EnerNOC, Inc.
ENERNOC INC (Form: 10-Q, Received: 08/05/2016 06:07:45)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
 
 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
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   ý     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   ý     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
ý
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   ý     
There were 31,247,254 shares of the registrant’s common stock, $0.001 par value per share, outstanding as of August 1, 2016 .
 




EnerNOC, Inc.
FORM 10-Q
For the Quarterly Period Ended June 30, 2016
TABLE OF CONTENTS
 
 
 
Page
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Item 1.
Item 1A
Item 2.
Item 6.
 


2



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EnerNOC, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and share data)
 
June 30, 2016
 
December 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
95,123

 
$
138,120

Restricted cash
543

 
464

Trade accounts receivable, net of allowance for doubtful accounts of $1,026 and $947 at June 30, 2016 and December 31, 2015, respectively
33,301

 
43,355

Unbilled revenue
10,341

 
70,101

Capitalized incremental direct customer contract costs
6,857

 
33,917

Prepaid expenses and other current assets
13,682

 
7,654

Assets held for sale
7,470

 

Total current assets
167,317

 
293,611

Property and equipment, net of accumulated depreciation of $124,153 and $114,828 at June 30, 2016 and December 31, 2015, respectively
44,009

 
49,653

Goodwill
37,865

 
39,747

Intangible assets, net
42,831

 
54,352

Deferred tax assets
464

 
458

Deposits and other assets
5,515

 
5,893

Total assets
$
298,001

 
$
443,714

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
1,405

 
$
6,002

Accrued capacity payments
47,299

 
104,278

Accrued payroll and related expenses
13,273

 
18,058

Accrued expenses and other current liabilities
15,086

 
20,734

Deferred revenue
14,269

 
55,631

Liabilities held for sale
915

 

Total current liabilities
92,247

 
204,703

Deferred tax liability

 
355

Deferred revenue
3,448

 
3,696

Other liabilities
7,591

 
8,763

Convertible senior notes
113,203

 
111,254

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, 31,304,642 and 30,797,289 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively
31

 
30

Additional paid-in capital
382,757

 
377,473

Accumulated other comprehensive loss
(6,768
)
 
(8,524
)
Accumulated deficit
(294,771
)
 
(254,335
)
Total EnerNOC, Inc. stockholders’ equity
81,249

 
114,644

Noncontrolling interest
263

 
299

Total stockholders’ equity
81,512

 
114,943

Total liabilities and stockholders’ equity
$
298,001

 
$
443,714

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

3



EnerNOC, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Software
$
16,232

 
$
19,908

 
$
33,265

 
$
37,325

Demand Response
116,462

 
52,592

 
152,809

 
85,726

Total revenues
132,694

 
72,500

 
186,074

 
123,051

Cost of revenues
81,531

 
33,543

 
114,125

 
65,499

Gross profit
51,163

 
38,957

 
71,949

 
57,552

Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
25,517

 
23,670

 
50,532

 
52,166

General and administrative
27,441

 
28,453

 
55,357

 
56,743

Research and development
7,634

 
7,735

 
15,677

 
15,186

Gain on sale of service lines and assets (Note 13)
(17,376
)
 
(2,991
)
 
(17,376
)
 
(2,991
)
Restructuring charges (Note 3)
3,694

 

 
3,694

 

Total operating expenses
46,910

 
56,867

 
107,884

 
121,104

Income (loss) from operations
4,253

 
(17,910
)
 
(35,935
)
 
(63,552
)
Other income (expense), net
(3,421
)
 
1,705

 
(334
)
 
(2,952
)
Interest expense
(1,844
)
 
(2,240
)
 
(3,621
)
 
(4,532
)
Loss before income tax
(1,012
)
 
(18,445
)
 
(39,890
)
 
(71,036
)
Benefit from (provision for) income tax
1,109

 
(345
)
 
(582
)
 
1,940

Net income (loss)
97

 
(18,790
)
 
(40,472
)
 
(69,096
)
Net loss attributable to noncontrolling interest
(5
)
 
(10
)
 
(36
)
 
(14
)
Net income (loss) attributable to EnerNOC, Inc.
$
102

 
$
(18,780
)
 
$
(40,436
)
 
$
(69,082
)
Net income (loss) attributable to EnerNOC, Inc. per common share
 
 
 
 
 
 
 
Basic
$
0.00

 
$
(0.66
)
 
$
(1.40
)
 
$
(2.45
)
Diluted
$
0.00

 
$
(0.66
)
 
$
(1.40
)
 
$
(2.45
)
Weighted average number of common shares used in computing net income (loss) per common share
 
 
 
 
 
 
 
Basic
29,114,200

 
28,327,867

 
28,962,021

 
28,172,398

Diluted
29,569,321

 
28,327,867

 
28,962,021

 
28,172,398

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


4



EnerNOC, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net income (loss)
$
97

 
$
(18,790
)
 
$
(40,472
)
 
$
(69,096
)
Foreign currency translation adjustments
1,373

 
(108
)
 
1,756

 
(2,650
)
Comprehensive income (loss)
1,470

 
(18,898
)
 
(38,716
)
 
(71,746
)
Comprehensive loss attributable to noncontrolling interest
(5
)
 
(15
)
 
(36
)
 
(19
)
Comprehensive income (loss) attributable to EnerNOC, Inc.
$
1,475

 
$
(18,883
)
 
$
(38,680
)
 
$
(71,727
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5




EnerNOC, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
Six Months Ended
 
June 30,
 
2016
 
2015
Cash flows from operating activities
 
 
 
Net loss
$
(40,472
)
 
$
(69,096
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation
12,210

 
11,803

Amortization of acquired intangible assets
6,180

 
7,945

Fair value adjustment of contingent purchase price

 
409

Stock-based compensation expense
6,784

 
7,237

Gain on sale of service lines and assets
(17,376
)
 
(2,991
)
Impairment of property and equipment
2,574

 
480

Unrealized foreign exchange (gain) loss
(582
)
 
3,344

Deferred income taxes
(253
)
 
(2,123
)
Non-cash interest expense
1,986

 
2,540

Other, net
1,519

 
356

Changes in operating assets and liabilities, net of effects of acquisitions and divestitures:
 
 
 
Trade accounts receivable
8,254

 
10,703

Unbilled revenue
60,605

 
78,308

Prepaid expenses and other current assets
(5,850
)
 
(5,820
)
Capitalized incremental direct customer contract costs
27,068

 
(11,200
)
Other noncurrent assets
401

 
(887
)
Deferred revenue
(37,401
)
 
9,636

Accrued capacity payments
(57,362
)
 
(45,553
)
Accrued payroll and related expenses
(4,877
)
 
(775
)
Accounts payable, accrued expenses and other current liabilities
(8,963
)
 
(18,151
)
Other noncurrent liabilities
(595
)
 
167

Net cash used in operating activities
(46,150
)
 
(23,668
)
Cash flows from investing activities
 
 
 
Purchases of property and equipment
(9,111
)
 
(11,290
)
Payments made for acquisitions, net of cash acquired
(840
)
 
(77,559
)
Proceeds from sale of service lines and assets
13,157

 
2,991

Change in restricted cash and deposits
284

 
2,323

Net cash provided by (used in) investing activities
3,490

 
(83,535
)
Cash flows from financing activities
 
 
 
Proceeds from exercises of stock options
8

 
1,017

Payments made for employee restricted stock minimum tax withholdings
(1,504
)
 
(3,147
)
Net cash used in financing activities
(1,496
)
 
(2,130
)
Effects of exchange rate changes on cash and cash equivalents
1,159

 
(1,463
)
Net change in cash and cash equivalents
(42,997
)
 
(110,796
)
Cash and cash equivalents at beginning of period
138,120

 
254,351

Cash and cash equivalents at end of period
$
95,123

 
$
143,555

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
$
1,668

 
$
1,992

Cash paid for income taxes
$
2,002

 
$
3,902

Non-cash financing and investing activities
 
 
 
Issuance of common stock in connection with acquisitions
$

 
$
103

Issuance of common stock in satisfaction of bonuses
$
265

 
$
865

Acquisition of property and equipment in accrued expenses
$
1,151

 
$
1,164

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

6



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) is a leading provider of energy intelligence software (EIS) and demand response solutions to enterprises, utilities, and electric power grid operators.
The Company’s EIS provides enterprises with a Software-as-a-Service (SaaS) energy management application that enables them to better manage and control energy costs for their organizations. The Company offers premium professional services that support the implementation of its EIS and help its enterprise customers set their energy management strategy. The Company's professional services offerings also include energy audits and retro-commissioning.
The Company’s demand response solutions provide utilities and electric power grid operators with a managed service demand response resource that matches obligation, in the form of megawatts (MWs) that the Company agrees to deliver to utilities and/or electric power grid operators, with supply, in the form of MWs that are curtailed from the electric power grid through the Company's arrangements with commercial and industrial end-users of energy (C&I end-users). The Company’s demand response solutions are also capable of providing utilities with the underlying technology to manage their own utility-sponsored demand response programs and secure reliable demand-side resources.
Reclassifications
Effective during the first quarter of 2016, the Company began operating as two reportable segments: Software and Demand Response. The Company updated the presentation of the revenue categories on its consolidated statements of operations for the three and six months ended June 30, 2016 to present revenue for each of these segments. The Company has reclassified prior period revenue categories to conform with the current period presentation. This reclassification had no impact on total revenue or any other income statement result. For further discussion regarding the Company's reorganization and the impact on segment reporting, please refer to Note 2.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries and have been prepared by the Company in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information pursuant to Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Intercompany transactions and balances are eliminated in consolidation. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements and accompanying notes. The Company owns 60% of EnerNOC Japan K.K., for which it consolidates the results of operations and financial position in the accompanying financial statements. The remaining 40% represents a noncontrolling interest in the accompanying unaudited condensed consolidated balance sheets and statements of operations.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Significant estimates made by management relate to revenue recognition reserves, allowances for doubtful accounts, expected future cash flows used to evaluate the recoverability of long-lived assets, amortization methods and periods, valuation of cost-method investments, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amounts of such items, when known, may vary from these estimates.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (2015 Form 10-K).
Recently Adopted Accounting Standards
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement (ASU 2015-05) . ASU 2015-05 amends Accounting Standards Codification (ASC) 350-40, Internal Use Software , to exclude cloud-computing arrangements from its scope. The

7



guidance was effective as of January 1, 2016 for arrangements entered into or materially modified after the effective date. The Company adopted this standard prospectively on January 1, 2016 and the adoption of ASU 2015-05 did not have an impact on the Company's consolidated financial statements.


2. Segment Information
Effective in the first quarter of 2016 , the Company began operating as two reportable segments: Software and Demand Response. The Company’s Chief Operating Decision Maker (CODM), who is the Company's Chief Executive Officer, primarily evaluates the business and assesses performance based on the revenue and adjusted EBITDA of the Company's Software and Demand Response segments. The Company defines segment adjusted EBITDA as segment income (loss) excluding depreciation and asset impairments, amortization of intangible assets, stock-based compensation, gain on the sale of service lines and assets, and restructuring charges. In addition, the Company does not allocate interest, non-operating income (expense), taxes, and certain corporate-level costs to its reportable segments. Management considers segment adjusted EBITDA to be an important indicator of the segment's operational strength and the performance of its business.
The financial results of each segment are based on revenues from external customers, cost of revenues and operating expenses that are directly attributable to the segment and an allocation of costs from shared functions. These shared functions include, but are not limited to, facilities, human resources, information technology, and engineering. Allocations are made based on management’s judgment of the most relevant factors, such as head count, number of customer sites, or other operational data that contributes to the shared costs. Certain corporate-level costs have not been allocated as they are not specifically attributable to either segment. These costs primarily consist of broad corporate functions, including executive, legal, finance and costs associated with acquisitions and divestitures. Segment-level asset information has not been provided as such information is not reviewed by the CODM for purposes of assessing segment performance and allocating resources. There are no intersegment sales or transactions. The accounting policies of the reportable segments are consistent with those described in Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies,” in the Company's 2015 Form 10-K.
The following is a description of the Company's two reportable segments:
Software Segment
The Software segment provides enterprises with the Company's EIS, which includes subscription software, energy procurement solutions, and professional services. The Software segment is responsible for developing and maintaining the Company's software platform; selling and marketing to enterprise customers; supporting customer relationships and managing customer projects; delivering software implementations, trainings, and other professional services; and managing contracting, invoicing and collection activities related to Software customer contracts.
Demand Response Segment
The Demand Response segment provides utilities and electric power grid operators with the Company’s demand response solutions. The Demand Response segment is responsible for developing and shaping demand response markets and securing future demand response obligations; procuring MWs that are available for curtailment through arrangements with C&I end-users; installing and maintaining a network of EnerNOC site servers to collect energy data from C&I end-users for use in the management of demand response programs; providing C&I end-users and certain utility customers with software tools to manage their demand response activities; coordinating the curtailment of MWs for delivery to utilities and electric power grid operators when called upon; and financially settling with utilities, electric power grid operators, and C&I end-users.

8



The following table presents segment revenue and segment adjusted EBITDA, along with the reconciliation of segment adjusted EBITDA to consolidated loss before income tax:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Revenues:
2016
 
2015
 
2016
 
2015
Software
 
 
 
 
 
 
 
Subscription software
$
5,569

 
$
4,831

 
$
11,745

 
$
9,318

Procurement solutions
8,795

 
8,855

 
17,728

 
17,476

Professional services
1,868

 
6,222

 
3,792

 
10,531

Total Software Revenues
16,232

 
19,908

 
33,265

 
37,325

 
 
 
 
 
 
 
 
Demand Response
 
 
 
 
 
 
 
Grid operator
104,673

 
41,545

 
131,485

 
65,291

Utility
11,789

 
11,047

 
21,324

 
20,435

Total Demand Response Segment Revenues
116,462

 
52,592

 
152,809

 
85,726

 
 
 
 
 
 
 
 
Consolidated Revenues
$
132,694

 
$
72,500

 
$
186,074

 
$
123,051

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Segment Adjusted EBITDA:
 
 
 
 
 
 
 
Software adjusted EBITDA
$
(20,030
)
 
$
(15,000
)
 
$
(38,037
)
 
$
(35,246
)
Demand Response adjusted EBITDA
27,965

 
13,613

 
24,481

 
7,197

Total Segment adjusted EBITDA
7,935

 
(1,387
)
 
(13,556
)
 
(28,049
)
Corporate unallocated expenses
(4,536
)
 
(4,808
)
 
(10,207
)
 
(8,159
)
Depreciation, asset impairments and amortization
(8,783
)
 
(9,914
)
 
(18,470
)
 
(19,748
)
Stock-based compensation expense
(3,669
)
 
(3,321
)
 
(6,784
)
 
(7,730
)
Gain on sale of service lines and assets
17,376

 
2,991

 
17,376

 
2,991

Restructuring charges
(3,694
)
 

 
(3,694
)
 

Direct and incremental expenses of acquisitions, divestitures and reorganizations
(371
)
 
(1,461
)
 
(564
)
 
(2,843
)
Noncontrolling interest expense
(5
)
 
(10
)
 
(36
)
 
(14
)
Interest and other income (expense), net
(5,265
)
 
(535
)
 
(3,955
)
 
(7,484
)
Consolidated loss before income tax
$
(1,012
)
 
$
(18,445
)
 
$
(39,890
)
 
$
(71,036
)


3. Restructuring Activities

On May 23, 2016, the Board of Directors of the Company approved a restructuring plan (the Q2 2016 Restructuring Plan) to enhance the Company’s strategic focus, deliver operational and cost efficiencies, and hold its utility customer engagement (UCE) business for sale. In addition, the Company executed other cost savings initiatives to reduce excess office space through sublease arrangements.
Workforce Reduction
On May 25, 2016, the Company notified employees of its plan to reduce the North American workforce by approximately 5% , which resulted in an employee related charge of $875 for the three and six months ended June 30, 2016 . Specifically, the charge represented severance for terminated employees and retention costs for employees who will remain with the Company until the UCE business is sold. The Company expects to record $1,350 in employee related costs as part of the Q2 2016 Restructuring Plan, all of which are expected to be paid by December 31, 2016. In addition, as a result of the sale of an additional component of the business (see Note 13), the Company incurred $325 in incremental retention bonuses that are included in restructuring charges for the three and six months ended June 30, 2016.


9



Asset Impairment Charges
During the three months ended June 30, 2016, the Company modified a non-cancelable sublease agreement with a third party for excess office space in its corporate headquarters. In connection with this sublease, the Company determined that the associated leasehold improvements and furniture and fixtures were impaired. Accordingly, the Company recorded an impairment charge of $2,494 for the three and six months ended June 30, 2016 .
The following table rolls forward restructuring activity, including severance and retention charges related to workforce reductions and business divestitures, and asset impairment charges related to lease exit activities.
 
Restructuring Activity
Beginning balance at January 1, 2016
$

Employee-related restructuring charges
1,200

Cash payments
(1,082
)
Adjustments

Ending balance included in current liabilities at June 30, 2016
$
118

Asset impairment charges
$
2,494

Total restructuring charges
$
3,694



4. Businesses Held for Sale

The Company has concluded that the UCE business, discussed in Note 3 , qualifies as “held for sale” as of June 30, 2016 . The UCE business is a component of the Software segment. The Company has aggregated the assets and liabilities of the UCE business, including associated cumulative currency translation adjustments of $1,950 , to determine the carrying amount of the disposal group. The Company concluded that the fair value of the UCE business exceeded its carrying amount as of June 30, 2016 . See Note 7 for a discussion of fair value. The sale of UCE does not qualify as a discontinued operation as the disposal does not represent a strategic shift that will have a major effect on the Company's operations and financial results.

The following table summarizes the assets and liabilities held for sale as of June 30, 2016 . Goodwill was allocated to the disposal group as of the date the "held for sale" criteria was met based on its relative fair value to the remaining Software reporting unit.
 
As of June 30, 2016
Trade accounts receivable
$
558

Property and equipment, consisting primarily of leasehold improvements
130

Intangible assets, including developed technology and customer relationships
5,741

Goodwill
1,041

Assets held for sale
$
7,470

Accounts payable and accrued liabilities
185

Deferred revenue
624

Net deferred tax liabilities
106

Liabilities held for sale
$
915



5. Goodwill and Intangible Assets
Goodwill
As discussed in Note 1, in January 2016, the Company reorganized its reporting structure and began operating as two reportable segments: Software and Demand Response. Accordingly, goodwill was reallocated from the Company's prior reporting units, which were defined as i) North America Software and Services and ii) International, to the new reporting units within the Software and Demand Response segments, as shown in the following table within "transfers".

10



The following table provides a roll forward of goodwill for the six months ended June 30, 2016 :
 
EnerNOC, Inc.
 
Demand Response
 
Software
 
Total Goodwill 1
Balance at December 31, 2015
$
39,747

 
$

 
$

 
$
39,747

Transfers
(39,747
)
 
27,391

 
12,356

 

Foreign exchange

 
378

 
138

 
516

Sale of business component (Note 13)

 

 
(1,357
)
 
(1,357
)
Allocation to assets held for sale (Note 4)

 

 
(1,041
)
 
(1,041
)
Balance at June 30, 2016
$

 
$
27,769

 
$
10,096

 
$
37,865

1 Accumulated impairment losses as of December 31, 2015 and June 30, 2016 were $108,763 .

As part of its ongoing assessment as to the existence of goodwill impairment indicators, the Company considered factors such as updated long-range financial forecasts, current economic conditions, the Company's market capitalization as well as other qualitative factors. As a result of this assessment, no impairment indicators were identified at June 30, 2016. In future periods, the Company may be subject to factors that constitute a change in circumstances, indicating that the carrying value of goodwill could exceed fair value. These changes may consist of, but are not limited to, a sustained decline in the Company's market capitalization, reduced future cash flow estimates, an adverse action or assessment by a regulator and slower growth rates in the Company's industry. Any of these factors, or others, could require the Company to record a significant charge to earnings in the consolidated financial statements during the period in which any impairment of goodwill is determined, negatively impacting the Company's results of operations.

Intangible Assets
The following table provides the gross carrying amount and related accumulated amortization of the Company's definite-lived intangible assets as of June 30, 2016 and December 31, 2015 :
 
As of June 30, 2016
 
As of December 31, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Customer relationships
$
60,325

 
$
(29,789
)
 
$
60,938

 
$
(26,043
)
Customer contracts
8,131

 
(7,419
)
 
8,042

 
(6,786
)
Employment and non-compete agreements
2,530

 
(1,998
)
 
3,055

 
(2,283
)
Software
170

 
(170
)
 
170

 
(170
)
Developed technology
17,128

 
(6,144
)
 
24,168

 
(6,867
)
Trade name
1,057

 
(1,057
)
 
1,087

 
(1,035
)
Patents
180

 
(113
)
 
180

 
(104
)
Total
$
89,521

 
$
(46,690
)
 
$
97,640

 
$
(43,288
)
The decrease in the gross carrying amount of intangible assets as of June 30, 2016 is primarily due to the allocation of $5,741 of net intangible assets, including gross carrying amounts of $8,937 and $3,196 of accumulated amortization, to assets held for sale as discussed in Note 4. Amortization expense was $2,895 and $4,027 for the three months ended June 30, 2016 and 2015 , respectively and $6,180 and $7,945 for the six months ended June 30, 2016 and 2015 , respectively. Amortization expense for acquired developed technology, which was $628 and $935 for the three months ended June 30, 2016 and 2015 , respectively, and $1,489 and $1,925 for the six months ended June 30, 2016 and 2015, respectively, is included in cost of revenues in the consolidated statements of operations. Amortization expense for all other intangible assets is included as a component of operating expenses. Definite-lived intangible asset lives range from 1 to 15 years and have a weighted average remaining life of 4.9 years at June 30, 2016 .

11



6. Net Income (Loss) Per Share
The computation of basic and diluted net income (loss) per share is as follows (in thousands, except share and per share information):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Numerator:
2016
 
2015
 
2016
 
2015
Net income (loss) for basic earnings per share
$
102

 
$
(18,780
)
 
$
(40,436
)
 
$
(69,082
)
ADD: Interest expense related to convertible notes

 

 

 

Net income (loss) for diluted earnings per share
$
102

 
$
(18,780
)
 
$
(40,436
)
 
$
(69,082
)
Denominator:
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
29,114,200

 
28,327,867

 
28,962,021

 
28,172,398

Weighted average common stock equivalents
455,121

 

 

 

Diluted weighted average common shares outstanding
29,569,321

 
28,327,867

 
28,962,021

 
28,172,398

 
 
 
 
 
 
 
 
Basic net income (loss) per share
$
0.00

 
$
(0.66
)
 
$
(1.40
)
 
$
(2.45
)
Diluted net income (loss) per share
$
0.00

 
$
(0.66
)
 
$
(1.40
)
 
$
(2.45
)
 
 
 
 
 
 
 
 
Weighted average anti-dilutive shares related to:
 
 
 
 
 
 
 
Incremental shares from assumed conversion of convertible notes
4,576,630

 
5,774,928

 
4,576,630

 
5,774,928

Stock options
303,441

 
448,910

 
308,599

 
416,375

Nonvested restricted stock
2,102,692

 
2,134,863

 
2,233,510

 
2,078,581

Restricted stock units
113,503

 
42,605

 
544,503

 
77,105

On May 27, 2015, the Company received stockholder approval to elect to settle conversions of the aggregate outstanding principal amount of its 2.25% convertible senior notes due August 15, 2019 (the Notes) by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock. The Notes are convertible at an initial conversion rate of 36.0933 shares of the common stock per $1 principal amount of Notes and the remaining principal outstanding was $126,800 as of June 30, 2016. For the three and six months ended June 30, 2016, the Notes are not assumed to be converted as the impact is anti-dilutive. For further information regarding the Notes, please refer to Note 8 .
Restricted stock awards are excluded from the calculation of basic weighted-average common shares outstanding until they vest. For restricted stock awards that vest based on achievement of performance conditions, the number of contingently issuable common shares included in diluted weighted-average common shares outstanding is based on the number of common shares, if any, that would be issuable under the terms of the arrangement if the end of the reporting period were the end of the contingency period, assuming the result would be dilutive.
In connection with the acquisition of Pulse Energy, Inc. in 2014, the Company issued 87,483 common shares that are held in escrow. The Company excludes these shares from the calculation of basic weighted-average common shares outstanding as the release of such shares is contingent upon an event and not solely subject to the passage of time.
The Company includes the 254,654 shares related to a component of the deferred purchase price consideration for the acquisition of M2M Communications Corporation in the calculation of both the basic and diluted weighted-average common shares outstanding as the shares are not subject to adjustment and the issuance of such shares is not subject to any contingency.


7. Fair Value Measurements
The Company measures the fair value of financial instruments pursuant to the guidelines of ASC 820, Fair Value Measurement , which establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to quoted market prices in active markets for identical assets and liabilities (Level 1); then to quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market (Level 2); and then to model-based techniques that use significant assumptions that are not observable in the market (Level 3).

12



Financial Instruments and Investments
The Company’s financial instruments mainly consist of cash and cash equivalents, restricted cash, accounts receivable and accounts payable. The carrying amounts of such financial instruments approximate their respective fair value due to their short-term nature. In addition, the Company has long-term investments in non-marketable equity securities that are accounted for as cost-method investments. These investments are not adjusted to fair value on a recurring basis but are periodically assessed for indications of a reduction in fair value that is other-than-temporary. The Company's financial instruments also include its convertible senior notes for which fair value is disclosed.
Recurring Fair Value Measurements
The table below presents the assets and liabilities measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015 :
 
 
 
 
Fair Value Measured and Recorded Using
 
Totals
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs 
(Level 2)
 
Unobservable Inputs 
(Level 3)
As of June 30, 2016
 
 
 
 
 
 
 
Assets: Money market funds
$
79,500

 
$
79,500

 
$

 
$

As of December 31, 2015
 
 
 
 
 
 
 
Assets: Money market funds
$
115,847

 
$
115,847

 
$

 
$

Liabilities: Contingent purchase price consideration (1)
$
840

 
$

 
$

 
$
840

(1) The contingent purchase price consideration as of December 31, 2015 relates to the Company’s 2014 acquisition of Activation Energy DSU Limited and was reflected in accrued expense and other current liabilities as of December 31, 2015 . The amount was paid in full in February 2016.
The following is a rollforward of liabilities measured at fair value on a recurring basis for which the measurement is categorized as Level 3:
 
Liabilities
Balance January 1, 2016
$
840

Cash payment during the period
(840
)
Balance June 30, 2016
$

 

Non-Recurring Fair Value Measurements
Cost-method investments and non-financial assets, such as intangible assets, property and equipment, and assets and liabilities held for sale, are recorded at fair value only if an impairment is recognized. The following table presents assets measured at fair value on a non-recurring basis as of June 30, 2016. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2016 and no assets or liabilities measured at fair value on a non-recurring basis at December 31, 2015.
 
 
 
 
Fair Value Measured Using
 
Carrying Amount
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs 
(Level 2)
 
Unobservable Inputs 
(Level 3)
As of June 30, 2016
 
 
 
 
 
 
 
Assets: Cost-method investments
$
1,300

 
$

 
$

 
$
1,300

The Company had $2,500 of cost-method investments included in "deposits and other assets" on the consolidated balance sheet as of December 31, 2015 . During the three months ended June 30, 2016 , management recorded an impairment loss of $1,200 , included in "other income (expense), net", to adjust the carrying amount of cost-method investments due to a decline in fair value that was deemed to be other-than-temporary. In assessing the fair value of these investments, the Company evaluated all available information, both qualitative and quantitative, including current financial forecasts, recent or pending rounds of financing activity, and other available market data. The fair value of the investments as of June 30, 2016 was determined based on a probability-weighted assessment of liquidation scenarios relative to the investments.

13



As discussed in Note 3, the Company recorded a $2,494 impairment charge related to leasehold improvements and furniture and fixtures associated with subleased office space. The fair value of the asset group, for which the inputs are categorized as Level 3 on the fair value hierarchy, was determined based on the discrete cash flows of the asset group and incorporated assumptions relative to how a market participant would value the group.
As discussed in Note 4, the Company presents the UCE disposal group at the lower of its carrying amount or fair value less cost to sell. As of June 30, 2016, the fair value of the business, less cost to sell, exceeded the carrying value of the disposal group. As a result, the disposal group was not adjusted to fair value as of June 30, 2016. The Company utilized a market approach to determine the fair value of the held-for-sale disposal group using a weighted-average of non-binding offers from independent market participants. The inputs used to evaluate the fair value of the business are classified as Level 3, as these represent significant inputs that are not observable in the market.

Assets and Liabilities for which Fair Value Disclosure is Required
The Company has $126,800 of principal outstanding on its convertible senior notes (the Notes) at June 30, 2016 and December 31, 2015 , respectively. The carrying value of the Notes, which includes the unamortized debt discount and issuance costs, was $113,203 and $111,254 as of June 30, 2016 and December 31, 2015 , respectively and the fair value of the Notes was approximately $90,345 and $73,624 as of June 30, 2016 and December 31, 2015 , respectively. The fair value was determined based on the quoted market price of the Notes as of those dates and is classified as a Level 1 measurement.


8. Borrowings and Credit Arrangements
Credit Agreement
On August 11, 2014, the Company entered into a $30,000 senior secured revolving credit facility (the 2014 credit facility), which was subsequently amended on October 23, 2014 and August 6, 2015, the full amount of which may be available for issuances of letters of credit and revolving loans, pursuant to a loan and security agreement with Silicon Valley Bank (SVB). On August 3, 2016 the Company and SVB entered into a third amendment to the 2014 credit facility to extend the maturity date from August 9, 2016 to August 8, 2017. The 2014 credit facility is subject to continued covenant compliance and borrowing base requirements. As of June 30, 2016 , the Company was in compliance with all of its covenants, had no outstanding borrowings and had outstanding letters of credit totaling $19,102 under the 2014 credit facility. As of June 30, 2016 , there was $10,898 available under the 2014 credit facility for future borrowings or additional issuances of letters of credit. In the event of termination or default, the Company may be required to cash collateralize any outstanding letters of credit up to 105% of their face amount.
Convertible Notes
On August 12, 2014, the Company sold $160,000 aggregate principal amount of 2.25% convertible senior notes due August 15, 2019 (the Notes). The Notes include customary terms and covenants, including certain events of default after which the Notes may be declared or become due and payable immediately. The Notes are convertible at an initial conversion rate of 36.0933 shares of the common stock per $1 principal amount of Notes (equivalent to an initial conversion price of approximately $27.71 per share of common stock). The Company may elect to settle conversions of Notes by paying or delivering, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock.
Upon issuance of the Notes, the Company accounted for the liability and equity components of the Notes separately to reflect a non-convertible borrowing rate. The estimated fair value of the liability component at issuance of $137,430 was determined using a discounted cash flow technique. The excess proceeds of $22,570 were allocated to the conversion feature (equity component) with a corresponding offset recognized as a discount to reduce the net carrying value of the Notes. In addition, debt issuance costs were allocated to the liability and equity components based on their relative percentage. The amounts allocated to the liability component are included as part of the debt discount. The discount is being amortized to interest expense over a five -year period ending August 15, 2019 (the expected life of the liability component) using the effective interest method.
In December 2015, in privately negotiated transactions, the Company repurchased in cash $33,200 in aggregate principal amount of the outstanding Notes for a total purchase price of $19,733 plus accrued interest. The consideration was allocated to the fair value of the liability component of the repurchased Notes immediately before extinguishment. Following the repurchases, the remaining principal outstanding was $126,800 .

14



The following table shows the gross and net carrying amount of the Notes at June 30, 2016 and December 31, 2015 :
 
June 30, 2016
 
December 31, 2015
Convertible senior notes
$
126,800

 
$
126,800

Less: debt discount and issuance costs
(13,597
)
 
(15,546
)
Convertible senior notes, net
$
113,203

 
$
111,254

Interest expense under the Notes is as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Accretion of debt discount and issuance costs
$
987

 
$
1,198

 
$
1,949

 
$
2,353

2.25% accrued interest
713

 
900

 
1,418

 
1,780

Total interest expense from the Notes
$
1,700

 
$
2,098

 
$
3,367

 
$
4,133



9. Commitments and Contingencies

Letters of Credit and Performance Guarantees
As of June 30, 2016 , the Company had outstanding letters of credit for $19,102 . 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, 2016 were $17,271 and included deposits held by certain customers of $173 . These amounts primarily represent upfront 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, 2016 , the Company had $600 in deferred fees for these arrangements, which were included in deferred revenues. As of June 30, 2016 , the maximum termination penalty to which the Company could be subject under these arrangements, which the Company has deemed not probable of being incurred, was approximately $4,372 .

Sublease Arrangements
The Company leases office space under various operating leases. The Company has entered into sublease arrangements for certain excess space related to these leased facilities. As of June 30, 2016, future non-cancelable sublease payments are $8,542 over the next four years.

Contingencies and Indemnifications
The Company is currently involved in an ongoing matter related to a review of certain services provided under a contractual arrangement with an enterprise customer. This matter is in initial stages and no lawsuit has currently been filed. The Company does not currently believe it is probable that a loss has been incurred and therefore, no amounts have been accrued related to this matter. However, the Company has determined that it is reasonably possible that it may incur a loss related to this matter. The potential amount of such a loss is not currently estimable because the matter is at an early stage and involves unresolved questions of fact.
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not expect the ultimate costs to resolve such matters to have a material adverse effect on its consolidated financial condition, results of operations or cash flows.



15



10. Stockholder's Equity
Stock-Based Compensation
The Company grants share-based awards to employees, consultants, members of the board of directors and advisory board members. All share-based awards granted, including grants of stock options, restricted stock and restricted stock units, are recognized in the statement of operations based on their fair value as of the date of grant.
Stock-based compensation expense recorded in the consolidated statements of operations was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Selling and marketing expenses
$
974

 
$
308

 
$
1,792

 
$
1,951

General and administrative expenses
2,358

 
2,696

 
4,319

 
5,126

Research and development expenses
337

 
317

 
673

 
653

Total stock-based compensation expense (1)
$
3,669

 
$
3,321

 
$
6,784

 
$
7,730

(1) Stock-based compensation expense for the three and six months ended June 30, 2015 includes $15 and $493 related to the Company's acquisition of World Energy that was settled with equivalent cash payments.
The Company’s Chief Executive Officer is required to receive his performance-based bonus, if achieved, in shares of the Company's common stock. During the three and six months ended June 30, 2016 , the Company recorded $127 and $253 of stock based compensation expense, respectively, related to this performance based bonus. During the three and six months ended June 30, 2015 the Company recorded $140 and $253 of stock-based compensation expense related to this performance-based bonus.
Stock Options
The following is a summary of the Company’s stock option activity during the six months ended June 30, 2016 :
 
Six Months Ended June 30,
 
Number of
Shares
Underlying
Options
 
Weighted-
Average
Exercise Price
Per Share
 
Aggregate
Intrinsic
Value
 
Weighted Average Remaining Life (in years)
Outstanding at December 31, 2015
610,855

 
$
18.93

 
 
 
 
Granted

 

 
 
 
 
Exercised
(15,361
)
 
0.51

 
 
 
 
Canceled
(184,269
)
 
26.59

 
 
 
 
Outstanding at June 30, 2016
411,225

 
$
16.20

 
$
591

 
 
Exercisable at end of period
401,402

 
$
16.32

 
$
591

 
1.9
Vested or expected to vest at June 30, 2016
410,361

 
$
16.20

 
$
591

 
2.0
The aggregate intrinsic value as of June 30, 2016 in the preceding table represents the total pre-tax intrinsic value, based on the Company's closing stock price of $6.32 on June 30, 2016 , that would have been received by the option holders had all options holders exercised their "in-the-money" options as of that date. The total number of shares issuable upon the exercise of "in-the-money" options exercisable as of June 30, 2016 was approximately 102,784 . The total intrinsic value of options exercised during the six months ended June 30, 2016 was $106 . For unvested stock options outstanding as of June 30, 2016 , the Company had $81 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 1.3 years.



16



Restricted Stock
The following table summarizes the Company’s restricted stock activity during the six months ended June 30, 2016 :
 
Number of
Shares
 
Weighted Average
Grant Date Fair
Value Per Share
Nonvested at December 31, 2015
2,294,691

 
$
14.20

Granted
935,355

 
6.87

Vested
(670,085
)
 
13.16

Cancelled
(238,211
)
 
13.54

Nonvested at June 30, 2016
2,321,750

 
$
11.20

For unvested restricted stock outstanding as of June 30, 2016 , the Company had $19,945 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.3 years.
Restricted Stock Units
The following table summarizes the Company’s restricted stock unit activity during the six months ended June 30, 2016 :
 
Number of
Shares
 
Weighted Average
Grant Date Fair
Value Per Share
Nonvested at December 31, 2015
258,983

 
$
15.27

Granted
565,750

 
6.33

Vested
(31,598
)
 
7.58

Cancelled
(133,870
)
 
11.70

Nonvested at June 30, 2016
659,265

 
$
7.99

For non-vested restricted stock units subject to service-based vesting conditions outstanding as of June 30, 2016 , the Company had $2,873 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.5 years. For non-vested restricted stock units subject to outstanding performance-based vesting conditions that were not probable of vesting at June 30, 2016 , the Company had $1,441 of unrecognized stock-based compensation expense. If and when any additional portion of these non-vested restricted stock units are deemed probable to vest, the Company will reflect the effect of the change in estimate in the period of change by recording a cumulative catch-up adjustment to retroactively apply the new estimate.
Employee Stock Purchase Plan
On May 26, 2016, the Company's shareholders approved an employee stock purchase plan (the 2016 ESPP). The 2016 ESPP permits eligible employees, through payroll withholdings, to purchase shares of the Company's common stock at a 15% discount from the fair market value of the stock as determined on specific dates at six month intervals. The Company expects that the first six month offer period will begin in November 2016. The maximum amount of shares issuable under the 2016 ESPP is 3,000,000 . In any six month period, the maximum amount of shares issuable is limited to 500 shares per participant and 350,000 shares for all participants.
Share Repurchase Activity
On August 6, 2015, the Company's Board of Directors approved a share repurchase program that enables the Company to repurchase up to $50,000 of the Company’s common stock during the period from August 9, 2015 to August 9, 2016 (the 2015 Repurchase Program). During the six months ended June 30, 2016 , the Company did not repurchase any of its common stock under the 2015 Repurchase Program.
In connection with the vesting of restricted stock and restricted stock units under its equity incentive plans, the Company withheld 109,299 shares of its common stock during the six months ended June 30, 2016 to satisfy employee minimum statutory income tax withholding obligations which the Company pays in cash to the appropriate taxing authorities on behalf of its employees. All withheld shares became immediately available for future issuance under the Company's equity incentive plans.


11. Income Taxes
The Company recorded a worldwide income tax benefit of $1,109 and tax expense of $582 for the three and six months ended June 30, 2016 , respectively. The income tax expense for the six months ended June 30, 2016 is driven by the mix of earnings for foreign operations and reflects changes relating to valuation allowances associated with deferred tax assets for certain

17



foreign entities. The Company recorded an income tax expense of $345 and tax benefit of $1,940 for the three and six months ended June 30, 2015 , which included a $2,268 benefit due to the release of a portion of a U.S. valuation allowance in connection with the World Energy Solutions, Inc. acquisition.
Each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. The Company is required, at the end of each interim reporting period, to make its best estimate of the effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. However, if the Company is unable to make a reliable estimate of its annual effective tax rate, the actual effective tax rate for the year-to-date period may be the best estimate of the annual effective tax rate. For the six months ended June 30, 2016 , the Company is able to reliably estimate the annual effective tax rate on its foreign earnings, but it is unable to reliably estimate the annual effective tax rate on its U.S. earnings.
If the Company is able to make a reliable estimate of its annual U.S. effective tax rate as of September 30, 2016, the Company expects to provide for income taxes on a current year-to-date basis. If the Company continues to be unable to make a reliable estimate of its annual effective tax rate as of September 30, 2016, the Company expects to provide for income taxes using a methodology consistent with the approach for the six months ended June 30, 2016 .
The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of losses in all tax jurisdictions, as well as its ability to generate income in future periods. As of June 30, 2016 , due to the uncertainty around the realizability of certain domestic and foreign deferred tax assets, the Company continues to maintain a valuation allowance.


12. Concentration of Credit Risk
The Company's significant customers are PJM Interconnection (PJM), the Korea Power Exchange (KPX), the Australian Energy Market Operator (AEMO), and the Electric Reliability Council of Texas (ERCOT). PJM is an electric power grid operator in the mid-Atlantic region of the United States that is comprised of multiple utilities and was formed to control the operation of the regional power system, coordinate the supply of electricity, and establish a fair and efficient market. KPX is an electric power grid operator in South Korea, AEMO is an entity that was established to administer and operate the Western Australia wholesale electricity market, and ERCOT is an electric power grid operator in Texas. Revenues from these customers are included within the Demand Response operating segment.
The following table presents the Company’s significant customers as of the three and six months ended June 30, 2016 and 2015:
 
Three Months Ended June 30,
 
2016
 
2015
 
Revenues
 
% of Total
Revenues
 
Revenues
 
% of Total
Revenues
PJM
$
83,189

 
62
%
 
$
17,652

 
24
%
AEMO
*

 
*

 
7,197

 
10
%
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2016
 
2015
 
Revenues
 
% of Total
Revenues
 
Revenues
 
% of Total
Revenues
PJM
$
84,781

 
45
%
 
$
17,815

 
14
%
AEMO
*

 
*

 
14,475

 
12
%
* Represents less than 10% of total revenues.
AEMO, KPX, and ERCOT were the only customers that comprised 10% or more of the Company’s accounts receivable balance at June 30, 2016 , representing 14% , 12% , and 10% , respectively.
The Company currently participates in three PJM programs, which the Company refers to as Limited, Extended and Annual. Each program has a different delivery period, but the Company receives payments for all three programs ratably throughout PJM’s fiscal year, which ends May 31. The delivery period for the Limited program is June through September. The delivery period for the Extended program is June through October and then the following May. The delivery period for the Annual program is June through May. In all three programs, revenues earned could potentially be subject to adjustment or refund based

18



on performance during the delivery period, and due to the difficultly of reliably estimating such adjustments or refunds, revenues from all three programs are deferred and recognized at the end of the applicable delivery period.
In the case of the Limited program, because the delivery period ends before the end of PJM’s fiscal year, throughout which the Company receives payments, a portion of the revenues earned are recorded and accrued as unbilled revenue. Unbilled revenue related to PJM was $8,205 and $68,859 at June 30, 2016 and December 31, 2015 , respectively.
In the event the Company completely eliminates its obligation in a program through portfolio management, including participation in PJM incremental auctions, revenues related to such activity are recognized at the beginning of the delivery period.


13. Gain on Sale of Service Lines and Assets

Gain on Sale of Service Line
On May 31, 2016, the Company sold the Utility Programs Group (UPG), a component of the business that provides professional services to utilities with an emphasis on energy efficiency initiatives. UPG was a component of the Software segment. The UPG business was sold for $14,757 in cash, of which $1,600 was placed in escrow to cover general representations and warranties. The Company included the $1,600 in "deposits and other assets" on the consolidated balance sheet. The purchase price includes an estimate of working capital and may be adjusted 90 days following the closing date based on final working capital. The Company has accrued $286 for the expected final settlement of working capital items. The sale of UPG does not qualify as a discontinued operation as the disposal does not represent a strategic shift that will have a major effect on the Company’s operations and financial results. The Company recognized a gain on the sale of $17,376 , which is presented as a separate line on the consolidated statement of operations and is net of direct and incremental transaction costs of $75 . The goodwill allocated to the component was based on its relative fair value to the portion of the Software reporting unit that will be retained.
The following table summarizes the components of the gain:
 
As of June 30, 2016
Sale price
$
14,757

Working capital adjustments
(286
)
Adjusted sale price
14,471

Less:
 
Net operating liabilities, consisting primarily of deferred revenue
(4,337
)
Goodwill (see Note 5)
1,357

Net liabilities
(2,980
)
Direct and incremental transaction costs
75

Gain on sale of service line
$
17,376

Gain on Sale of Assets
On April 22, 2014, the Company entered into an agreement with a third party enterprise customer to sell its remaining two contractual demand response capacity resources related to an open market demand response program. The third party paid for the first demand response capacity resource during the three months ended June 30, 2014. During the three months ended June 30, 2015, the third party paid for the second demand response capacity resource and the Company recognized a gain on the sale of this asset equal to the purchase price of $2,991 .


14. Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 provides that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. As amended, the new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted no earlier than the original effective date of the standard, which is the first quarter of fiscal 2017 for the Company. ASU 2014-09 allows for full retrospective adoption applied to all periods presented or a modified retrospective adoption with the cumulative effect of initially applying this update recognized at the date of initial application.

19



Subsequent to issuing ASU 2014-09, the FASB has issued several amendments and updates to the new revenue standard. In March 2016, the FASB issued ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends ASU 2014-09 to provide additional guidance on how an entity should determine whether it should recognize revenue as a principal or as an agent. In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends certain aspects of the guidance set forth in the new revenue standard related to how an entity should identify performance obligations in contracts with customers and to provide implementation guidance on licensing arrangements. In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients , which provides implementation guidance for the new revenue standard in areas such as assessing collectibility, non-cash consideration, sale taxes, and treatment of completed contacts upon adoption of the standard. These amendments are effective when the Company adopts ASU 2014-09.
The Company is continuing to evaluate the future impact and method of adoption of ASU 2014-09 and related amendments on its consolidated financial statements and related disclosures. The Company is considering early adoption of ASU 2014-09 and related amendments using the modified retrospective method in the first quarter of 2017. The Company's ability to early adopt using the modified retrospective method is dependent on system readiness, and the completion of analysis necessary to meet the requirements under ASU 2014-09. While management continues to assess all potential impacts of ASU 2014-09, the Company currently believes that the most significant impact of adoption relates to the enhanced level of disclosures related to revenue from contracts with customers and the accounting for demand response programs. The Company anticipates that revenue for certain demand response programs, for which revenue is currently deferred until the end of the program period, will be recognized ratably under the new revenue guidance.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15). ASU 2014-15 requires that the Company evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is effective for annual and interim periods ending after December 15, 2016, and early adoption is permitted. The Company does not expect to early adopt ASU 2014-15 and does not believe the standard will have a material impact on its consolidated financial statements and related disclosures.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which provides new guidance on recognition and measurement of financial assets and financial liabilities. ASU 2016-01 will impact the accounting for equity investments and financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. All equity investments in unconsolidated entities (other than those accounted for under the equity method of accounting) will generally be measured at fair value with changes in fair value recognized in earnings. There will no longer be an available-for-sale classification for equity securities with readily determinable fair values. In addition, the FASB clarified the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale debt securities. In general, the new guidance will require modified retrospective application to all outstanding instruments, with a cumulative effect adjustment recorded to opening retained earnings. This guidance is effective January 1, 2018. The Company is currently evaluating the effect of the standard on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. The standard will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the effect of the standard on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for the Company's fiscal year ending December 31, 2017, unless the Company decides to early adopt the ASU. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.

20



In June 2016, the FASB issued ASU 2016-13, Credit Losses (ASU 2016-13). ASU 2016-13 provides guidance on how an entity should calculate and disclose expected credit losses related to financial assets, including trade accounts receivable. The guidance will replace the current "incurred loss" model for recording credit loss reserves. ASU 2016-13 is effective for the Company's fiscal year ending December 31, 2020 and interim periods therein. Early adoption of the ASU is permitted. The Company is currently evaluating the impact of the standard on its consolidated financial statements and related disclosures.

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, 2015 , as filed with the Securities and Exchange Commission, or the SEC, on March 10, 2016, or our 2015 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,” “likely,” “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 2015 Form 10-K. 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, or EIS, and demand response solutions to enterprises, utilities and electric power grid operators.
Energy Intelligence Software
Our EIS includes our subscription software, energy procurement solutions, and professional services.
Subscription Software
Our EIS provides enterprises with a Software-as-a-Service, or SaaS, energy management application that enables them to address their most important energy challenges, including:
energy cost visualization, budgets, forecasts, and accruals;
utility bill validation and payment;
facility optimization, including benchmarking facilities and identifying cost savings opportunities;
energy project tracking;
reporting for energy and sustainability disclosure and compliance; and
peak energy demand and the related cost impacts.
Our EIS helps enterprises quickly analyze data, achieve real-time visibility into and intelligence about their organization’s energy usage, reduce operational costs, comply and report on sustainability requirements, and drive better business decisions.
Energy Procurement Solutions
Our EIS also provides enterprises and utilities located in restructured or deregulated markets with the ability to more effectively manage energy supplier selection and the energy procurement process by providing highly-structured auction events designed to yield transparent and competitive energy pricing. Our energy procurement application consists of an online auction platform that helps enterprises and utilities realize the best price for electricity, natural gas and other energy resources by having energy suppliers compete for their business. Our procurement application also includes supplier contract management and price alert tools.
Professional Services
We offer premium professional services that support the implementation of our EIS and help our enterprise customers set their energy management strategy. Our professional services offerings also include energy audits and retro-commissioning. Professional services are offered to our customers as a means to further implement and extend our technology across their organizations.

21



Demand Response Solutions
Our demand response solutions provide utilities and electric power grid operators with a managed service demand response resource where we match obligation, in the form of megawatts, or MWs, that we agree to deliver to utilities and/or electric power grid operators, with supply, in the form of MWs, that we are able to curtail from the electric power grid through our arrangements with C&I end-users. When we are called upon by utilities and electric power grid operators to deliver contracted capacity, we use our Network Operations Center, or NOC, to remotely manage and reduce electricity consumption across our network of C&I end-user sites, making demand response capacity available to utilities and electric power grid operators on demand, while helping C&I end-users achieve energy savings, improve financial results and realize environmental benefits. We receive payments from utilities and electric power grid operators for providing our demand response solutions, and we share those payments with C&I end-users in exchange for those C&I end-users reducing their power consumption when called upon by us to do so. Our demand response solutions are also capable of providing utilities with the underlying technology to manage their own utility sponsored demand response programs and secure reliable demand side resources. This product consists of long‑term contracts with utilities for a technology enabled managed service that provides utilities with real time load monitoring, dispatching applications, customizable reports, and measurement and verification tools.


Significant Recent Developments
During the second quarter, our Board of Directors approved a restructuring plan to enhance our strategic focus, deliver operational and cost efficiencies, and hold our utility customer engagement, or UCE, business for sale. In addition, we executed other cost savings initiatives to reduce excess office space through sublease arrangements. As a result of these actions and the divestiture of a business as noted below, we recorded a restructuring charge of $3.7 million, which includes $1.2 million for severance and retention bonuses and $2.5 million of non-cash asset impairments.
Also during the second quarter, we completed the sale of a professional services business (UPG) for net proceeds of $14.5 million and recorded a gain on the sale of $17.4 million .
We appointed Bill Sorenson as Chief Financial Officer of the Company effective August 22, 2016. Sorensen will succeed Neil Moses, who will remain employed by the Company as a special advisor until his retirement in early 2017.

Use of Non-Financial Business and Operational Data
We utilize certain non-financial business and operational data to provide additional insight into factors and opportunities relevant to our business. This non-financial business and operational data does not necessarily have any direct correlation to our financial performance. However, the non-financial business and operational data may provide observations as to the scope of, and trends related to, our operations and therefore, we believe the utilization of such data can provide insights into certain aspects of our business, such as market share and penetration, and customer adoption and depth.

22



The following table outlines certain non-financial business and operational data utilized as of June 30, 2016 and December 31, 2015 :
 
June 30, 2016
 
December 31, 2015
Subscription Software Customers (1)(5)
1,100

 
1,100

Subscription Software ARR (in millions) (2)
$
28

 
$
27

Procurement Solutions Customers (3)(5)
2,300

 
2,800

Procurement Solutions ARR (in millions) (4)
$
34

 
$
35

 
(1) The term “Subscription Software Customers,” describes the number of our enterprise customers that purchase our EIS subscription software offerings including our basic, standard, professional, and industrial packages as well as various other subscription software applications. As of the reporting period ended June 30, 2016 we have removed the UCE business customers from the Subscription Software Customer count to reflect that the UCE business is currently classified as held for sale. The December 31, 2015 Subscription Software Customer count was previously reported as 1,100 and remains 1,100 without UCE business customers.
(2) The term “Subscription Software ARR” describes the annual recurring revenue, or ARR, from our contracts with Subscription Software Customers. ARR is defined as contracted, active (non-expired or terminated as of the end of the reporting period, or within a renewal grace period) subscription-based expected billings, normalized for a one-year period, regardless of contract length. ARR is exclusive of non-recurring or one-time fees which include professional service fees, site installation or set up, software implementation, and consulting or project-based fees. As of the reporting period ending June 30, 2016 we have removed our UCE business ARR from the Subscription Software ARR value to reflect that the UCE business is currently classified as held for sale. The December 31, 2015 Subscription Software ARR value was previously reported as $33 million and has been updated to $27 million to reflect the removal of the UCE business ARR as of December 31, 2015.
(3) The term “Procurement Solutions Customers” describes the number of our enterprise and utility customers that purchase our EIS procurement solutions including our energy procurement auction platform, supplier management and price alert tools, and supply procurement advisory services.
(4) The term “Procurement Solutions ARR” describes the annual recurring revenue, or ARR, from our contracts with Procurement Solutions Customers. ARR is defined as all contracted, active (non-expired or terminated as of the end of the reporting period, or within a renewal grace period) recurring expected billings, normalized for a one-year period, regardless of contract length. ARR is exclusive of non-recurring or one-time fees which include professional services fees, consulting or project-based fees, and wholesale procurement.
(5) Numbers rounded to nearest hundred.
The number of Subscription Software Customers at June 30, 2016 and December 31, 2015 was approximately 1,100 . Subscription Software ARR at June 30, 2016 was approximately $28 million compared to approximately $27 million at December 31, 2015 . The increase in Subscription Software ARR reflects the addition of new subscription software contracts from new customers as well as expansion from existing customers, net of churned ARR from non-renewed or terminated contracts. We expect the number of Subscription Software Customers and Subscription Software ARR to generally increase over time.
The number of Procurement Solutions customers at June 30, 2016 was approximately 2,300 compared to approximately 2,800 at December 31, 2015 . The decrease in Procurement Solutions Customers is consistent with our strategy to not renew certain smaller or unprofitable customers acquired through our acquisition of World Energy Solutions, Inc., or World Energy. Procurement Solutions ARR at June 30, 2016 was approximately $34 million , compared to approximately $35 million at December 31, 2015 . We expect the number of Procurement Solutions Customers and Procurement Solutions ARR to generally increase over time, but the number of Procurement Solutions Customers and Procurement Solutions ARR may decrease in the near term as we continue to selectively not renew certain smaller or unprofitable customers acquired through our acquisition of World Energy.
We continually evaluate the non-financial business and operational data that we review and the relevance of this data as our business continues to evolve and, as a result, such data and information may change over time.

23



Consolidated Results of Operations
Three and Six Months Ended June 30, 2016 Compared to the Three and Six Months Ended June 30, 2015
Revenues
The following table summarizes our consolidated revenues for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Dollar
 
Percentage
 
2016
 
2015
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
Software
$
16,232

 
$
19,908

 
$
(3,676
)
 
(18.5
)%
Demand Response
116,462

 
52,592

 
63,870

 
121.4
 %
Total
$
132,694

 
$
72,500

 
$
60,194

 
83.0
 %
 
Six Months Ended June 30,
 
Dollar
 
Percentage
 
2016
 
2015
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
Software
$
33,265

 
$
37,325

 
$
(4,060
)
 
(10.9
)%
Demand Response
152,809

 
85,726

 
67,083

 
78.3
 %
Total
$
186,074

 
$
123,051

 
$
63,023

 
51.2
 %
The decrease in Software revenues during the three and six months ended June 30, 2016 , as compared to the same periods in 2015 , was primarily due to our divestiture of the World Energy efficiency business in the fourth quarter of 2015 and the divestiture of UPG in the second quarter of 2016, both of which reduced our energy efficiency professional services revenue. This decrease was partially offset by an increase in our subscription software revenue. The increase in Demand Response revenues during the three and six months ended June 30, 2016 , as compared to the same periods in 2015 , was primarily due to recognition of revenues associated with our participation in PJM Interconnection's (PJM) Extended program.
Gross Profit and Gross Margin
The following table summarizes our consolidated gross profit and gross margin percentages for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):
Three Months Ended June 30,
2016
 
2015
Gross Profit
 
Gross Margin
 
Gross Profit
 
Gross Margin
$
51,163

 
38.6
%
 
$
38,957

 
53.7
%
Six Months Ended June 30,
2016
 
2015
Gross Profit
 
Gross Margin
 
Gross Profit
 
Gross Margin
$
71,949

 
38.7
%
 
$
57,552

 
46.8
%
The increase in consolidated gross profit and the decrease in consolidated gross margin for the three and six months ended June 30, 2016 , as compared to the same period in 2015, was primarily due to an increase in revenues associated with the delivery of demand response in our PJM Extended program, which had a lower gross margin than the mix of programs in 2015. We currently expect our consolidated gross profit in 2016 to be slightly lower, as compared to 2015, primarily as a result of the slightly lower revenue expectations with relatively consistent year-over-year gross margins.


24



Operating Expenses
The following table summarizes our consolidated operating expenses for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Percentage
Operating expenses:
2016
 
2015
 
Change
Selling and marketing
$
25,517

 
$
23,670

 
7.8
 %
General and administrative
27,441

 
28,453

 
(3.6
)%
Research and development
7,634

 
7,735

 
(1.3
)%
Gain on sale of service lines and assets
(17,376
)
 
(2,991
)
 
n/m

Restructuring charges
3,694

 

 
n/m

     Total operating expenses
$
46,910

 
$
56,867

 
(17.5
)%
 
Six Months Ended June 30,
 
Percentage
 
2016
 
2015
 
Change
Selling and marketing
$
50,532

 
$
52,166

 
(3.1
)%
General and administrative
55,357

 
56,743

 
(2.4
)%
Research and development
15,677

 
15,186

 
3.2
 %
Gain on sale of service lines and assets
(17,376
)
 
(2,991
)
 
n/m

Restructuring charges
3,694

 

 
n/m

     Total operating expenses
$
107,884

 
$
121,104

 
(10.9
)%
Selling and Marketing Expenses
The following table summarizes our consolidated selling and marketing expenses for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Percentage
 
2016
 
2015
 
Change
Payroll and related costs
$
15,889

 
$
15,563

 
2.1
 %
Stock-based compensation
974


308

 
216.2
 %
Amortization of intangible assets
2,173

 
3,070

 
(29.2
)%
Other
6,481

 
4,729

 
37.0
 %
     Total selling and marketing expenses
$
25,517

 
$
23,670

 
7.8
 %
 
Six Months Ended June 30,
 
Percentage
 
2016
 
2015
 
Change
Payroll and related costs
$
32,209

 
$
32,847

 
(1.9
)%
Stock-based compensation
1,792


1,951

 
(8.1
)%
Amortization of intangible assets
4,377

 
5,313

 
(17.6
)%
Other
12,154

 
12,055

 
0.8
 %
     Total selling and marketing expenses
$
50,532

 
$
52,166

 
(3.1
)%

The increase in payroll and related costs for the three months ended June 30, 2016 was primarily due to an increase in employee placement fees, travel, and training associated with bringing on new software sales representatives, partially offset by a decrease in the number of selling and marketing full-time employees from 372 at June 30, 2015 to 322 at June 30, 2016 . Stock-based compensation for the three months ended June 30, 2015 includes a reversal of $0.8 million related to the cancellation of awards upon termination of employment of a former executive officer. Excluding this reversal, stock-based compensation in the current year three and six month periods is lower compared to the prior periods due to a decline in grant date fair value of stock-based awards. Amortization of intangible assets decreased in both the three and six month periods due to certain customer relationship intangible assets becoming fully amortized or classified as held for sale in the current period. Other selling and marketing expenses include advertising, marketing, professional services, and a company-wide overhead cost allocation. Other sales and marketing expenses increased in the three month period compared to the prior year due to higher conference and trade show costs and external consulting fees. Other sales and marketing expenses were relatively consistent across the six month periods. We currently expect selling and marketing expenses in fiscal 2016 to be consistent with 2015.

25



General and Administrative Expenses
The following table summarizes our consolidated general and administrative expenses for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Percentage
 
2016
 
2015
 
Change
Payroll and related costs
$
16,832

 
$
15,782

 
6.7
 %
Stock-based compensation
2,358

 
2,696

 
(12.5
)%
Other
8,251

 
9,975

 
(17.3
)%
     Total general and administrative expenses
$
27,441

 
$
28,453

 
(3.6
)%
 
Six Months Ended June 30,
 
Percentage
 
2016
 
2015
 
Change
Payroll and related costs
$
33,456

 
$
33,531

 
(0.2
)%
Stock-based compensation
4,319

 
5,126

 
(15.7
)%
Other
17,582

 
18,086

 
(2.8
)%
     Total general and administrative expenses
$
55,357

 
$
56,743

 
(2.4
)%

Payroll and related costs increased in the current three month period as compared to the prior year primarily as a result of fewer professional services costs classified to cost of sales due to lower utilization as well as higher travel costs. Payroll and related costs were relatively consistent in the six month periods as compared to the prior year. The number of general and administrative full-time employees declined slightly from 547 at June 30, 2015 to 530 at June 30, 2016 . The decrease in stock-based compensation expense for the current year three and six month periods as compared to the prior year was primarily due to the decline in the grant date fair value of stock-based awards. Other general and administrative expenses include professional services, rent, depreciation and a company-wide overhead cost allocation. Other expenses declined in the current three month period as compared to the prior year as a result of lower external legal costs, lower facility costs as a result of subleasing arrangements, and lower costs related to acquisitions and divestitures. We currently expect a slight decrease in general and administrative expenses in fiscal 2016, as compared to 2015.
Research and Development Expenses
The following table summarizes our consolidated research and development expenses for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Percentage
 
2016

2015
 
Change
Payroll and related costs
$
4,752

 
$
4,488

 
5.9
 %
Stock-based compensation
337

 
317

 
6.3
 %
Other
2,545

 
2,930

 
(13.1
)%
     Total research and development marketing expenses
$
7,634

 
$
7,735

 
(1.3
)%
 
Six Months Ended June 30,
 
Percentage
 
2016
 
2015
 
Change
Payroll and related costs
$
9,891

 
$
8,982

 
10.1
 %
Stock-based compensation
673

 
653

 
3.1
 %
Other
5,113

 
5,551

 
(7.9
)%
     Total research and development expenses
$
15,677

 
$
15,186

 
3.2
 %
The increase in payroll and related costs for the three and six month periods as compared to the prior year was primarily driven by an increase in average salary and bonus expense per research and development full time employee, partially offset by more internal use software development costs capitalized in the current year periods as compared to the prior year. The number of research and development full time employees decreased from 206 at June 30, 2015 to 197 at June 30, 2016 . Stock-based compensation was relatively consistent across both periods. Other research and development expenses, which include technology expenses, professional services, facilities and a company-wide overhead cost allocation, declined in the current three and six month periods as compared to the prior year as a result of a reduction in third party software and data storage costs. We currently expect research and development expenses in fiscal 2016 to be comparable to 2015.


26




Gain on Sale of Services Lines and Assets
As discussed in Note 13, during the three months ended June 30, 2016, we sold UPG, a component of the business that provides professional services to utilities, for approximately $14.5 million in cash. We recognized a gain of $17.4 million , net of direct transaction costs of $0.1 million . These gains exceeded similar gains recorded in the prior year as described below.

Also as discussed in Note 13, during the three months ended June 30, 2015, we recognized a gain of $3.0 million for payments received related to the sale of contractual demand response capacity resources.

Restructuring Charges
Restructuring charges for the three and six months ended June 30, 2016 were $3.7 million. During the three month period ended June 30, 2016, our Board of Directors approved a restructuring plan to enhance our strategic focus, deliver operational and cost efficiencies, and to place our UCE business for sale. Restructuring charges related to these actions include $0.9 million of severance costs for terminated employees and retention costs for employees who will remain with the UCE business until it is sold. We expect to record an aggregate of $1.4 million in severance and retention bonuses related to the sale of UCE and we expect to settle all termination and retention bonuses in the current fiscal year. We expect that these restructuring activities will result in savings, through lower personnel related costs of approximately $5.0 million to $6.0 million on an annualized basis. In addition, we also recorded $0.3 million of restructuring charges related to the divestiture of UPG as noted above. Total cash restructuring charges were $1.2 million in the second quarter of 2016.
 
Restructuring charges for the second quarter also include non-cash impairment charges for long-lived assets related to our corporate facility. During the three months ended June 30, 2016, we modified a non-cancelable sublease agreement with a third party. We assessed the carrying value of leasehold improvements and furniture and fixtures related to the subleased space and recorded an impairment charge of $2.5 million to adjust these assets to fair value.
Other Income (Expense), Net and Interest Expense
Other expense for the three months ended June 30, 2016 was $3.4 million as compared to other income of $1.7 million for the three months ended June 30, 2015. Other expense in the current period includes a $1.2 million impairment to a cost-method investment due to a decline in fair value of the investment that is deemed to be other-than-temporary. Other expense in the three months ended June 30, 2016 also includes net unrealized foreign currency losses on intercompany loans and receivables held by our corporate U.S. entity largely due to the recent weakening of the British Pound and Euro relative to the U.S. dollar. In contrast, for the three months ended June 30, 2015, other income includes unrealized foreign currency gains that are primarily driven by the strengthening of Canadian dollar and the Euro against the U.S. Dollar.

Other expense for the six months ended June 30, 2016 was $0.3 million as compared to other expense of $3.0 million for the six months ended June 30, 2015. Other expense in the current period includes a $1.2 million impairment to a cost-method investment, partially offset by net unrealized foreign currency gains. In the current year, foreign exchange rates are relatively consistent from June 30, 2016 to December 31, 2015. In contrast, the U.S. dollar strengthened in the first half of 2015, resulting in unrealized foreign currency losses.
Interest expense was $1.8 million and $3.6 million for the three and six months ended June 30, 2016 , respectively, compared to $2.2 million and $4.5 million for the three and six months ended June 30, 2015 , respectively. The decrease in interest expense in the current three and six month periods as compared to the prior year was due to the retirement of a portion of our convertible notes in the fourth quarter of 2015.
Income Taxes
For the three and six months ended June 30, 2016 , we recorded a worldwide tax benefit of $1.1 million and tax expense of $0.6 million , respectively. The income tax expense for the six months ended June 30, 2016 is driven by the mix of earnings for foreign operations and reflects changes relating to valuation allowances associated with deferred tax assets for certain foreign entities. For the three and six months ended June 30, 2015 , we recorded a tax expense of $0.3 million and tax benefit of $1.9 million , respectively, primarily due to the release of a portion of the U.S. valuation allowance in connection with the World Energy acquisition.

27




Segment Results of Operations
Effective in the first quarter of 2016 , we began operating as two reportable segments: Software and Demand Response. We evaluate and assess the performance of our operating segments based on revenues and adjusted EBITDA, which is the measure of segment profit or loss that is reported to our Chief Operating Decision Maker for purposes of making decisions about allocating resources to each segment and assessing its performance. We define segment adjusted EBITDA as segment income (loss) excluding depreciation and asset impairments, amortization of intangible assets, stock-based compensation, gain on the sale of service lines and assets, and restructuring charges. We do not allocate interest, non-operating income (expense), taxes, and certain corporate-level costs to our reportable segments.

Three and Six Months Ended June 30, 2016 Compared to the Three and Six Months Ended June 30, 2015 :
Revenues:
Software Segment Revenues
The following table summarizes our Software segment revenues for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Dollar
 
Percentage
 
2016
 
2015
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
Subscription software
$
5,569

 
$
4,831

 
$
738

 
15.3
 %
Procurement solutions
8,795

 
8,855

 
(60
)
 
(0.7
)%
Professional services
1,868

 
6,222

 
(4,354
)
 
(70.0
)%
Total Software Revenues
$
16,232

 
$
19,908

 
$
(3,676
)
 
(18.5
)%
 
Six Months Ended June 30,
 
Dollar
 
Percentage
 
2016
 
2015
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
Subscription software
11,745

 
9,318

 
$
2,427

 
26.0
 %
Procurement solutions
17,728

 
17,476

 
252

 
1.4
 %
Professional services
3,792

 
10,531

 
(6,739
)
 
(64.0
)%
Total Software Revenues
$
33,265

 
$
37,325

 
$
(4,060
)
 
(10.9
)%
The decrease in Software segment revenues during the three and six months ended June 30, 2016 , as compared to the same periods in 2015 , was primarily due to the divestiture of our World Energy efficiency business and the UPG business. The divestitures, both of which impacted our professional services business, occurred in the fourth quarter of 2015 and second quarter of 2016, respectively. Excluding the impact of these divestitures, Software segment revenue increased in the current three and six month periods primarily due to the organic growth in subscription software revenues. We currently expect our Software segment revenues in fiscal 2016 to be slightly lower, as compared to 2015, due to the aforementioned divestitures and the expected divestiture of our UCE business, partially offset by organic growth in our subscription software revenues.

28



Demand Response Segment Revenues
The following table summarizes our Demand Response segment revenues for the three and six months ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Dollar
 
Percentage
 
2016
 
2015
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
Grid Operator
$
104,673

 
$
41,545

 
$
63,128

 
152.0
%
Utility
11,789

 
11,047

 
742

 
6.7
%
Total Demand Response Revenues
$
116,462

 
$
52,592

 
$
63,870

 
121.4
%
 
Six Months Ended June 30,
 
Dollar
 
Percentage
 
2016
 
2015
 
Change
 
Change
Revenues:
 
 
 
 
 
 
 
Grid Operator
$
131,485

 
$
65,291

 
$
66,194

 
101.4
%
Utility
21,324

 
20,435

 
889

 
4.4
%
Total Demand Response Revenues
$
152,809

 
$
85,726

 
$
67,083

 
78.3
%
The increase in Demand Response segment revenues during the three and six months ended June 30, 2016 , as compared to the same periods in