
continue to increase in absolute dollar terms for the foreseeable future as we
invest in infrastructure to support our continued growth; however, we expect
that general and administrative expenses as a percentage of revenues will
decrease for the foreseeable future.
Research and Development
Research and development expenses consist primarily of (a) salaries and related
personnel costs, including costs associated with share-based payment awards,
related to our research and development organization, (b) payments to suppliers
for design and consulting services, (c) costs relating to the design and
development of
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new energy management applications, services and products and enhancement of
existing energy management applications, services and products, (d) quality
assurance and testing and (e) other related overhead. During the years ended
December 31, 2012, 2011 and 2010, we capitalized software development costs of
$4.7 million, $3.2 million and $6.8 million, respectively, which are included as
software in property and equipment at December 31, 2012. We expect research and
development expenses to increase in absolute dollar terms for the foreseeable
future as we develop new technologies and enhance our existing technologies;
however, we expect that research and development expenses as a percentage of
revenues will decrease for the foreseeable future.
Stock-Based Compensation
We account for stock-based compensation in accordance with Accounting Standards
Codification, or ASC 718, Stock Compensation. As such, all share-based payments
to employees, including grants of stock options, restricted stock and restricted
stock units, are recognized in the statement of operations based on their fair
values as of the date of grant. During the year ended December 31, 2012, in lieu
of a portion of cash bonuses related to our 2012 and 2013 bonus plans, we
granted 1,023,010 shares of non-vested restricted stock to certain executives
and non-executive employees that contain performance-based vesting conditions.
These awards will vest in equal installments in 2013 and 2014 if the performance
conditions are achieved. If the employee who received the restricted stock
leaves the company for any reason prior to the vesting date, the shares of
restricted stock will be forfeited and returned to us. In addition, in December
2011, we granted 283,334 shares of non-vested restricted stock to certain
non-executive employees that contained performance-based vesting conditions in
lieu of a portion of cash bonuses related to our 2012 and 2013 bonus plan. The
performance conditions associated with the December 2011 grants were modified
during the three months ended March 31, 2012. As a result of these grants of
non-vested restricted stock, we anticipate that, on a per employee basis,
stock-based compensation expense will increase for the foreseeable future with a
corresponding decrease in cash compensation expense.
For the years ended December 31, 2012, 2011 and 2010, we recorded expenses of
approximately $13.6 million, $13.5 million and $15.7 million, respectively, in
connection with share-based payment awards to employees and non-employees. With
respect to option grants through December 31, 2012, a future expense of
non-vested options of approximately $1.7 million is expected to be recognized
over a weighted average period of 1.3 years. For non-vested restricted stock
awards and restricted stock units subject to service-based vesting conditions
outstanding as of December 31, 2012, we had $8.4 million of unrecognized
stock-based compensation expense, which is expected to be recognized over a
weighted average period of 2.5 years. For non-vested restricted stock awards
subject to performance-based vesting conditions outstanding, and that were
probable of vesting as of December 31, 2012, we had $3.9 million of unrecognized
stock-based compensation expense, which is expected to be recognized over a
weighted average period of 1.3 years. For non-vested restricted stock awards
subject to outstanding performance-based vesting conditions that were not
probable of vesting as of December 31, 2012, we had $0.7 million of unrecognized
stock-based compensation expense. If and when any additional portion of our
outstanding equity awards is deemed probable to vest or awards that are deemed
probable to vest become not probable, we will reflect the effect of the change
in estimate in the period of change by recording a cumulative catch-up
adjustment to retroactively apply the new estimate.
Although the number of share-based awards has increased significantly during the
year ended December 31, 2012 as compared to the same period in 2011 due to
stock-based compensation being issued in lieu of certain cash compensation, the
overall amount of our stock-based compensation expense has decreased as a result
of the lower fair value of these awards compared to awards granted in prior
periods due to our lower stock price compared to the same period in 2011.
Accordingly, the weighted average grant date fair value of share-based payments
issued during the year ended December 31, 2012 was $8.05 per share as compared
to $14.12 per share for the same period in 2011.
Interest and Other (Expense) Income, Net
Interest expense primarily consists of fees associated with the 2012 credit
facility. Interest expense also consists of fees associated with issuing letters
of credit and other financial assurances. Other income and expense consist
primarily of gains or losses on transactions denominated in currencies other
than our or our subsidiaries' functional currency, interest income earned on
cash balances, and other non-operating income and expense. We historically have
invested our cash in money market funds, treasury funds, commercial paper, and
municipal bonds.
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Consolidated Results of Operations
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Revenues
The following table summarizes our revenues for the years ended December 31,
2012 and 2011 (in thousands):
December 31, Dollar Percentage
2012 2011 Change Change
Revenues:
DemandSMART $ 244,852 $ 259,150 $ (14,298 ) (5.5 )%EfficiencySMART, SupplySMART and Other 33,132 27,458
5,674 20.7 %
Total revenues $ 277,984 $ 286,608 $ (8,624 ) (3.0 )%
The overall decrease in our DemandSMART revenues was primarily attributable to
changes in the following existing operating areas (dollars in thousands):
Revenue (Decrease) Increase:
December 31, 2011
to
December 31, 2012
PJM $ (42,092 )
New England (14,347 )
OPA (4,396 )
Australia 17,962
Act129 13,513
Texas 5,996
California 3,873
Alberta 2,680
Other (1) 2,513
Total decreased DemandSMART revenues $ (14,298 )
(1) The amounts included in this category relate to net increases in various
demand response programs, none of which are individually material.
The decrease in our DemandSMART revenues for the year ended December 31, 2012,
as compared to 2011, was primarily attributable to less favorable pricing and a
decrease in our MW delivery obligations in the PJM and ISO-NE programs, in
addition to decreased energy revenues as a result of fewer demand response
events that yielded energy payments and a change in the mix of energy rates. In
addition, the discontinuance of PJM's ILR program in June 2012 reduced our
flexibility to manage our portfolio of demand response capacity in the PJM
market and negatively impacted our revenues for the year ended December 31,
2012. The decrease in DemandSMART revenues was also attributable to the
termination of an ISO-NE program during the three months ended June 30, 2012,
from which we derived revenues throughout 2011 compared to only six months
during the year ended December 31, 2012. In addition, DemandSMART revenues
declined due to the recognition of $5.3 million of previously deferred revenues
during the year ended December 31, 2011 as a result of an amendment to our
utility contract with OPA, or the OPA contract. There was no similar recognition
of deferred revenues under the OPA contract during the year ended December 31,
2012. The decrease in DemandSMART revenues was partially offset by an increase
in enrolled MW and pricing in our Western Australia program and certain of our
Texas programs, including ERCOT, Centerpoint and ONCOR and an increase in
enrolled MW and improved performance in our California programs. The decrease in
DemandSMART revenues was also partially offset by revenue we earned from the
Pennsylvania Act 129, or Act 129, programs and a demand response program in
Alberta, Canada for which no revenues were recognized in 2011.
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For the year ended December 31, 2012, our EfficiencySMART, SupplySMART and other
revenues increased, as compared to 2011, due to continued growth in customers
and contracts, the commencement of revenue recognition in 2012 that resulted
from the completion of the installation phase of a $10 million EfficiencySMART
data-driven energy management application for the Massachusetts Department of
Energy Resources, and enhanced customer relationships that resulted from our
acquisitions of Global Energy and M2M in 2011. In addition, the increase in our
EfficiencySMART, SupplySMART and other revenues for the year ended December 31,
2012 was attributable to the recognition of a full year of revenues during
fiscal 2012 from our acquisitions of Global Energy and M2M, both of which
occurred in early 2011.
We currently expect our total DemandSMART revenues to increase during the year
ending December 31, 2013, or fiscal 2013, as compared to fiscal 2012 primarily
due to an increase in pricing and enrolled MW in our Western Australia demand
response program, as well as an increase in PJM revenues as PJM prices return to
more historical levels.
Gross Profit and Gross Margin
The following table summarizes our gross profit and gross margin percentages for
our energy management applications, services and products for the years ended
December 31, 2012 and 2011 (dollars in thousands):
Year Ended December 31,
2012 2011
Gross Profit Gross Margin Gross Profit Gross Margin
$ 123,444 44.4% $123,397 43.1%
Despite a decline in revenue, the slight increase in gross profit for the year
ended December 31, 2012, as compared to 2011, was primarily due to the gross
profit generated from the increase in our enrolled MW and pricing in Western
Australia and the gross profit generated from our new DemandSMART arrangements
in fiscal 2012 when no revenues were recognized in 2011, including our Act 129
programs and our program in Alberta, Canada. The increase in gross profit was
also attributable to improved management of our portfolio of demand response
capacity and an overall reduction in the percentage of revenues paid to our C&I
customers. This increase in gross profit was partially offset by less favorable
pricing and a decrease in enrolled MW in our PJM and ISO-NE programs, as well as
the termination of an ISO-NE program during the three months ended June 30, 2012
from which we derived revenues throughout 2011. In addition, the increase in
gross profit was also partially offset by the recognition of $5.3 million of
revenues during the year ended December 31, 2011 related to our OPA contract for
which we had recognized the associated cost of such revenues prior to 2011.
There were no similar transactions during the year ended December 31, 2012.
Our gross margin during the year ended December 31, 2012 increased in comparison
to 2011 due to improved management of our portfolio of demand response capacity,
including the adjustment of our zonal capacity obligations through our
participation in PJM incremental auctions and lower costs associated with our
C&I contracts. These increases were offset by a decrease in gross margin under
our OPA contract due to the recognition of revenues during the year ended
December 31, 2011 in connection with the amendment to the OPA contract, for
which we recognized the cost of such revenues in previous periods. The increase
in our gross margin during the year ended December 31, 2012 compared to 2011 was
also offset by the decrease in gross margin that resulted from the recognition
of revenues during the year ended December 31, 2011 in connection with our
participation in a California demand response program for which we recognized
the cost of such revenues in previous periods.
We currently expect that our gross margin for the year ending December 31, 2013
will be slightly higher than our gross margin for the year ended December 31,
2012 due to the continuing improvement in the management of our portfolio of
demand response capacity, as well as lower costs associated with our C&I
contracts. We also expect that our gross margin for the three months ending
September 30, 2013 will be the highest gross margin among our four quarterly
reporting periods in fiscal 2013 due to the seasonality of the demand response
industry, which is consistent with our gross margin pattern in fiscal 2012 and
prior years.
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Operating Expenses
The following table summarizes our operating expenses for the years ended
December 31, 2012 and 2011 (dollars in thousands):
Year Ended
December 31, Percentage
2012 2011 Change
Operating Expenses:
Selling and marketing $ 55,963 $ 51,907 7.8 %
General and administrative 71,643 66,773 7.3 %
Research and development 16,226 14,254 13.8 %
Total $ 143,832 $ 132,934 8.2 %
In certain forward capacity markets in which we participate, such as PJM, we may
enable our C&I customers, meaning we may install our equipment at a C&I customer
site to allow for the curtailment of MW from the electric power grid, up to
twelve months in advance of enrolling the C&I customer in a particular program.
As a result, there has been a trend of incurring operating expenses at the time
of enablement, including salaries and related personnel costs, associated with
enabling certain of our C&I customers, in advance of recognizing the
corresponding revenues.
Selling and Marketing Expense
The following table summarizes our selling and marketing expenses for the years
ended December 31, 2012 and 2011 (dollars in thousands):
Year Ended
December 31, Percentage
2012 2011 Change
Payroll and related costs $ 35,374 $ 34,143 3.6 %
Stock-based compensation 4,641 4,203 10.4 %
Other 15,948 13,561 17.6 %
Total $ 55,963 $ 51,907 7.8 %
The increase in payroll and related costs for the year ended December 31, 2012
compared to 2011 was primarily due to an increase in the number of selling and
marketing full-time employees from 204 at December 31, 2011 to 212 at
December 31, 2012. This increase was partially offset by lower commissions and a
decrease in cash bonuses for fiscal 2012 as a portion of those bonuses will be
settled in shares of our common stock and therefore is recorded in stock-based
compensation expense. In addition, we incurred higher travel related costs of
$0.5 million primarily as a result of our continued international expansion.
The increase in stock-based compensation for the year ended December 31, 2012
compared to 2011 was primarily due to a portion of the bonuses for fiscal 2012
that will be settled in shares of our common stock rather than cash and is,
therefore, recorded as a component of stock-based compensation expense. This
increase was offset by a lower grant date fair value of stock-based awards
granted during the year ended December 31, 2012, which was lower than the grant
date fair value of stock-based awards that became fully vested during the year
ended December 31, 2011, as well as a reversal of stock-based compensation
expense that resulted from forfeitures of a greater number of stock-based awards
during the year ended December 31, 2012.
The increase in other selling and marketing expenses for the year ended
December 31, 2012 compared to 2011 was due to a $1.3 million increase in
amortization expense related to acquired intangible assets that resulted from
our acquisition of Energy Response in July 2011, a $1.3 million increase in the
allocation to selling and marketing of company-wide overhead costs, which are
allocated based upon headcount, due to higher facilities
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and IT costs, and an increase in professional services fees of $0.7 million.
This increase was partially offset by the recording in 2011 of approximately
$0.5 million of impairment charges associated with the discontinued use of the
trade name intangible assets acquired in connection with our acquisition of
Energy Response and another immaterial acquisition that we completed in 2011, in
addition to the discontinuation of certain customer relationships related to our
acquisition of eQ. We did not incur any such charges in 2012. We also incurred
lower marketing costs of $0.3 million in 2012 compared to 2011.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
years ended December 31, 2012 and 2011 (dollars in thousands):
Year Ended
December 31, Percentage
2012 2011 Change
Payroll and related costs $ 37,538 $ 34,057 10.2 %
Stock-based compensation 7,755 8,255 (6.1 )%
Other 26,350 24,461 7.7 %
Total $ 71,643 $ 66,773 7.3 %
The increase in payroll and related costs for the year ended December 31, 2012
compared to 2011 was primarily attributable to an increase in the number of
general and administrative full-time employees from 322 at December 31, 2011 to
383 at December 31, 2012. This increase was partially offset by a portion of the
bonuses for fiscal 2012 that will be settled in shares of our common stock
rather than cash and is, therefore, recorded as a component of stock-based
compensation expense.
The decrease in stock-based compensation for the year ended December 31, 2012
compared to 2011 was primarily due to the reversal of stock-based compensation
expense related to the forfeiture of stock-based awards that were granted to our
former chief financial officer, as well as fully-vested stock awards that were
granted to our board of directors at a lower grant-date fair value in the year
ended December 31, 2012 than the fair value of stock-based awards granted to
them during 2011. These decreases were offset by an increase in stock-based
compensation related to a portion of the bonuses for fiscal 2012 that will be
settled in shares of our common stock rather than cash, which is recorded as a
component of stock-based compensation expense.
The increase in other general and administrative expenses for the year ended
December 31, 2012 compared to 2011 was attributable to an increase of $3.2
million in facilities expenses due to higher rent and insurance costs in
addition to higher depreciation expense that resulted from a change in useful
life of the leasehold improvements under our current lease, an increase of $2.5
million in higher fees mainly associated with regulatory compliance, and an
increase of $0.8 million in information technology and communication costs in
support of our business. The increase in other general and administrative
expenses for the year ended December 31, 2012 compared to 2011 was also
attributable to a lease termination charge of $1.1 million resulting from our
election to terminate the operating lease for our current corporate headquarters
effective June 30, 2013. These increases in other general and administrative
expenses for the year ended December 31, 2012 were offset by a decrease of $3.8
million in finance charges, most of which were attributable to charges that we
recorded during the year ended December 31, 2011 in connection with a certain
contract that we terminated during 2011. The increase in other general and
administrative expenses for the year ended December 31, 2012 was also offset by
an increase of $2.1 million in the allocation to selling and marketing, and
research and development of company-wide overhead costs.
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Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended December 31, 2012 and 2011 (dollars in thousands):
Year Ended
December 31, Percentage
2012 2011 Change
Payroll and related costs $ 9,172 $ 7,682 19.4 %
Stock-based compensation 1,220 1,006 21.3 %
Other 5,834 5,566 4.8 %
Total $ 16,226 $ 14,254 13.8 %
The increase in payroll and related costs for the year ended December 31, 2012
compared to 2011 was primarily driven by an increase in the number of research
and development full-time employees from 73 at December 31, 2011 to 90 at
December 31, 2012, as well as an increase in salary rates per full-time
employee. This increase was partially offset by an increase in capitalized
application development costs primarily related to our DemandSMART application,
as well as a portion of the bonuses for fiscal 2012 that will be settled in
shares of our common stock rather than cash and is, therefore, recorded as a
component of stock-based compensation expense.
The increase in stock-based compensation for the year ended December 31, 2012
compared to 2011 was related to a portion of the bonuses for fiscal 2012 that
will be settled in shares of our common stock rather than cash and is,
therefore, recorded as a component of stock-based compensation expense.
The increase in other research and development expenses for the year ended
December 31, 2012 compared to 2011 was due to an increase of $0.8 million in the
allocation to research and development of company-wide overhead costs which are
allocated based upon headcount. The increase in other research and development
expenses was also due to an increase of $0.5 million in software licensing fees.
This increase was partially offset by an impairment charge of $0.5 million
related to an indefinite-lived in-process research and development intangible
asset and an impairment charge related to a definite-lived patent intangible
asset of less than $0.1 million that were recorded in 2011 as a result of a
review and realignment of our development efforts. In addition, we incurred
lower professional services fees during the year ended December 31, 2012 of $0.4
million compared to 2011 and lower miscellaneous equipment expenses of $0.1
million.
Interest and Other (Expense) Income, Net
The increase in interest expense of $0.5 million for the year ended December 31,
2012 compared to 2011 was mainly attributable to the costs associated with the
renegotiation of our 2012 credit facility, higher average outstanding letter of
credit balances in addition to higher partner bank fees. Other income (expense),
net for the year ended December 31, 2012 was primarily comprised of foreign
currency gains (losses) and a nominal amount of interest income. We had
approximately $21.2 million at December 31, 2012 exchange rates ($20.4 million
Australian) in intercompany receivables denominated in Australian dollars that
arose from the acquisition of Energy Response in July 2011. Substantially all of
the foreign currency gains (losses) represent unrealized gains (losses) and,
therefore, are non-cash in nature. We currently do not hedge any of our foreign
currency transactions.
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Income Taxes
We recorded a provision for income taxes of $1.8 million and $1.8 million for
the years ended December 31, 2012 and 2011, respectively. Although our federal
and state net operating loss carryforwards exceeded our taxable income for the
years ended December 31, 2012 and 2011, our annual effective tax rate was
greater than zero due to the following:
• estimated foreign taxes resulting from guaranteed profit allocable to our
foreign subsidiaries, which have been determined to be limited-risk service
providers acting on behalf of the U.S. parent for tax purposes, for which
there are no tax net operating loss carryforwards;
• certain state taxes for jurisdictions where the states currently limit or
disallow the utilization of net operating loss carryforwards; and
• amortization of tax deductible goodwill, which generates a deferred tax
liability that cannot be offset by net operating losses or other deferred
tax assets since its reversal is considered indefinite in nature.Our effective tax rate for the year ended December 31, 2012 was 8.6% compared to
an effective tax rate of 15.6% for the year ended December 31, 2011.
We review all available evidence to evaluate the recovery of our deferred tax
assets, including the recent history of accumulated losses in all tax
jurisdictions over the last three years, as well as our ability to generate
income in future periods. As of December 31, 2012 and December 31, 2011, due to
the uncertainty related to the ultimate use of our deferred income tax assets,
we have provided a full valuation allowance against our U.S., Australian and New
Zealand deferred tax assets.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Revenues
The following table summarizes our revenues for the years ended December 31,
2011 and 2010 (dollars in thousands):
Year Ended
December 31, Dollar Percentage
2011 2010 Change Change
Revenues:
DemandSMART $ 259,150 $ 264,608 $ (5,458 ) (2.1 )%EfficiencySMART, SupplySMART and Other 27,458 15,549
11,909 76.6 %
Total revenues $ 286,608 $ 280,157 $ 6,451 2.3 %
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For the year ended December 31, 2011, our demand response revenues decreased by
$5.5 million, or 2%, as compared to the year ended December 31, 2010. The
decrease in our DemandSMART revenues was primarily attributable to changes in
the following existing operating areas (dollars in thousands):
Revenue Increase
(Decrease):
December 31, 2010
to
December 31, 2011
PJM $ (14,431 )
New England (14,123 )
New York (2,601 )
Public Service Company of New Mexico, or PNM (560 )
OPA 12,204
California 5,090
Australia 3,725
ERCOT 1,793
XCEL Energy 959
Salt River Project, or SRP 880
UK National Grid 798
Tucson Electric Power, or TEP 646
Other(1) 162
Total decreased demand response revenues $ (5,458 )
The decrease in our DemandSMART revenues during the year ended December 31, 2011
compared to 2010 was primarily attributable to less favorable pricing in the PJM
and New York markets, as well as a decrease in MW enrolled in our ISO-NE program
and less favorable pricing compared to 2010 due to the commencement of a new
ISO-NE program in June 2010. The decrease in DemandSMART revenues was also
partially attributable to fewer demand response events being called by PJM
during the year ended December 31, 2011, which resulted in decreased energy
payments, as compared to 2010. The decrease in DemandSMART revenues was also
partially attributable to a decrease in MW enrolled in our PNM program during
the year ended December 31, 2011 as compared to 2010. The decrease in
DemandSMART revenues was partially offset by an increase in revenues recognized
as a result of amendments to the OPA contract during the year ended December 31,
2011 that resulted in the recognition of $5.3 million of revenues during the
year that had been previously deferred. The decrease in DemandSMART revenues was
also partially offset by stronger demand response event performance in our
California demand response programs, our ability to recognize revenues based on
the finalization of performance in a certain California demand response program,
and an increase in our enrolled MW in the XCEL Energy, SRP, UK National Grid,
and certain other demand response programs in which we participate. The decrease
in DemandSMART revenues was also partially offset by our participation in demand
response programs in Australia and the TEP demand response program. We did not
receive any revenues related to the Australia or TEP programs during the year
ended December 31, 2010.
For the year ended December 31, 2011, our EfficiencySMART, SupplySMART and other
revenues increased by $11.9 million compared to 2010 primarily due to our
acquisitions of Global Energy and M2M, both of which occurred in January 2011.
In addition, we completed a certain EfficiencySMART project during 2011, which
resulted in the recognition of $0.6 million of revenues that had been previously
deferred.
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Gross Profit and Gross Margin
The following table summarizes our gross profit and gross margin percentages for
our energy management applications, services and products for the years ended
December 31, 2011 and 2010 (dollars in thousands):
Year Ended December 31,
2011 2010
Gross Profit Gross Margin Gross Profit Gross Margin
$ 123,397 43.1% $120,325 42.9%
The increase in gross profit during the year ended December 31, 2011 compared to
2010 was primarily due to our ability to recognize revenues that had previously
been deferred in connection with the OPA contract, pursuant to which we
recognized the cost of such revenues in prior periods due to the uncertainty of
the realizability of these costs. The increase in gross profit was also
partially attributable to stronger demand response event performance in certain
of the demand response programs in which we participate, including ISO-NE, which
in some cases resulted in increased energy payments for the year ended
December 31, 2011 compared to 2010, as well as our ability to recognize revenues
based on the finalization of performance in a certain California demand response
program for which the corresponding cost of revenues were recorded during the
year ended December 31, 2010. The acquisitions that we completed in 2011 also
contributed to the increase in gross profit for the year ended December 31,
2011. The increase in gross profit was partially offset by less favorable
pricing in PJM and ISO-NE, as well as fewer demand response events being called
by PJM during the year ended December 31, 2011, which resulted in decreased
energy payments from PJM compared to 2010.
The slight increase in gross margin during the year ended December 31, 2011,
compared to 2010 was primarily due to the recognition of revenues in connection
with the OPA contract, pursuant to which we recognized the cost of revenues in
prior periods due to the uncertainty of the realizability of these costs. The
increase was partially offset by less favorable pricing in PJM and ISO-NE, which
was not entirely offset by lower payments to our C&I customers.
Operating Expenses
The following table summarizes our operating expenses for the years ended
December 31, 2011 and 2010 (dollars in thousands):
Year Ended December 31, Percentage
2011 2010 Change
Operating Expenses:
Selling and marketing $ 51,907 $ 44,029 17.9 % General and administrative 66,773 54,983
21.4 %
Research and development 14,254 10,097 41.2 %
Total $ 132,934 $ 109,109 21.8 %
In certain forward capacity markets in which we participate, such as PJM, we may
enable our C&I customers, meaning we may install our equipment at a C&I customer
site to allow for the curtailment of MW from the electric power grid, up to
twelve months in advance of enrolling the C&I customer in a particular demand
response program. As a result, there has been a trend of increasing operating
expenses at the time of enablement, including salaries and related personnel
costs associated with enabling certain of our C&I customers, in advance of
recognizing the corresponding revenues.
The increase in payroll and related costs within our operating expenses for the
year ended December 31, 2011 compared to 2010 was primarily driven by an
increase in headcount from 484 full time employees at December 31, 2010 to 599
full time employees at December 31, 2011, which was substantially due to the
acquisitions that we completed in 2011.
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Selling and Marketing Expense
The following table summarizes our selling and marketing expenses for the years
ended December 31, 2011 and 2010 (dollars in thousands):
Year Ended
December 31, Percentage
2011 2010 Change
Payroll and related costs $ 34,143 $ 29,765 14.7 %
Stock-based compensation 4,203 4,583 (8.3 )%
Other 13,561 9,681 40.1 %
Total $ 51,907 $ 44,029 17.9 %
The increase in payroll and related costs for the year ended December 31, 2011
compared to 2010 was primarily due to an increase in the number of selling and
marketing full-time employees from 176 at December 31, 2010 to 204 at
December 31, 2011 which was partially offset by a decrease of $0.6 million in
sales commissions payable to employees in our sales organization for the year
ended December 31, 2011.
The decrease in stock-based compensation for the year ended December 31, 2011
compared to 2010 was primarily due to significant stock-based awards granted in
2007 that became fully vested prior to June 30, 2011. The decrease was also
partially attributable to the reversal of stock-based compensation expense that
resulted from forfeitures of a greater number of stock-based awards in
connection with an increase in our attrition rate. These decreases were offset
by a full year of stock-based compensation expense related to awards granted
during the year ended December 31, 2010 and by stock-based compensation expense
related to awards granted during the year ended December 31, 2011.
The increase in other selling and marketing expenses for the year ended
December 31, 2011 compared to 2010 was primarily attributable to an increase in
amortization expense of $3.5 million due to the customer relationship and trade
name intangible assets acquired in connection with the acquisitions we completed
in 2011. During the year ended December 31, 2011, we recorded an impairment
charge of $0.2 million related to the discontinued use of the trade name
intangible assets acquired in connection with our acquisition of Energy Response
and another immaterial acquisition that we completed in 2011, contributing to
the increase in selling and marketing expenses for the year ended December 31,
2011 compared to 2010. In addition, during the year ended December 31, 2011, as
a result of the discontinuation of certain customer relationships related to our
acquisition of eQ, we recorded an impairment charge of $0.3 million during the
three month period ended December 31, 2011. The increase in other selling and
marketing expenses for the year ended December 31, 2011 compared to 2010 was
also partially attributable to an increase in professional services fees of $0.2
million. The increase in other selling and marketing expenses for the year ended
December 31, 2011 was offset by a decrease in marketing costs of $0.5 million
due to our rebranding efforts that took place in 2010.
General and Administrative Expenses
The following table summarizes our general and administrative expenses for the
years ended December 31, 2011 and 2010 (dollars in thousands):
Year Ended
December 31, Percentage
2011 2010 Change
Payroll and related costs $ 34,057 $ 28,709 18.6 %
Stock-based compensation 8,255 10,252 (19.5 )%
Other 24,461 16,022 52.7 %
Total $ 66,773 $ 54,983 21.4 %
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The increase in general and administrative expenses for the year ended
December 31, 2011 compared to 2010 was partially due to an increase in the
number of general and administrative full-time employees from 250 at
December 31, 2010 to 322 at December 31, 2011. The increase in headcount was
partly offset by the timing of the hiring of those new full-time employees
during 2011.
The decrease in stock-based compensation for the year ended December 31, 2011
compared to 2010 was primarily due to prior period stock-based awards that
became fully vested in the first half of 2011 and the reversal of stock-based
compensation expense that resulted from forfeitures of a greater number of
stock-based awards in connection with an increase in our attrition rate. The
decrease in stock-based compensation expense from 2010 was also partially
attributable to fully-vested stock awards granted to our board of directors
during the year ended December 31, 2011 with a lower grant-date fair value than
the same amount of fully-vested stock awards granted during 2010.
The increase in other general and administrative expenses for the year ended
December 31, 2011 compared to 2010 was primarily attributable to a $4.3 million
increase in finance costs due to charges that we recorded in connection with a
certain contract that we terminated during the year ended December 31, 2011. As
a result of this termination, we recorded charges of $4.1 million during the
year ended December 31, 2011, which represented the $3.2 million paid upon the
termination and $0.9 million that had been previously capitalized. In addition,
the increase in other general and administrative expenses for the year ended
December 31, 2011 compared to 2010 was also due to an increase in professional
services fees of $1.5 million incurred in connection with the integration of the
acquisitions that we completed in 2011, technology and communication costs of
$1.3 million due to increased software licensing fees and computer supplies, and
an increase in facility costs of $1.3 million due to the expansion of our office
space as a result of our recent acquisitions.
Research and Development Expenses
The following table summarizes our research and development expenses for the
years ended December 31, 2011 and 2010 (dollars in thousands):
Year Ended
December 31, Percentage
2011 2010 Change
Payroll and related costs $ 7,682 $ 5,517 39.2 %
Stock-based compensation 1,006 907 10.9 %
Other 5,566 3,673 51.5 %
Total $ 14,254 $ 10,097 41.2 %
The increase in research and development expenses for the year ended
December 31, 2011 compared to 2010 was primarily driven by the costs associated
with an increase in the number of research and development full-time employees
from 58 at December 31, 2010 to 73 at December 31, 2011 and the timing
associated with our hiring of new full-time employees during 2011 compared to
2010, as well as an increase in salary rates per full-time employee. The
increase was offset by an increase in capitalized internal payroll and related
costs of $0.3 million for the year ended December 31, 2011.
The increase in stock-based compensation for the year ended December 31, 2011
compared to 2010 was primarily due to costs related to equity awards granted to
new employees during 2011, including a senior level employee.
The increase in other research and development expenses for the year ended
December 31, 2011 compared to 2010 was attributable to a $0.6 million increase
in technology and communications expenses related to software licensing fees and
a $0.5 million impairment charge. This increase was also attributable to an
increase in the allocation of facility costs of $0.2 million due to the
expansion of our office space as a result of recent acquisitions, an increase of
$0.4 million in professional services fees related to our intellectual property
and an increase of $0.2 million in miscellaneous equipment expenses as a result
of the expansion of our hardware product offerings.
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During the three months ended December 31, 2011, as a result of our review and
realignment of our development efforts, we abandoned our efforts to complete the
development of a certain in-process research and development indefinite-lived
intangible asset related to our acquisition of Zox. As a result, we recorded an
impairment charge related to this indefinite-lived in-process research and
development intangible asset of $0.5 million and an impairment charge related to
the associated definite-lived patent intangible asset of less than $0.1 million.
Interest and Other (Expense) Income, Net
Interest expense for the year ended December 31, 2011 includes amortization of
capitalized debt issuance costs, interest on our outstanding capital leases and
letters of credit origination fees. The increase in interest expense for the
year ended December 31, 2011 compared to 2010 was due to the amortization of
capitalized debt issuance costs associated with our previously outstanding $75.0
million senior secured revolving credit facility, as amended, that we and one of
our subsidiaries entered into with SVB and a certain other financial institution
in April 2011, which we refer to as the 2011 credit facility, which were
significantly higher than the amortization of debt issuance costs associated
with our previously outstanding $35.0 million secured revolving credit and term
loan facility that we and one of our subsidiaries entered into with SVB in
August 2008.
Other expense, net for the year ended December 31, 2011 was primarily comprised
of foreign currency losses related to certain intercompany receivables
denominated in foreign currencies. Other expense, net for the year ended
December 31, 2010 was primarily comprised of a nominal amount of foreign
currency losses related to certain intercompany receivables denominated in
foreign currencies offset by a nominal amount of interest income. The
significant increase in losses arising from transactions denominated in foreign
currencies for the year ended December 31, 2011 compared to 2010 was due to the
significant increase in foreign denominated intercompany receivables held by us
from one of our Australian subsidiaries, primarily as a result of the funding
provided to complete the acquisition of Energy Response, and the strengthening
of the United States dollar as compared to the Australian dollar during the year
ended December 31, 2011. As of December 31, 2011, we had an intercompany
receivable from our Australian subsidiary that is denominated in Australian
dollars and not deemed to be of a "long-term investment" nature totaling $33.7
million at December 31, 2011 exchange rates ($33.1 million Australian). The
significant increase in losses arising from transactions denominated in foreign
currencies was primarily unrealized losses and therefore a non-cash expense. We
did not engage in any currency hedging transactions during the year ended
December 31, 2011.
Income Taxes
We recorded a provision for income taxes of $1.8 million and $0.8 million for
the years ended December 31, 2011 and 2010, respectively. Although our federal
and state net operating loss carryforwards exceeded our taxable income for the
years ended December 31, 2011 and 2010, our annual effective tax rate was
greater than zero due to the following:
• estimated foreign taxes resulting from guaranteed profit allocable to our
foreign subsidiaries, which have been determined to be limited-risk service
providers acting on behalf of the U.S. parent for tax purposes, for which
there are no tax net operating loss carryforwards;
• certain state taxes for jurisdictions where the states currently limit or
disallow the utilization of net operating loss carryforwards; and
• amortization of tax deductible goodwill, which generates a deferred tax
liability that cannot be offset by net operating losses or other deferred
tax assets since its reversal is considered indefinite in nature.Our effective tax rate for the year ended December 31, 2011 was 15.6% compared
to an effective tax rate of 8.0% for the year ended December 31, 2010.
We review all available evidence to evaluate the recovery of our deferred tax
assets, including the recent history of accumulated losses in all tax
jurisdictions over the last three years, as well as our ability to generate
income in future periods. As of December 31, 2011 and December 31, 2010, due to
the uncertainty related to the ultimate use of our deferred income tax assets,
we have provided a full valuation allowance against these U.S. deferred tax
assets.
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Liquidity and Capital Resources
Overview
We have generated significant cumulative losses since inception. As of
December 31, 2012, we had an accumulated deficit of $103.4 million. As of
December 31, 2012, our principal sources of liquidity were cash and cash
equivalents totaling $115.0 million, an increase of $27.7 million from the
December 31, 2011 balance of $87.3 million. At December 31, 2012 and
December 31, 2011, the majority of our excess cash was invested in money market
funds.
We believe our existing cash and cash equivalents at December 31, 2012 and our
anticipated net cash flows from operating activities will be sufficient to meet
our anticipated cash needs, including investing activities, for at least the
next 12 months. Our future working capital requirements will depend on many
factors, including, without limitation, the rate at which we sell our energy
management applications, services and products to customers and the increasing
rate at which letters of credit or security deposits are required by electric
power grid operators and utilities, the introduction and market acceptance of
new energy management applications, services and products, the expansion of our
sales and marketing and research and development activities, and the geographic
expansion of our business operations. To the extent that our cash and cash
equivalents and our anticipated cash flows from operating activities are
insufficient to fund our future activities or planned future acquisitions, we
may be required to raise additional funds through bank credit arrangements,
including the potential expansion, renewal or replacement of the 2012 credit
facility, or public or private equity or debt financings. We also may raise
additional funds in the event we determine in the future to effect one or more
acquisitions of businesses, technologies or products. In addition, we may elect
to raise additional funds even before we need them if the conditions for raising
capital are favorable. Any equity or equity-linked financing could be dilutive
to existing stockholders. In the event we require additional cash resources we
may not be able to obtain bank credit arrangements or complete any equity or
debt financing on terms acceptable to us or at all.
If we fail to extend, renew or replace the 2012 credit facility and we still
have letters of credit issued and outstanding under the 2012 credit facility
when it matures on April 15, 2013, we will be required to post up to 105% of the
value of the letters of credit in cash with SVB to collateralize those letters
of credit.
Cash Flows
The following table summarizes our cash flows for the years ended December 31,
2012, 2011 and 2010 (dollars in thousands):
Year Ended December 31,
2012 2011 2010 Cash flows provided by operating activities $ 31,011 $ 27,637
$ 45,148
Cash flows used in investing activities (3,585 ) (95,516 )
(15,424 )
Cash flows provided by financing activities 356 1,997
3,974
Effects of exchange rate changes on cash (38 ) (237 ) (21 )
Net change in cash and cash equivalents $ 27,744 $ (66,119 )
$ 33,677
Cash Flows Provided by Operating Activities
Cash provided by operating activities primarily consists of net (loss) income
adjusted for certain non-cash items including depreciation and amortization,
stock-based compensation expense, and the effect of changes in working capital
and other activities.
Cash provided by operating activities for the year ended December 31, 2012 was
approximately $31.0 million and consisted of a net loss of $22.3 million, offset
by $42.3 million of non-cash items and $11.0 million of net cash provided by
working capital and other activities. The non-cash items primarily consisted of
depreciation and amortization, stock-based compensation expense, impairment
charges, unrealized foreign
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exchange transaction gains, deferred taxes and non-cash interest expense. Cash
provided by working capital and other activities consisted of a decrease of
$19.2 million in unbilled revenues relating to the PJM demand response market, a
decrease in prepaid expenses and other assets of $2.9 million, an increase of
$22.5 million in deferred revenue, an increase of $1.4 million in accrued
payroll and related expenses and an increase of $1.6 million in other noncurrent
liabilities. These amounts were offset by cash used in working capital and other
activities consisting of an increase in accounts receivable of $19.5 million due
to the timing of cash receipts under the demand response programs in which we
participate, an increase in capitalized incremental direct customer contract
costs of $5.7 million, a decrease in accrued capacity payments of $9.2 million,
the majority of which was related to the PJM demand response market and a
decrease of $2.4 million in accounts payable, accrued performance adjustments
and accrued expenses primarily due to the repayment of certain accrued
performance adjustments.
Cash provided by operating activities for the year ended December 31, 2011 was
approximately $27.6 million and consisted of a net loss of $13.4 million and
$0.5 million of net cash used in working capital and other activities offset by
$41.5 million of non-cash items, primarily consisting of depreciation and
amortization, deferred taxes, stock-based compensation expense, property and
equipment and intangible assets impairment charges, and unrealized foreign
exchange losses. Cash used in working capital and other operating activities
consisted of a decrease in accrued capacity payments of $7.4 million relating
primarily to the decrease in PJM revenues and therefore the associated decrease
in capacity payments to C&I customers from 2010 to 2011, a decrease of $2.1
million in accounts payable and accrued expenses and other current liabilities
due to the timing of payments, an increase in other assets of $3.8 million, an
increase in prepaid expenses and other current assets of $5.0 million, and a
decrease in other noncurrent liabilities of $0.2 million. These amounts were
offset by cash provided by working capital and other operating activities
consisting of a decrease of $7.0 million in unbilled revenues relating to the
PJM demand response market, a decrease of $2.7 million in accounts receivable
due to the timing of cash receipts under the demand response programs in which
we participate, an increase of $7.0 million in deferred revenue, and an increase
of $1.3 million in accrued payroll and related expenses.
Cash provided by operating activities for the year ended December 31, 2010 was
$45.1 million and consisted of net income of $9.6 million, $33.9 million of
non-cash items, primarily depreciation and amortization, deferred taxes,
stock-based compensation expense and impairment of property and equipment, and
$1.6 million of net cash used in working capital and other activities. Cash used
in working capital and other operating activities consisted of an increase of
$32.8 million in unbilled revenues relating to the PJM demand response market,
an increase of $4.9 million in accounts receivable due to the timing of cash
receipts under the programs in which we participate and an increase in prepaid
expenses and other assets of $0.7 million. These amounts were offset by cash
provided by working capital and other activities which reflected an increase of
$2.2 million in accrued payroll and related expenses, an increase of $5.8
million in accounts payable and accrued expenses due to the timing of payments,
an increase in accrued capacity payments of $25.2 million, the majority of which
was related to the PJM demand response market, and an increase of $6.8 million
in deferred revenue.
Cash Flows Used in Investing Activities
Cash used in investing activities was $3.6 million for the year ended
December 31, 2012. During the year ended December 31, 2012, we incurred
$15.9 million in capital expenditures primarily related to the purchase of
office and IT equipment, capitalized internal use software costs, demand
response equipment and other miscellaneous capital expenditures. In addition our
restricted cash and deposits decreased by $12.4 million due to a decline in
deposits principally related to the financial assurances required for the demand
response programs in which we participated, as these deposits were replaced with
letters of credit.
Cash used in investing activities was $95.5 million for the year ended
December 31, 2011. During the year ended December 31, 2011, we acquired Global
Energy for a purchase price of $26.7 million, of which we paid $19.9 million in
cash, M2M for a purchase price of $28.6 million, of which we paid $17.5 million
in cash, and Energy Response for a purchase price of $30.1 million, of which we
paid $27.3 million in cash, and we completed another immaterial acquisition for
a purchase price of $5.2 million, of which we paid $3.9 million in cash. The net
cash acquired from these acquisitions was $1.1 million. Additionally, our cash
investments
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included the cash portion of the acquisition contingent consideration for Cogent
of $1.5 million. Our other principal cash investments during the year ended
December 31, 2011 related to capitalized internal use software costs used to
build out and expand our energy management applications, services and products
and purchases of property and equipment. We incurred $17.6 million in capital
expenditures primarily related to the purchase of office equipment, demand
response equipment and other miscellaneous expenditures. In addition, during the
year ended December 31, 2011, our deposits increased by $8.4 million primarily
due to financial assurance requirements related to our demand response programs
in Australia and our long-term assets increased by $0.5 million due to financing
costs in connection with the 2011 credit facility.
Cash used in investing activities was $15.4 million for the year ended
December 31, 2010. Our principal cash investments during the year ended
December 31, 2010, which totaled $19.4 million, related to capitalizing internal
use software costs used to build out and expand our energy management
applications and services, and purchases of property and equipment. During the
year ended December 31, 2010, we acquired SmallFoot and Zox for a purchase price
of $1.4 million, of which $1.1 million was paid in cash. Additionally, our cash
investments included the cash portion of the earn-out payment due in connection
with our acquisition of SRC of $0.9 million. We had a decrease in restricted
cash and deposits of $6.0 million primarily as a result of demand response event
performance in July 2010 under a certain open market program in which we
participated, resulting in our restricted cash becoming unrestricted in
July 2010.
Cash Flows Provided by Financing Activities
Cash provided by financing activities was $0.4 million, $2.0 million and $4.0
million for the years ended December 31, 2012, 2011 and 2010, respectively, and
consisted primarily of proceeds that we received from exercises of options to
purchase shares of our common stock.
Credit Facility Borrowings
Subject to continued compliance with the covenants contained in our 2012 credit
facility, the full amount of the 2012 credit facility may be available for
issuances of letters of credit and up to $5.0 million of the 2012 credit
facility may be available for swing line loans. We are charged letter of credit
fees in connection with the issuance or renewal of letters of credit equal to 2%
of each letter of credit. The interest on revolving loans under the 2012 credit
facility will accrue, at our election, at either (i) the Eurodollar Rate with
respect to the relevant interest period plus 2.00% or (ii) the ABR (defined as
the highest of (x) the "prime rate" as quoted in the Wall Street Journal,
(y) the Federal Funds Effective Rate plus 0.50% and (z) the Eurodollar Rate for
a one-month interest period plus 1.00%) plus 1.00%. We expense the interest and
letter of credit fees under the 2012 credit facility, as applicable, in the
period incurred. The obligations under the 2012 credit facility are secured by
all of our domestic assets and the assets of several of our subsidiaries,
excluding our foreign subsidiaries. The 2012 credit facility terminates and all
amounts outstanding thereunder are due and payable in full on April 15, 2013. We
incurred total financing costs of $0.5 million in connection with the 2012
credit facility, which were deferred and are being amortized to interest expense
over the term of the 2012 credit facility, or through April 15, 2013.
The 2012 credit facility contains customary terms and conditions for credit
facilities of this type, including, among other things, restrictions on our
ability to incur additional indebtedness, create liens, enter into transactions
with affiliates, transfer assets, make certain acquisitions, pay dividends or
make distributions on, or repurchase, our common stock, consolidate or merge
with other entities, or undergo a change in control. In addition, we are
required to meet certain monthly and quarterly financial covenants customary
with this type of credit facility.
The 2012 credit facility contains customary events of default, including for
payment defaults, breaches of representations, breaches of affirmative or
negative covenants, cross defaults to other material indebtedness, bankruptcy
and failure to discharge certain judgments. If a default occurs and is not cured
within any applicable cure period or is not waived, SVB may accelerate our
obligations under the 2012 credit facility. If we are determined to be in
default then any amounts outstanding under the 2012 credit facility would become
immediately due and payable and we would be required to collateralize with cash
any outstanding letters of credit up to 105% of the amounts outstanding.
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As of December 31, 2012, we were in compliance with all of our covenants under
the 2012 credit facility. We believe that it is reasonably assured that we will
comply with the financial covenants under the 2012 credit facility for the
foreseeable future. The 2012 credit facility will expire in April 2013. If we
are unable to renew the 2012 credit facility under favorable terms or enter into
a new credit facility, we may be required to collateralize with cash any
outstanding letters of credit.
As of December 31, 2012, we had no borrowings but had outstanding letters of
credit totaling $42.6 million under the 2012 credit facility. The increase of
$11.0 million from the amount of outstanding letters of credit at December 31,
2011, which totaled $31.6 million, is due to additional financial assurance
requirements resulting from new customer arrangements and increases in delivery
obligations under certain open market bidding programs. As of December 31, 2012,
we had $7.4 million available under the 2012 credit facility for future
borrowings or issuances of additional letters of credit.
Contingent Earn-Out Payments
As discussed in Note 2 of our consolidated financial statements contained
herein, in connection with our acquisition of Energy Response, we may be
obligated to pay additional contingent purchase price consideration related to
an earn-out payment of $10.4 million based on December 31, 2012 exchange rates
($10.0 million Australian). The earn-out payment, if any, will be based on the
development of a demand response reserve capacity market in the National
Electric Market in Australia by December 31, 2013 that meets certain market size
and price per megawatt conditions. This milestone needs to be achieved in order
for the earn-out payment to occur, and there will be no partial payment if the
milestone is not fully achieved. We determined that the initial fair value of
the earn-out payment as of the acquisition date was $0.3 million. As of
December 31, 2012, the liability associated with the earn-out payment was
recorded at $0.4 million after adjusting for changes in exchange rates.
Capital Spending
We have made capital expenditures primarily for general corporate purposes to
support our growth and for equipment installations related to our business. Our
capital expenditures totalled $15.9 million, $17.6 million and $19.4 million
during the years ended December 31, 2012, 2011 and 2010, respectively.
Furthermore, we expect our capital expenditures for fiscal 2013 to increase
partially due to the capital expenditures related to the lease for our new
corporate headquarters.
Contractual Obligations
In June 2012, we exercised the termination option under our current lease and
provided notice of our election to terminate our current lease for our corporate
headquarters. The termination will be effective as of June 30, 2013. As a result
of our election to terminate our current lease, we are required to make a lease
termination payment of $1.1 million, of which $0.6 million was paid upon
exercise of the election to terminate and the remaining $0.5 million is due and
payable on or before July 1, 2013.
Information regarding our significant contractual obligations of the types
described below is set forth in the following table and includes the new lease
for our corporate headquarters and the change in the expected payments under our
current lease. Payments due by period have been presented based on payments due
subsequent to December 31, 2012 (in thousands):
Payments Due By Period
Less than 1 - 3 3 - 5 More than
Contractual Obligations Total 1 Year Years Years 5 Years
Operating lease obligations $ 32,399 $ 5,379 $ 8,939 $ 7,703 $ 10,378
Total $ 32,399 $ 5,379 $ 8,939 $ 7,703 $ 10,378
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Our operating lease obligations relate primarily to the leases of our corporate
headquarters in Boston, Massachusetts and our offices in Walnut Creek, San
Francisco, Irvine and Concord, California; Baltimore, Maryland; Boise, Idaho;
Dallas, Texas; Melbourne, Australia; and London, United Kingdom as well as
certain property and equipment.
In connection with the acquisition of Energy Response, in addition to the
amounts paid at closing, we may be obligated to pay additional contingent
purchase price consideration related to an earn-out payment equal to $10.4
million based on December 31, 2012 exchange rates ($10.0 million Australian).
The earn-out payment, if any, will be based on the development of a demand
response reserve capacity market in the National Electricity Market in Australia
by December 31, 2013 that meets certain market size and price per megawatt
conditions. This milestone needs to be achieved in order for the earn-out
payment to occur and there will be no partial payment if the milestone is not
fully achieved. We determined that the initial fair value of the earn-out
payment as of the acquisition date was $0.3 million. This fair value was
included as a component of the purchase price resulting in an aggregate purchase
price of $30.1 million. At December 31, 2012, the liability was recorded at $0.4
million after adjusting for changes in exchange rates.
In connection with our acquisition of M2M, we are required to pay additional
consideration that was deferred at the date of the acquisition. This deferred
purchase price consideration of $7.0 million will be paid upon the earlier of
the satisfaction of certain conditions contained in the definitive agreement or
seven years after the acquisition date of January 25, 2011. The deferred
purchase price consideration is not subject to adjustment or forfeiture. We
recorded our estimate of the fair value of the deferred purchase price
consideration based on the evaluation of the likelihood of the achievement of
the contractual conditions that would result in the payment of the deferred
purchase price consideration prior to seven years from the acquisition date and
weighted probability assumptions of these outcomes. The cash portion of the
deferred purchase price consideration of less than $0.5 million is recorded as a
liability, discounted to reflect the time value of money. As the milestone
payment date approaches, the fair value of this liability will increase. The
fair value of the deferred purchase price consideration of $3.4 million, related
to the 254,654 shares of common stock to be issued upon the milestone payment
date has been classified as additional paid-in capital within stockholders'
equity. With respect to the cash portion of the deferred purchase price
consideration, the increase in fair value is recorded as an expense in our
accompanying consolidated statements of operations. During each of the years
ended December 31, 2012 and 2011, we recorded a charge of less than $0.1 million
related to the accretion for the time value of money discount. At December 31,
2012, the liability was recorded at $0.5 million. The deferred purchase price
consideration to be paid in shares meets the requirements of an equity
instrument and, accordingly, will not be remeasured at fair value each reporting
period. This acquisition had no contingent consideration or earn-out payments.
As of December 31, 2012, we had no borrowings, but had outstanding letters of
credit totaling $42.6 million under the 2012 credit facility. As of December 31,
2012, we had $7.4 million available under the 2012 credit facility for future
borrowings or issuances of additional letters of credit. If we are unable to
renew the 2012 credit facility under favorable terms or enter into a new credit
facility, we may be required to collateralize with cash any outstanding letters
of credit.
We typically grant certain customers a limited warranty that guarantees that our
hardware products will substantially conform to current specifications for one
year from the delivery date. Based on our operating history, the liability
associated with product warranties has been determined to be nominal. We also
indemnify our customers from third-party claims relating to the intended use of
our products. Pursuant to these clauses, we indemnify and agree to pay any
judgment or settlement relating to a claim.
We guarantee the electrical capacity we have committed to deliver pursuant to
certain utility contracts. Such guarantees may be secured by cash or letters of
credit. Performance guarantees as of December 31, 2012 and 2011 were $44.5
million and $34.2 million, respectively. These performance guarantees include
deposits held by certain customers of $1.9 million and $14.3 million,
respectively, at December 31, 2012 and December 31, 2011.
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Off-Balance Sheet Arrangements
As of December 31, 2012, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
our financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors. We have
issued letters of credit in the ordinary course of our business in order to
participate in certain demand response programs. As of December 31, 2012, we had
outstanding letters of credit totaling $42.6 million. For information on these
commitments and contingent obligations, see "Liquidity and Capital Resources -
Credit Facility Borrowings" above and Note 12 to our consolidated financial
statements contained herein.
Additional Information
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented on a GAAP basis,
we disclose certain non-GAAP measures that exclude certain amounts, including
non-GAAP net (loss) income, non-GAAP net (loss) income per share, adjusted
EBITDA and free cash flow. These non-GAAP measures are not in accordance with,
or an alternative for, generally accepted accounting principles in the United
States.
The GAAP measure most comparable to non-GAAP net (loss) income is GAAP net
(loss) income; the GAAP measure most comparable to non-GAAP net (loss) income
per share is GAAP net (loss) income per share; the GAAP measure most comparable
to adjusted EBITDA is GAAP net (loss) income; and the GAAP measure most
comparable to free cash flow is net cash provided by (used in) operating
activities. Reconciliations of each of these non-GAAP financial measures to the
corresponding GAAP measure are included below.
Use and Economic Substance of Non-GAAP Financial Measures
Management uses these non-GAAP measures when evaluating our operating
performance and for internal planning and forecasting purposes. Management
believes that such measures help indicate underlying trends in our business, are
important in comparing current results with prior period results, and are useful
to investors and financial analysts in assessing our operating performance. For
example, management considers non-GAAP net (loss) income to be an important
indicator of the overall performance because it eliminates the effects of events
that are either not part of our core operations or are non-cash compensation
expenses. In addition, management considers adjusted EBITDA to be an important
indicator of our operational strength and performance of our business and a good
measure of our historical operating trend. Moreover, management considers free
cash flow to be an indicator of our operating trend and performance of our
business.
The following is an explanation of the non-GAAP measures that we utilize,
including the adjustments that management excluded as part of the non-GAAP
measures for the years ended December 31, 2012, 2011 and 2010, respectively, as
well as reasons for excluding these individual items:
• Management defines non-GAAP net (loss) income as net income (loss) before
expenses related to stock-based compensation and amortization expenses
related to acquisition-related intangible assets, net of related tax
effects.
• Management defines adjusted EBITDA as net (loss) income, excluding
depreciation, amortization, stock-based compensation, interest, income
taxes and other income (expense). Adjusted EBITDA eliminates items that are
either not part of our core operations or do not require a cash outlay,
such as stock-based compensation. Adjusted EBITDA also excludes
depreciation and amortization expense, which is based on our estimate of
the useful life of tangible and intangible assets. These estimates could
vary from actual performance of the asset, are based on historic cost incurred to build out our deployed network and may not be indicative of
current or future capital expenditures.
• Management defines free cash flow as net cash provided by (used in) operating activities less capital expenditures. Management defines capital
expenditures as purchases of property and equipment, which includes
capitalization of internal-use software development costs.
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Material Limitations Associated with the Use of Non-GAAP Financial Measures
Non-GAAP net (loss) income, non-GAAP net (loss) income per share, adjusted
EBITDA and free cash flow may have limitations as analytical tools. The non-GAAP
financial information presented here should be considered in conjunction with,
and not as a substitute for or superior to the financial information presented
in accordance with GAAP and should not be considered measures of our liquidity.
There are significant limitations associated with the use of non-GAAP financial
measures. Further, these measures may differ from the non-GAAP information, even
where similarly titled, used by other companies and therefore should not be used
to compare our performance to that of other companies.
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Non-GAAP Net (Loss) Income and Non-GAAP Net (Loss) Income per Share
Net loss for the year ended December 31, 2012 was $22.3 million, or $0.84 per
basic and diluted share, compared to a net loss of $13.4 million, or $0.52 per
basic and diluted share for the year ended December 31, 2011, and net income of
$9.6 million, or $0.39 per basic share and $0.37 per diluted share, for the year
ended December 31, 2010. Excluding stock-based compensation charges and
amortization of expenses related to acquisition-related assets, net of tax
effects, non-GAAP net loss for the year ended December 31, 2012 was $1.4
million, or $0.05 per basic and diluted share, compared to a non-GAAP net income
of $5.9 million, or $0.23 per basic share and $0.22 per diluted share, for the
year ended December 31, 2011, and a non-GAAP net income of $25.4 million, or
$1.03 per basic share and $0.97 per diluted share, for the year ended
December 31, 2010. The reconciliation of GAAP net (loss) income to non-GAAP net
(loss) income is set forth below:
Year Ended December 31,
2012 2011 2010
(In thousands, except share and per share data)
GAAP net (loss) income $ (22,293 ) $ (13,383 ) $ 9,577
ADD: Stock-based compensation 13,616 13,464 15,742
ADD: Amortization expense of
acquired intangible assets 7,241 5,856 1,452
LESS: Income tax effect on Non-GAAP
adjustments (1) - - (1,380 )
Non-GAAP net (loss) income $ (1,436 ) $ 5,937 $ 25,391
GAAP net (loss) income per basic
share $ (0.84 ) $ (0.52 ) $ 0.39
ADD: Stock-based compensation 0.52 0.52 0.64
ADD: Amortization expense of
acquired intangible assets 0.27 0.23 0.06
LESS: Income tax effect on Non-GAAP
adjustments (1) - - (0.06 )
Non-GAAP net (loss) income per
basic share $ (0.05 ) $ 0.23 $ 1.03
GAAP net (loss) income per diluted
share $ (0.84 ) $ (0.52 ) $ 0.37
ADD: Stock-based compensation 0.52 0.52 0.60
ADD: Amortization expense of
acquired intangible assets 0.27 0.23 0.05
LESS: Income tax effect on Non-GAAP
adjustments (1) - - (0.05 )
LESS: Dilutive impact on weighted
average
common stock equivalents - (0.01 ) -
Non-GAAP net (loss) income per
diluted share $ (0.05 ) $ 0.22 $ 0.97
Weighted average number of common
shares outstanding
Basic 26,551,234 25,799,494 24,611,729
Diluted 26,551,234 26,766,359 26,054,162
(1) Represents the increase in the income tax provision recorded for the year
ended December 31, 2010 based on our effective tax rate for the year ended
December 31, 2010. The non-GAAP adjustments would have no impact on the
provision for income taxes recorded for the years ended December 31, 2012 and
2011.
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Adjusted EBITDA
Adjusted EBITDA was $ 18.4 million, $ 26.0 million, and $42.8 million for the
years ended December 31, 2012, 2011 and 2010, respectively.
The reconciliation of adjusted EBITDA to net (loss) income is set forth below:
Year Ended December 31,
2012 2011 2010
Net (loss) income $ (22,293 ) $ (13,383 ) $ 9,577
Add back:
Depreciation and amortization 25,218 22,043 15,866
Stock-based compensation expense 13,616 13,464 15,742
Other (income) expense (1,457 ) 987 85
Interest expense 1,591 1,053 718
Provision for income tax 1,771 1,806 836
Adjusted EBITDA $ 18,446 $ 25,970 $ 42,824
Free Cash Flow
Net cash provided by operating activities was $31.0 million, $27.6 million and
$45.1 million for the years ended December 31, 2012, 2011 and 2010,
respectively. We generated $15.2 million, $10.0 million and $25.8 million of
free cash flow for the years ended December 31, 2012, 2011 and 2010,
respectively. The reconciliation of free cash flow to net cash provided by
operating activities is set forth below:
Year Ended December 31,
2012 2011 2010 Net cash provided by operating activities $ 31,011 $ 27,637
$ 45,148
Subtract:
Purchases of property and equipment (15,854 ) (17,613 ) (19,394 )
Free cash flow $ 15,157 $ 10,024 $ 25,754
Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to revenue recognition for multiple element
arrangements, allowance for doubtful accounts, valuations and purchase price
allocations related to business combinations, expected future cash flows
including growth rates, discount rates, terminal values and other assumptions
and estimates used to evaluate the recoverability of long-lived assets and
goodwill, estimated fair values of intangible assets and goodwill, amortization
methods and periods, certain accrued expenses and other related charges,
stock-based compensation, contingent liabilities, tax reserves and
recoverability of our deferred tax assets and related valuation allowance. We
base our estimates on historical experience and various other assumptions that
are believed to be reasonable under the circumstances. Actual results could
differ from these estimates if past experience or other assumptions do not turn
out to be substantially accurate. Any differences could have a material impact
on our financial condition and results of operations.
We believe that of our significant accounting policies, which are described in
Note 1 to our consolidated financial statements beginning on page F-1 of
Appendix A to this Annual Report on Form 10-K, the following accounting policies
involve a greater degree of judgment and complexity. Accordingly, these are the
policies we believe are the most critical to aid in fully understanding and
evaluating our financial condition and results of operations.
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Revenue Recognition
We recognize revenues in accordance with ASC 605, Revenue Recognition, or ASC
605. In all of our arrangements, we do not recognize any revenues until
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and we deem collection to be reasonably assured. In
making these judgments, we evaluate these criteria as follows:
• Evidence of an arrangement. We consider a definitive agreement signed by
the customer and us or an arrangement enforceable under the rules of an
open market bidding program to be representative of persuasive evidence of
an arrangement.
• Delivery has occurred. We consider delivery to have occurred when service
has been delivered to the customer and no post-delivery obligations exist.
In instances where customer acceptance is required, delivery is deemed to
have occurred when customer acceptance has been achieved.
• Fees are fixed or determinable. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not
payable within normal payment terms. If the fee is subject to refund or
adjustment and we cannot reliably estimate this amount, we recognize
revenues when the right to a refund or adjustment lapses. If offered
payment terms significantly exceed our normal terms, we recognize revenues
as the amounts become due and payable or upon the receipt of cash.
• Collection is reasonably assured. We conduct a credit review at the inception of an arrangement to determine the creditworthiness of the
customer. Collection is reasonably assured if, based upon our evaluation,
we expect that the customer will be able to pay amounts under the
arrangement as payments become due. If we determine that collection is not
reasonably assured, revenues are deferred and recognized upon the receipt
of cash.
We enter into contracts and open market bidding programs with utilities and
electric power grid operators to provide demand response applications and
services. Demand response revenues consist of two elements: revenue earned based
on our ability to deliver committed capacity to our electric power grid operator
and utility customers, which we refer to as capacity revenue; and revenue earned
based on additional payments made to us for the amount of energy usage actually
curtailed from the grid during a demand response event, which we refer to as
energy event revenue.
We recognize demand response revenue when we have provided verification to the
electric power grid operator or utility of our ability to deliver the committed
capacity which entitles us to payments under the utility contract or open market
program. Committed capacity is generally verified through the results of an
actual demand response event or a measurement and verification test. Once the
capacity amount has been verified, the revenue is recognized and future revenue
becomes fixed or determinable and is recognized monthly until the next demand
response event or test. In subsequent verification events, if our verified
capacity is below the previously verified amount, the electric power grid
operator or utility customer will reduce future payments based on the adjusted
verified capacity amounts. Ongoing demand response revenue recognized between
demand response events or tests that are not subject to penalty or customer
refund are recognized in revenue. If the revenue is subject to refund and the
amount of refund cannot be reliably estimated, the revenue is deferred until the
right of refund lapses.
We have evaluated the factors within ASC 605 regarding gross versus net revenue
reporting for our demand response revenues and payments to C&I customers. Based
on the evaluation of the factors within ASC 605, we determined that all of the
applicable indicators of gross revenue reporting were met. These applicable
indicators of gross revenue reporting included, but were not limited to, the
following:
• We are the primary obligor in our arrangements with electric power grid
operators and utility customers because we provide demand response services
directly to electric power grid operators and utilities under long-term
contracts or pursuant to open market programs and contract separately with
C&I customers to deliver such services. We manage all interactions with the
electric power grid operators and utilities, while C&I customers do not
interact with the electric power grid operators and utilities. In addition,
we assume the entire performance risk under arrangements with electric
power grid operators and utility customers,
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including the posting of financial assurance to assure timely delivery of
committed capacity with no corresponding financial assurance received from
C&I customers. In the event of a shortfall in delivered committed capacity,
we are responsible for all penalties assessed by the electric power grid
operators and utilities without regard for any recourse we may have with our
C&I customers.
• We have latitude in establishing pricing, as the pricing under our
arrangements with electric power grid operators and utilities is negotiated
through a contract proposal and contracting process or determined through a
capacity auction. We then separately negotiate payment to C&I customers and
have complete discretion in the contracting process with the C&I customer.
• We have complete discretion in determining the supplier (C&I customer) to
provide the demand response services, provided that the C&I customer is
located in the same region as the applicable electric power grid operator
or utility.
• We are involved in both the determination of service specifications and
performing part of the services, including the installation of metering and
other equipment for the monitoring, data gathering and measurement of
performance, as well as, in certain circumstances, the remote control of
C&I customer loads.
As a result, we determined that we earn revenue (as a principal) from the
delivery of demand response services to electric power grid operators and
utility customers and we record the amounts billed to the electric power grid
operators and utility customers as gross demand response revenues and the
amounts paid to C&I customers as cost of revenues.
In the PJM open market program in which we participate, the program year
operates on a June to May basis and performance is measured based on the
aggregate performance during the months of June through September. As a result,
fees received for the month of June could potentially be subject to adjustment
or refund based on performance during the months of July through September.
Based on recent changes to certain PJM program rules, we have concluded that we
no longer have the ability to reliably estimate the amount of fees potentially
subject to adjustment or refund until the performance period ends on
September 30th of each year. Therefore, commencing in fiscal 2012, all demand
response capacity revenues related to our participation in the PJM open market
program are being recognized at the end of the performance period, or
September 30th of each year. Because the period during which we are required to
perform (June through September) is shorter than the period over which we
receive payments under the program (June through May), a portion of the revenues
that have been earned are recorded and accrued as unbilled revenue. As a result
of the billing period not coinciding with the revenue recognition period, we had
$44.9 million in unbilled revenues from PJM at December 31, 2012.
Certain of the forward capacity programs in which we participate may be deemed
derivative contracts under ASC 815, Derivatives and Hedging, or ASC 815. In such
situations, we believe we meet the scope exception under ASC 815 as a normal
purchase, normal sale as that term is defined in ASC 815 and, accordingly, the
arrangement is not treated as a derivative contract.
Energy event revenues are recognized when earned. Energy event revenue is deemed
to be substantive and represents the culmination of a separate earnings process
and is recognized when the energy event is initiated by the electric power grid
operator or utility customer and we have responded under the terms of the
contract or open market program.
With respect to our non-demand response revenues, which represent our
EfficiencySMART, SupplySMART and other revenues, these generally represent
ongoing service arrangements where the revenues are recognized ratably over the
service period commencing upon delivery of the contracted service with the
customer. Under certain of our arrangements, in particular certain
EfficiencySMART arrangements with utilities, a portion of the fees received may
be subject to adjustment or refund based on the validation of the energy savings
delivered after the implementation is complete. As a result, we defer the
portion of the fees that are subject to adjustment or refund until such time as
the right of adjustment or refund lapses, which is generally upon completion and
validation of the implementation. In addition, under certain of our other
arrangements, we sell proprietary equipment to C&I customers that is utilized to
provide the ongoing services that the we deliver.
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Currently, this equipment has been determined to not have stand-alone value. As
a result, we defer revenues associated with the equipment and we begin
recognizing such revenue ratably over the expected C&I customer relationship
period (generally 3 years), once the C&I customer is receiving the ongoing
services from us. In addition, we capitalize the associated direct and
incremental costs, which primarily represent the equipment and third-party
installation costs, and recognizes such costs over the expected C&I customer
relationship period.
We adopted ASC Update No. 2009-13, Multiple-Deliverable Revenue Arrangements, or
ASU 2009-13, at the beginning of its first quarter of the fiscal year ended
December 31, 2011, fiscal 2011, on a prospective basis for transactions
originating or materially modified on or after January 1, 2011. The impact of
adopting ASU 2009-13 was not material to our financial statements for fiscal
2011, and if it was applied in the same manner to the fiscal year ended
December 31, 2010, or fiscal 2010, would not have had a material impact to
revenue for fiscal 2010. The adoption of ASU 2009-13 has not had and is not
expected to have a significant impact on the timing and pattern of revenue
recognition due to our limited number of multiple element arrangements.
We typically determine the selling price of our services based on vendor
specific objective evidence, or VSOE. Consistent with its methodology under
previous accounting guidance, we determine VSOE based on its normal pricing and
discounting practices for the specific service when sold on a stand-alone basis.
In determining VSOE, our policy is to require a substantial majority of selling
prices for a product or service to be within a reasonably narrow range. We also
consider the class of customer, method of distribution, and the geographies into
which its products and services are sold when determining VSOE. We typically
have had VSOE for its products and services.
In certain circumstances, we are not able to establish VSOE for all deliverables
in a multiple element arrangement. This may be due to the infrequent occurrence
of stand-alone sales for an element, a limited sales history for new services or
pricing within a broader range than permissible by our policy to establish VSOE.
In those circumstances, we proceed to the alternative levels in the hierarchy of
determining selling price. Third Party Evidence, or TPE, of selling price is
established by evaluating largely similar and interchangeable competitor
products or services in stand-alone sales to similarly situated customers. We
are typically not able to determine TPE and has not used this measure since we
have been unable to reliably verify standalone prices of competitive solutions.
Management's best estimate of selling price, or ESP, is established in those
instances where neither VSOE nor TPE are available, considering internal factors
such as margin objectives, pricing practices and controls, customer segment
pricing strategies and the product life cycle. Consideration is also given to
market conditions such as competitor pricing information gathered from
experience in customer negotiations, market research and information, recent
technological trends, competitive landscape and geographies. Use of ESP is
limited to a very small portion of our services, principally certain
EfficiencySMART services.
We maintain a reserve for customer adjustments and allowances as a reduction in
revenues. In determining our revenue reserve estimate, and in accordance with
internal policy, we rely on historical data and known performance adjustments.
These factors, and unanticipated changes in the economic and industry
environment, could cause our reserve estimates to differ from actual results. We
record a provision for estimated customer adjustments and allowances in the same
period as the related revenues are recorded. These estimates are based on the
specific facts and circumstances of a particular program, analysis of credit
memoranda data, historical customer adjustments, and other known factors. If the
data we use to calculate these estimates does not properly reflect reserve
requirements, then a change in the allowances would be made in the period in
which such a determination is made and revenues in that period could be
affected. During the year ended December 31, 2012, we recorded a revenue reserve
of $0.5 million based on our analysis. Reserve requirements in 2011 and 2010
were not material.
Business Combinations
We record tangible and intangible assets acquired and liabilities assumed in
business combinations under the purchase method of accounting. Amounts paid for
each acquisition are allocated to the assets acquired and liabilities assumed
based on their fair values at the dates of acquisition. The fair value of
identifiable intangible assets is based on detailed valuations that use
information and assumptions provided by management. We estimate the fair value
of contingent consideration at the time of the acquisition using all pertinent
information
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known to us at the time to assess the probability of payment of contingent
amounts. We allocate any excess purchase price over the fair value of the net
tangible and intangible assets acquired and liabilities assumed to goodwill.
We use the income approach to determine the estimated fair value of identifiable
intangible assets, including customer contracts, customer relationships,
non-compete agreements and trade names. This approach determines fair value by
estimating the after-tax cash flows attributable to an in-process project over
its useful life and then discounting these after-tax cash flows back to a
present value. We base our revenue assumptions on estimates of relevant market
sizes, expected market growth rates and expected trends, including introductions
by competitors of new services and products. We base the discount rate used to
arrive at a present value as of the date of acquisition on the time value of
money and market participant investment risk factors. The use of different
assumptions could materially impact the purchase price allocation and our
financial condition and results of operations.
Customer relationships represent established relationships with customers, which
provide a ready channel for the sale of additional energy management
applications, services and products. Non-compete agreements represent
arrangements with certain employees that limit or prevent their ability to take
employment at a competitor for a fixed period of time. Trade names represent
acquired product names that we intend to continue to utilize.
We have also utilized the cost approach to determine the estimated fair value of
acquired indefinite-lived intangible assets related to acquired in-process
research and development given the stage of development as of the acquisition
date and the lack of sufficient information regarding future expected cash
flows. The cost approach calculates fair value by calculating the reproduction
cost of an exact replica of the subject intangible asset. We calculate the
replacement cost based on actual development costs incurred through the date of
acquisition. In determining the appropriate valuation methodology, we consider,
among other factors: the in-process projects' stage of completion; the
complexity of the work completed as of the acquisition date; the costs already
incurred; the projected costs to complete; the expected introduction date; and
the estimated useful life of the technology. We believe that the estimated
in-process research and development amounts so determined represent the fair
value at the date of acquisition and do not exceed the amount a third party
would pay for the projects.
Impairment of Intangible Assets and Goodwill
Intangible Assets
We amortize our intangible assets that have finite lives using either the
straight-line method or, if reliably determinable, based on the pattern in which
the economic benefit of the asset is expected to be consumed utilizing expected
undiscounted future cash flows. Amortization is recorded over the estimated
useful lives ranging from one to ten years. We review our intangible assets
subject to amortization to determine if any adverse conditions exist or a change
in circumstances has occurred that would indicate impairment or a change in the
remaining useful life. If the carrying value of an asset exceeds its
undiscounted cash flows, we will write-down the carrying value of the intangible
asset to its fair value in the period identified. In assessing recoverability,
we must make assumptions regarding estimated future cash flows and discount
rates. If these estimates or related assumptions change in the future, we may be
required to record impairment charges. We generally calculate fair value as the
present value of estimated future cash flows to be generated by the asset using
a risk-adjusted discount rate. If the estimate of an intangible asset's
remaining useful life is changed, we will amortize the remaining carrying value
of the intangible asset prospectively over the revised remaining useful life.
During the year ended December 31, 2012, we did not identify any adverse
conditions or change in expected cash flows or useful lives of our
definite-lived intangible assets that could indicate the existence of a
potential impairment.
During the year ended December 31, 2011, as a result of a discontinuation of
certain trade names acquired in connection with the acquisition of Energy
Response in July 2011 and another immaterial acquisition that
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occurred in January 2011, we determined that these definite-lived intangible
assets were impaired and recorded an impairment charge of $0.2 million to reduce
the carrying value of these assets to zero, which was included in selling and
marketing expense in the accompanying consolidated statements of operations. In
addition, during the year ended December 31, 2011, as a result of the
discontinuation of certain customer relationships related to a 2009 acquisition,
we recorded an impairment charge of $0.3 million which was included in selling
and marketing expense in the accompanying consolidated statements of operations.
During the year ended December 31, 2011, as a result of our review and
realignment of our development efforts, we discontinued our efforts to complete
the development of a certain in-process research and development
indefinite-lived intangible asset related to our March 2010 acquisition of Zox.
As a result, we recorded an impairment charge related to this indefinite-lived
in-process research and development intangible asset of $0.5 million and an
impairment charge related to the associated definite-lived patent intangible
asset of less than $0.1 million, both of which are included in research and
development expenses in the accompanying consolidated statements of operations
for the year ended December 31, 2011. We had no indefinite-lived intangible
assets as of December 31, 2012 or 2011, respectively.
Goodwill
In accordance with ASC 350, Intangibles-Goodwill and Other, or ASC 350, we test
goodwill at the reporting unit level for impairment on an annual basis and
between annual tests if events and circumstances indicate it is more likely than
not that the fair value of a reporting unit is less than its carrying value. We
have determined that we currently have two reporting units: (1) our consolidated
Australian operations and (2) all other operations. Although our chief operating
decision maker, which is our chief executive officer and certain members of our
executive management team, collectively, make business decisions based on the
evaluation of financial information at the entity level, certain discrete
financial information is available related to our consolidated Australian
operations with such discrete financial information utilized by the business
unit manager to manage the consolidated Australian operations and make decisions
for those operations. The consolidated Australian operations are comprised of
the operations acquired in the acquisitions of Energy Response and another
immaterial acquisition, as well as the operations of our subsidiary, EnerNOC
Australia Pty Ltd. Events that would indicate impairment and trigger an interim
impairment assessment include, but are not limited to, current economic and
market conditions, including a decline in market capitalization, a significant
adverse change in legal factors, business climate or operational performance of
the business, and an adverse action or assessment by a regulator. Our annual
impairment test date is November 30, which we refer to as the impairment date.
In performing the test, we utilize the two-step approach prescribed under ASC
350. The first step requires a comparison of the carrying value of the reporting
units to the fair value of these units. We consider a number of factors to
determine the fair value of a reporting unit, including an independent valuation
to conduct this test. The valuation is based upon expected future discounted
operating cash flows of the reporting unit as well as analysis of recent sales
or offerings of similar companies. We base the discount rate used to arrive at a
present value as of the date of the impairment test on our weighted average cost
of capital, or WACC. If the carrying value of the reporting unit exceeds its
fair value, we will perform the second step of the goodwill impairment test to
measure the amount of impairment loss, if any. The second step of the goodwill
impairment test compares the implied fair value of a reporting unit's goodwill
to its carrying value.
In order to determine the fair value of our reporting units, we utilize both a
market approach based on the quoted market price of our common stock and the
number of shares outstanding and a discounted cash flow, or DCF, under the
income approach. The key assumptions that drive the fair value in the DCF model
are the discount rates (i.e. WACC), terminal values, growth rates, and the
amount and timing of expected future cash flows. If the current worldwide
financial markets and economic environment were to deteriorate, this would
likely result in a higher WACC because market participants would require a
higher rate of return. In the DCF, as the WACC increases, the fair value
decreases. The other significant factor in the DCF is its projected financial
information (i.e., amount and timing of expected future cash flows and growth
rates) and if its assumptions were to be adversely impacted, this could result
in a reduction of the fair value of the entity. As a result of completing the
first step on the impairment date, the fair value exceeded the carrying value,
and as such the second step of
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the impairment test was not required. To date, we have not been required to
perform the second step of the impairment test. As of the impairment date and as
of December 31, 2012, our market capitalization exceeded the fair value of our
consolidated net assets by more than 30%. In addition, as of the impairment
date, the fair value of both our consolidated Australian reporting unit and our
all other operations reporting unit exceeded each of their respective carrying
values by more than 50%.
The estimate of fair value requires significant judgment. Any loss resulting
from an impairment test would be reflected in operating loss in our consolidated
statements of operations. The annual impairment testing process is subjective
and requires judgment at many points throughout the analysis. If these estimates
or their related assumptions change in the future, we may be required to record
impairment charges for these assets not previously recorded.
Impairment of Long-Lived Assets
We review long-lived assets, including property and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable over their remaining estimated useful lives. If
these assets are considered to be impaired the long-lived assets are measured
for impairment at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets or liabilities. Impairment is
recognized in earnings and equals the amount by which the carrying value of the
assets exceeds their fair market value determined by either a quoted market
price, if any, or a value determined by utilizing a DCF technique. If these
assets are not impaired, but their useful lives have decreased, the remaining
net book value is amortized over the revised useful life.
During the years ended December 31, 2012, 2011 and 2010, we identified
impairment indicators related to certain demand response equipment as a result
of the removal of such equipment from service during each of these respective
years. As a result of these impairment indicators, we performed impairment tests
during the years ended December 31, 2012, 2011 and 2010, and recognized
impairment charges of $1.1 million, $0.6 million and $0.6 million, respectively,
representing the difference between the carrying value and fair market value of
the demand response equipment, which is included in cost of revenues in the
accompanying consolidated statements of operations. The fair market value was
determined utilizing Level 3 inputs, as defined by ASC 820, Fair Value
Measurements and Disclosures, or ASC 820, based on the projected future cash
flows discounted using the estimated market participant rate of return for this
type of asset.
In connection with the decision that we made in the fourth quarter of 2012 to
net settle a portion of our future contractual delivery obligations in a certain
open market bidding program, we concluded that it was more likely than not that
certain of our production and generation equipment utilized in connection with
this demand response arrangement would be disposed or abandoned, significantly
before the end of its previously estimated useful life, and that this
represented a potential indicator of impairment. Accordingly, we performed an
impairment test during the year ended December 31, 2012.
The applicable long-lived assets are measured for impairment at the lowest level
at which identifiable cash flows are largely independent of the cash flows of
other assets or liabilities. We determined that the undiscounted cash flows to
be generated by the asset group over its remaining estimated useful life would
not be sufficient to recover the carrying value of the asset group. We then
determined the fair value of the asset group using a discounted cash flow
technique based on Level 3 inputs, as defined by ASC 820, and a discount rate of
11%, which we determined represents a market rate of return for the assets being
evaluated for impairment. Our estimate of the fair value of the asset group was
$0.4 million compared to the carrying value of the asset group of $1.5 million.
As a result, we recorded an impairment charge of $1.1 million during the year
ended December 31, 2012, which is reflected in cost of revenues in the
accompanying consolidated statements of operations. The impairment charge was
allocated to the individual assets within the asset group on a pro-rata basis
using the relative carrying amounts of those assets.
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We also re-evaluated the estimated useful life of this production and generation
equipment and concluded that a change in the estimated useful life was required.
As a result, in December 2012, we revised the estimated useful life of the
remaining net book value of the production and generation equipment totaling
$0.4 million to fully depreciate these assets over the shorter of their
estimated remaining useful life or the date on which our delivery obligations
under this demand response arrangement are expected to cease.
During the years ended December 31, 2011 and 2010, we identified potential
indicators of impairment related to certain demand response and back-up
generator equipment as a result of lower than estimated demand response event
performance by these assets. As a result of the potential indicators of
impairment, we performed impairment tests. The applicable long-lived assets are
measured for impairment at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets or liabilities. We
determined that the undiscounted cash flows to be generated by the asset group
over its remaining estimated useful life would not be sufficient to recover the
carrying value of the asset group. We determined the fair value of the asset
group using a discounted cash flow technique based on Level 3 inputs, as defined
by ASC 820, and a discount rate of 11%, which we determined represents a market
rate of return for the assets being evaluated for impairment. We recorded
impairment charges of $0.1 million and $1.1 million during the years ended
December 31, 2011 and 2010, respectively, which is reflected in cost of revenues
in the accompanying consolidated statements of operations. The impairment
charges were allocated to the individual assets within the asset group on a
pro-rata basis using the relative carrying amounts of those assets.
Software Development Costs
We capitalize eligible costs associated with software developed or obtained for
internal use. We capitalize the payroll and payroll-related costs of employees
who devote time to the development of internal-use computer software in addition
to applicable third-party costs. We amortize these costs on a straight-line
basis over the estimated useful life of the software, which is generally two to
three years. Our judgment is required in determining the point at which various
projects enter the stages at which costs may be capitalized, in assessing the
ongoing value and impairment of the capitalized costs, and in determining the
estimated useful lives over which the costs are amortized. Internal use software
development costs of $4.7 million, $3.2 million and $6.8 million for the years
ended December 31, 2012, 2011 and 2010, respectively, have been capitalized.
Included in the capitalized software development costs for the year ended
December 31, 2012 is $0.7 million of software development costs related to the
implementation of a company-wide human resource system which was put into
production in June 2012 and is being amortized over a three-year useful life.
During the year ended December 31, 2010, we capitalized $1.3 million of software
development costs related to a company-wide enterprise resource planning system
implementation project which was put into production in June 2011 and is being
amortized over a five-year useful life.
The costs for the development of new software and substantial enhancements to
existing software that is intended to be sold or marketed, or external use
software, are expensed as incurred until technological feasibility has been
established, at which time any additional costs would be capitalized. We
determine that technological feasibility of external use software is established
at the time a working model of software is completed. Because we believe our
current process for developing external use software will be essentially
completed concurrently with the establishment of technological feasibility, no
costs have been capitalized to date.
Stock-Based Compensation
We recognize stock-based compensation expense associated with the fair value of
stock options, restricted stock and restricted stock units issued to our
employees. Determining the amount of stock-based compensation to be recorded
requires us to develop estimates to be used in calculating the grant-date fair
value of stock options. We use a lattice model to determine the fair value of
our stock options. We consider a number of factors to determine the fair value
of stock options. The model requires us to make estimates of the following
assumptions:
Expected volatility-We are responsible for estimating volatility and have
considered a number of factors, including third-party estimates, when estimating
volatility. We currently use a combination of historical and implied volatility,
which is weighted based on a number of factors.
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Exit rate post-vesting-We use historical option forfeiture and expiration data
to estimate the post vesting exit-rate. We believe that this historical data is
currently the best estimate of the expected future post-vesting forfeiture rate.
Risk-free interest rate-The yield on zero-coupon U.S. Treasury securities for a
period that is commensurate with the expected term assumption is used as the
risk-free interest rate.
The fair value of stock awards where vesting is solely based on service vesting
conditions is expensed ratably over the vesting period. With respect to certain
awards of restricted stock where vesting contains certain performance-based
vesting conditions, the fair value is expensed based on the accelerated
attribution method as prescribed by ASC 718 over the vesting period. During the
year ended December 31, 2012, we granted 1,023,010 shares of non-vested
restricted stock to certain executives and non-executive employees that contain
performance-based vesting conditions and these awards will vest in equal
installments in 2013 and 2014 if the performance conditions are achieved. If the
employee who received the restricted stock leaves our employment prior to the
vesting date for any reason, the shares of restricted stock will be forfeited
and returned to us.
In November 2011, our board of directors approved a plan to include
performance-based stock awards as part of the annual non-executive bonus plan.
In December 2011, 283,334 shares were issued under our Amended and Restated 2007
Employee, Director and Consultant Stock Plan with a fair value of $2.7 million
and these awards will vest in equal installments in 2013 and 2014 if the
performance conditions are achieved. Through December 31, 2011, we determined
that no awards were probable of vesting and as a result, no stock-based
compensation expense related to these awards was recorded through December 31,
2011. In March 2012, the performance conditions were modified and we determined
that the modified performance conditions were probable of being achieved. As the
performance-based stock awards were improbable of vesting prior to the
modification of the performance conditions, the original grant date fair value
is no longer used to measure compensation cost for the awards. The fair value of
these awards was re-measured as of the modification date resulting in a new
grant date fair value of $2.1 million after accounting for cancelled grants due
to employee terminations. As these awards were probable of vesting as of
March 31, 2012 and a portion of the service period had lapsed, we recorded a
cumulative catch-up adjustment of stock-based compensation expense during 2012
as required by ASC 718. During the year ended December 31, 2012, there were no
other changes to probabilities of existing performance-based stock awards which
had a material impact on stock-based compensation expense or amounts expected to
be recognized.
The amount of stock-based compensation expense recognized during a period is
based on the value of the portion of the awards that are ultimately expected to
vest. ASC 718 requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from
those estimates. Based on an analysis of historical forfeitures, we have
determined a specific forfeiture rate for certain employee groups and have
applied forfeiture rates ranging from 0% to 8.1% as of December 31, 2012
depending on the specific employee group. This analysis is re-evaluated
periodically and the forfeiture rate is adjusted as necessary. Ultimately, the
actual expense recognized over the vesting period will only be for those awards
that vest.
We recognized $13.6 million, $13.5 million and $15.7 million of stock-based
compensation expense for employee equity awards during the years ended
December 31, 2012, 2011 and 2010, respectively.
Of the stock options outstanding at December 31, 2012, 1,265,418 options were
held by our employees and directors and 9,893 options were held by
non-employees. For outstanding unvested stock options related to employees as of
December 31, 2012, we had $1.7 million of unrecognized stock-based compensation
expense, which is expected to be recognized over a weighted average period of
1.3 years. There were no material unvested non-employee stock options as of
December 31, 2012.
For non-vested restricted stock and restricted stock units subject to
service-based vesting conditions outstanding as of December 31, 2012, we had
$8.5 million of unrecognized stock-based compensation expense, which is expected
to be recognized over a weighted average 2.5 years. For non-vested restricted
stock subject to performance-based vesting conditions outstanding and that were
probable of vesting as of December 31, 2012, we had $3.9 million of unrecognized
stock-based compensation expense, which is expected to be recognized over
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a weighted average period of 1.3 years. For non-vested restricted stock subject
to performance-based vesting conditions outstanding that were not probable of
vesting as of December 31, 2012, we had $0.7 million of unrecognized stock-based
compensation expense. If and when any additional portion of these equity awards
are deemed probable to vest or awards that are deemed probable to vest become
not probable, we will reflect the effect of the change in estimate in the period
of change by recording a cumulative catch-up adjustment to retroactively apply
the new estimate.
Accounting for Income Taxes
We use the asset and liability method for accounting for income taxes. Under
this method, we determine deferred tax assets and liabilities based on the
difference between financial reporting and taxes bases of our assets and
liabilities. We measure deferred tax assets and liabilities using enacted tax
rates and laws that will be in effect when we expect the differences to reverse.
We have incurred consolidated net losses since our inception and as a result, we
had not recognized net United States deferred taxes as of December 31, 2012 or
December 31, 2011. Our deferred tax liabilities primarily relate to deferred
taxes associated with our acquisitions and property and equipment. Our deferred
tax assets relate primarily to net operating loss carryforwards, accruals and
reserves, deferred revenue and stock-based compensation. We record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event we were to determine that we would be able
to realize our deferred tax assets in the future in excess of the net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made.
In accordance with ASC 740, Income Taxes, or ASC 740, we are required to
evaluate uncertainty in income taxes recognized in our financial statements. ASC
740 prescribes a recognition threshold and measurement criteria for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC 740 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition and defines the criteria that must be met
for the benefits of a tax position to be recognized.
We had $0.4 million and $0 unrecognized tax benefits as of December 31, 2012 and
2011, respectively.
In the ordinary course of global business, there are many transactions and
calculations where the ultimate tax outcome is uncertain. Judgment is required
in determining our worldwide income tax provision. In our opinion, it is not
required that we have a provision for income taxes for any years subject to
audit. Although we believe our estimates are reasonable, no assurance can be
given that the final tax outcome of matters will not be different than that
which is reflected in our historical income tax provisions and accruals. In the
event our assumptions are incorrect, the differences could have a material
impact on our income tax provision and operating results in the period in which
such determination is made.
Recent Accounting Pronouncements
Presentation of Comprehensive Income
In June 2011, the Financial Accounting Standards Board, or FASB, issued ASU
No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive
Income, or ASU 2011-05, which requires an entity to present total comprehensive
income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two
separate but consecutive statements. ASU 2011-05 does not change any of the
components of comprehensive income, but it eliminates the option to present the
components of other comprehensive income as part of the statement of
stockholders equity. ASU 2011-05 was effective in the first quarter of 2012 and
should be applied retrospectively. As such, we adopted ASU 2011-05 in 2012 and
have provided a separate statement of comprehensive income (loss) in our
consolidated financial statements.
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In December 2011, the FASB issued ASU 2011-12, deferring certain provisions of
ASU 2011-05. One of the provisions of ASU 2011-05 required entities to present
reclassification adjustments out of accumulated other comprehensive income
(loss) by component in both the statement in which net income is presented and
the statement in which other comprehensive income (loss) is presented (for both
interim and annual financial statements). This requirement is indefinitely
deferred by ASU 2011-12 and will be further deliberated by the FASB at a future
date. The effective date of ASU 2011-12 is the same as that for the unaffected
provisions of ASU 2011-05.
Disclosures about Offsetting Assets and Liabilities
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities, or ASU 2011-11. ASU 2011-11
requires an entity to disclose information about offsetting and related
arrangements to enable users of its financial statements to understand the
effect of those arrangements on its financial position. An entity is required to
apply ASU 2011-11 for annual reporting periods beginning on or after January 1,
2013, and interim periods within those annual periods. An entity should provide
the disclosures required by ASU 2011-11 retrospectively for all comparative
periods presented. We do not expect that the adoption of ASU 2011-11 will have a
significant, if any, impact on our consolidated financial statements.
Selected Quarterly Financial Data
The table below sets forth selected unaudited quarterly financial information.
The information is derived from our unaudited consolidated financial statements
and includes, in the opinion of management, all normal and recurring adjustments
that management considers necessary for a fair statement of results for such
periods. The operating results for any quarter are not necessarily indicative of
results for any future period.
Year Ended December 31, 2012 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(In thousands, except per share data)
Revenues $ 24,450 $ 33,273 $ 177,947 $ 42,314
Gross profit 5,888 8,345 95,000 14,211
Operating expenses 33,958 36,111 35,689 38,074
(Loss) income from operations (28,070 ) (27,766 ) 59,311 (23,863 )
Net (loss) income (27,713 ) (29,136 ) 60,348 (25,792 )
Basic net (loss) income per share: $ (1.06 ) $ (1.10 ) $ 2.26 $ (0.96 )
Diluted net (loss) income per share: $ (1.06 ) $ (1.10 ) $ 2.21 $ (0.96 )
Year Ended December 31, 2011 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
(In thousands, except per share data)
Revenues $ 31,762 $ 58,904 $ 169,183 $ 26,759
Gross profit 12,561 20,377 84,832 5,627
Operating expenses 31,132 32,869 33,861 35,072
(Loss) Income from operations (18,571 ) (12,492 ) 50,971 (29,445 )
Net (loss) income (19,272 ) (12,973 ) 46,878 (28,016 )
Basic net (loss) income per share: $ (0.76 ) $ (0.51 ) $ 1.83 $ (1.08 )
Diluted net (loss) income per share: $ (0.76 ) $ (0.51 ) $ 1.77 $ (1.08 )
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