EnerNOC, Inc.
ENERNOC INC (Form: 10-Q, Received: 08/07/2013 06:04:03)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2013

or

 

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

For the transition period from                      to                     

Commission File Number: 001-33471

 

 

EnerNOC, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   87-0698303
(State or Other Jurisdiction of
Incorporation or Organization)
  (IRS Employer
Identification No.)

 

One Marina Park Drive  
Suite 400  
Boston, Massachusetts   02210
(Address of Principal Executive Offices)   (Zip Code)

(617) 224-9900

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

There were 30,232,273 shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 1, 2013.

 

 

 


Table of Contents

EnerNOC, Inc.

Index to Form 10-Q

 

          Page  

Part I—Financial Information

  

Item 1.

  

Financial Statements

  
  

Unaudited Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012

     3   
  

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June  30, 2013 and 2012

     4   
  

Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2013 and 2012

     5   
  

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June  30, 2013 and 2012

     6   
  

Notes to Unaudited Condensed Consolidated Financial Statements

     7   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     23   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4.

  

Controls and Procedures

     43   

Part II—Other Information

  

Item 1.

  

Legal Proceedings

     43   

Item 1A

  

Risk Factors

     43   

Item 6.

  

Exhibits

     46   
  

Signatures

     47   
  

Exhibit Index

     40   

 

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EnerNOC, Inc.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

 

     June 30, 2013     December 31, 2012  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 101,576     $ 115,041  

Restricted cash

     174       9  

Trade accounts receivable, net of allowance for doubtful accounts of $441 and $487 at June 30, 2013 and December 31, 2012, respectively

     25,470       35,208  

Unbilled revenue

     813       45,269  

Capitalized incremental direct customer contract costs

     26,253       10,226  

Deposits

     468       2,296  

Prepaid expenses and other current assets

     7,267       4,640  
  

 

 

   

 

 

 

Total current assets

     162,021       212,689  

Property and equipment, net of accumulated depreciation of $73,404 and $67,909 at June 30, 2013 and December 31, 2012, respectively

     51,091       32,592  

Goodwill

     77,867       79,505  

Customer relationship intangible assets, net

     17,259       21,709  

Other definite-lived intangible assets, net

     3,133       3,915  

Capitalized incremental direct customer contract costs, long-term

     2,442       3,929  

Deposits and other assets

     1,001       826  
  

 

 

   

 

 

 

Total assets

   $ 314,814     $ 355,165  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 2,881     $ 3,976  

Accrued capacity payments

     30,110       49,258  

Accrued payroll and related expenses

     13,115       13,044  

Accrued expenses and other current liabilities

     12,156       8,978  

Accrued performance adjustments

     1,524       685  

Deferred revenue

     48,796       20,063  
  

 

 

   

 

 

 

Total current liabilities

     108,582       96,004  

Deferred acquisition consideration

     550       533  

Accrued acquisition contingent consideration

     418       431  

Deferred tax liability

     4,966       4,222  

Deferred revenue

     9,247       11,837  

Other liabilities

     8,002       2,116  

Commitments and contingencies (Notes 7 and 11)

     —         —    

Stockholders’ equity

    

Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued

     —         —    

Common stock, $0.001 par value; 50,000,000 shares authorized, 30,242,503 and 29,019,923 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     30       29  

Additional paid-in capital

     353,093       344,137  

Accumulated other comprehensive loss

     (1,744     (702

Accumulated deficit

     (168,330     (103,442
  

 

 

   

 

 

 

Total stockholders’ equity

     183,049       240,022  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 314,814     $ 355,165  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Revenues

        

DemandSMART

   $ 26,585     $ 26,205     $ 51,074     $ 43,928  

EfficiencySMART, SupplySMART and other

     9,568       7,068       17,929       13,795  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     36,153       33,273       69,003       57,723  

Cost of revenues

     23,873       24,928       46,070       43,490  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     12,280       8,345       22,933       14,233  

Operating expenses:

        

Selling and marketing

     19,030       14,693       34,683       27,918  

General and administrative

     21,005       17,600       41,126       34,529  

Research and development

     4,770       3,818       9,590       7,622  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     44,805       36,111       85,399       70,069  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (32,525     (27,766     (62,466     (55,836

Other (expense) income, net

     (1,184     (536     (1,117     697  

Interest expense

     (448     (417     (761     (897
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income tax

     (34,157     (28,719     (64,344     (56,036

Provision for income tax

     (194     (417     (544     (813
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (34,351   $ (29,136   $ (64,888   $ (56,849
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share (basic and diluted)

   $ (1.23   $ (1.10   $ (2.35   $ (2.16
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares used in computing basic and diluted net loss per common share

     27,852,298       26,505,322       27,610,797       26,378,322  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

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EnerNOC, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net loss

   $ (34,351   $ (29,136   $ (64,888   $ (56,849

Foreign currency translation adjustments

     (1,018     (257     (1,042     142  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (35,369   $ (29,393   $ (65,930   $ (56,707
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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EnerNOC, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Six Months Ended June 30,  
     2013     2012  

Cash flows from operating activities

    

Net loss

   $ (64,888   $ (56,849

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation

     10,004       8,794  

Amortization of acquired intangible assets

     3,557       3,630  

Stock based compensation expense

     8,011       6,677  

Impairment of equipment

     239       343  

Unrealized foreign exchange transaction loss (gain)

     1,607       (210

Deferred taxes

     744       744  

Non-cash interest expense

     151       235  

Accretion of fair value of deferred and contingent purchase price consideration related to acquisitions

     59       59  

Other, net

     46       157  

Changes in operating assets and liabilities, net of effects of acquisitions:

    

Accounts receivable, trade

     9,507       (3,661

Unbilled revenue

     44,433       64,144  

Prepaid expenses and other current assets

     (4,480     (1,511

Capitalized incremental direct customer contract costs

     (14,750     (10,935

Other assets

     (503     (28

Other noncurrent liabilities

     5,898       45  

Deferred revenue

     29,258       21,274  

Accrued capacity payments

     (18,334     (26,840

Accrued payroll and related expenses

     350       (949

Accounts payable, accrued performance adjustments and accrued expenses and other current liabilities

     1,255       (878
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,164       4,241  

Cash flows from investing activities

    

Purchases of property and equipment

     (27,186     (9,134

Change in restricted cash and deposits

     1,833       (2,911

Change in long-term assets

     —         (111
  

 

 

   

 

 

 

Net cash used in investing activities

     (25,353     (12,156

Cash flows from financing activities

    

Proceeds from exercises of stock options

     791       65  
  

 

 

   

 

 

 

Net cash provided by financing activities

     791       65  

Effects of exchange rate changes on cash and cash equivalents

     (1,067     (33
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (13,465     (7,883

Cash and cash equivalents at beginning of period

     115,041       87,297  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 101,576     $ 79,414  
  

 

 

   

 

 

 

Non-cash financing and investing activities

    

Issuance of common stock in satisfaction of bonuses

   $ 154     $ 350  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Table of Contents

EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Description of Business and Basis of Presentation

Description of Business

EnerNOC, Inc. (the Company) was incorporated in Delaware on June 5, 2003. The Company, which operates in a single segment, is a leading provider of energy intelligence software and related solutions. The Company maximizes the full value of energy management for commercial, institutional and industrial end-users of energy, which the Company refers to as its C&I customers, and its electric power grid operator and utility customers by delivering a comprehensive suite of demand-side management services that reduce real-time demand for electricity, increase energy efficiency, improve energy supply transparency in competitive markets, and mitigate emissions. The Company uses its Network Operations Center (NOC) and comprehensive demand response application, DemandSMART, to remotely manage and reduce electricity consumption across a growing network of C&I customer sites, making demand response capacity available to electric power grid operators and utilities on demand while helping C&I customers achieve energy savings, improved financial results and environmental benefits. To date, the Company has generated revenues primarily from electric power grid operators and utilities that make recurring payments to the Company for managing demand response capacity. The Company shares these recurring payments with its C&I customers in exchange for those C&I customers reducing their power consumption when called upon.

Reclassifications

The Company has reclassified certain amounts in its condensed consolidated balance sheet as of December 31, 2012 resulting in a decrease to both accounts receivable and deferred revenues of $8,042 to properly account for outstanding accounts receivable where the fees had been deferred because they were not fixed or determinable.

The Company reclassified a portion of its amortization expense related to acquired intangible assets in its condensed consolidated statements of income for the three and six month periods ended June 30, 2012 totaling $787 and $1,582, respectively, that had been classified within general and administrative expenses during such period to selling and marketing expenses to conform with current period presentation. Based on the nature of the acquired intangible assets to which this amortization expense relates, which are primarily customer relationship intangible assets, the Company believes that the classification within selling and marketing expenses is a preferable classification.

The Company has reclassified certain amounts in its unaudited condensed consolidated statements of cash flows for the six month period ended June 30, 2012 to account for the changes in the unaudited condensed consolidated statements of cash flows for certain reclassifications to the unaudited condensed consolidated balance sheet as of June 30, 2012 and consolidated balance sheet as of December 31, 2011. The reclassifications resulted in a decrease to accounts receivable of $1,121 and a decrease to accounts payable of $1,121 to properly account for receivables and payables under a contractual arrangement on a gross basis. These reclassifications had no impact on the net cash used in operating activities in the unaudited condensed consolidated statements of cash flows for the six month period ended June 30, 2012.

Basis of Consolidation

The unaudited condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). Intercompany transactions and balances are eliminated upon consolidation.

Subsequent Events Consideration

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required.

 

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Table of Contents

EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

On August 2, 2013, the Company entered into an amendment to its $70 million senior secured revolving credit facility with the several lenders from time to time party thereto and Silicon Valley Bank, as administrative agent, swingline lender, issuing lender, lead arranger and book manager (“SVB” and together with the other lenders, the “Lenders”) dated April 18, 2013 (the 2013 credit facility). This amendment provides for an increase to the maximum amount that the Company can spend to repurchase or redeem common stock of the Company held by its public stockholders without consent of the Lenders.

On August 6, 2013, the Company’s Board of Directors authorized the repurchase of up to $30 million of the Company’s common stock during the period from August 6, 2013 through August 6, 2014, unless earlier terminated by the Board of Directors. The Company has not made any repurchases to date.

There were no other material recognizable subsequent events recorded or requiring disclosure in the June 30, 2013 unaudited condensed consolidated financial statements.

Use of Estimates in Preparation of Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and include all adjustments (consisting of normal, recurring adjustments) necessary for the fair presentation of the Company’s financial position at June 30, 2013 and statements of operations, statements of comprehensive loss and statements of cash flows for the three and six month periods ended June 30, 2013 and 2012. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending December 31, 2013 (fiscal 2013).

The preparation of these unaudited condensed consolidated financial statements requires the Company 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, the Company evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, valuations and purchase price allocations related to business combinations, fair value of deferred acquisition consideration, fair value of accrued acquisition contingent consideration, 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, fair value of asset retirement obligations, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance.

Although the Company regularly assesses these estimates, actual results could differ materially. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience or other assumptions prove not to be substantially accurate, even if such assumptions are reasonable when made.

The Company is subject to a number of risks similar to those of other companies of similar and different sizes both inside and outside of its industry, including, but not limited to, rapid technological changes, competition from similar energy management applications, services and products provided by larger companies, customer concentration, government regulations, market or program rule changes, protection of proprietary rights and dependence on key individuals.

Foreign Currency Translation

        Foreign currency translation adjustments are recorded as a component of other comprehensive loss and included in accumulated other comprehensive loss within stockholders’ equity. (Losses) gains arising from transactions denominated in foreign currencies and the re-measurement of certain intercompany receivables and payables are included in other (expense) income, net in the unaudited condensed consolidated statements of operations and were ($1,339) and ($556) for the three month periods ended June 30, 2013 and 2012, respectively, and ($1,323) and $588 for the six month periods ended June 30, 2013 and 2012, respectively. Foreign currency exchange (losses) gains resulted primarily from foreign denominated intercompany receivables held by the Company from one of its Australian subsidiaries which mainly resulted from funding provided to complete the acquisition of Energy Response Holdings Pty Ltd (Energy Response) and fluctuations in the Australian dollar exchange rate. During the three and six month periods ended June 30, 2013, $1,543 ($1,500 Australian) and $11,809 ($11,421 Australian), respectively, of the intercompany receivable from the Company’s Australian subsidiary was settled resulting in a realized loss of $68 and $348, respectively. During the three month period ended June 30, 2012, there was no settlement of the intercompany receivable from the Company’s Australian subsidiary. During the six month period ended June 30, 2012, $17,468 ($16,400 Australian) of the intercompany receivable from the Company’s Australian subsidiary

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

was settled resulting in a realized gain of $494. During the three month periods ended June 30, 2013 and 2012, there were no other material realized gains (losses) incurred related to transactions denominated in foreign currencies. As of June 30, 2013, the Company had an intercompany receivable from its Australian subsidiary that is denominated in Australian dollars and not deemed to be of a “long-term investment” nature totaling $9,186 at June 30, 2013 exchange rates ($10,058 Australian).

In addition, a portion of the funding provided by the Company to one of its Australian subsidiaries to complete the acquisition of Energy Response was deemed to be of a “long-term investment” nature and therefore, the resulting translation adjustments are being recorded as a component of stockholders’ equity within accumulated other comprehensive loss. As of June 30, 2013, the intercompany funding that is denominated in Australian dollars and deemed to be of a “long-term investment” nature totaled $18,598 at June 30, 2013 exchange rates ($20,364 Australian) and during the three and six month periods ended June 30, 2013, the Company recorded translation adjustments of $2,614 and $2,527, respectively, related to this intercompany funding within accumulated other comprehensive loss.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from non-owner sources. As of June 30, 2013 and 2012, accumulated other comprehensive loss was comprised solely of cumulative foreign currency translation adjustments. The Company presents its components of other comprehensive loss, net of related tax effects, which have not been material to date.

Software Development Costs

Software development costs, including license fees and external consulting costs, of $1,681 and $1,636 for the three month periods ended June 30, 2013 and 2012, respectively, and $4,312 and $2,294 for the six month periods ended June 30, 2013 and 2012, respectively, have been capitalized in accordance with Accounting Standard Codification (ASC) 350-40 (ASC 350-40), Internal-Use Software. The capitalized amount was included as software in property and equipment at June 30, 2013 and December 31, 2012. Amortization of capitalized internal use software costs was $1,444 and $1,104 for the three month periods ended June 30, 2013 and 2012, respectively, and $2,752 and $2,179 for the six month periods ended June 30, 2013 and 2012, respectively. Accumulated amortization of capitalized internal use software costs was $18,461 and $15,709 as of June 30, 2013 and December 31, 2012, respectively. The Company anticipates that the amount of software development costs that are capitalized in accordance with ASC 350-40 will continue to increase for the foreseeable future as the Company continues its development and significant enhancement of its DemandSMART, EfficiencySMART and SupplySMART applications.

Impairment of Property and Equipment

During the three and six month periods ended June 30, 2013, as a result of the removal of certain demand response equipment from service, the Company concluded that there were no expected future direct cash flows associated with this demand response equipment and therefore, an impairment indicator existed. The Company determined that the residual value of this demand response equipment was nominal and as a result, recorded an impairment charge during the three and six month periods ended June 30, 2013 of $97 and $239, respectively, to reduce the carrying value of such equipment to zero.

Industry Segment Information

The Company operates in the following major geographic areas as noted in the below chart. The “All other” designation includes Australia, New Zealand and the United Kingdom. Revenues are based upon customer location and internationally totaled $5,957 and $3,332 for the three month periods ended June 30, 2013 and 2012, respectively, and totaled $14,044 and $6,351 for the six month periods ended June 30, 2013 and 2012, respectively.

Revenues by geography as a percentage of total revenues are as follows:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

United States

     84     90     80     89

Canada

     13       7       14       8  

All other

     3       3       6       3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

As of June 30, 2013 and December 31, 2012, the long-lived assets related to the Company’s international subsidiaries were not material to the accompanying unaudited condensed consolidated financial statements taken as a whole.

2. Intangible Assets and Goodwill

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of intangible assets as of June 30, 2013 and December 31, 2012:

 

            As of June 30, 2013     As of December 31, 2012  
     Weighted Average
Amortization
Period (in years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Gross
Carrying
Amount
     Accumulated
Amortization
 

Customer relationships

     3.53      $ 30,225      $ (12,966   $ 32,667      $ (10,958
     

 

 

    

 

 

   

 

 

    

 

 

 

Customer contracts

     3.74      $ 4,218      $ (2,626   $ 4,218      $ (2,420

Employment agreements and non-compete agreements

     0.73        1,716        (1,298     1,728        (1,115

Software

     2.24        120        (120     120        (120

Developed Technology

     1.31        2,281        (1,456     2,300        (1,161

Trade name

     0.64        575        (398     575        (340

Patents

     6.66        180        (59     180        (50
     

 

 

    

 

 

   

 

 

    

 

 

 

Total other definite-lived intangible assets

        9,090        (5,957     9,121        (5,206
     

 

 

    

 

 

   

 

 

    

 

 

 

Total

      $ 39,315      $ (18,923   $ 41,788      $ (16,164
     

 

 

    

 

 

   

 

 

    

 

 

 

The change in intangible assets from December 31, 2012 to June 30, 2013 was due to foreign currency translation adjustments. Amortization expense related to intangible assets amounted to $1,763 and $1,794 for the three month periods ended June 30, 2013 and 2012, respectively, and $3,557 and $3,630 for the six month periods ended June 30, 2013 and 2012, respectively. Amortization expense for developed technology, which was $139 and $161 for the three month periods ended June 30, 2013 and 2012, respectively, and $278 and $322 for the six month periods ended June 30, 2013 and 2012, respectively, is included in cost of revenues in the accompanying unaudited condensed consolidated statements of operations. Amortization expense for all other intangible assets is included as a component of operating expenses in the accompanying unaudited condensed consolidated statements of operations. The intangible asset lives range from one to ten years and the weighted average remaining life was 3.3 years at June 30, 2013. Estimated amortization is expected to be $3,399, $6,327, $4,296, $3,711 and $2,659 for the six month period ending December 31, 2013, and years ending 2014, 2015, 2016 and 2017, respectively.

Goodwill

In accordance with ASC 350, Intangibles—Goodwill and Other , the Company tests 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. The Company’s annual impairment test date is November 30. The Company has determined that it currently has two reporting units: (1) the consolidated Australian operations, which represents the Company’s Australia and New Zealand operations, and (2) all other operations. During the three month period ended June 30, 2013, there were no potential impairment indicators identified that required an interim impairment test of goodwill. The Company’s market capitalization as of June 30, 2013 exceeded the book value of its consolidated net assets by more than 100%. In addition, as of November 30, 2012 the fair value of both the Company’s consolidated Australian reporting unit and the Company’s all other operations reporting unit exceeded each of their respective carrying values by more than 50%.

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

The following table shows the change of the carrying amount of goodwill from December 31, 2012 to June 30, 2013:

 

Balance at December 31, 2012

   $ 79,505  

Foreign currency translation

     (1,638
  

 

 

 

Balance at June 30, 2013

   $ 77,867  
  

 

 

 

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

3. Net Loss Per Share

A reconciliation of basic and diluted share amounts for the three and six month periods ended June 30, 2013 and 2012 are as follows (shares in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  

Basic weighted average common shares outstanding

     27,852        26,505        27,611        26,378  

Weighted average common stock equivalents

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     27,852        26,505        27,611        26,378  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average anti-dilutive shares related to:

           

Stock options

     1,184        1,431        1,217        1,491  

Nonvested restricted shares

     2,471        1,750        2,300        1,507  

Restricted stock units

     50        138        65        164  

Escrow shares

     64        329        64        333  

In reporting periods in which the Company has a net loss, anti-dilutive shares consist of the impact of those number of shares that would have been dilutive had the Company had net income plus the number of common stock equivalents that would have been anti-dilutive had the Company had net income. In those reporting periods in which the Company reports net income, anti-dilutive shares consist of those common stock equivalents that have either an exercise price above the average stock price for the period or the common stock equivalents’ related average unrecognized stock compensation expense is sufficient to “buy back” the entire amount of shares.

The Company excludes the shares issued in connection with restricted stock awards from the calculation of basic weighted average common shares outstanding until such time as those shares vest. In addition, with respect to restricted stock awards that vest based on achievement of performance conditions, because performance conditions are considered contingencies under ASC 260, Earnings per Share, the criteria for contingent shares must first be applied before determining the dilutive effect of these types of share-based payments. Prior to the end of the contingency period (i.e., before the performance conditions have been satisfied), the number of contingently issuable common shares to be included in diluted weighted average common shares outstanding should be based on the number of common shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period were the end of the contingency period (e.g., the number of shares that would be issuable based on current performance criteria) assuming the result would be dilutive.

In connection with certain of the Company’s business combinations, the Company issued common shares that were held in escrow upon closing of the applicable business combination. The Company excludes shares held in escrow from the calculation of basic weighted average common shares outstanding where the release of such shares is contingent upon an event and not solely subject to the passage of time. The 254,654 shares related to a component of the deferred purchase price consideration from the acquisition of M2M Communications Corporation (M2M), which are not subject to adjustment as the issuance of such shares is not subject to any contingency, are included in both the basic and diluted weighted average common shares outstanding.

In January 2013, the Company released 46,506 shares of common stock held in escrow related to the Energy Response acquisition in accordance with the provisions within the respective escrow agreement.

4. Disclosure of Fair Value of Financial Instruments

The Company’s financial instruments mainly consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and debt obligations. The carrying amounts of the Company’s cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments. At both June 30, 2013 and December 31, 2012, the Company had no outstanding debt obligations.

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

5. Fair Value Measurements

The tables below present the balances of assets and liabilities measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012:

 

     Fair Value Measurement at June 30, 2013 Using  
            Quoted Prices in      Significant         
            Active Markets      Other         
            for Identical      Observable      Unobservable  
     Totals      Assets (Level 1)      Inputs (Level 2)      Inputs (Level 3)  

Liabilities:

           

Deferred acquisition consideration (1)

   $ 550      $ —        $ —        $ 550  

Accrued acquisition contingent consideration (1)

     418        —          —          418  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 968      $ —        $ —        $ 968  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Deferred acquisition consideration and accrued acquisition contingent consideration, which are liabilities and were the result of the Company’s acquisition of M2M and Energy Response, respectively, represent the only assets or liabilities that the Company measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3). The aggregate increase in fair value of liabilities for the six month period ended June 30, 2013 of $4 was due to the increase in the liabilities as a result of the amortization of the applicable discounts related to the time value of money of $59 and changes in exchange rates. There were no changes to the probability or timing of payment during the six month period ended June 30, 2013.

 

     Fair Value Measurement at December 31, 2012 Using  
            Quoted Prices in      Significant         
            Active Markets      Other         
            for Identical      Observable      Unobservable  
     Totals      Assets (Level 1)      Inputs (Level 2)      Inputs (Level 3)  

Liabilities:

           

Deferred acquisition consideration (1)

   $ 533      $ —        $ —        $ 533  

Accrued acquisition contingent consideration (1)

     431        —          —          431  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 964      $ —        $ —        $ 964  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Deferred acquisition consideration and accrued acquisition contingent consideration, which are liabilities that were the result of the Company’s acquisition of M2M and Energy Response, respectively, represented the only assets or liabilities that the Company measured and recorded at fair value on a recurring basis using significant unobservable inputs (Level 3).

6. Financing Arrangements

In March 2012, the Company and one of its subsidiaries entered into a $50,000 credit facility with SVB, which was subsequently amended in June 2012 (the 2012 credit facility). On April 12, 2013, the Company, one of its subsidiaries and SVB entered into an amendment to the 2012 credit facility to extend the termination date from April 15, 2013 to April 30, 2013. On April 18, 2013 the Company, one of its subsidiaries and SVB terminated the 2012 credit facility.

On April 18, 2013, the Company entered into the 2013 credit facility, which replaced the 2012 credit facility. The 2013 credit facility provides for a two year revolving line of credit in the aggregate amount of $70,000, subject to increase from time to time up to an aggregate amount of $100,000 with an additional commitment from the lenders or new commitments from new financial institutions. The material changes in the 2013 credit facility’s monthly and quarterly financial covenants as compared to the financial covenants contained in the 2012 credit facility include:

 

   

a change in the Company’s quarterly financial covenant, previously based on specified minimum earnings levels, to one based on specified free cash flow levels. The specified minimum free cash flow financial covenant is based on earnings before depreciation and amortization expense, interest expense and income, provision for income taxes, stock-based compensation expense, certain impairment charges and certain other non-cash charges or unusual gains over a trailing twelve month period less the sum of capital expenditures, cash paid for interest expense and cash paid for income taxes over the same trailing twelve month period;

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

   

a change to the Company’s monthly financial covenant related to maintenance of a minimum specified ratio of current assets to current liabilities, increasing the Company’s required minimum of unrestricted cash from $30,000 to $45,000 for certain periods; and

 

   

inclusion of a borrowing base covenant that limits the amount of borrowings, including letters of credit, under the 2013 credit facility based on a specified calculation. This borrowing base covenant is effective through the required filing date of the Company’s September 30, 2013 unaudited condensed consolidated financial statements with the SEC on Form 10-Q, as well as for any period in which the Company’s unrestricted cash falls below $70,000.

Subject to continued compliance with the covenants contained in the 2013 credit facility, the full amount of the 2013 credit facility may be available for issuances of letters of credit and up to $5,000 may be available for swing line loans. The interest on revolving loans under the 2013 credit facility will accrue, at the Company’s election, at either (i) the Eurodollar Rate with respect to the relevant interest period plus 2.00% per annum or (ii) the ABR (defined as the highest of (x) the “prime rate” as quoted in the  Wall Street Journal , and (y) the Federal Funds Effective Rate plus 0.50%) plus 1.00% per annum. The letter of credit fee charged under the 2013 credit facility is consistent with the 2012 credit facility letter of credit fee of 2.00%. The Company expenses the interest and letter of credit fees under the 2013 credit facility, as applicable, in the period incurred. The obligations under the 2013 credit facility are secured by all domestic assets of the Company and several of its domestic subsidiaries. The 2013 credit facility terminates on April 18, 2015 and all amounts outstanding thereunder will become due and payable in full and the Company would be required to collateralize with cash any outstanding letter of credit under the 2013 credit facility up to 105% of the amounts outstanding. The Company incurred financing costs of $111 in connection with the 2012 credit facility, which were deferred and were amortized to interest expense over the term of the 2012 credit facility, or through April 15, 2013. In connection with the 2013 credit facility, the Company incurred financing costs of approximately $540 which have been deferred and will be amortized to interest expense over the term of the 2013 credit facility, or through April 18, 2015.

The 2013 credit facility contains customary terms and conditions for credit facilities of this type, including, among other things, restrictions on the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, enter into transactions with affiliates, transfer assets, make certain acquisitions, pay dividends or make distributions on, or repurchase, the Company’s common stock, consolidate or merge with other entities, or undergo a change in control. In addition and as described above, the Company is required to meet certain monthly and quarterly financial covenants customary for this type of credit facility, including maintaining minimum specified level of free cash flow, a minimum specified unrestricted cash balance and a minimum specified ratio of current assets to current liabilities.

The 2013 credit facility contains customary events of default, including 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 the Company’s obligations under the 2013 credit facility. If the Company is determined to be in default then any amounts outstanding under the 2013 credit facility would become immediately due and payable and the Company would be required to collateralize with cash any outstanding letters of credit up to 105% of the amounts outstanding.

As of June 30, 2013, the Company was in compliance with all of its covenants under the 2013 credit facility. The Company believes that it is reasonably assured that it will comply with the covenants of the 2013 credit facility for the foreseeable future.

In May 2013, the Company was required to provide financial assurance in connection with its capacity bid in a certain open market bidding program. The Company provided this financial assurance utilizing a $22,700 letter of credit issued under the 2013 credit facility and a portion of its available unrestricted cash on hand. During the three month period ended June 30, 2013, based on the capacity that the Company cleared in the above open market bidding program and the required post-auction financial assurance requirements, the Company recovered all of its available cash that it had provided as financial assurance prior to the auction and $6,200 of the letter of credit was cancelled.

As of June 30, 2013, the Company had no borrowings, but had outstanding letters of credit totaling $63,338, under the 2013 credit facility. The increase in the amount of outstanding letters of credit from December 31, 2012 to June 30, 2013 is primarily as a result of additional letters of credit issued as collateral for new demand response arrangements and obligations. In July 2013, $10,000 of outstanding letters of credit were cancelled as a result of the reduction of post-auction financial assurance requirements related to capacity that the Company cleared in an open market bidding program. As of June 30, 2013, the Company had $6,662 available under the 2013 credit facility for future borrowings or issuances of additional letters of credit.

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

On August 2, 2013, the Company entered into an amendment to the 2013 credit facility. This amendment provides for an increase to the maximum amount that the Company can spend to repurchase or redeem common stock of the Company held by its public stockholders without consent of the Lenders.

7. Commitments and Contingencies

In June 2012, the Company exercised its termination option under the lease for its principal executive offices at 75-101 Federal Street, Boston, Massachusetts and provided notice of its election to terminate the lease effective as of June 30, 2013. As a result of its election to terminate the lease, the Company was required to make a lease termination payment of $1,146 of which $573 was paid upon exercise of the election to terminate; and the remaining $573 was paid during the three month period ended June 30, 2013. In accordance with ASC 420, Exit or Disposal Cost Obligations, the Company recorded the fair value of this lease termination expense of $1,146 within operating expenses in the accompanying unaudited condensed consolidated statements of operations during the three month period ended June 30, 2012.

In July 2012, the Company entered into a lease for its new principal executive offices at One Marina Park Drive, Floors 4-6, Boston, Massachusetts (the New Lease). The New Lease term is through July 2020 and the New Lease contains both a rent holiday period and escalating rental payments over the New Lease term. The New Lease requires payments for additional expenses such as taxes, maintenance, and utilities and contains a fair value renewal option. The Company began occupying the space during the second quarter of fiscal 2013. In accordance with the terms of the New Lease, the landlord provided certain lease incentives with respect to the leasehold improvements. In accordance with ASC 840, Leases, the Company recorded the incentives as deferred rent and will reflect these amounts as reductions of lease expense over the lease term. During the three and six month periods ended June 30, 2013, the Company recorded $1,607 and $4,119, respectively, as deferred rent related to landlord lease incentives. Although lease payments under this arrangement do not commence until August 2013, as the Company has the right to use and controls physical access to the space, it has determined that the lease term commenced in July 2012 and, as a result, began recording rent expense on this lease arrangement at that time on a straight-line basis. The New Lease also contains certain provisions requiring the Company to restore certain aspects of the leased space to its initial condition. The Company has determined that these provisions represent asset retirement obligations and recorded the estimated fair value of these obligations as the related leasehold improvements were incurred. The Company will accrete the liability to fair value over the life of the lease as a component of operating expenses. As of June 30, 2013, the Company recorded an asset retirement obligation of $419.

As of June 30, 2013 and December 31, 2012, the Company had a deferred rent liability representing rent expense recorded on a straight-line basis in excess of contractual lease payments of $7,014 and $1,641, respectively, which is included in other liabilities in the accompanying unaudited condensed consolidated balance sheets.

As of June 30, 2013, the Company was contingently liable under outstanding letters of credit for $63,338. As of June 30, 2013 and December 31, 2012, the Company had restricted cash balances of $174 and $9, respectively, all of which related to collateral to secure certain insurance commitments.

The Company is subject to performance guarantee requirements under certain utility and electric power grid operator customer contracts and open market bidding program participation rules, which may be secured by cash or letters of credit. Performance guarantees as of June 30, 2013 were $63,682 and included deposits held by certain customers of $344 at June 30, 2013. These amounts primarily represent up-front payments required by utility and electric power grid operator customers as a condition of participation in certain demand response programs and to ensure that the Company will deliver its committed capacity amounts in those programs. If the Company fails to meet its minimum committed capacity requirements, a portion or all of the deposits may be forfeited. The Company assessed the probability of default under these customer contracts and open market bidding programs and has determined the likelihood of default and loss of deposits to be remote. In addition, under certain utility and electric power grid operator customer contracts, if the Company does not achieve the required performance guarantee requirements, the customer can terminate the arrangement and the Company would potentially be subject to termination penalties. Under these arrangements, the Company defers all fees received up to the amount of the potential termination penalty until the Company has concluded that it can reliably determine that the potential termination penalty will not be incurred or the termination penalty lapses. As of June 30, 2013, the Company had $1,010 in deferred fees for these arrangements which were included in deferred revenues as of June 30, 2013. As of June 30, 2013, the maximum termination penalty to which the Company could be subject under these arrangements, which the Company has deemed not probable of being incurred, was approximately $10,329.

As of June 30, 2013 and December 31, 2012, the Company accrued in the accompanying unaudited condensed consolidated balance sheets $1,524 and $685, respectively, of performance adjustments related to fees received for its participation in a certain demand response program. The Company believes that it is probable that these performance adjustments will need to be re-paid to the electric power grid operator and since the electric power grid operator has the right to require repayment at any point at its discretion, the amounts have been classified as a current liability.

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

In 2012, the Company decided to net settle a portion of its future contractual delivery obligations in a certain open market bidding program. As of June 30, 2013, the Company entered into transactions to net settle a significant portion of its future delivery obligations and these transactions have been approved by the customer as of June 30, 2013. As a result, as long as the other criteria for revenue recognition are met, the Company will recognize these fees from the net settlement transactions as revenues as they become due and payable with such fees being recorded as a component of DemandSMART revenues. During the three month period ended June 30, 2013, the Company recognized revenues of $835 related to these net settlement transactions. During the three and six month periods ended June 30, 2013, the Company did not incur any material charges or liabilities related to this matter. Furthermore, the Company does not expect that any additional charges or liabilities will be material to the Company’s consolidated results of operations and anticipates that additional charges or liabilities, if any, would be substantially incurred and recorded within the Company’s consolidated results of operations for fiscal 2013.

The Company typically grants customers a limited warranty that guarantees that its hardware will substantially conform to current specifications for one year from the delivery date. Based on the Company’s operating history, the liability associated with product warranties has been determined to be nominal.

In connection with the Company’s agreement for its employee health insurance plan, the Company could be subject to an additional payment if the agreement is terminated. The Company has not elected to terminate this agreement nor does the Company believe that termination is probable for the foreseeable future. As a result, the Company has determined that it is not probable that a loss is likely to occur and no amounts have been accrued related to this potential payment upon termination. As of June 30, 2013, the payment due upon termination would be $823.

8. Stock-Based Compensation

During the six month periods ended June 30, 2013 and 2012, the Company issued 8,920 shares and 44,871 shares of its common stock, respectively, to certain executives to satisfy a portion of the Company’s bonus obligation to these individuals. Historically, the Company’s Amended and Restated 2007 Employee, Director and Consultant Stock Plan (the 2007 Plan) contained an “evergreen” provision, which provided for an annual increase to the shares issuable under the 2007 Plan by an amount equal to the lesser of 520,000 shares or an amount determined by the Company’s board of directors. The annual increase to the 2007 Plan of 520,000 shares occurred during the three month period ended March 31, 2013. On May 28, 2013, the Company’s shareholders approved an amendment and restatement of the 2007 Plan to, among other things, increase the number of shares of common stock authorized for issuance under the 2007 Plan by 2,500,000 shares and eliminate the evergreen provision. As of June 30, 2013, 2,770,425 shares were available for future grant under the 2007 Plan, as amended and restated.

Stock Options

The fair value of options granted was estimated at the date of grant using the following weighted average assumptions:

 

     Six Months Ended June 30,  
     2013     2012  

Risk-free interest rate

     1.8     1.8

Vesting term, in years

     2.22       2.22  

Expected annual volatility

     75     80

Expected dividend yield

     —       —  

Exit rate pre-vesting

     7.7     7.9

Exit rate post-vesting

     14.06     14.06

Volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. The Company calculates volatility using a component of implied volatility and historical volatility to determine the value of share-based payments. The risk-free interest rate is the rate available as of the option date on zero-coupon United States government issues with a term equal to the expected life of the option. The Company has not paid dividends on its common stock in the past and does not plan to pay any dividends in the foreseeable future. In addition, the terms of the 2013 credit facility preclude the Company from paying dividends. During the three month period ended June 30, 2013, the Company updated its estimated exit rate pre-vesting and post-vesting applied to options, restricted stock and restricted stock units based on an evaluation of demographics of its employee groups and historical

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

forfeitures for these groups in order to determine its option valuations as well as its stock-based compensation expense noting no change in the exit-rate post vesting and no material changes in the expected annual volatility or exit rate pre-vesting. The changes in estimates of the volatility and exit rate pre-vesting did not have a material impact on the Company’s stock-based compensation expense recorded in the accompanying unaudited condensed consolidated statements of operations for the three and six month periods ended June 30, 2013.

In June 2013, in connection with the departure of the Company’s former Executive Vice President, certain unvested share-based payments were forfeited. This individual forfeited 159,028 shares of restricted common stock and 12,500 restricted stock units. As a result, during the three month period ended June 30, 2013, the Company reversed approximately $476 of stock-based compensation expense that had been recognized in prior periods related to the portion of these unvested share-based payments that had been previously expected to vest.

The components of stock based compensation expense are disclosed below:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  

Stock options

   $ 349      $ 519      $ 748      $ 1,113  

Restricted stock and restricted stock units

     2,958        2,780        7,263        5,564  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,307      $ 3,299      $ 8,011      $ 6,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

Stock based compensation is recorded in the accompanying unaudited condensed consolidated statements of operations, as follows:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  

Selling and marketing expenses

   $ 1,456      $ 1,192      $ 2,846      $ 2,246  

General and administrative expenses

     1,520        1,794        4,472        3,804  

Research and development expenses

     331        313        693        627  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,307      $ 3,299      $ 8,011      $ 6,677  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company recognized no material income tax benefit from share-based compensation arrangements during the three and six month periods ended June 30, 2013 and 2012. In addition, no material compensation cost was capitalized during the three and six month periods ended June 30, 2013 and 2012.

The following is a summary of the Company’s stock option activity during the six month period ended June 30, 2013:

 

     Six Months Ended June 30, 2013  
     Number of
Shares
Underlying
Options
    Exercise
Price Per
Share
   Weighted-
Average
Exercise Price
Per Share
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2012

     1,275,311     $0.17 - $48.06    $ 16.26      $ 2,915   (2) 

Granted

     3,500          16.57     

Exercised

     (108,310        7.32      $ 1,051   (3) 

Cancelled

     (12,220        23.29     
  

 

 

         

Outstanding at June 30, 2013

     1,158,281     $0.17 - $48.06      17.02      $ 3,298   (4) 
  

 

 

   

 

  

 

 

    

 

 

 

Weighted average remaining contractual life in years: 3.4

          

Exercisable at end of period

     1,072,556     $0.17 - $48.06    $ 16.39      $ 3,259   (4) 
  

 

 

   

 

  

 

 

    

 

 

 

Weighted average remaining contractual life in years: 3.2

          

Vested or expected to vest at June 30, 2013 (1)

     1,153,236     $0.17 -$48.06    $ 17.01      $ 3,294   (4) 
  

 

 

   

 

  

 

 

    

 

 

 

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

 

(1) This represents the number of vested options as of June 30, 2013 plus the number of unvested options expected to vest as of June 30, 2013 based on the unvested options outstanding at June 30, 2013, adjusted for the estimated forfeiture rate of 7.7%.
(2) The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on December 31, 2012 of $11.75 and the exercise price of the underlying options.
(3) The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on the applicable exercise dates and the exercise price of the underlying options.
(4) The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on June 30, 2013 of $13.26 and the exercise price of the underlying options.

Additional Information About Stock Options

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     In thousands, except share and
per share amounts
     In thousands, except share and
per share amounts
 

Total number of options granted during the period

     2,500        2,950        3,500        5,450  

Weighted-average fair value per share of options granted

   $ 10.19      $ 3.73      $ 10.15      $ 4.65  

Total intrinsic value of options exercised (1)

   $ 498      $ 17      $ 1,051      $ 930  

 

(1) Represents the difference between the market price at exercise and the price paid to exercise the options.

Of the stock options outstanding as of June 30, 2013, 1,149,088 options were held by employees and directors of the Company and 9,193 options were held by non-employees. For outstanding unvested stock options related to employees and directors of the Company as of June 30, 2013, the Company had $998 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 1.0 year. There were no unvested non-employee stock options as of June 30, 2013.

Restricted Stock and Restricted Stock Units

For non-vested restricted stock and restricted stock units subject to service-based vesting conditions outstanding as of June 30, 2013, the Company had $16,853 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 3.1 years. For non-vested restricted stock subject to performance-based vesting conditions outstanding that were probable of vesting as of June 30, 2013, the Company had $7,009 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 1.8 years. For non-vested restricted stock subject to outstanding performance-based vesting conditions that were not probable of vesting as of June 30, 2013, the Company had $163 of unrecognized stock-based compensation expense. If and when any additional portion of the equity awards are deemed probable to vest, the Company will reflect the effect of the change in estimate in the period of change by recording a cumulative catch-up adjustment to retroactively apply the new estimate.

Restricted Stock

The following table summarizes the Company’s restricted stock activity during the six month period ended June 30, 2013:

 

           Weighted Average  
     Number of     Grant Date Fair  
     Shares     Value Per Share  

Nonvested at December 31, 2012

     2,135,496     $ 9.78  

Granted

     1,410,566       16.51  

Vested

     (695,239     10.55  

Cancelled

     (361,819     11.45  
  

 

 

   

Nonvested at June 30, 2013

     2,489,004     $ 13.12  
  

 

 

   

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. Restricted stock typically vests ratably over a four-year period from the date of issuance, with certain exceptions. Included in the above table are 18,000 shares of restricted stock granted to certain non-executive employees and 30,740 shares of restricted stock granted to certain members of the Company’s board of directors during the six month period ended June 30, 2013 that were immediately vested. In addition, during the three month period ended June 30, 2013, the Company granted 22,000 shares of restricted stock to a non-employee advisory board member that vest ratably on a quarterly basis over four years commencing on July 1, 2013, as long as the individual continues as an advisory board member. The Company will account for this share-based award in accordance with ASC 505-50, Equity Based Payments to Non-Employees, which will result in the Company continuing to re-measure the fair value of the share-based award until such time as the award vests. During the three month period ended June 30, 2013, the Company recorded stock-based compensation expense related to this award of $15 and as of June 30, 2013 the award had a fair value of $292.

The fair value of restricted stock upon which vesting is solely service-based is expensed ratably over the vesting period. With respect to 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,  Stock Compensation, over the vesting period. With the exception of certain executives whose employment agreements provide for continued vesting in certain circumstances upon departure, if the employee who received the restricted stock leaves the Company prior to the vesting date for any reason, the shares of restricted stock will be forfeited and returned to the Company. During the three month period ended June 30, 2013, the Company did not grant any shares of restricted stock that contained performance-based vesting conditions. During the six month period ended June 30, 2013, the Company granted 480,000 shares of nonvested restricted stock to certain executives that contain performance-based vesting conditions. Of these shares, 25% vest in 2014 if the performance criteria related to certain 2013 operating results are achieved and the executive is still employed as of the vesting date and the remaining 75% of the shares vest quarterly over a three year period thereafter as long as the executive is still employed as of the vesting date. If the performance criteria related to certain 2013 operating results are not achieved, 100% of the shares are forfeited.

During the three and six month periods ended June 30, 2013, there were no changes to probabilities of vesting of performance-based stock awards which had a material impact on stock-based compensation expense or amounts expected to be recognized.

Additional Information about Restricted Stock

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     in thousands, except share and per share amounts  

Total number of shares of restricted stock granted during the period

     428,725        295,418        1,410,566        1,300,878  

Weighted average fair value per share of restricted stock granted

   $ 15.13      $ 6.22      $ 16.51      $ 7.34  

Total number of shares of restricted stock vested during the period

     117,946        30,644        695,239        194,339  

Total fair value of shares of restricted stock vested during the period

   $ 1,216      $ 198      $ 7,335      $ 1,680  

Restricted Stock Units

The following table summarizes the Company’s restricted stock unit activity during the six month period ended June 30, 2013:

 

           Weighted Average  
     Number of     Grant Date Fair  
     Shares     Value Per Share  

Nonvested at December 31, 2012

     106,478     $ 27.88  

Granted

     —         —    

Vested

     (56,603     27.01  

Cancelled

     (12,500     28.59  
  

 

 

   

Nonvested at June 30, 2013

     37,375     $ 28.96  
  

 

 

   

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

Additional Information about Restricted Stock Units

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2013      2012      2013      2012  
     in thousands, except share and per share amounts  

Total number of shares of restricted stock vested during the period

     3,125        13,856        56,603        78,584  

Total fair value of shares of restricted stock vested during the period

   $ 38      $ 86      $ 948      $ 731  

9. Income Taxes

The Company accounts for income taxes in accordance with the liability method of ASC 740,  Income Taxes (ASC 740). Deferred tax assets and liabilities are recognized based on the differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. A valuation allowance must be provided against deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

ASC 740 also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits. During the three and six month periods ended June 30, 2013, there were no material changes in the Company’s uncertain tax positions.

Each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if an enterprise is unable to make a reliable estimate of its annual effective tax rate, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. The Company is able to reliably estimate the annual effective tax rate on its foreign earnings, but is unable to reliably estimate the annual effective tax rate on its U.S. earnings. As a result, the Company has provided a $194 and $544 worldwide tax provision for the three and six month periods ended June 30, 2013, respectively. The provision is comprised of a tax benefit on its foreign loss for the quarter plus a U.S. tax expense related to tax deductible goodwill that generates a deferred tax liability that cannot be used as a source of income against which deferred tax assets may be realized.

If the Company is able to make a reliable estimate of its U.S. annual effective tax rate as of September 30, 2013, the Company is expected to utilize that rate to provide for income taxes on a current year-to-date basis. The Company may potentially record a significant provision for income taxes during the three month period ending September 30, 2013 since the majority of the forecasted U.S. income will be realized during the three month period ending September 30, 2013 and may potentially record a significant benefit from income taxes being recorded during the three month period ending December 31, 2013.

The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as its ability to generate income in future periods. As of June 30, 2013, due to the uncertainty related to the ultimate use of the Company’s deferred income tax assets, the Company has provided a valuation allowance on all of its U.S., Australia and New Zealand deferred tax assets.

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

10. Concentrations of Credit Risk

The following table presents the Company’s significant customers. ISO-New England, Inc. (ISO-NE) is an electric power grid operator customer in New England that is comprised of multiple utilities and was formed to control the operation of the regional power system, coordinate the supply of electricity, and establish fair and efficient markets. No other customers comprised more than 10% of consolidated revenues during the three or six month periods ended June 30, 2013 and 2012, respectively.

 

     Three Months Ended June 30,  
     2013     2012  
     Revenues      % of Total
Revenues
    Revenues      % of Total
Revenues
 

ISO-NE

   $ 4,666        13   $   6,588        20

 

     Six Months Ended June 30,  
     2013     2012  
     Revenues      % of Total
Revenues
    Revenues      % of Total
Revenues
 

ISO-NE

   $ 9,427        14   $ 12,875        22

Southern California Edison Company, Tennessee Valley Authority and Electric Reliability Council of Texas (ERCOT) were the only customers that each comprised 10% or more of the Company’s accounts receivable balance at June 30, 2013, representing 14%, 13% and 12% respectively, of such accounts receivable balance. Southern California Edison Company, PJM Interconnection (PJM) and PPL Electric Utilities Corporation were the only customers that each comprised 10% or more of the Company’s accounts receivable balance at December 31, 2012, representing 14%, 12%, and 10%, respectively, of such accounts receivable balance.

Unbilled revenue related to PJM was $64 and $44,926 at June 30, 2013 and December 31, 2012, respectively. There was no significant unbilled revenue for any other customers at June 30, 2013 and December 31, 2012.

Deposits consist of funds to secure performance under certain contracts and open market bidding programs with electric power grid operator and utility customers. Deposits held by these customers were $344 and $1,888 at June 30, 2013 and December 31, 2012, respectively.

11. Legal Proceedings

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. In accordance with ASC 450, Contingencies , the Company accrues for losses that are determined to be both probable and estimable. As of June 30, 2013, the amounts accrued related to probable and estimable losses are not material and the Company does not expect the ultimate costs to resolve these matters to have a material adverse effect on its consolidated financial position, results of operations or cash flows. In addition to ordinary-course litigation, the Company is a party to the litigation described below.

On May 3, 2013, a purported shareholder of the Company filed a derivative and class action complaint in the United States District Court for the District of Delaware (the Court) against certain officers and directors of the Company as well as the Company as a nominal defendant. The complaint asserts derivative claims, purportedly brought on behalf of the Company, for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with certain equity grants (awarded in 2010, 2012, and 2013) that allegedly exceeded the annual limit on per-employee equity grants contained in the 2007 Plan. The complaint also asserts a direct claim, brought on behalf of the plaintiff and a proposed class of the Company’s shareholders, alleging the Company’s proxy statement filed on April 26, 2013 is false and misleading because it fails to disclose that the equity grants were improper. The plaintiff seeks, among other relief, rescission of the equity grants, unspecified damages, injunctive relief, disgorgement, attorneys’ fees, and such other relief as the Court may deem proper. The Company’s response to the complaint is presently due on August 30, 2013.

Company management believes that the Company and the other defendants have substantial legal and factual defenses to the claims and allegations contained in the complaint, and intends to pursue these defenses vigorously. There can be no assurance, however, that such efforts will be successful, and an adverse resolution of the lawsuit could have a material effect on the Company’s consolidated financial position and results of operations in the period in which the lawsuit is resolved. In addition, although the Company carries insurance for these types of claims, there is no guarantee that this claim will be covered. A lack of insurance coverage or a judgment significantly in excess of the Company’s insurance coverage could materially and adversely affect its financial condition, results of operations and cash flows. The Company is not presently able to reasonably estimate potential losses, if any, related to the lawsuit.

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

12. Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (FASB) issued guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance was effective prospectively for reporting periods beginning after December 15, 2012. Early adoption was permitted. The adoption of this guidance did not have any impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities  (ASU No. 2011-11). ASU No. 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 No. 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 No. 2011-11 retrospectively for all comparative periods presented. The adoption of ASU No. 2011-11 did not have any impact on the Company’s consolidated financial statements.

 

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

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission, or the SEC, on February 27, 2013, or our 2012 Form 10-K. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “target” and variations of those terms or the negatives of those terms and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding our results of operations, operating expenses and the sufficiency of our cash for future operations. We assume no obligation to revise or update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth below under this Item 2—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A—“Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as well as in our 2012 Form 10-K and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, as filed with the SEC on May 7, 2013, or our 2013 First Quarter 10-Q. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC.

Overview

We are a leading provider of energy intelligence software and related solutions. We unlock the full value of energy management for commercial, institutional and industrial end-users of energy, which we refer to as our C&I customers, and our electric power grid operator and utility customers by delivering a comprehensive suite of demand-side management services that reduce real-time demand for electricity, increase energy efficiency, improve energy supply transparency in competitive markets, and mitigate emissions.

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.

In providing our demand response services, we match obligation, in the form of megawatts, or MW, that we agree to deliver to our utility and electric power grid operator customers, with supply, in the form of MW that we are able to curtail from the electric power grid through our arrangements with C&I customers. We increase our ability to curtail demand from the electric power grid by deploying a sales team to contract with our C&I customers and by installing our equipment at these customers’ sites to connect them to our network. When we are called upon by our utility or electric power grid operator customers to deliver MW, we use our Network Operations Center, or NOC, and our comprehensive demand response application, DemandSMART, to remotely manage and reduce electricity consumption across a growing network of C&I customer sites, making demand response capacity available to electric power grid operators and utilities on demand while helping C&I customers achieve energy savings, improved financial results and environmental benefits. We receive recurring payments from electric power grid operators and utilities for managing demand response capacity and we share these recurring payments with our C&I customers in exchange for those C&I customers reducing their power consumption when called upon by us to do so. We occasionally reallocate and realign our capacity supply and obligation through open market bidding programs, supplemental demand response programs, auctions or other similar capacity arrangements and bilateral contracts to account for changes in supply and demand forecasts, as well as changes in programs and market rules in order to achieve more favorable pricing opportunities. We refer to the above activities as managing our portfolio of demand response capacity.

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

 

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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.

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.

Significant Recent Developments

At our 2013 Annual Meeting of Stockholders held on May 28, 2013, our stockholders approved an amendment and restatement of our Amended and Restated 2007 Employee, Director and Consultant Stock Plan, which we refer to as the 2007 Plan, to, among other things, increase the shares available for issuance under the 2007 Plan by 2,500,000 shares.

On June 3, 2013, David Samuels, our former Executive Vice President, notified us that he was resigning as an officer effective June 11, 2013 in order to pursue another professional opportunity.

On August 2, 2013, we entered into an amendment to our $70 million senior secured revolving credit facility with the several lenders from time to time party thereto and Silicon Valley Bank, or SVB, as administrative agent, swingline lender, issuing lender, lead arranger and book manager dated April 18, 2013, which we refer to as the 2013 credit facility. This amendment provides for an increase to the maximum amount that we can spend to repurchase or redeem shares of our common stock held by our stockholders without the consent of SVB.

On August 2, 2013, Kevin J. Bligh notified us that he was resigning as our Chief Accounting Officer and principal accounting officer, effective November 29, 2013. Mr. Bligh will remain employed by us as a special advisor to the Chief Financial Officer until on or about June 2, 2014 in order to assist us in an orderly transition.

On August 6, 2013, our board of directors authorized the repurchase of up to $30 million of our common stock during the twelve month period ending August 6, 2014, unless earlier terminated by the board of directors. We have not made any repurchases to date.

Revenues and Expense Components

Revenues

We derive recurring revenues from the delivery 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 from 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

 

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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.

In the PJM Interconnection, or 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 30 th of each year. Therefore, commencing in fiscal 2012, all demand response capacity revenues related to our participation in the PJM open market program are recognized at the end of the performance period, or during the three months ended September 30 th 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 and the Western Australia demand response program during the three months ended September 30 th of each year, that our revenues will typically be higher in the third quarter as compared to any other quarter in our fiscal year. However, the introduction in the PJM market of the Summer-Only, Extended-Summer and Annual demand response products beginning in the 2014/2015 delivery year could adversely impact our ability to successfully manage our portfolio of demand response capacity in that program and could negatively impact our results of operations and financial condition.

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. Due to the fact the demand response capacity revenues related to the PJM Emergency Load Response Program are not recognized until the three months ended September 30 th of each year, there were no material unbilled revenues as of June 30, 2013.

Fees received from the reallocation or realignment of our capacity supply and obligation through auctions or other similar capacity arrangements and bilateral contracts to account for changes in supply and demand forecasts, as well as changes in programs and market rules in order to achieve more favorable pricing opportunities, are recognized as revenues as they become due and payable with such fees being recorded as a component of DemandSMART revenues.

Revenues generated from open market sales to ISO New England, Inc., or ISO-NE, accounted for approximately 13% and 20% of our total revenues for the three month periods ended June 30, 2013 and 2012, respectively. Revenues generated from open market sales to ISO-NE accounted for approximately 14% and 22% of our total revenues for the six month periods ended June 30, 2013 and 2012, respectively. Other than ISO-NE, no individual electric power grid operator or utility customer accounted for more than 10% of our total revenues for the three and six month periods ended June 30, 2013 and 2012. We expect revenues generated from sales to ISO-NE to decline as a percentage of total revenues for the foreseeable future as a result of our reduction in capacity supply obligations in this market and re-alignment of our resources. If we choose to participate in additional or different markets in the future, or we increase or decrease our participation in the markets in which we currently participate, the contribution of our current electric power grid operator and utility customers to total revenues may 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

 

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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 Communications Corporation, or M2M, we sell proprietary equipment to C&I 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 three 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.

Cost of Revenues

Cost of revenues for our demand response services primarily consist 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 during interim periods as described elsewhere in this Quarterly Report on Form 10-Q. Cost of revenues for our EfficiencySMART and SupplySMART applications and services, and certain other wireless energy management products include 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 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 June 30, 2013 and December 31, 2012, we had no deferred incremental direct costs related to the acquisition or origination of a utility contract or open market program and during the three and six month periods ended June 30, 2013 and 2012, no contract origination costs were deferred. 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 three month periods ended June 30, 2013 and 2012, we deferred $10.9 million and $8.0 million, respectively, of incremental direct costs associated with customer contracts. During the six month periods ended June 30, 2013 and 2012, we deferred $17.2 million and $10.7 million, respectively, of incremental direct costs associated with customer contracts. These deferred expenses will be expensed in proportion to the related revenue being recognized. The increase in the deferral of incremental costs during the six month period ended June 30, 2013 compared to the same period in 2012 was primarily related to the increase in deferred costs associated with our Western Australia and our PJM demand response programs where the deferred costs will be expensed when the associated revenues are recognized during the three month period ending September 30, 2013. During the three month periods ended June 30, 2013 and 2012, we expensed $1.4 million and $1.1 million, respectively, of deferred incremental direct costs to cost of revenues. During the six month periods ended June 30, 2013 and 2012, we expensed $2.5 million and $1.3 million, respectively, of deferred incremental direct costs to cost of revenues. As of June 30, 2013, there were 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 these costs over the lesser of the estimated useful life or the term of the contractual arrangement. During the three month periods ended June 30, 2013 and 2012, we capitalized $5.2 million and $2.7 million, respectively, of production and generation equipment costs. During the six month periods ended June 30, 2013 and 2012, we capitalized $7.6 million and $5.2 million, respectively, of production and generation equipment costs. We believe that the above accounting treatments appropriately match expenses with the associated revenues.

 

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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 operators or utilities, 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 the 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 625 full-time employees at June 30, 2012 to 744 full-time employees at June 30, 2013 primarily as a result of our overall growth and expansion into new markets over the past year. In addition, we incur significant up-front costs associated with the expansion of the number of contractual MW, which we expect to continue for the foreseeable future. We expect our overall operating expenses to increase marginally in absolute dollar terms for the foreseeable future as we continue to enable new C&I customer sites 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 through at least the end of fiscal 2015, 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 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 through at least the end of fiscal 2015 as we continue the expansion of our selling and marketing activities into new markets and regions; 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 through at least the end of fiscal 2015 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 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 three and six month periods ended June 30, 2013, we capitalized software development costs, including software license fees and external consulting costs, of $1.7 million and $4.3 million, respectively, which are included as software in property and equipment at June 30, 2013. During the three and six month periods ended June 30, 2012, we capitalized software development costs of $1.6 million and $2.3 million, respectively, and the amount is included as software in property and equipment at June 30, 2012. We expect research and development expenses to increase in absolute dollar terms through at least the end of fiscal 2015 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 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 three month period ended March 31,

 

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2013, we granted 480,000 shares of non-vested restricted stock to certain executive employees. Of these shares, 25% vest in 2014 if the performance criteria related to certain 2013 operating results are achieved and the executive is still employed as of the vesting date and the remaining 75% of the shares vest quarterly over a three year period thereafter as long as the executive is still employed as of the vesting date. If the performance criteria related to certain 2013 operating results are not achieved, 100% of the shares are forfeited. We did not grant any shares of non-vested restricted stock with performance-based vesting criteria during the three months ended June 30, 2013. During the six month period ended June 30, 2013, we granted 1,410,566 shares of non-vested restricted stock at a weighted-average grant date fair value of $16.51 per share as compared to grants of 1,300,878 shares of non-vested restricted stock at a weighted average grant date fair value of $7.34 per share during the six month period ended June 30, 2012. As a result of the increase in the grants of shares of non-vested restricted stock and the overall increase in our stock price, we anticipate that, on a per employee basis, stock-based compensation expense will increase for the foreseeable future.

For both the three month periods ended June 30, 2013 and 2012, we recorded expenses of approximately $3.3 million in connection with share-based payment awards made to employees and non-employees. For the six month periods ended June 30, 2013 and 2012, we recorded expenses of approximately $8.0 million and $6.7 million, respectively, in connection with share-based payment awards made to employees and non-employees. With respect to stock option grants through June 30, 2013, a future expense of non-vested stock options of approximately $1.0 million is expected to be recognized over a weighted average period of 1.0 year. For outstanding non-vested restricted stock awards and restricted stock units subject to service-based vesting conditions as of June 30, 2013, we had $16.9 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 3.1 years. For outstanding non-vested restricted stock awards subject to performance-based vesting conditions, and that were probable of vesting as of June 30, 2013, we had $7.0 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 1.8 years. For non-vested restricted stock awards subject to outstanding performance-based vesting conditions that were not probable of vesting as of June 30, 2013, we had $0.2 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. In June 2013, in connection with the departure of our former Executive Vice President, certain unvested share-based payments were forfeited. This individual forfeited 159,028 shares of restricted common stock and 12,500 restricted stock units. As a result, during the three month period ended June 30, 2013, we reversed approximately $0.5 million of stock-based compensation expense that had been recognized in prior periods related to the portion of these unvested share-based payments that had been previously expected to vest.

Interest Expense and Other Income, Net

Interest expense primarily consists of fees associated with credit facilities that we and one of our subsidiaries entered into with SVB in 2012 and 2013. 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.

Consolidated Results of Operations

Three and Six Month Periods Ended June 30, 2013 Compared to the Three and Six Month Periods Ended June 30, 2012

Revenues

The following table summarizes our revenues for the three and six month periods ended June 30, 2013 and 2012 (dollars in thousands):

 

                                                                   
     Three Months Ended June 30,      Dollar
Change
     Percentage
Change
 
     2013      2012        

Revenues:

           

DemandSMART

   $ 26,585      $ 26,205      $ 380        1.5

EfficiencySMART, SupplySMART, and Other

     9,568        7,068        2,500        35.4
  

 

 

    

 

 

    

 

 

    

Total

   $ 36,153      $ 33,273      $ 2,880        8.7
  

 

 

    

 

 

    

 

 

    

 

                                                                   
     Six Months Ended June 30,      Dollar
Change
     Percentage
Change
 
     2013      2012        

Revenues:

           

DemandSMART

   $ 51,074      $ 43,928      $ 7,146        16.3

EfficiencySMART, SupplySMART, and Other

     17,929        13,795        4,134        30.0
  

 

 

    

 

 

    

 

 

    

Total

   $ 69,003      $ 57,723      $ 11,280        19.5
  

 

 

    

 

 

    

 

 

    

 

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For the three months ended June 30, 2013, our DemandSMART revenues increased by $0.4 million, or 1.5%, as compared to the three months ended June 30, 2012. For the six months ended June 30, 2013, our DemandSMART revenues increased by $7.1 million, or 16.3%, as compared to the six months ended June 30, 2012. The increase in our DemandSMART revenues was primarily attributable to changes in the following operating areas (dollars in thousands):

 

     Increase (Decrease)     Increase (Decrease)  
     Three Months Ended
June 30, 2012 to
June 30, 2013
    Six Months Ended
June 30, 2012 to
June 30, 2013
 

Alberta, Canada

   $ 1,506       3,534  

New Zealand

     1,027       1,927  

Electric Reliability Council of Texas (ERCOT)

     841       1,692  

Tennessee Valley Authority (TVA)

     434       1,420  

ISO-NE

     (1,922     (3,448

Pennsylvania Act 129 (Act 129)

     (1,121     (1,121

Australia

     (558     1,004  

Other (1)

     173       2,138  
  

 

 

   

 

 

 

Total increased DemandSMART revenues

   $ 380       7,146  
  

 

 

   

 

 

 

 

(1) The amounts included in this category relate to various demand response programs, none of which are individually material.

The increase in DemandSMART revenues during the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was largely due to revenues recognized from our participation in international demand response programs, including Alberta, Canada and New Zealand. We recognized no revenues from our participation in the Alberta, Canada demand response program and no material revenues from our participation in the New Zealand demand response program during the three and six months ended June 30, 2012. The increase was also due to an increase in enrolled MW in certain of our U.S. demand response programs, including TVA and ERCOT. The increase in DemandSMART revenues during the six month period ended June 30, 2013 as compared to the same period in 2012 was also due to an increase in enrolled MW and dispatches in certain of our Australia demand response programs. The increase in DemandSMART revenues was partially offset by a decrease in our MW delivery obligation and less favorable pricing in the ISO-NE market, and the termination of an ISO-NE program during the second quarter of 2012 from which we derived revenues for the three and six month periods ended June 30, 2012. We have reduced a portion of our MW delivery obligation in the ISO-NE market for the program year commencing June 1, 2013 through third party bilateral contracts and capacity auctions. As a result, we expect our ISO-NE revenues for the remainder of the year ending December 31, 2013, or fiscal 2013, to be lower than the comparative period in 2012. The increase in DemandSMART revenues was also partially offset by a decrease in revenues from the Act 129 programs, as these programs ended in the third quarter of 2012 and were not renewed for 2013. The increase in DemandSMART revenues for the three month period ended June 30, 2013 compared to the same period in 2012 was also partially offset by a decrease in revenues from certain Australia demand response programs, as these programs ended during the three month period ended March 31, 2013 and have not yet been renewed.

For the three and six month periods ended June 30, 2013, our EfficiencySMART, SupplySMART and other revenues increased by $2.5 million and $4.1 million, respectively, or 35.4% and 30.0%, as compared to the same periods in 2012 due to the recognition of revenues related to a $10 million EfficiencySMART data-driven energy management application for the Massachusetts Department of Energy Resources, under which all revenues were deferred as of June 30, 2012, an increase in our EfficiencySMART customers and an increase in EfficiencySMART and related consulting arrangements with utilities.

We currently expect our total DemandSMART revenues to increase during fiscal 2013 as compared to fiscal 2012 primarily due to an increase in pricing and enrolled MW in our Western Australia and PJM demand response programs. We also currently expect our total EfficiencySMART, SupplySMART and other revenues to increase during fiscal 2013 as compared to fiscal 2012 primarily due to the expected continued growth in customers and contracts, as well as the recognition of previously deferred revenues.

 

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Gross Profit and Gross Margin

The following table summarizes our gross profit and gross margin percentages for the three and six months ended June 30, 2013 and 2012 (dollars in thousands):

 

Three Months Ended June 30,  
2013     2012  
Gross Profit      Gross Margin     Gross Profit      Gross Margin  
$ 12,280         34.0   $ 8,345         25.1

 

 

      

 

 

    

 

Six Months Ended June 30,  
2013     2012  
Gross Profit      Gross Margin     Gross Profit      Gross Margin  
$ 22,933         33.2   $ 14,233         24.7

 

 

      

 

 

    

The increase in gross profit during the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was primarily due to an increase in revenues related to our participation in international demand response programs, including Alberta, Canada and New Zealand. We had no revenues in Alberta, Canada and no material revenues in New Zealand, and therefore no significant gross profits were recognized during the three and six month periods ended June 30, 2012 related to these programs. In addition, the increase in gross profits was due to lower installed costs associated with our C&I contracts. The increase in gross profit during the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was also due to increased gross profits from EfficiencySMART, SupplySMART and other products and services that resulted from the increase in revenues, as well as a decrease in delivery costs. The increase in gross profits during the six month period ended June 30, 2013 as compared to the same period in 2012 was also due to an increase in enrolled MW and dispatches in certain of our Australia demand response programs. The increase in gross profit during the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was partially offset by a reduction in revenues related to ISO-NE. The increase in gross profits for the three month period ended June 30, 2013 as compared to the same period in 2012 was also partially offset by the recognition of cost of revenues in a certain California demand response program where the associated revenues were deferred due to fees not being fixed or determinable and due to a decrease in revenues from certain Australia demand response programs, as these programs ended during the three month period ended March 31, 2013 and have not yet been renewed.

Our gross margin increased during the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 primarily due to the increase in revenues related to our participation in international demand response programs, which are higher margin demand response programs, improved management of our portfolio of demand response capacity and lower installed costs associated with our C&I contracts. The increase in our gross margin during the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was also attributable to higher gross margins from our EfficiencySMART, SupplySMART and other revenues, including the recognition of previously deferred revenues related to a $10 million EfficiencySMART data-driven energy management application for the Massachusetts Department of Energy Resources for which a portion of the costs had been expensed in prior periods. The increase in our gross margin for the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was partially offset by a decrease in gross margin related to less favorable pricing in the ISO-NE market, which was not entirely offset by payments to C&I customers. For the three month period ended June 30, 2013 as compared to the same period in 2012, our increase in gross margin was partially offset by the recognition of cost of revenues in a certain California demand response program where the associated revenues were deferred due to fees not being fixed or determinable.

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 installed 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 three and six months ended June 30, 2013 and 2012 (dollars in thousands):

 

                                                  
     Three Months Ended June 30,      Percentage
Change
 
     2013      2012     

Operating Expenses:

        

Selling and marketing

   $ 19,030      $ 14,693        29.5

General and administrative

     21,005        17,600        19.3

Research and development

     4,770        3,818        24.9
  

 

 

    

 

 

    

Total

   $ 44,805      $ 36,111        24.1
  

 

 

    

 

 

    

 

                                                        
     Six Months Ended June 30,      Percentage
Change
 
     2013      2012     

Operating Expenses:

        

Selling and marketing

   $ 34,683      $ 27,918        24.2

General and administrative

     41,126        34,529        19.1

Research and development

     9,590        7,622        25.8
  

 

 

    

 

 

    

Total

   $ 85,399      $ 70,069        21.9
  

 

 

    

 

 

    

In certain forward capacity markets in which we participate, such as PJM, we may install our equipment at a C&I customer site to allow for the curtailment of MW from the electric power grid, which we refer to as enablement, 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 Expenses

 

                                                  
     Three Months Ended June 30,      Percentage
Change
 
     2013      2012     
     (dollars in thousands)         

Payroll and related costs

   $ 12,000      $ 9,753        23.0

Stock-based compensation

     1,456        1,192        22.1

Other

     5,574        3,748        48.7
  

 

 

    

 

 

    

Total

   $ 19,030      $ 14,693        29.5
  

 

 

    

 

 

    

 

                                                        
     Six Months Ended June 30,      Percentage
Change
 
     2013      2012     
     (dollars in thousands)         

Payroll and related costs

   $ 21,598      $ 18,125        19.2

Stock-based compensation

     2,846        2,246        26.7

Other

     10,239        7,547        35.7
  

 

 

    

 

 

    

Total

   $ 34,683      $ 27,918        24.2
  

 

 

    

 

 

    

The increase in payroll and other employee related costs for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was primarily due to the increase in the number of selling and marketing full-time employees from 195 at June 30, 2012 to 235 at June 30, 2013, as well as to higher average expected bonuses.

The increase in stock-based compensation for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was primarily due to the grant of additional stock-based awards, as well as an increase in the grant date fair value of stock-based awards granted during the three and six months ended June 30, 2013 as a result of the increase in our stock price as compared to the same periods in 2012.

 

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The increase in other selling and marketing expenses for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was attributable to an increase of $1.0 million and $1.6 million, respectively, in the allocation of company-wide overhead costs, which are based on headcount, that resulted from the increase in the number of full-time selling and marketing employees. This increase for the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was also due to higher costs associated with various marketing initiatives of $0.2 million and $0.5 million, respectively, and higher professional fees and related costs of $0.6 million and $0.6 million, respectively.

General and Administrative Expenses

 

                                                  
     Three Months Ended June 30,      Percentage
Change
 
     2013      2012     
     (dollars in thousands)         

Payroll and related costs

   $ 11,946      $ 8,746        36.6

Stock-based compensation

     1,520        1,794        (15.3 )% 

Other

     7,539        7,060        6.8
  

 

 

    

 

 

    

Total

   $ 21,005      $ 17,600        19.3
  

 

 

    

 

 

    

 

                                                        
     Six Months Ended June 30,      Percentage
Change
 
     2013      2012     
     (dollars in thousands)         

Payroll and related costs

   $ 22,988      $ 18,018        27.6

Stock-based compensation

     4,472        3,804        17.6

Other

     13,666        12,707        7.5
  

 

 

    

 

 

    

Total

   $ 41,126      $ 34,529        19.1
  

 

 

    

 

 

    

The increase in payroll and related costs for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was primarily attributable to an increase in the number of general and administrative full-time employees from 347 at June 30, 2012 to 404 at June 30, 2013, as well as an increase in overall salary rates and expected bonuses per full-time employee.

The decrease in stock-based compensation expense for the three month period ended June 30, 2013 compared to the same period in 2012 was primarily due to the reversal of stock-based compensation expense during the three month period ended June 30, 2013 related to the forfeiture upon the termination of employment of our former Executive Vice President of stock-based awards that were granted to him. There was no similar material reversal of stock-based compensation expense during the three month period ended June 30, 2012.

The increase in stock-based compensation expense for the six month period ended June 30, 2013 compared to the same period in 2012 was primarily due to an increase in the number of stock-based awards granted to new executive officers and new members of our board of directors during the period, and an increase in the overall grant-date fair value of stock-based awards granted as a result of the increase in our stock price, including fully-vested awards that were granted to our board of directors during the six months ended June 30, 2013. This increase was partially offset by the forfeiture described in the preceding paragraph.

The increase in other general and administrative expenses for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was attributable to overall higher infrastructure costs in support of our growth. For the three month period ended June 30, 2013 we incurred an increase of $1.4 million in facilities expenses due to higher rent, utility costs and depreciation expense. These increases were the result of the lease for our new principal executive offices, which we occupied during the quarter ended June 30, 2013, and the corresponding change in useful life of the leasehold improvements under the former lease for our principal executive offices, which we refer to as the prior lease. We also incurred higher professional fees of $0.5 million, incurred higher information technology costs of $0.3 million, and higher insurance and software license fees of $0.7 million. The increase in other general and administrative expenses for the three month period ended June 30, 2013 compared to the same period in 2012 was offset by a $1.4 million increase in the allocation of company-wide overhead costs to sales and marketing, and research and development, which are based on headcount, that resulted from the overall increase in our overhead costs. In addition, during the quarter ended June 30, 2012 we incurred a $1.1 million lease termination charge as a result of our election to terminate the prior lease. There was no similar charge during the three month period ended June 30, 2013.

 

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The increase in other general and administrative expenses for the six month period ended June 30, 2013 compared to the same period in 2012 was attributable to higher facilities costs of $2.6 million due to higher rent, utility costs and depreciation expense, higher insurance and software license fees of $0.7 million, higher professional fees of $0.4 million and higher information technology costs of $0.4 million. These increases were offset by a $2.2 million increase in the allocation of company-wide overhead costs to sales and marketing, and research and development, which are based on headcount, that resulted from the overall increase in our overhead costs. In addition, during the six month period ended June 30, 2012 we incurred a $1.1 million lease termination charge as a result of our election to terminate the prior lease. There was no similar charge during the six month period ended June 30, 2013.

Research and Development Expenses

 

                                                        
     Three Months Ended June 30,      Percentage
Change
 
     2013      2012     
     (dollars in thousands)         

Payroll and related costs

   $ 2,607      $ 2,160        20.7

Stock-based compensation

     331        313        5.8

Other

     1,832        1,345        36.2
  

 

 

    

 

 

    

Total

   $ 4,770      $ 3,818        24.9
  

 

 

    

 

 

    

 

                                                        
     Six Months Ended June 30,      Percentage
Change
 
     2013      2012     
     (dollars in thousands)         

Payroll and related costs

   $ 5,074      $ 4,413        15.0

Stock-based compensation

     693        627        10.5

Other

     3,823        2,582        48.1
  

 

 

    

 

 

    

Total

   $ 9,590      $ 7,622        25.8
  

 

 

    

 

 

    

The increase in payroll and other employee related costs for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was primarily driven by an increase in the number of research and development full-time employees from 83 at June 30, 2012 to 105 at June 30, 2013, as well as an increase in salary rates per full-time employee. This increase for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was partially offset by an increase in capitalized application development costs primarily related to our DemandSMART application.

The increase in stock-based compensation expense for the three and six month periods ended June 30, 2013 as compared to the same periods in 2012 was primarily attributable to an increase in the number of stock-based awards granted and an increase in the overall grant-date fair value of the stock-based awards granted as a result of the increase in our stock price. This increase was partially offset by a decrease in the percentage of stock-based compensation expense related to our stock-based awards granted during fiscal 2011 and fiscal 2012 with performance-based vesting conditions under which the stock-based compensation expense is being recognized under the accelerated attribution method, which results in a greater percentage of stock-based compensation expense being recognized in fiscal 2011 and fiscal 2012 as compared to fiscal 2013.

The increase in other research and development expenses for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was primarily due to an increase of $0.2 million and $0.3 million, respectively, in technology and communication expenses due to data storage and software licenses and fees used in the development of our energy management applications, services and products. The increase in other research and development expenses for the three and six month periods ended June 30, 2013 compared to the same periods in 2012 was also due to an increase of $0.4 million and $0.6 million, respectively, in the allocation of company-wide overhead costs, which are allocated based on headcount. The increase in other research and development expenses for the six month period ended June 30, 2013 compared to the same period in 2012 was also due to higher consulting and professional fees of $0.4 million.

 

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Interest Expense and Other (Expense) Income, Net

Interest expense for the three month period ended June 30, 2013 was relatively unchanged from the three month period ended June 30, 2012. The decrease in interest expense of approximately $0.1 million for the six month period ended June 30, 2013 compared to the same period in 2012 was mainly attributable to $0.1 million of additional interest expense incurred during the six month period ended June 30, 2012 due to the accelerated amortization of deferred financing costs that resulted from the modifications to the 2012 credit facility that we and one of our subsidiaries entered into with SVB in March 2012 for which there were no similar charges during the six month period ended June 30, 2013. In addition, we incurred higher amortization expense of our deferred financing costs during the six month period ended June 30, 2012 compared to the same period in 2013. The decrease in interest expense for the six month period ended June 30, 2013 compared to the same period in 2012 was partially offset by higher average outstanding letter of credit balances during the six month period ended June 30, 2013 as compared to the same period in 2012.

Other expense, net for the three month period ended June 30, 2013 was $1.2 million compared to $0.5 million for the three month period ended June 30, 2012. Other expense, net for the six month period ended June 30, 2013 was $1.1 million compared to other income, net of $0.7 million for the six month period ended June 30, 2012. Other (expense) income, net was comprised primarily of net foreign currency gains (losses) due to fluctuations in the Australian dollar and a nominal amount of other income. We had approximately $9.1 million at June 30, 2013 exchange rates ($10.1 million Australian) in intercompany receivables denominated in Australian dollars that primarily arose from the acquisition of Energy Response Holdings Pty Ltd., or Energy Response, in July 2011. During the three month period ended June 30, 2013, we incurred ($0.1) million of realized foreign currency losses primarily due to the settlement of a portion of our intercompany receivables denominated in Australian dollars. We incurred no material foreign currency gains (losses) during the three month period ended June 30, 2012. During the six month periods ended June 30, 2013 and 2012, we incurred ($0.6) million and $0.4 million, respectively, of realized foreign currency (losses) gains primarily due to the settlement of a portion of our intercompany receivables denominated in Australian dollars. We currently do not hedge any of our foreign currency transactions.

Income Taxes

The tax provision recorded for the three and six month periods ended June 30, 2013 was $0.2 million and $0.5 million, respectively, and was comprised of a tax benefit on our foreign loss for the quarter plus a U.S. tax expense related to tax deductible goodwill that generates a deferred tax liability that cannot be used as a source of income against which deferred tax assets may be realized.

Each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if an enterprise is unable to make a reliable estimate of its annual effective tax rate the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. We are able to reliably estimate the annual effective tax rate on our foreign earnings, but are unable to reliably estimate the annual effective tax rate on U.S. earnings. As a result, we have provided a $0.5 million worldwide tax provision for the six months ended June 30, 2013.

We review all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as our ability to generate income in future periods. As of June 30, 2013, due to the uncertainty related to the ultimate use of our deferred income tax assets, we have provided a valuation allowance on all of our U.S., Australian, and New Zealand deferred tax assets.

For the three and six month periods ended June 30, 2012, due to the fact that we could not make a reliable estimate of our annual effective rate at June 30, 2012, we recorded an income tax provision of $0.4 million and $0.8 million, respectively, based on the estimated foreign taxes resulting from guaranteed profit allocable to our foreign subsidiaries, which were determined to be limited-risk service providers acting on behalf of the U.S. parent for tax purposes, for which there were no tax net operating loss carryforwards, and amortization of tax deductible goodwill, which generated a deferred tax liability that could not be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature.

Liquidity and Capital Resources

Overview

We have generated significant cumulative losses since inception. As of June 30, 2013, we had an accumulated deficit of $168.3 million. As of June 30, 2013, our principal sources of liquidity were cash and cash equivalents totaling $101.6 million, a

 

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decrease of $13.5 million from our December 31, 2012 balance of $115.0 million, and amounts available under the 2013 credit facility. At June 30, 2013 and December 31, 2012, our cash resided primarily in our operating cash accounts.

We believe our existing cash and cash equivalents at June 30, 2013, amounts available under the 2013 credit facility 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, amounts available under the 2013 credit facility 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 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.

Cash Flows

The following table summarizes our cash flows for the six months ended June 30, 2013 and 2012 (dollars in thousands):

 

     Six Months Ended June 30,  
     2013     2012  

Cash flows provided by operating activities

   $ 12,164     $ 4,241  

Cash flows used in investing activities

     (25,353     (12,156

Cash flows provided by financing activities

     791       65  

Effects of exchange rate changes on cash

     (1,067     (33
  

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ (13,465   $ (7,883
  

 

 

   

 

 

 

Cash Flows Provided by Operating Activities

Cash provided by operating activities primarily consists of net loss adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expenses, and the effect of changes in working capital and other activities.

Cash provided by operating activities for the six months ended June 30, 2013 was $12.2 million and consisted of a net loss of $64.9 million offset by $24.4 million of non-cash items and $52.7 million of net cash provided by working capital and other activities. The noncash items consisted primarily of depreciation and amortization, stock-based compensation charges, equipment charges, unrealized foreign exchange transaction losses due to the strengthening of the U.S. dollar and deferred taxes. Cash provided by working capital and other activities consisted of a decrease of $9.5 million in accounts receivable due to the timing of cash receipts under the demand response programs in which we participate, a decrease of $44.4 million in unbilled revenues, most of which related to the PJM demand response market, an increase of $5.9 million in other noncurrent liabilities, an increase of $29.3 million in deferred revenue primarily related to the Western Australia demand response program, an increase of $0.3 million in accrued payroll and related expenses, and an increase of $1.3 million in accounts payable, accrued performance adjustments and accrued expenses primarily due to the timing of payments. These amounts were offset by cash used in working capital and other activities consisting of an increase in prepaid expenses and other assets of $4.5 million, an increase in capitalized incremental direct customer contract costs of $14.7 million, an increase in other assets of $0.5 million and a decrease of $18.3 million in accrued capacity payments.

Cash provided by operating activities for the six months ended June 30, 2012 was $4.2 million and consisted of a net loss of $56.8 million, offset by $20.4 million of noncash items, primarily consisting of depreciation and amortization, deferred taxes, stock-based compensation charges and non-cash interest expense, as well as $40.6 million of net cash provided by working capital and other activities. Cash provided by working capital and other activities consisted of an increase of $21.3 million in deferred revenue, a decrease of $64.1 million in unbilled revenues relating to the PJM demand response market and an increase of $0.2 million in

 

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accounts payable, accrued performance adjustments and accrued expenses due to the timing of payments. These amounts were offset by cash used in working capital and other activities consisting of a decrease of accrued capacity payments of $26.8 million, the majority of which was related to the PJM demand response market, an increase in capitalized incremental direct customer contract costs of $10.9 million, a decrease of $1.0 million in accrued payroll and related expenses, an increase of $4.8 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 $1.5 million.

Cash Flows Used in Investing Activities

Cash used in investing activities was $25.4 million for the six months ended June 30, 2013. During the six months ended June 30, 2013, we incurred $27.2 million in capital expenditures primarily related to capital expenditures for our new corporate headquarters, demand response equipment, as well as capitalized internal use software costs as we continue our investment to further develop and enhance our software. In addition, during the six months ended June 30, 2013, our restricted cash and deposits decreased by $1.8 million due to a decrease in deposits principally related to the financial assurance requirements for demand response programs in which we participate, as these deposits were replaced with letters of credit.

Cash used in investing activities was $12.2 million for the six months ended June 30, 2012. During the six months ended June 30, 2012, we incurred $9.1 million in capital expenditures primarily related to the purchase of office equipment, capitalized internal use software costs and demand response equipment and other miscellaneous capital expenditures. In addition, during the six months ended June 30, 2012, our restricted cash and deposits increased by $2.9 million due to a $15 million increase in deposits related to the financial assurance requirements for a demand response program in which we participate.

Cash Flows Provided by Financing Activities

Cash provided by financing activities was $0.8 million and $0.1 million for the six months ended June 30, 2013 and 2012, respectively, and consisted primarily of proceeds that we received from exercises of options to purchase shares of our common stock.

Credit Facility Borrowings

In March 2012, we and one of our subsidiaries entered into a $50.0 million credit facility with SVB, which was subsequently amended in June 2012 and which we refer to as the 2012 credit facility. On April 12, 2013, the 2012 credit facility was amended to extend the termination date from April 15, 2013 to April 30, 2013. On April 18, 2013 we, one of our subsidiaries and SVB terminated the 2012 credit facility.

On April 18, 2013, we entered into the 2013 credit facility, which replaced the 2012 credit facility. The 2013 credit facility provides for a two year revolving line of credit in the aggregate amount of $70.0 million, subject to increase from time to time up to an aggregate amount of $100.0 million with an additional commitment from the lenders or new commitments from new financial institutions. The material changes in the 2013 credit facility’s monthly and quarterly financial covenants as compared to the financial covenants contained in the 2012 credit facility include:

 

   

a change in our quarterly financial covenant, previously based on specified minimum earnings levels, to one based on specified free cash flow levels. The specified minimum free cash flow financial covenant is based on earnings before depreciation and amortization expense, interest expense and income, provision for income taxes, stock-based compensation expense, certain impairment charges and certain other non-cash charges or unusual gains over a trailing twelve month period less the sum of capital expenditures, cash paid for interest expense and cash paid for income taxes over the same trailing twelve month period;

 

   

a change to our monthly financial covenant related to maintenance of a minimum specified ratio of current assets to current liabilities, increasing our required minimum of unrestricted cash from $30.0 million to $45.0 million for certain periods; and

 

   

inclusion of a borrowing base covenant that limits the amount of borrowings, including letters of credit, under the 2013 credit facility based on a specified calculation. This borrowing base covenant is effective through the required filing date of our September 30, 2013 unaudited condensed consolidated financial statements with the SEC on Form 10-Q, as well as for any period in which our unrestricted cash falls below $70.0 million.

Subject to continued compliance with the covenants contained in the 2013 credit facility, the full amount of the 2013 credit facility may be available for issuances of letters of credit and up to $5.0 million may be available for swing line loans. The interest on revolving loans under the 2013 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 , and

 

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(y) the Federal Funds Effective Rate plus 0.50%) plus 1.00%. The letter of credit fee charged under the 2013 credit facility is consistent with the 2012 credit facility letter of credit fee of 2.00%. We expense the interest and letter of credit fees under the 2013 credit facility, as applicable, in the period incurred. The obligations under the 2013 credit facility are secured by all our domestic assets and several of our domestic subsidiaries. The 2013 credit facility terminates on April 18, 2015 and all amounts outstanding thereunder will become due and payable in full and we would be required to collateralize with cash any outstanding letter of credit under the 2013 credit facility up to 105% of the amounts outstanding. We incurred financing costs of $0.1 million in connection with the 2012 credit facility, which were deferred and were amortized to interest expense over the term of the 2012 credit facility, or through April 15, 2013. In connection with the 2013 credit facility, we incurred financing costs of approximately $0.5 million which have been deferred and will be amortized to interest expense over the term of the 2013 credit facility, or through April 18, 2015.

The 2013 credit facility contains customary terms and conditions for credit facilities of this type, including, among other things, restrictions on our and our subsidiaries 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 and as described above, we are required to meet certain monthly and quarterly financial covenants customary for this type of credit facility, including maintaining a minimum specified level of free cash flow, a minimum specified unrestricted cash balance and a minimum specified ratio of current assets to current liabilities.

The 2013 credit facility contains customary events of default, including 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 2013 credit facility. If we are determined to be in default then any amounts outstanding under the 2013 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.

As of June 30, 2013, we were in compliance with all of our covenants under the 2013 credit facility. We believe that it is reasonably assured that we will comply with the covenants of the 2013 credit facility for the foreseeable future.

In May 2013, we were required to provide financial assurance in connection with our capacity bid in a certain open market bidding program. We provided this financial assurance utilizing a $22.7 million letter of credit issued under the 2013 credit facility and a portion of our available unrestricted cash on hand. During the three month period ended June 30, 2013, based on the capacity that we cleared in the above open market bidding program and the required post-auction financial assurance requirements, we recovered all of the cash that we had provided as financial assurance prior to the auction and $6.2 million of the letter of credit was cancelled.

As of June 30, 2013, we had no borrowings, but had outstanding letters of credit totaling $63.3 million, under the 2013 credit facility. As of June 30, 2013, we had $6.7 million available under the 2013 credit facility for future borrowings or issuances of additional letters of credit.

In July 2013, $10.0 million of outstanding letters of credit were cancelled as a result of the reduction of post-auction financial assurance requirements related to capacity that we cleared in an open market bidding program.

On August 2, 2013, we entered into an amendment to the 2013 credit facility. This amendment provides for an increase to the maximum amount that we can spend to repurchase or redeem shares of our common stock held by our stockholders without the consent of SVB.

Capital Spending

We have made capital expenditures primarily for general corporate purposes to support our growth, for equipment installations related to our business and, more recently, for the build out of the lease for our new principal executive offices which we occupied during the second quarter of fiscal 2013. Our capital expenditures totaled $27.2 million and $9.1 million during the six month periods ended June 30, 2013 and 2012, respectively. Even after the exclusion of capital expenditures related to our new principal executive offices, we expect our capital expenditures for fiscal 2013 to increase as compared to fiscal 2012 due to our continued growth.

Contractual Obligations

As of June 30, 2013, the contractual obligations disclosure contained in our 2012 Form 10-K has not materially changed.

 

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Off-Balance Sheet Arrangements

As of June 30, 2013, 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 June 30, 2013, we had outstanding letters of credit totaling $63.3 million under the 2013 credit facility. For information on these commitments and contingent obligations, see “Liquidity and Capital Resources—Credit Facility Borrowings” above and Note 7 to our unaudited condensed consolidated financial statements contained herein.

Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our interim unaudited condensed 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 net 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 may have a material impact on our financial condition and results of operations.

The critical accounting estimates used in the preparation of our financial statements that we believe affect our more significant judgments and estimates used in the preparation of our interim unaudited condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in our 2012 Form 10-K. There have been no material changes to our critical accounting policies or estimates during the three and six month periods ended June 30, 2013.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board, or FASB, issued the guidance for reporting of amounts reclassified out of accumulated other comprehensive income. The revised guidance requires reporting the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required to be reclassified in its entirety to net income. For other amounts that are not required to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about these amounts. The guidance did not change the current requirements for reporting net income or other comprehensive income in financial statements. The guidance was effective prospectively for reporting periods beginning after December 15, 2012. Early adoption was permitted. The adoption of this guidance did not have any impact on our consolidated financial statements.

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. The adoption of ASU 2011-11 did not have any impact on our consolidated financial statements.

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, non-GAAP net loss 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.

 

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The GAAP measure most comparable to non-GAAP net loss is GAAP net loss; the GAAP measure most comparable to non-GAAP net loss per share is GAAP net loss per share; the GAAP measure most comparable to adjusted EBITDA is GAAP net loss; and the GAAP measure most comparable to free cash flow is cash flows provided by operating activities. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measures 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 income (loss) 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 three and six month periods ended June 30, 2013 and 2012, respectively, as well as reasons for excluding these individual items:

 

   

Management defines non-GAAP net income (loss) 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 income (loss), 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.

Material Limitations Associated with the Use of Non-GAAP Financial Measures

Non-GAAP net income (loss), non-GAAP net income (loss) 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 and Non-GAAP Net Loss per Share

Net loss for the three month period ended June 30, 2013 was $34.4 million, or $1.23 per basic and diluted share, compared to a net loss of $29.1 million, or $1.10 per basic and diluted share, for the three month period ended June 30, 2012. Net loss for the six month period ended June 30, 2013 was $64.9 million, or $2.35 per basic and diluted share, compared to a net loss of $56.8 million, or $2.16 per basic and diluted share, for the six month period ended June 30, 2012. Excluding stock-based compensation charges and amortization expense related to acquisition-related assets, net of tax effects, non-GAAP net loss for the three month period ended June 30, 2013 was $29.3 million, or $1.05 per basic and diluted share, compared to a non-GAAP net loss of $24.0 million, or $0.91 per basic and diluted share, for the three month period ended June 30, 2012. Excluding stock-based compensation charges and amortization expense related to acquisition-related assets, net of tax effects, non-GAAP net loss for the six month period ended June 30, 2013 was $53.3 million, or $1.93 per basic and diluted share, compared to a non-GAAP net loss of $46.5 million, or $1.77 per basic and diluted share, for the six month period ended June 30, 2012. The reconciliation of GAAP net loss to non-GAAP net loss is set forth below:

 

    Three Months Ended June 30,  
    2013     2012  
    (In thousands, except share and per share data)  

GAAP net loss

  $ (34,351   $ (29,136

ADD: Stock-based compensation (1)

    3,307       3,299  

ADD: Amortization expense of acquired intangible assets (1)

    1,763       1,794  
 

 

 

   

 

 

 

Non-GAAP net loss

  $ (29,281   $ (24,043
 

 

 

   

 

 

 

GAAP net loss per basic share

  $ (1.23   $ (1.10

ADD: Stock-based compensation (1)

    0.12       0.12  

ADD: Amortization expense of acquired intangible assets (1)

    0.06       0.07  
 

 

 

   

 

 

 

Non-GAAP net loss per basic share

  $ (1.05   $ (0.91
 

 

 

   

 

 

 

GAAP net loss per diluted share

  $ (1.23   $ (1.10

ADD: Stock-based compensation (1)

    0.12       0.12  

ADD: Amortization expense of acquired intangible assets (1)

    0.06       0.07  
 

 

 

   

 

 

 

Non-GAAP net loss per diluted share

  $ (1.05   $ (0.91
 

 

 

   

 

 

 

Weighted average number of common shares outstanding

   

Basic

    27,852,298       26,505,322  

Diluted

    27,852,298       26,505,322  

 

    Six Months Ended June 30,  
    2013     2012  
    (In thousands, except share and per share data)  

GAAP net loss

  $ (64,888   $ (56,849

ADD: Stock-based compensation (1)

    8,011       6,677  

ADD: Amortization expense of acquired intangible assets (1)

    3,557       3,630  
 

 

 

   

 

 

 

Non-GAAP net loss

  $ (53,320   $ (46,542
 

 

 

   

 

 

 

GAAP net loss per basic share

  $ (2.35   $ (2.16

ADD: Stock-based compensation (1)

    0.29       0.25  

ADD: Amortization expense of acquired intangible assets (1)

    0.13       0.14  
 

 

 

   

 

 

 

Non-GAAP net loss per basic share

  $ (1.93   $ (1.77
 

 

 

   

 

 

 

GAAP net loss per diluted share

  $ (2.35   $ (2.16

ADD: Stock-based compensation (1)

    0.29       0.25  

ADD: Amortization expense of acquired intangible assets (1)

    0.13       0.14  
 

 

 

   

 

 

 

Non-GAAP net loss per diluted share

  $ (1.93   $ (1.77
 

 

 

   

 

 

 

Weighted average number of common shares outstanding

   

Basic

    27,610,797       26,378,322  

Diluted

    27,610,797       26,378,322  

 

(1) The non-GAAP adjustments would have no impact on the provision for income taxes recorded for the three or six month periods ended June 30, 2013 or 2012, respectively.

 

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Adjusted EBITDA

Adjusted EBITDA was negative $22.4 million and negative $18.2 million for the three month periods ended June 30, 2013 and 2012, respectively. Adjusted EBITDA was negative $40.9 million and negative $36.7 million for the six month periods ended June 30, 2013 and 2012, respectively.

The reconciliation of net loss to adjusted EBITDA is set forth below (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net loss

   $ (34,351   $ (29,136   $ (64,888   $ (56,849

Add back:

        

Depreciation and amortization

     6,831       6,314       13,561       12,424  

Stock-based compensation expense

     3,307       3,299       8,011       6,677  

Other expense (income)

     1,184       536       1,117       (697

Interest expense

     448       417       761       897  

Provision for income tax

     194       417       544       813  
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (22,387   $ (18,153   $ (40,894   $ (36,735
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Free Cash Flow

Cash flows provided by operating activities were $5.4 million and $12.2 million for the three and six month periods ended June 30, 2013, respectively. Cash flows provided by operating activities were $4.4 million and $4.2 million for the three and six month periods ended June 30, 2012, respectively. We had negative free cash flow of $12.9 million and $1.2 million for the three month periods ended June 30, 2013 and 2012, respectively. We had negative free cash flow of $15.0 million and $4.9 million for the six month periods ended June 30, 2013 and 2012, respectively. The reconciliation of cash flows from operating activities to free cash flow is set forth below (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net cash provided by operating activities

   $ 5,384     $ 4,429     $ 12,164     $ 4,241  

Subtract:

        

Purchases of property and equipment

     (18,248     (5,581     (27,186     (9,134
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (12,864   $ (1,152   $ (15,022   $ (4,893
  

 

 

   

 

 

   

 

 

   

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as disclosed herein, there have been no material changes during the three or six month periods ended June 30, 2013 in the interest rate risk information and foreign exchange risk information disclosed in the “Quantitative and Qualitative Disclosures About Market Risk” subsection of the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2012 Form 10-K.

Foreign Currency Exchange Risk

Our international business is subject to risks, including, but not limited to unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

A substantial majority of our foreign expense and sales activities are transacted in local currencies, including Australian dollars, British pounds, Canadian dollars and New Zealand dollars. In addition, our foreign revenues are denominated in local currencies. Fluctuations in the foreign currency rates could affect our sales, cost of revenues and profit margins and could result in exchange losses. In addition, currency devaluations can result in a loss if we maintain deposits in a foreign currency. During the three and six month periods ended June 30, 2013, approximately 16% and 20% of our consolidated revenues were generated outside the United States, and we anticipate that revenues generated outside the United States will continue to represent greater than 10% of our consolidated revenues for fiscal 2013 and will continue to grow in subsequent fiscal years.

We believe that the operating expenses of our international subsidiaries that are incurred in local currencies will not have a material adverse effect on our business, results of operations or financial condition for fiscal 2013. Our operating results and certain assets and liabilities that are denominated in foreign currencies are affected by changes in the relative strength of the U.S. dollar against the applicable foreign currency. Our expenses denominated in foreign currencies are positively affected when the U.S. dollar strengthens against the applicable foreign currency and adversely affected when the U.S. dollar weakens.

During the three month periods ended June 30, 2013 and 2012, we incurred net foreign exchange losses totaling ($1.3) million and ($0.6) million, respectively. During the six month periods ended June 30, 2013 and 2012, we incurred net foreign exchange (losses) gains totaling ($1.3) million and $0.6 million, respectively. During the three month periods ended June 30, 2013 and 2012, we realized losses of ($0.1) million and ($19,000), respectively, related to transactions denominated in foreign currencies. During the six months ended June 30, 2013 and 2012, we realized (losses) gains of ($0.6) million and $0.4 million, respectively, related to transactions denominated in foreign currencies. As of June 30, 2013, 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 $9.2 million at June 30, 2013 exchange rates ($10.1 million Australian).

A hypothetical 10% increase or decrease in foreign currencies in which we transact would not have a material adverse effect on our financial condition or results of operations other than the impact on the unrealized gain (loss) on the intercompany receivable held by us from our Australian subsidiary that is denominated in Australian dollars, and for which a hypothetical 10% increase or decrease in the foreign currency would result in an incremental $0.9 million gain or loss.

 

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We currently do not have a program in place that is designed to mitigate our exposure to changes in foreign currency exchange rates. We are evaluating certain potential programs, including the use of derivative financial instruments, to reduce our exposure to foreign exchange gains and losses, and the volatility of future cash flows caused by changes in currency exchange rates. The utilization of forward foreign currency contracts would reduce, but would not eliminate, the impact of currency exchange rate movements.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures.

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. We do not expect the ultimate costs to resolve these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition to ordinary-course litigation, we are a party to the litigation described below.

On May 3, 2013, a purported shareholder of the Company filed a derivative and class action complaint in the United States District Court for the District of Delaware, or the Court, against certain of our officers and directors, as well as the Company as a nominal defendant. The complaint asserts derivative claims, purportedly brought on our behalf, for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with certain equity grants (awarded in 2010, 2012, and 2013) that allegedly exceeded the annual limit on per-employee equity grants contained in our 2007 Plan. The complaint also asserts a direct claim, brought on behalf of the plaintiff and a proposed class of our shareholders, alleging that our recently-filed proxy statement is false and misleading because it fails to disclose that the equity grants were improper. The plaintiff seeks, among other relief, rescission of the equity grants, unspecified damages, injunctive relief, disgorgement, attorneys’ fees, and such other relief as the Court may deem proper. Our response to the complaint is presently due on August 30, 2013.

We believe that we and the other defendants have substantial legal and factual defenses to the claims and allegations contained in the complaint, and we intend to pursue these defenses vigorously. There can be no assurance, however, that such efforts will be successful, and an adverse resolution of the lawsuit could have a material effect on our consolidated financial position and results of operations in the period in which the lawsuit is resolved. In addition, although we carry insurance for these types of claims, there is no guarantee that this claim will be covered. A lack of insurance coverage or a judgment significantly in excess of our insurance coverage could materially and adversely affect our financial condition, results of operations and cash flows. We are not presently able to reasonably estimate potential losses, if any, related to the lawsuits.

 

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I—Item 1A under the heading “Risk Factors” in our 2012 Form 10-K and Part II—Item 1A under the heading “Risk Factors” in our 2013 First Quarter 10-Q. During the three months ended June 30, 2013, there were no material changes to the risk factors that were disclosed in our 2012 Form 10-K or our 2013 First Quarter 10-Q other than as set forth below.

 

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The following risk factors replace and supersede the corresponding risk factors set forth in our 2012 Form 10-K and 2013 First Quarter 10-Q:

The expiration of our existing utility contracts without obtaining renewal or replacement utility contracts, or the termination of any of our existing utility contracts, could negatively impact our business by reducing our revenues and profit margins, thereby having a material adverse effect on our results of operations and financial condition.

We have entered into utility contracts with our electric power grid operator and utility customers in different geographic regions in the United States, as well as in Australia, Canada, New Zealand and the United Kingdom, and are regularly in discussions to enter into new utility contracts with electric power grid operators and utilities. However, there can be no assurance that we will be able to renew or extend our existing utility contracts or enter into new utility contracts on favorable terms, if at all. If, upon expiration, we are unable to renew or extend our existing utility contracts and are unable to enter into new utility contracts, our future revenues and profit margins could be significantly reduced, which could have a material adverse effect on our results of operations and financial condition.

Our existing utility contracts generally contain termination provisions pursuant to which the utility customer can terminate under certain circumstances, including in the event that we fail to comply with the terms or provisions contained therein. In addition, in the event that we breach any of our utility contracts, we may be liable to pay the utility customer an associated fee or penalty payment in connection with such breach. The termination of any of our existing utility contracts, or any fees or penalties payable by us in connection with a breach of our existing utility contracts, could negatively impact our business by reducing our revenues and profit margins, thereby having a material adverse effect on our results of operations and financial condition.

 

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Table of Contents

We are currently subject to litigation, the unfavorable outcome of which may have a material adverse effect on our financial condition, results of operations and cash flows.

On May 3, 2013, a purported shareholder of the Company filed a derivative and class action complaint in the United States District Court for the District of Delaware against certain of our officers and directors, as well as the Company as a nominal defendant, alleging breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with certain equity grants (awarded in 2010, 2012, and 2013) that allegedly exceeded the annual limit on per-employee equity grants contained in our 2007 Plan. While we believe we have substantial legal and factual defenses to each of the claims in this lawsuit and we intend to vigorously defend the lawsuit, the outcome of this litigation is difficult to predict and quantify, and the defense against such claims or actions may be costly. In addition to negatively impacting our sales and prospects, diverting financial and management resources and general business disruption, we may suffer from adverse publicity that could harm our reputation and negatively impact our stock price, regardless of whether the allegations are valid or whether we are ultimately liable. Further, in the event that the insurance that we carry for this type of claim does not provide coverage, or if there is a judgment that is significantly in excess of any such insurance coverage, our financial condition, results of operations and cash flows could be materially and adversely impacted.

 

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Table of Contents
Item 6. Exhibits.

 

  10.1*#   Credit Agreement by and among EnerNOC, Inc., several lenders from time to time party thereto and Silicon Valley Bank, dated as of April 18, 2013.
  10.2*   Guarantee and Collateral Agreement made by EnerNOC, Inc. and Other Grantors in favor of Silicon Valley Bank, dated as of April 18, 2013
  10.3*   Second Amendment to Amended and Restated Credit Agreement by and among EnerNOC, Inc., ENOC Securities Corporation and Silicon Valley Bank, dated as of April 12, 2013.
  10.4@   Amended and Restated 2007 Employee, Director and Consultant Stock Plan of EnerNOC, Inc. dated May 28, 2013, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 3, 2013 (File No. 001-33471), is hereby incorporated by reference as Exhibit 10.4.
  10.5@   Offer Letter, dated as of April 18, 2013, by and between EnerNOC, Inc. and Neil Moses, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 23, 2013 (File No. 001-33471), is hereby incorporated by reference as Exhibit 10.5.
  10.6@   Severance Agreement, dated as of April 22, 2013, by and between EnerNOC, Inc. and Neil Moses, filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed April 23, 2013 (File No. 001-33471), is hereby incorporated by reference as Exhibit 10.6.
  31.1*   Certification of Chief Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
  31.2*   Certification of Chief Financial Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
  32.1*   Certification of the Chief Executive Officer and Chief Financial Officer of EnerNOC, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   The following materials from EnerNOC, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

* Filed herewith
@ Management contract, compensatory plan or arrangement
# Portions of this Exhibit have been omitted and filed separately with the Securities and Exchange Commission as part of an application for confidential treatment pursuant to the Securities Act of 1933, as amended.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    EnerNOC, Inc.
Date: August 6, 2013     By:  

/s/ Timothy G. Healy

      Timothy G. Healy
      Chief Executive Officer
Date: August 6, 2013     By:  

/s/ Neil Moses

      Neil Moses
      Chief Financial Officer

 

47

Exhibit 10.1

Execution Version

$70,000,000 SENIOR SECURED CREDIT FACILITY

CREDIT AGREEMENT

AMONG

ENERNOC, INC.,

AS THE BORROWER,

THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO,

SILICON VALLEY BANK,

AS ADMINISTRATIVE AGENT, SWINGLINE LENDER, ISSUING LENDER, LEAD

ARRANGER AND BOOK MANAGER,

AND

THE OTHER LENDERS FROM TIME TO TIME PARTY HERETO,

AS LENDERS

DATED AS OF APRIL 18, 2013

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Table of Contents

 

          Page  

SECTION 1 DEFINITIONS

     1   

1.1

   Defined Terms      1   

1.2

   Other Definitional Provisions.      34   
SECTION 2 AMOUNT AND TERMS OF COMMITMENTS      34   

2.1

   Revolving Commitments.      34   

2.2

   Procedure for Revolving Loan Borrowing      35   

2.3

   Overadvances      36   

2.4

   Swingline Commitment      36   

2.5

   Procedure for Swingline Borrowing; Refunding of Swingline Loans.      36   

2.6

   Commitment Fees, etc.      38   

2.7

   Termination or Reduction of Commitments      39   

2.8

   Optional Prepayments      39   

2.9

   Conversion and Continuation Options.      40   

2.10

   Limitations on Eurodollar Tranches      40   

2.11

   Interest Rates and Payment Dates.      40   

2.12

   Computation of Interest and Fees.      41   

2.13

   Inability to Determine Interest Rate      42   

2.14

   Pro Rata Treatment and Payments.      42   

2.15

   Illegality; Requirements of Law.      45   

2.16

   Taxes.      47   

2.17

   Indemnity      51   

2.18

   Change of Lending Office      51   

2.19

   Substitution of Lenders      52   

2.20

   Defaulting Lenders.      53   

2.21

   [Reserved].      54   

2.22

   Notes      54   

2.23

   Incremental Loans.      55   
SECTION 3 LETTERS OF CREDIT      56   

3.1

   L/C Commitment.      56   

 

-i-

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Table of Contents

(continued)

 

          Page  

3.2

   Procedure for Issuance of Letters of Credit      59   

3.3

   Fees and Other Charges.      59   

3.4

   L/C Participations; Existing Letters of Credit      60   

3.5

   Reimbursement.      61   

3.6

   Obligations Absolute      61   

3.7

   Letter of Credit Payments      62   

3.8

   Applications      62   

3.9

   Interim Interest      62   

3.10

   Cash Collateral.      63   

3.11

   Additional Issuing Lenders      64   

3.12

   Resignation of the Issuing Lender      64   
SECTION 4 REPRESENTATIONS AND WARRANTIES      65   

4.1

   Financial Condition.      65   

4.2

   No Change      65   

4.3

   Existence; Compliance with Law      65   

4.4

   Power, Authorization; Enforceable Obligations      65   

4.5

   No Legal Bar      66   

4.6

   Litigation      66   

4.7

   No Default      67   

4.8

   Ownership of Property; Liens; Investments      67   

4.9

   Intellectual Property      67   

4.10

   Taxes      67   

4.11

   Federal Regulations      67   

4.12

   Labor Matters      68   

4.13

   ERISA      68   

4.14

   Investment Company Act; Other Regulations      69   

4.15

   Subsidiaries      69   

4.16

   Use of Proceeds      69   

4.17

   Environmental Matters      69   

4.18

   Accuracy of Information, etc      70   

 

-ii-

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Table of Contents

(continued)

 

          Page  

4.19

   Security Documents.      71   

4.20

   Solvency      71   

4.21

   Regulation H      72   

4.22

   Designated Senior Indebtedness      72   

4.23

   Insurance      72   

4.24

   No Casualty      72   

4.25

   Accounts Receivable.      72   

4.26

   Patriot Act      73   

4.27

   OFAC      73   
SECTION 5 CONDITIONS PRECEDENT      73   

5.1

   Conditions to Initial Extension of Credit      73   

5.2

   Conditions to Each Extension of Credit      76   
SECTION 6 AFFIRMATIVE COVENANTS      77   

6.1

   Financial Statements      77   

6.2

   Certificates; Other Information      78   

6.3

   Payment of Obligations      79   

6.4

   Maintenance of Existence; Compliance      79   

6.5

   Maintenance of Property; Insurance      80   

6.6

   Books and Records      80   

6.7

   Notices      80   

6.8

   Environmental Laws.      81   

6.9

   Accounts; Collections.      82   

6.10

   Audits      82   

6.11

   Additional Collateral, etc.      83   

6.12

   Use of Proceeds      85   

6.13

   Designated Senior Indebtedness      85   

6.14

   Accounts Receivable.      86   

6.15

   Further Assurances      87   
SECTION 7 NEGATIVE COVENANTS      87   

7.1

   Financial Condition Covenants.      87   

 

-iii-

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Table of Contents

(continued)

 

          Page  

7.2

   Indebtedness      88   

7.3

   Liens      89   

7.4

   Fundamental Changes      90   

7.5

   Disposition of Property      90   

7.6

   Restricted Payments      91   

7.7

   Investments      92   

7.8

   Modifications of Certain Preferred Stock and Debt Instrument      92   

7.9

   Transactions with Affiliates      93   

7.10

   Sale Leaseback Transactions      93   

7.11

   Swap Agreements      93   

7.12

   Changes in Fiscal Periods      93   

7.13

   Negative Pledge Clauses      93   

7.14

   Clauses Restricting Subsidiary Distributions      94   

7.15

   Lines of Business      94   

7.16

   Amendments to Organizational Agreements and Material Contracts      94   

7.17

   ERISA      94   

7.18

   Use of Proceeds      95   

7.19

   Subordinated Debt      95   
SECTION 8 EVENTS OF DEFAULT      95   

8.1

   Events of Default      95   

8.2

   Application of Funds      98   
SECTION 9 THE ADMINISTRATIVE AGENT      100   

9.1

   Appointment and Authority.      100   

9.2

   Delegation of Duties      100   

9.3

   Exculpatory Provisions      101   

9.4

   Reliance by Administrative Agent      101   

9.5

   Notice of Default      102   

9.6

   Non-Reliance on Administrative Agent and Other Lenders      102   

9.7

   Reserved      103   

 

-iv-

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Table of Contents

(continued)

 

          Page  

9.8

   Agent in Its Individual Capacity      103   

9.9

   Successor Administrative Agent      103   

9.10

   Collateral and Guaranty Matters      104   

9.11

   Proofs of Claim      105   

9.12

   No Other Duties, Etc.      105   

9.13

   Survival      105   
SECTION 10 MISCELLANEOUS      106   

10.1

   Amendments and Waivers.      106   

10.2

   Notices      107   

10.3

   No Waiver; Cumulative Remedies      109   

10.4

   Survival of Representations and Warranties      109   

10.5

   Expenses; Indemnity; Damage Waiver.      109   

10.6

   Successors and Assigns; Participations and Assignments.      111   

10.7

   Adjustments; Set-off.      116   

10.8

   Payments Set Aside      117   

10.9

   Counterparts      117   

10.10

   Severability      117   

10.11

   Integration      118   

10.12

   GOVERNING LAW      118   

10.13

   Submission To Jurisdiction; Waivers      118   

10.14

   Acknowledgements      119   

10.15

   Releases of Guarantees and Liens.      119   

10.16

   Confidentiality      119   

10.17

   Patriot Act      120   

 

-v-

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Table of Contents

(continued)

 

          Page
EXHIBITS

Exhibit A:

   Form of Guarantee and Collateral Agreement   

Exhibit B:

   Form of Compliance Certificate   

Exhibit C:

   Form of Closing Certificate   

Exhibit D:

   Form of Solvency Certificate   

Exhibit E:

   Form of Assignment and Assumption   

Exhibit F-1-4:

   Form of Tax Certificates   

Exhibit G:

   Form of Borrowing Base Certificate   

Exhibit H-1:

   Form of Revolving Loan Note   

Exhibit H-2:

   Form of Swingline Loan Note   

Exhibit I:

   Form of Collateral Information Certificate   

Exhibit J:

   Form of Notice of Borrowing   

Exhibit K:

   Form of Notice of Conversion/Continuation   
SCHEDULES

Schedule 1.1A:

   Commitments   

Schedule 1.1B:

   Existing Letters of Credit   

Schedule 1.1C:

   Immaterial Subsidiaries   

Schedule 4.3:

   Existence; Compliance with Law   

Schedule 4.4:

   Governmental Approvals, Consents, Authorizations, Filings and Notices   

Schedule 4.5:

   Requirements of Law   

Schedule 4.6:

   Litigation   

Schedule 4.7:

   No Default   

Schedule 4.10:

   Taxes   

Schedule 4.13:

   ERISA   

Schedule 4.15:

   Subsidiaries   

Schedule 4.19(a):

   Financing Statements and Other Filings   

Schedule 7.2(d):

   Existing Indebtedness   

Schedule 7.3(f):

   Existing Liens   

Schedule 7.5(g):

   Dispositions   

 

-vi-

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


CREDIT AGREEMENT (this “ Agreement ”), dated as of April 18, 2013, among (a)  ENERNOC, INC. , a Delaware corporation (the “ Borrower ”), (b) the several banks and other financial institutions or entities from time to time parties to this Agreement (each a “ Lender ” and, collectively, the “ Lenders ”), including SILICON VALLEY BANK (“ SVB ”), (c)  SVB , as administrative agent for the Lenders (in such capacity, the Administrative Agent ), (d)  SVB , as the Issuing Lender, and (e)  SVB , as the Swingline Lender.

W ITNESSETH :

W HEREAS , the Borrower has previously entered into a certain Amended and Restated Credit Agreement dated as of March 14, 2012 with the Administrative Agent, the Issuing Lender (as defined therein) and the “Lenders” (as defined therein) (as amended and in effect, the “ Existing Credit Agreement ”; the credit facility provided pursuant to the Existing Credit Agreement is referred to herein as the “ Existing Credit Facility ”);

W HEREAS , the Borrower desires to obtain financing to refinance the Existing Credit Facility, as well as for working capital financing and letter of credit facilities;

W HEREAS , the Lenders have agreed to extend certain credit facilities to the Borrower upon the terms and conditions specified in this Agreement, in an aggregate amount not to exceed $70,000,000.00, consisting of a revolving loan facility providing for $70,000,000 in aggregate principal amount of Revolving Commitments, including $70,000,000.00 in aggregate principal amount of availability for Letters of Credit (as a sublimit of the Revolving Commitments) and a swingline sub-facility in the aggregate availability amount of $5,000,000 (as a sublimit of the revolving loan facility);

W HEREAS , the Borrower has agreed to secure all of its Obligations by granting to the Administrative Agent, for the benefit of the Secured Parties, a first priority lien on substantially all of its assets;

W HEREAS , each of the Guarantors has agreed to guarantee the Obligations of the Borrower and to secure their respective Obligations by granting to the Administrative Agent, for the benefit of the Secured Parties, a first priority lien on substantially all of its respective assets;

Now, T HEREFORE , the parties hereto hereby agree as follows:

SECTION 1

DEFINITIONS

1.1 Defined Terms . As used in this Agreement (including the recitals hereof), the terms listed in this Section 1.1 shall have the respective meanings set forth in this Section 1.1 .

ABR ”: for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the higher of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect for such day plus one-half of one percent (0.50%). Any change in the

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Federal Funds Effective Rate.

ABR Loans ”: Loans, the rate of interest applicable to which is based upon the ABR.

Account Debtor ”: any Person who may become obligated to any Person under, with respect to, or on account of, an Account, chattel paper or general intangibles (including a payment intangible). Unless otherwise stated, the term “Account Debtor,” when used herein, shall mean an Account Debtor in respect of an Account of the Borrower or a Subsidiary.

Accounts ”: all “accounts” (as defined in the UCC) of a Person, including, without limitation, accounts, accounts receivable, monies due or to become due and obligations in any form (whether arising in connection with contracts, contract rights, instruments, general intangibles, or chattel paper), in each case whether arising out of goods sold or services rendered or from any other transaction and whether or not earned by performance, now or hereafter in existence, and all documents of title or other documents representing any of the foregoing, and all collateral security and guaranties of any kind, now or hereafter in existence, given by any Person with respect to any of the foregoing. Unless otherwise stated, the term “Account,” when used herein, shall mean an Account of the Borrower or a Subsidiary.

Administrative Agent ”: SVB, as the administrative agent under this Agreement and the other Loan Documents, together with any of its successors in such capacity.

Affected Lender : as defined in Section 2.19 .

Affiliate ”: as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (a) vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

Aggregate Exposure ”: with respect to any Lender at any time, an amount equal to the amount of such Lender’s Revolving Commitment (including, without duplication, such Lender’s L/C Commitment) then in effect or, if the Revolving Commitments have been terminated, the amount of such Lender’s Revolving Extensions of Credit then outstanding.

Aggregate Exposure Percentage ”: with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lender’s Aggregate Exposure at such time to the Aggregate Exposure of all Lenders at such time.

Agreement ”: as defined in the preamble hereto.

Applicable Margin ”: 2.00% per annum in the case of Eurodollar Loans and Letter of Credit Fees, and 1.00% per annum in the case of ABR Loans.

 

2

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Application ”: an application, in such form as the Issuing Lender may specify from time to time, requesting the Issuing Lender to issue a Letter of Credit.

Approved Fund ”: as defined in Section 10.6(b) .

Assignment and Assumption ”: an Assignment and Assumption, substantially in the form of Exhibit E.

Auto-Extension Letter of Credit ”: as defined in Section 3.1(a) .

Available Revolving Commitment ”: (i) at any time a Borrowing Base Period is in effect, an amount equal to (a) the lesser of (1) the Total Revolving Commitments in effect at such time and (2) the Borrowing Base in effect at such time, minus (b) the aggregate undrawn Dollar Equivalent amount of all outstanding Letters of Credit at such time and the aggregate Dollar Equivalent amount of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time, minus (c) the aggregate outstanding principal balance of any Revolving Loans, and (ii) at any time a Borrowing Base Period is not in effect, an amount equal to (a) the Total Revolving Commitments in effect at such time, minus (b) the aggregate undrawn Dollar Equivalent amount of all outstanding Letters of Credit at such time and the aggregate Dollar Equivalent amount of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time, minus (c) the then aggregate outstanding principal balance of any Revolving Loans; provided that in each case for purposes of calculating any Lender’s Revolving Extensions of Credit for the purpose of determining such Lender’s Available Revolving Commitment pursuant to Section 2.6(a) , the aggregate principal amount of Swingline Loans then outstanding shall be deemed to be zero.

Bankruptcy Code ”: Title 11 of the United States Code entitled “Bankruptcy,” as now or hereafter in effect, or any successor thereto.

Bank Services ”: are any products and/or credit services facilities provided to any Loan Party by Administrative Agent, any Lender, or any of their Affiliates, including, without limitation, all letters of credit, guidance facilities, bank services (including, without limitation, merchant services, direct deposit of payroll, business credit cards, and check cashing services) and foreign exchange services as any such products or services may be identified in the various agreements related thereto (each, a “ Bank Services Agreement ”).

BBA LIBOR : as defined in the definition of “Eurodollar Base Rate.”

Benefitted Lender ”: as defined in Section 10.7(a) .

Board ”: the Board of Governors of the Federal Reserve System of the United States (or any successor).

Borrower ”: as defined in the preamble hereto.

Borrowing Base ”: as of any date of determination by the Administrative Agent, from time to time, an amount equal to the sum as of such date of (a) [*****] of Unrestricted Cash, plus (b) [*****] of the book value of Eligible Accounts as of such date, plus (c) until the Borrowing

 

3

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Base Step-down Date, [*****] of Eligible Fixed Assets as of such date valued at the lower of cost or market, plus (d) until the Borrowing Base Step-down Date, [*****] of Eligible Unbilled Accounts as of such date; ( provided that (i) the amount made available under clauses (c) and (d) in the aggregate shall not exceed [*****] of the entire Borrowing Base, (ii) the amount made available under clause (b) in respect of Eligible Australian Accounts shall not exceed [*****] in the aggregate at any time, (iii) the amount made available under clause (b) in respect of Eligible Canadian Accounts shall not exceed [*****] in the aggregate at any time and (iv) the amount made available under clause (b) in respect of Eligible Accounts owned by Loan Parties other than the Borrower shall not exceed [*****] in the aggregate at any time), less (e) in each case, the amount of any Reserves established by the Administrative Agent in its Permitted Discretion as of such date.

Borrowing Base Certificate ”: a certificate to be executed and delivered from time to time by the Borrower in substantially the form of Exhibit G , or in such other form as shall be acceptable in form and substance to the Administrative Agent.

Borrowing Base Period : (i) the period commencing on the Closing Date and ending on the Borrowing Base Step-down Date and (ii) on and after the Borrowing Base Step-down Date, at any time Unrestricted Cash is less than the dollar amount of the Total Revolving Commitment then in effect as determined by Administrative Agent in its sole discretion.

Borrowing Base Step-down Date : the earlier of (i) the date on which the financial reports and certificates required by Sections 6.1 and 6.2 are required to be delivered with respect to the fiscal quarter ending September 30, 2013 and (ii) the date on which such financial reports and certificates are actually delivered.

Borrowing Date ”: any Business Day specified by the Borrower in a Notice of Borrowing as a date on which the Borrower requests the relevant Lenders to make Loans hereunder.

Business ”: as defined in Section 4.17(b) .

Business Day ”: a day other than a Saturday, Sunday or other day on which commercial banks in the State of New York are authorized or required by law to close; provided that with respect to notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, such day is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market.

Capital Expenditures ”: for any period, with respect to any Person, the aggregate of all expenditures (whether paid in cash or other consideration or accrued as a liability and including that portion of Capital Lease Obligations which is capitalized on the consolidated balance sheet of such Person and its Subsidiaries) by such Person and its Subsidiaries during such period for the acquisition or leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) that, in conformity with GAAP, are included in “additions to property, plant or equipment” or comparable items reflected in the consolidated statement of cash flows of such Person and its Subsidiaries.

 

4

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Capital Lease Obligations ”: as to any Person, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP.

Capital Stock ”: any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing.

Cash Collateralize ”: to pledge and deposit with or deliver to (a) with respect to Obligations in respect of Letters of Credit, the Administrative Agent, for the benefit of the Issuing Lender and one or more of the Lenders, as applicable, as collateral for L/C Exposure or obligations of the Lenders to fund participations in respect thereof, cash or deposit account balances or, if the Administrative Agent and the Issuing Lender shall agree in their sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to the Administrative Agent and such Issuing Lender; (b) with respect to Obligations arising under any Bank Services Agreement in connection with Bank Services, such Lender, for its own or any of its applicable Affiliate’s benefit, as provider of such Bank Services, cash or deposit account balances or, if such provider of Bank Services shall agree in its sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to such provider of Bank Services; or (c) with respect to Obligations in respect of any Specified Swap Agreements, the applicable Qualified Counterparty, as Collateral for such Obligations, cash or deposit account balances or, if such Qualified Counterparty shall agree in its sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to such Qualified Counterparty. “Cash Collateral” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.

Cash Equivalents ”: (a) marketable direct obligations issued by, or unconditionally guaranteed by, the United States government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of six months or less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws of the United States or any state thereof having combined capital and surplus of not less than $250,000,000; (c) commercial paper of an issuer rated at least A-1 by S&P or P-1 by Moody’s, or carrying an equivalent rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition; (d) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than thirty (30) days, with respect to securities issued or fully guaranteed or insured by the United States government; (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing

 

5

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody’s; (f) securities with maturities of six (6) months or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition; (g) money market mutual or similar funds that invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition; or (h) money market funds that (i) comply with the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, as amended, (ii) are rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets of at least $5,000,000,000.

Certificated Securities ”: as defined in Section 4.19(a) .

Change of Control ”:

(a) EnerNOC shall cease to own, directly or indirectly, 100% of the Capital Stock of ENOC Securities and each of the Wholly Owned Subsidiary Guarantors except as expressly permitted hereunder.

(b) at any time, any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), shall become, or obtain rights (whether by means or warrants, options or otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of forty percent (40%) or more of the ordinary voting power for the election of directors of the Borrower (determined on a fully diluted basis); or

(c) during any period of twelve (12) consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors).

Closing Date ”: the date on which all of the conditions precedent set forth in Section 5.1 are satisfied or waived by the Administrative Agent and, as applicable, the Lenders or the Required Lenders.

Code ”: the Internal Revenue Code of 1986, as amended from time to time.

Collateral ”: all property of the Loan Parties, now owned or hereafter acquired, upon which a Lien is purported to be created by any Security Document.

 

6

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Collateral Information Certificate ”: the Collateral Information Certificate to be executed and delivered by the Borrower and each other Loan Party, substantially in the form of Exhibit I.

Collateral-Related Expenses ”: all costs and expenses of the Administrative Agent paid or incurred in connection with any sale, collection or other realization on the Collateral, including reasonable compensation to the Administrative Agent and its agents and counsel, and reimbursement for all other costs, expenses and liabilities and advances made or incurred by the Administrative Agent in connection therewith (including as described in Section 6.6 of the Guarantee and Collateral Agreement), and all amounts for which the Administrative Agent is entitled to indemnification under the Security Documents and all advances made by the Administrative Agent under the Security Documents for the account of any Loan Party.

Commitment ”: as to any Lender, the Revolving Commitment (including, without duplication, such Lender’s L/C Commitment) of such Lender.

Commitment Fee ”: as defined in Section 2.6(a) .

Commitment Fee Rate ”: a per annum rate of one-quarter of one percent (0.25%).

Compliance Certificate ”: a certificate duly executed by a Responsible Officer of the Borrower substantially in the form of Exhibit B.

Connection Income Taxes ”: Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

Consolidated Adjusted EBITDA ”: with respect to the Borrower and its Subsidiaries for any period, (a) the sum , without duplication, of the amounts for such period of (i) Net Income, plus (ii) Interest Expense, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus (v) total amortization expense, plus (vi) other extraordinary, unusual, or non-recurring losses or expenses reducing Net Income (capped at $3,000,000 in the aggregate during any period of twelve (12) consecutive months), plus (vii) non-cash impairment of intangible assets, including goodwill (capped at $20,000,000 in the aggregate during any period of twelve (12) consecutive months), plus , (viii) non-cash stock compensation expense, minus (b) the sum , without duplication of the amounts for such period of (i) extraordinary, unusual, or non-recurring gains or income increasing Net Income for such period, plus (ii) interest income, each as determined in accordance with GAAP.

Contractual Obligation ”: as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.

Control Agreement ”: a Deposit Account Control Agreement or a Securities Account Control Agreement.

Credit Extension ” or “ extension of credit ”: is any Revolving Loan, Letter of Credit, amount utilized for Bank Services, or any other extension of credit by Lenders for Borrower’s benefit.

 

7

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Default ”: any of the events specified in Section 8 , whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied.

Defaulting Lender ”: subject to Section 2.20(b) , any Lender that, (a) has failed to (i) fund all or any portion of its Loans (including Swingline Loans) or participations in respect of Letters of Credit, within three (3) Business Days of the date required to be funded by it hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lender’s determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied or (ii) pay to the Administrative Agent, any Issuing Lender, any Swingline Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swingline Loans) within three (3) Business Days of the date when due, (b) has notified the Borrower, the Administrative Agent or any Lender in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect with respect to its funding obligations hereunder unless such writing or public statement relates to such Lender’s obligation to fund a Loan hereunder and states that such position is based on such Lender’s determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied, (c) has failed, within three (3) Business Days after request by the Administrative Agent, to confirm in a manner satisfactory to the Administrative Agent that it will comply with its funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, (i) become the subject of an Insolvency Proceeding, or (ii) had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or a custodian appointed for it, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above, and of the effective date of such status, shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.20(b) ) as of the date established therefor by the Administrative Agent in written notice of such determination, which shall be delivered by the Administrative Agent to the Borrower, the L/C Lender, the Swing Line Lender and each other Lender promptly following such determination.

Default Rate ”: as defined in Section 2.11(c) .

Deferred Revenue ”: all amounts received or invoiced in advance of performance under contracts and not yet recognized as revenue in accordance with GAAP.

 

8

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Deposit Account Control Agreement ”: any control agreement entered into by the Administrative Agent, a Loan Party and a financial institution holding a deposit account of such Loan Party pursuant to which the Administrative Agent is granted “control” (for purposes of the UCC) over such deposit account.

Discharge of Obligations ”: subject to Section 10.8 , the satisfaction of the Obligations by the payment in full, in cash (or, as applicable, Cash Collateralization in accordance with the terms hereof) of the principal of and interest on or other liabilities relating to each Loan, all fees and all other expenses or amounts payable under any Loan Document (other than inchoate indemnification obligations and any other obligations which pursuant to the terms of any Loan Document specifically survive repayment of the Loans for which no claim has been made), and other Obligations under or in respect of Specified Swap Agreements and Bank Services, to the extent (a) no default or termination event shall have occurred and be continuing thereunder, (b) no Letter of Credit shall be outstanding (or, as applicable, each outstanding and undrawn Letter of Credit has been Cash Collateralized in accordance with the terms hereof), and (c) the aggregate Commitments of the Lenders are terminated.

Disposition ”: with respect to any property (including, without limitation, Capital Stock of any Subsidiary of the Borrower), any sale, lease, Sale Leaseback Transaction, assignment, conveyance, transfer or other disposition thereof and any issuance of Capital Stock of the Borrower or any of its Subsidiaries. The terms “ Dispose ” and “ Disposed of ” shall have correlative meanings.

Dollars ” and “ $ ”: dollars in lawful currency of the United States.

Dollar Equivalent ”: at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in a Foreign Currency, the equivalent amount therefor in Dollars as determined by the Administrative Agent at such time based upon the then applicable exchange rate reported by Bloomberg Financial Services Reporting for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

Domestic Subsidiary ”: any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States.

Eligible Accounts ”: (i) all of the Accounts owned by a Loan Party, (ii) with respect to the period from April 1, 2013 through June 30, 2013, Eligible Canadian Accounts owned by EnerNOC Canada, and (iii) with respect to the period from April 1, 2013 through June 30, 2013, Eligible Australian Accounts owned by EnerNOC Australia, and, in each case, reflected in the most recent Borrowing Base Certificate delivered by the Borrower to the Administrative Agent, except any such Account as to which any of the exclusionary criteria set forth below applies. The Administrative Agent shall have the right, at any time and from time to time after the Closing Date, in its Permitted Discretion to establish and, with the consent of the Required Lenders, modify or eliminate Reserves against Eligible Accounts, or, acting in its commercially reasonable good faith business judgment, to adjust or supplement any of the criteria set forth below, to establish new criteria, and to adjust advance rates with respect to Eligible Accounts, to

 

9

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


reflect changes in the collectability or realization values of such Accounts arising or discovered by the Administrative Agent after the Closing Date. Eligible Accounts shall not include any Account of the Borrower:

(a) that does not arise from the sale of goods or the performance of services by the Borrower in the ordinary course of its business;

(b) (i) upon which the Borrower’s right to receive payment is not absolute or is contingent upon the fulfillment of any condition whatsoever or (ii) as to which the Borrower is not able to bring suit or otherwise enforce its remedies against the applicable Account Debtor through judicial process or (iii) if the Account represents a progress billing consisting of an invoice for goods sold or services rendered pursuant to a contract under which the applicable Account Debtor’s obligation to pay is subject to the Borrower’s completion of further performance under such contract or is subject to the equitable lien of a surety bond issuer;

(c) to the extent that any defense, counterclaim, setoff or dispute is asserted as to such Account;

(d) that is not a true and correct statement of bona fide indebtedness incurred in the amount of the Account for merchandise sold to or services rendered and accepted by the applicable Account Debtor;

(e) with respect to which an invoice, in a form reasonably acceptable to the Administrative Agent and consistent with the Borrower’s past business practices, has not been sent to the applicable Account Debtor, unless an invoice is not required by the agreements between the Borrower and the applicable Account Debtor entered into in the ordinary course of business consistent with past practice (sometimes referred to as “self-invoicing”);

(f) that (i) is not owned by (A) a Loan Party, (B) EnerNOC Canada (with respect to Eligible Canadian Accounts), or (C) EnerNOC Australia (with respect to Eligible Australian Accounts), or (ii) is subject to any Lien of any other Person, other than Liens in favor of the Administrative Agent (held for the ratable benefit of the Secured Parties), except for Liens permitted under Section 7.3 hereof (other than Eligible Australian Accounts and Eligible Canadian Accounts which shall be free and clear of all Liens);

(g) that arises from a sale to any director, officer, other employee or Affiliate of any Loan Party, or to any entity that has any common officer or director with any Loan Party;

(h) that is the obligation of an Account Debtor that is the United States government or a political subdivision thereof, or any state, county or municipality or department, agency or instrumentality thereof unless the Borrower has complied with respect to such obligation with the Federal Assignment of Claims Act of 1940, or any applicable state, county or municipal law restricting assignment thereof;

(i) that is the obligation of an Account Debtor located in a foreign country, other than (i) as determined on a case-by-case basis where the Administrative Agent is confident of its ability to perfect its security interest therein, or (ii) where such obligation is supported by a letter of credit, assigned and delivered to the Administrative Agent and reasonably satisfactory to the Administrative Agent as to form, amount and issuer or (iii) Eligible Australian Accounts and Eligible Canadian Accounts;

 

10

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


(j) to the extent any Group Member is liable to the applicable Account Debtor related to such Account for goods sold or services rendered or to be rendered by such Group Member, but only to the extent of the potential offset;

(k) that arises with respect to goods that are delivered on a bill-and-hold, cash-on-delivery basis or placed on consignment, guaranteed sale or other terms by reason of which the payment by the applicable Account Debtor is or may be conditional (but only to the extent that any such delivery condition then applies);

(l) that is in default; provided that, without limiting the generality of the foregoing, an Account shall be deemed in default upon the occurrence of any of the following:

(i) such Account is not paid within ninety (90) days following its original invoice date (irrespective of whether the payment terms relating to such Account permit payment after the 90th day following such original invoice date);

(ii) the Account Debtor obligated upon such Account suspends business, makes a general assignment for the benefit of creditors or fails to pay its debts generally as they come due; or

(iii) a petition is filed by or against the Account Debtor obligated upon such Account under any bankruptcy law or any other federal, state or foreign (including any provincial) receivership, insolvency relief or other law or laws for the relief of debtors

(m) that is owed by an Account Debtor where 50% or more of the aggregate Dollar amount of all Accounts owing by such Account Debtor are ineligible under one or more of the other criteria set forth in this definition;

(n) as to which any Lien in favor of the Administrative Agent is not a first priority perfected Lien (for the avoidance of doubt, there shall not be a Lien in favor of the Administrative Agent with respect to Eligible Australian Accounts and Eligible Canadian Accounts);

(o) as to which any of the representations or warranties in the Loan Documents are untrue;

(p) to the extent such Account exceeds any credit limit established by the Administrative Agent, in its Permitted Discretion;

(q) to the extent that such Account, together with all other Accounts owing by such Account Debtor and its Affiliates as of any date of determination exceed 25% of all Eligible Accounts;

(r) that is payable in any currency other than Dollars (unless converted into Dollars on terms reasonably satisfactory to the Administrative Agent);

 

11

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


(s) owing from an Account Debtor the amount of which may be subject to withholding based on the Account Debtor’s satisfaction of the Borrower’s complete performance (but only to the extent of the amount withheld (sometimes called retainage billings);

(t) subject to contractual arrangements between the Borrower and an Account Debtor where payments shall be scheduled or due according to completion or fulfillment requirements and where the Account Debtor has a right of setoff for damages suffered as a result of the Borrower’s failure to perform in accordance with the contract setting forth such requirements (sometimes called contracts accounts receivable, progress billings, milestone billings or fulfillment contracts);

(u) subject to trust provisions, subrogation rights of a bonding company or a statutory trust;

(v) owing from an Account Debtor with respect to whom the Borrower has received Deferred Revenue (but only to the extent of such Deferred Revenue); or

(w) for which the Administrative Agent or the Required Lenders reasonably determines in its Permitted Discretion collection to be doubtful.

Any Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing eligibility requirements, shall forthwith cease to be an Eligible Account until such time as such Account shall again meet all of the foregoing requirements.

Eligible Assignee ”: (a) a Lender, an Affiliate of a Lender or any Approved Fund; or (b) any commercial bank, insurance company, investment or mutual fund or other entity that is an “accredited investor” (as defined in Regulation D under the Securities Act) and which extends credit or buys loans as one of its substantial businesses; provided that neither the Borrower nor any Affiliate of the Borrower shall be an Eligible Assignee.

Eligible Fixed Assets : The net book value of fixed assets of the Borrower and its Subsidiaries as determined under GAAP and reflected in the Borrower’s consolidated financial statements.

Eligible Australian Accounts ”: During the period from April 1, 2013 through June 30, 2013, Accounts owned by EnerNOC Australia and reflected in the most recent Borrowing Base Certificate delivered by the Borrower to the Administrative Agent that meet all of the criteria of an “Eligible Account”.

Eligible Canadian Accounts ”: During the period from April 1, 2013 through June 30, 2013, Accounts owned by EnerNOC Canada and reflected in the most recent Borrowing Base Certificate delivered by the Borrower to the Administrative Agent that meet all of the criteria of an “Eligible Account”.

Eligible Unbilled Accounts ”: Accounts owned by a Loan Party and reflected in the most recent Borrowing Base Certificate delivered by the Borrower to the Administrative Agent that meet all of the criteria of an “Eligible Account” except such accounts (i) are not due and

 

12

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


payable and (ii) have not been invoiced as required by the criteria set forth in clause (e) of the definition of “Eligible Accounts”, but in respect of which the Loan Parties are recognizing income in accordance with GAAP. The Administrative Agent shall have the right, at any time and from time to time after the Closing Date, in its Permitted Discretion to establish, and, with the consent of the Required Lenders, modify or eliminate Reserves against Eligible Unbilled Accounts, or, acting in its commercially reasonable good faith business judgment, to adjust or supplement any of the criteria set forth below, to establish new criteria, and to adjust advance rates with respect to Eligible Unbilled Accounts, to reflect changes in the collectability or realization values of such Accounts arising or discovered by the Administrative Agent after the Closing Date.

EnerNOC Australia ”: EnerNOC Australia Pty Ltd., a company organized under the laws of Australia.

EnerNOC Canada ”: EnerNOC Ltd., a company organized under the laws of Ontario, Canada.

ENOC Securities ”: ENOC Securities Corporation, a Massachusetts corporation.

Environmental Laws ”: any and all foreign, Federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect.

ERISA ”: the Employee Retirement Income Security Act of 1974, including (unless the context otherwise requires) any rules or regulations promulgated thereunder.

ERISA Affiliate ”: each business or entity which is, or within the last six (6) years was, a member of a “controlled group of corporations,” under “common control” or an “affiliated service group” with any Loan Party within the meaning of Section 414(b), (c) or (m) of the Code, required to be aggregated with any Loan Party under Section 414(o) of the Code, or is, or within the last six (6) years was, under “common control” with any Loan Party, within the meaning of Section 4001(a)(14) of ERISA.

ERISA Event ”: any of (a) a reportable event as defined in Section 4043 of ERISA with respect to a Pension Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; (b) the applicability of the requirements of Section 4043(b) of ERISA with respect to a contributing sponsor, as defined in Section 4001(a)(13) of ERISA, to any Pension Plan where an event described in paragraph (9), (10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such plan within the following 30 days; (c) a withdrawal by any Loan Party or, to the knowledge of any Loan Party, any ERISA Affiliate thereof from a Pension Plan or the termination of any Pension Plan resulting in liability under Sections 4063 or 4064 of ERISA; (d) the withdrawal of any Loan Party or any ERISA Affiliate thereof in a complete or partial withdrawal (within the meaning of Section 4203 and 4205 of ERISA) from any Multiemployer Plan if there is any potential liability

 

13

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


therefore, or the receipt by any Loan Party or, to the knowledge of any Loan Party, any ERISA Affiliate thereof of notice from any Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA; (e) the filing of a notice of intent to terminate, the treatment of a plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (f) the imposition of liability on any Loan Party or any ERISA Affiliate thereof pursuant to Sections 4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (g) the failure by any Loan Party or any ERISA Affiliate thereof to make any required contribution to a Pension Plan, or the failure to meet the minimum funding standard of Section 412 of the Code with respect to any Pension Plan (whether or not waived in accordance with Section 412(c) of the Code) or the failure to make by its due date a required installment under Section 430 of the Code with respect to any Pension Plan or the failure to make any required contribution to a Multiemployer Plan; (h) the determination that any Pension Plan is considered an at-risk plan or a plan in endangered to critical status within the meaning of Sections 430, 431 and 432 of the Code or Sections 303, 304 and 305 of ERISA; (i) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; (j) the imposition of any liability under Title I or Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon any Loan Party or any ERISA Affiliate thereof; (k) an application for a funding waiver under Section 303 of ERISA or an extension of any amortization period pursuant to Section 412 of the Code with respect to any Pension Plan; (l) the occurrence of a non-exempt prohibited transaction under Sections 406 or 407 of ERISA for which any Loan Party or any Subsidiary thereof may be directly or indirectly liable; (m) the occurrence of an act or omission which could give rise to the imposition on any Loan Party or any ERISA Affiliate thereof of fines, penalties, taxes or related charges under Chapter 43 of the Code or under Sections 409, 502(c), (i) or (1) or 4071 of ERISA; (n) the assertion of a material claim (other than routine claims for benefits) against any Pension Plan or the assets thereof, or against any Loan Party or any Subsidiary thereof in connection with any such plan; (o) receipt from the IRS of notice of the failure of any Pension Plan to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Pension Plan to fail to qualify for exemption from taxation under Section 501(a) of the Code; or (p) the imposition of any lien (or the fulfillment of the conditions for the imposition of any lien) on any of the rights, properties or assets of any Loan Party or any ERISA Affiliate thereof, in either case pursuant to Title I or IV, including Section 302(f) or 303(k) of ERISA or to Section 401(a)(29) or 430(k) of the Code.

ERISA Funding Rules ”: the rules regarding minimum required contributions (including any installment payment thereof) to Pension Plans, as set forth in Section 412 of the Code and Section 302 of ERISA, with respect to Plan years ending prior to the effective date of the Pension Protection Act of 2006, and thereafter, as set forth in Sections 412, 430, 431, 432 and 436 of the Code and Sections 302, 303, 304 and 305 of ERISA.

Eurocurrency Reserve Requirements ”: for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and emergency reserves) under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board) maintained by a member bank of the Federal Reserve System.

 

14

 

Portions of this Exhibit, indicated by the mark “[*****],” were omitted and have been filed separately with the Securities and Exchange Commission pursuant to the Registrant’s application requesting confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.


Eurodollar Base Rate ”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum determined by the Administrative Agent to be a rate equal to the British Bankers’ Association LIBOR Rate (“ BBA LIBOR ”) for deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period in Dollars, determined as of approximately 11:00 A.M. (London, England time) two (2) Business Days prior to the beginning of such Interest Period (as set forth by Bloomberg Information Service or any successor thereto or any other service selected by the Administrative Agent which has been nominated by the British Bankers’ Association as an authorized information vendor for the purpose of displaying BBA LIBOR). In the event that the Administrative Agent determines that BBA LIBOR is not available, the “Eurodollar Base Rate” shall be determined by reference to the rate per annum equal to the offered quotation rate to first class banks in the London interbank market by SVB for deposits (for delivery on the first day of the relevant Interest Period) in Dollars of amounts in same day funds comparable to the principal amount of the applicable Loan of the Administrative Agent, in its capacity as a Lender, for which the Eurodollar Base Rate is then being determined with maturities comparable to such period as of approximately 11:00 A.M. (London, England time) two (2) Business Days prior to the beginning of such Interest Period.

Eurodollar Loans ”: Loans the rate of interest applicable to which is based upon the Eurodollar Rate.

Eurodollar Rate ”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula:

 

Eurodollar Base Rate