S-1 1 d620747ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on March 3, 2014.

Registration No. 333-          

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

 

Opower, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   7372   26-0542549

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

1515 North Courthouse Road, 8th Floor

Arlington, Virginia 22201

703.778.4544

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

 

Daniel Yates

Chief Executive Officer

Opower, Inc.

1515 North Courthouse Road, 8th Floor

Arlington, Virginia 22201

703.778.4544

(Name, address, including zip code, and telephone number, including area code, of agent for service) 

 

 

 

Copies to:

 

Richard A. Kline, Esq.

Anthony J. McCusker, Esq.

Joseph C. Theis, Esq.

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, California 94025

650.752.3100

 

Michael Sachse, Esq.

Senior Vice President and General Counsel Opower, Inc.

1515 North Courthouse Road, 8th Floor

Arlington, Virginia 22201

703.778.4544

 

Mark R. Fitzgerald, Esq.

Michael C. Labriola, Esq.

Wilson Sonsini Goodrich & Rosati, Professional Corporation

1700 K Street NW, Fifth Floor

Washington, District of Columbia 20006

202.973.8800

 

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box:  ¨

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 

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

 

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

 

Proposed

maximum

aggregate

offering price(1)(2)

  Amount of
registration fee

Common Stock, $0.000005 par value per share

  $100,000,000   $12,880

 

 

(1)   Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)   Includes the aggregate offering price of additional shares that the underwriters have the option to purchase to cover overallotments, if any.

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PROSPECTUS (Subject to completion)

 

Issued      , 2014

 

                Shares

 

LOGO

 

COMMON STOCK

 

 

 

Opower, Inc. is offering              shares of its common stock. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price of our common stock will be between $             and $             per share.

 

 

 

We have applied to list our common stock on the New York Stock Exchange under the symbol “OPWR.”

 

 

 

We are an “emerging growth company” under the U.S. federal securities laws and are subject to reduced public company reporting requirements. Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.

 

 

 

PRICE $             A SHARE

 

 

 

   

Price to
    Public    

 

Underwriting
Discounts
and
Commissions(1)

 

Proceeds to

    Opower    

Per Share

  $            $            $         

Total

 

$                    

  $                       $                    

 

  (1)   See “Underwriters” for additional information regarding underwriting compensation.

 

We have granted the underwriters the right to purchase up to an additional                 shares of common stock to cover over-allotments.

 

The Securities and Exchange Commission and any state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the shares of common stock to purchasers on             , 2014.

 

 

 

MORGAN STANLEY   GOLDMAN, SACHS & CO.
Allen & Company LLC   Pacific Crest Securities
Canaccord Genuity   Cowen and Company

 

            , 2014


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LOGO

 

INFORMATION IS POWER


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LOGO

 

POWERFUL SOFTWARE, POWERED BY DATA 1.4 MILLION households served in 2010 32.1 MILLION households and businesses served in 2013 1,900 GWh saved in 2013 100+ BILLION meter reads analyzed annually $234.1 MILLIONsaved by consumers in 2013* 40+ behavioral science techniques used in our products *at average U.S. electricity prices 52 MILLION households and businesses in the Opower data set 93 utility customers across 8 COUNTRIES 27 of the 50 LARGEST U.S. ELECTRIC UTILITIES 52 MILLION households and businesses in the Opower data set


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LOGO

 

This is OPOWER


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TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     34   

Market and Industry Data

     35   

Use of Proceeds

     35   

Dividend Policy

     35   

Capitalization

     36   

Dilution

     38   

Selected Financial Data

     40   

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

     42   

Business

     63   
     Page  

Management

     79   

Executive Compensation

     85   

Certain Relationships And Related Party Transactions

     92   

Principal Stockholders

     95   

Description Of Capital Stock

     98   

Shares Eligible For Future Sale

     102   

Certain Material U.S. Federal Income Tax Consequences

     105   

Underwriters

     109   

Legal Matters

     116   

Experts

     116   

Additional Information

     116   
 

 

 

 

You should rely only on the information contained in this prospectus or contained in any free writing prospectus filed with the Securities and Exchange Commission. Neither we nor any of the underwriters have authorized anyone to provide any information or make any representations other than those contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial condition, results of operations and prospects may have changed since such date.

 

Through and including             , 2014 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

For investors outside of the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

 

This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. Unless the context otherwise requires, the terms “Opower,” “the company,” “we,” “us,” and “our” in this prospectus refer to Opower, Inc.

 

OPOWER, INC.

 

Overview

 

Opower is a leading provider of cloud-based software to the $2.2 trillion utility industry. Utilities use our software platform to deliver key customer-facing applications that reduce energy demand and improve customer perception of the utility. Our software analyzes energy data and presents personalized insights to consumers in order to motivate reductions in energy consumption. These reductions are valued as a source of energy much like a conventional power plant. We believe that we are poised to transform the way the utility industry meets energy demand.

 

Utilities face two critical challenges that our software is built to address. First, utilities are under political, regulatory and environmental pressure to build fewer power plants, find cleaner sources of fuel and keep rates low. In order to accomplish these goals, utilities implement energy efficiency and demand response programs, which reduce overall and peak usage. Regulatory mechanisms support these programs by compensating utilities for reducing usage. Second, utilities need to strengthen their customer relationships. In many parts of the world, utilities compete for customers, and therefore customer engagement is critical. In regulated markets, which include much of the United States, regulators reward utilities for improving customer satisfaction. Utilities committed an estimated $11 billion to energy efficiency, demand response and customer engagement programs in 2013 in an effort to address these two challenges.

 

Our software is replacing low-tech and hardware-intensive products. Alternative efficiency programs today primarily consist of subsidies for energy efficient products, such as air conditioners and light bulbs. A common residential demand response program is a decades-old hardware switch connected to a pager network that shuts off the consumer’s air conditioner. Utility marketing efforts are often limited to traditional mass market approaches, such as bus stop advertisements and television commercials. We are able to replace these programs because our software offers measurable results and a better return on investment to utilities when scaled. Our approach has improved customer sentiment metrics by a median of 6% and up to 10% in some cases and we helped utilities and their customers save over 1,900 gigawatt hours of energy in 2013.

 

We can embed our solutions within utilities’ websites, mobile applications and customer service interfaces, and deliver individualized emails, text messages, automated phone calls and mail. In the design of these consumer touch points, we apply behavioral science insights to actionable patterns identified by our proprietary data analytics engine, which analyzes hundreds of billions of energy usage data points. Our cloud-based platform is extensible and configurable, a necessity to accommodate our customers’ diverse needs on a single code base.

 

We have developed four interconnected solutions on our platform:

 

   

2007: Opower Energy Efficiency – Reports and alerts, via mail and email, that compare consumers’ energy use to their neighbors’ and provide targeted energy saving recommendations.

 

 

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2010: Opower Customer Engagement Web, mobile, digital alerts and customer service applications that improve customer experience and streamline operations.

 

   

2012: Opower Thermostat Management Mobile and web applications that connect to third-party thermostats in order to control and optimize peak and overall HVAC utilization.

 

   

2013: Opower Demand Response – A zero-hardware solution consisting of near real-time text messages, email and automated phone alerts that motivates peak reductions in energy consumption.

 

We generate revenue from utilities by selling primarily multi-year subscriptions to our software. As of December 31, 2013, we served 93 utility customers in eight countries, including 27 of the 50 largest electric utilities in the United States. We have the opportunity to expand within these existing customers; for example, the average penetration of our Energy Efficiency solution is approximately 10% of our utility clients’ customer base. We believe our addressable market includes 1,300 electric and gas utilities worldwide, serving 650 million households and 60 million businesses.

 

Because our clients often provide us all of their energy data even when launching smaller programs, we currently manage data representing 37% of all U.S. households. The scale and scope of this data enable us to better optimize the energy-saving performance of our programs and continually improve our pattern-matching algorithms. We share our proprietary cross-utility insights with our utility customers, and they see it as a valued benefit. We believe that as we grow, these network effects will continue to strengthen, and that these advantages give us a defensible leadership position.

 

We have experienced significant growth since our inception. Through our utility customers, we have increased the households we serve from 1.4 million in 2010 to 32.1 million in 2013. For the years ended December 31, 2011, 2012 and 2013, our revenue was $28.7 million, $51.8 million and $88.7 million, respectively, representing year-over-year revenue growth of 80% and 71%, respectively. We generated more than 90% of our revenue from annual recurring subscription fees in 2013. Because we believe our opportunity is large, we continue to invest significantly in our growth. As a result, we have generated net losses of $21.3 million, $12.3 million and $14.2 million in 2011, 2012 and 2013, respectively.

 

Utility Industry Background and Our Market Opportunity

 

Utilities operate in a highly regulated environment. Regulators review and approve capital expenditures and, in most markets, set the rates utilities charge their customers. In particular, regulators increasingly incentivize utilities to pursue energy efficiency and demand response, and place higher priority on better customer experience.

 

Key Industry Trends Affecting Utilities

 

Key trends affecting utilities include:

 

Regulators Prioritizing Energy Efficiency Over New Capacity. More than 25 U.S. states have enacted long-term energy efficiency resource standards, and these states account for over 61% of total U.S. electricity consumption. Similarly, the European Union adopted an Energy Efficiency Directive in October 2012 in order to ensure the achievement of its commitment to reduce emissions by 20% by 2020. In Asia and Latin America, rapid development, limited supply and government regulation and initiatives are also creating an imperative for energy saving measures.

 

Increasing Focus on Reducing Peak Demand. As it is for most large network providers, reducing peak demand is valuable for utilities. In fact, it has become even more valuable as peak supply prices have gone up and as changing regulations have made it easier to sell energy reductions on par with supply.

 

 

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Changing Consumer Expectations. The widespread adoption of smartphones, mobile apps and social networking tools has changed the way consumers interact with their service providers. The change in consumer expectations has led utilities to seek new communication tools. As a result, utilities are looking for services that can improve their relationship with their customers.

 

Increasing Data Available to Utilities. Smart meter rollouts continue to accelerate globally. According to a January 2013 IMS Research report, smart meter penetration is expected to increase from 18% of all electricity meters in 2011 to 35% of all meters in 2016. Smart meters generate over 700 times more data than traditional meters, and this large increase creates an opportunity for utilities to offer new services and analytics-driven insights for their customers. In addition, the emergence of WiFi-enabled thermostats is likely to increase available energy data even further.

 

Increasing Competition. Over the past two decades, many countries and some U.S. states have separated the retail sale of energy from the generation, distribution and transmission of power. In these markets, competition among retail providers can be high, and customer retention is a challenge with some utilities experiencing customer churn of more than 25% per year. In noncompetitive, or regulated, energy markets, other providers, such as rooftop solar contractors, are entering the market with products and services that threaten to disintermediate the utility. All of these challenges mean that utilities must build deeper relationships with their customers.

 

The Opportunity for the Opower Solution

 

We believe our solutions give utilities greater returns than their historical options and, as a result, we expect to continue to grow our share of these large markets over time.

 

   

Energy Efficiency. In the U.S. alone, utilities spent $6.9 billion on electric efficiency in 2012. Since 2007, this spending has grown at a 21% CAGR, according to a July 2013 report from the Institute for Electric Innovation.

 

   

Demand Response. The global demand response market is projected to grow from $3.0 billion in 2013 to $5.8 billion in 2020, representing a CAGR of 10%, according to a second quarter 2013 report published by Navigant Research.

 

   

Customer Engagement. We believe that customer engagement is at the intersection of a number of markets for utilities, including customer billing and information systems, home energy management solutions and smart grid analytics. These markets are expected to grow from $4.1 billion in 2013 to $12.1 billion in 2020, representing a 17% CAGR, according to Navigant Research and Greentech Media.

 

Our solutions address a portion of each of these markets. Based on our internal analysis and industry experience, we estimate our addressable market opportunity to be at least $11 billion annually. Our newest solutions, Thermostat Management and Demand Response, offer significant growth potential, but both are still in a nascent stage with an immaterial impact on our revenue to date.

 

Key Benefits to Utilities

 

The key benefits utilities derive from our solutions include:

 

Low Cost, Large Scale Energy Efficiency. We are able to cost-effectively drive energy efficiency results across millions of homes. As a result, for some utilities, our efficiency solution has become their single biggest source of residential energy savings.

 

Low Cost, Large Scale Residential Demand Response. Our software enables utilities to scale residential peak demand reductions by rapidly communicating with energy consumers.

 

 

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Improved Customer Satisfaction. Utilities have implemented our user-friendly solutions to increase customer satisfaction. We have surveyed over 30,000 energy consumers who receive our solutions. These consumers consistently report greater trust in their utility as a source of information, and they believe that the utility wants to help them save energy and money.

 

Reduced Cost to Serve. Utilities spend $6 billion annually on customer service. With our digital solutions, utilities can communicate with their customers through web and mobile applications, making interactions more cost effective and efficient. We believe this reduces customer service costs. Customer service software has been reducing the cost of service for a wide set of industries, but the utility industry has lagged behind.

 

Better Customer Engagement Technology. Our platform gives utilities the ability to deploy state-of-the-art technology for their customer communications, allowing them to reach and engage their customers across multiple channels with minimal effort. Much as next generation customer relationship management (“CRM”) software and digital marketing software have delivered significant value to enterprises globally, our solutions help utilities strengthen their relationships with their customers.

 

Network Effects. We have six years of experience working with industry leading utilities. Our large and growing energy dataset combined with our significant industry experience has caused many utilities to view us as a source of third-party benchmarking and industry knowledge.

 

Our Differentiated Approach

 

The key components of our differentiated approach are:

 

Highly Scalable Data Analytics Engine. We have built what we believe to be the most sophisticated data engine serving utilities. As of December 31, 2013, we have collected energy data from 52 million households and businesses aggregated from our utility customers. Our data analytics engine can process and analyze our vast data set and provide personalized insights to the households and businesses that our utility customers serve.

 

Cloud-Based Architecture. Our solutions are built on a cloud-based architecture and delivered through web and mobile applications, text message, email, phone and mail. We maintain a single version of our code base, which means that all of our customers receive new features and updates simultaneously. In an industry that is accustomed to long-term investments, the fact that our software is regularly updated at no added cost is a significant benefit.

 

Intuitive User Experience Informed by Behavioral Science. An intuitive user experience and behavioral science are at the core of all of our solutions. We seek to change the habits of consumers by presenting realistic goals, encouragement and rewards. We use more than 40 behavioral science techniques such as loss language, normative comparisons and reciprocity to encourage utility customers to optimize their energy consumption.

 

Track Record of Measurable Results. We design our products to deliver measurable outcomes, which are necessary for utilities to meet their energy efficiency and demand response targets. We have 189 client years of results, and we believe this track record gives us a significant advantage over our competitors. Our approach to savings has been approved by regulators in 30 states, and that track record has strengthened our brand.

 

 

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Our Growth Strategy

 

The key elements of our growth strategy include:

 

Expand With Existing Customers. We see a significant opportunity to grow our revenue simply by expanding our presence within our existing customer base. Currently, our energy efficiency reports are deployed to approximately 10% of households that our utility customers serve. Most of our utility customers initially purchase only one of our four solutions, and deploy that initial solution to only a portion of their customers. Because all of our easily integrated products help utilities improve their engagement with energy consumers, we believe that utilities will derive even greater benefits as they deploy additional solutions. Moreover, once a utility begins to send us its data, we can more easily roll out programs to additional households and businesses.

 

Win New Customers Globally. As of December 31, 2013, we had 93 utility customers in eight countries, yet we believe that there are approximately 1,300 utilities that could benefit from our solutions. To reach more of these potential customers, we are expanding our sales, marketing and regulatory efforts, in particular internationally.

 

Develop New Offerings on Our Industry Data Platform. Since we are a trusted partner, our customers often ask us to develop new offerings to meet their growing needs. These requests are increasingly central to our plans for growth. We have made, and will continue to make, significant investments to augment our platform to capture adjacent opportunities.

 

Focus on Gas and Electric Consumer Outcomes. From the outset, we have designed products that can deliver measurable changes in consumer behavior, which has been core to our success. We believe we can achieve more both with our existing solutions and through new products. We have focused and will continue to focus our research and development efforts to continue to improve outcomes for gas and electric consumers.

 

Risks Affecting Us

 

Our business, financial condition, results of operations and prospects are subject to numerous risks. These risks include:

 

   

We have a history of losses and we may not achieve or sustain profitability on a quarterly or annual basis.

 

   

Sales and implementation cycles to our customers can be lengthy and unpredictable.

 

   

We operate in a highly regulated business environment.

 

   

We are dependent on the utility industry, which has experienced increased and changing regulations.

 

   

A limited number of our utility customers are responsible for a significant portion of our bookings, revenue and cash flow.

 

   

We have experienced rapid growth and organizational change in recent periods.

 

   

The market for our products and solutions is still developing.

 

   

Utilities in critical markets may fail to collect data or may be unable to collect current data that we require to provide our products and solutions.

 

   

Our quarterly results are inherently unpredictable and subject to substantial fluctuations.

 

   

We operate in a competitive industry.

 

 

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Corporate Information

 

We were incorporated in Delaware in 2007. Our principal executive offices are located at 1515 North Courthouse Road, 8th Floor, Arlington, Virginia 22201, and our telephone number is (703) 778-4544. Our website address is www.opower.com. Information contained on or that can be accessed through our website does not constitute part of this prospectus and inclusions of our website address in this prospectus are inactive textual references only.

 

“Opower” is our registered trademark in the United States, Australia, Canada, the European Community, Japan and New Zealand. Other trademarks and trade names referred to in this prospectus are the property of their respective owners.

 

 

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THE OFFERING

 

Common stock offered by us

                    shares

Common stock to be outstanding after this offering

                    shares

Option to purchase additional shares from us

   We have granted the underwriters an option, exercisable for 30 days after the date of this prospectus, to purchase up to an additional                  shares from us.

Use of proceeds

   We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $                 million (or approximately $                 million if the underwriters’ option to purchase additional shares in this offering is exercised in full), based upon an assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   We currently intend to use the net proceeds of this offering for working capital and other general corporate purposes, including investing further in our sales and marketing and research and development efforts. We intend to use proceeds from this offering to further grow our business and to fund our growth strategies discussed in this prospectus. We may also use a portion of the net proceeds to acquire or invest in complementary businesses, products, services, technologies or other assets. See “Use of Proceeds” for additional information.

Concentration of ownership

   Upon completion of this offering, our executive officers and directors, and their affiliates, will beneficially own, in the aggregate, approximately         % of our outstanding shares of common stock.

Risk factors

   See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common stock.

New York Stock Exchange trading symbol

   “OPWR”

 

The number of shares of common stock that will be outstanding after this offering is based on 41,359,839 shares outstanding as of December 31, 2013, and excludes:

 

   

7,789,720 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of December 31, 2013, with a weighted-average exercise price of $3.83 per share;

 

 

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1,093,326 shares of common stock issuable upon the vesting of restricted stock units that were outstanding as of December 31, 2013;

 

   

283,950 shares of common stock issuable upon the vesting of restricted stock units that were granted after December 31, 2013;

 

   

                 shares of common stock issuable upon the conversion of the subordinated convertible promissory note with a utility partner dated March 8, 2013, based on an assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; and

 

   

6,529,852 shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of 1,529,852 shares of common stock reserved for future issuance under our 2007 Stock Plan as of December 31, 2013, which shares will be added to the shares to be reserved under our 2014 Stock Incentive Plan, and 5,000,000 shares of common stock reserved for future issuance under our 2014 Stock Incentive Plan, which will become effective in connection with this offering, and shares that become available pursuant to provisions thereof that automatically increase the share reserves under the 2014 Stock Incentive Plan each year.

 

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 19,246,714 shares of common stock, the conversion of which will occur immediately prior to the completion of this offering;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation in Delaware and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the completion of this offering; and

 

   

no exercise by the underwriters of their option to purchase up to an additional                  shares of common stock from us in this offering.

 

 

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SUMMARY FINANCIAL DATA

 

The following tables summarize our historical financial data. We have derived the summary statement of operations data for the years ended December 31, 2011, 2012 and 2013 and the balance sheet data as of December 31, 2013 from our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. The following summary financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands, except per share
amounts)
 

Consolidated Statements of Operations Data:

      

Revenue

   $ 28,746      $ 51,756      $ 88,703   

Cost of revenue(1)

     13,306        18,913        31,304   
  

 

 

   

 

 

   

 

 

 

Gross profit

     15,440        32,843        57,399   

Operating expenses(1):

      

Sales and marketing

     13,648        21,338        30,551   

Research and development

     14,372        16,134        27,087   

General and administrative

     8,716        7,730        13,578   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,736        45,202        71,216   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (21,296     (12,359     (13,817

Other income (expense), net

     (1     54        (321
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (21,297     (12,305     (14,138

Provision for income taxes

            27        23   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (21,297   $ (12,332   $ (14,161
  

 

 

   

 

 

   

 

 

 

Weighted-average common stock outstanding(2):

      

Basic and diluted

     17,836        19,442        21,121   

Net income (loss) per share(2):

      

Basic and diluted

   $ (1.19   $ (0.63   $ (0.67

Pro forma weighted-average common stock outstanding(2):

      

Basic and diluted

      

Pro forma net loss per share (unaudited)(2):

      

Basic and diluted

       $     

 

  (1)   Stock-based compensation was allocated as follows:

 

     Year Ended December 31,  
         2011              2012              2013      
     (In thousands)  

Cost of revenue

   $ 87       $ 137       $ 197   

Sales and marketing

     340         484         1,348   

Research and development

     382         447         939   

General and administrative

     151         119         1,141   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 960       $ 1,187       $ 3,625   
  

 

 

    

 

 

    

 

 

 
  (2)   See Note 10 to our audited financial statements for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders, pro forma basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

 

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     December 31, 2013  
     Actual     Pro Forma(1)      Pro Forma  As
Adjusted(2)(3)
 
     (In thousands)  

Balance Sheet Data:

       

Cash and cash equivalents

   $ 28,819      $                        $                    

Working capital (deficit)

     (11,851     

Property and equipment, net

     10,813        

Total assets

     63,135        

Deferred revenue

     52,390        

Total indebtedness

     3,673        

Total stockholders’ equity (deficit)

     (6,263     

 

  (1)   The pro forma column in the balance sheet data table above gives effect to (i) the filing of our amended and restated certificate of incorporation, (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 19,246,714 shares of common stock and (iii) the automatic conversion of all outstanding debt under a subordinated convertible promissory note with a utility partner dated March 8, 2013 into                  shares of common stock, based on an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, which conversion will occur prior to the completion of this offering, as if such conversion had occurred on December 31, 2013.
  (2)   The pro forma as adjusted column in the balance sheet data table above gives effect to the pro forma adjustments set forth in footnote 1 above and the sale and issuance by us of                  shares of common stock in this offering at an assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
  (3)   Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the cash and cash equivalents, working capital (deficit), total assets and total stockholders’ equity (deficit) by $                 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the cash and cash equivalents, working capital (deficit), total assets and total stockholders’ equity (deficit) by $                 million assuming an initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions payable by us.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  
Other Financial Metrics:       

Adjusted EBITDA

   $ (19,710   $ (9,573   $ (6,426

 

To provide investors with additional information regarding our financial results, we have disclosed in the table above and within this prospectus adjusted EBITDA, a non-GAAP financial measure. We have provided a reconciliation below between adjusted EBITDA and net loss, the most directly comparable financial measure as measured in accordance with U.S. generally accepted accounting principles (“GAAP”).

 

We have included adjusted EBITDA in this prospectus because it is a key measure used by our management to evaluate our operating performance, generate future operating plans and make strategic decisions. Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management and board of directors.

 

 

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While we believe that this non-GAAP financial measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared in accordance with GAAP. Some of these limitations are:

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

   

adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

   

adjusted EBITDA does not include the impact of stock-based compensation;

 

   

adjusted EBITDA does not reflect income tax payments that may represent a reduction in cash available to us; and

 

   

other companies, including companies in our industry, may calculate adjusted EBITDA differently or not at all, which reduces its usefulness as a comparative measure.

 

We believe it is useful to exclude non-cash charges, such as depreciation and amortization and stock-based compensation, from our adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

 

Because of the aforementioned limitations, you should consider adjusted EBITDA alongside other financial performance measures, including net loss, cash flow metrics and our financial results presented in accordance with GAAP. The following table presents a reconciliation of net loss to adjusted EBITDA for each of the periods indicated:

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Reconciliation of Net Loss to Adjusted EBITDA:

      

Net loss

   $ (21,297   $ (12,332   $ (14,161

Provision for income taxes

            27        23   

Other (income) expense, including interest

     1        (54     321   

Depreciation and amortization

     626        1,599        3,766   

Stock-based compensation

     960        1,187        3,625   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (19,710   $ (9,573   $ (6,426
  

 

 

   

 

 

   

 

 

 

 

 

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RISK FACTORS

 

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, before making a decision to invest in our common stock. If any of the risks actually occur, our business, financial condition, results of operations and prospects could be harmed. In that event, the trading price of our common stock could decline, and you could lose part or all of your investment.

 

Risks Related to Our Business

 

We have a history of losses and anticipate continued losses and negative operating cash flow for the foreseeable future, and we may not achieve or sustain profitability on a quarterly or annual basis.

 

We have incurred significant losses to date, with an accumulated deficit of $83.2 million as of December 31, 2013. For the years ended December 31, 2011, 2012 and 2013, we incurred net losses of $21.3 million, $12.3 million and $14.2 million, respectively. We expect these losses to continue. We also anticipate negative operating cash flow for the foreseeable future, as we expect to incur significant operating expenses in connection with the continued development and expansion of our business. Many of these expenses relate to prospective customers that may never contract with us, as well as products that may not be introduced, that we may choose to discontinue, that may fail to achieve desired results or that may not generate revenue until later periods, if at all. We may not achieve or sustain profitability on a quarterly or annual basis.

 

Sales cycles and implementation times can be lengthy and unpredictable and require significant employee time and financial resources.

 

Sales cycles for our products tend to be long and unpredictable. Even after we have convinced prospective customers of the need for, and value of, our products and solutions, our customers are large organizations that frequently have extensive budgeting, procurement, competitive bidding, technical and performance reviews and regulatory approval processes that can slow down the sales process by months or even years. Utilities may choose, and many historically have chosen, to follow industry trends rather than be early adopters of new products or solutions, which can extend the lead time for or prevent acceptance of more recently introduced products or solutions such as ours. In many instances, a utility may require one or more pilot programs to test our products and solutions before committing to a larger deployment. These pilot programs may be quite lengthy and provide no assurance that they will lead to a larger deployment or future sales. The implementation and deployment of our solutions can be unpredictable due to contract negotiations and challenges with implementation, or critical dependencies, such as the installation of other products, including smart meters. Furthermore, the implementation and deployment of new products and solutions may require troubleshooting, which requires additional time and resources from us and our customers. These delays may lengthen our sales cycles.

 

Our sales cycle is typically 6 months to 24 months. This extended sales, implementation and deployment process requires our senior management and our sales and marketing and customer services personnel to dedicate significant time to sales, and to use significant financial resources without any assurance of success or recovery of our related expenses.

 

The lengthy sales cycle also makes it difficult to forecast new customer implementations and deployments, as well as the volume and timing of future agreements, which, in turn, makes forecasting our future results of operations challenging. In the event that we publicly disclose any forecasts of our future results of operations or other forward-looking metrics, and those forecasts ultimately turn out to be inaccurate, the value of our common stock could significantly decline.

 

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We provide services to utilities that operate in a highly regulated business environment, and regulatory requirements or need for regulatory approval could delay or reduce demand for our products, impose costs on us or make our products less attractive to our customers.

 

Our customers, products and solutions are subject to many federal, state, local and foreign laws and regulations. In many cases, our customers are subject to direct oversight from Public Utility Commissions, Public Service Commissions, Independent System Operators, the Federal Energy Regulatory Commission or other regulatory entities primarily focused on the energy utility sector. Applicable laws and regulations govern, among other things, utility demand for energy efficiency and demand response solutions, the data that we are able to handle and collect, utility structuring and incentives, the utility’s ability to spend money on our products and solutions and the methods and manners that we can use to contact utility customers. Depending on the solutions sought, prospective customers may be required to gain approval from any of these organizations prior to implementing our solutions, which could delay our ability to collect cash and recognize revenue.

 

We are dependent in part on regulations on the utility industry, and the changing regulatory landscape could alter our customers’ buying patterns.

 

The utility industry has been subject to increasing and changing regulations in recent years. We derive substantially all of our revenue from sales of products and solutions directly and indirectly to utilities, and this complex and difficult landscape poses a risk to us. We have experienced, and may in the future experience, variability in our results of operations on an annual and a quarterly basis as a result of these factors. Going forward, these factors could harm our financial condition and cash flows.

 

Changes in the regulatory conditions could reduce a customer’s interest in or ability to implement our products and solutions. Examples of market dynamics driven by regulation include:

 

   

energy efficiency goals;

 

   

interpretations of the energy savings credit attributed to our products;

 

   

regulated compensation associated with energy efficiency;

 

   

demand response goals;

 

   

rules concerning the peak reductions attributed to our products;

 

   

regulated compensation associated with demand response;

 

   

smart metering or advanced meter infrastructure deployments; and

 

   

data privacy.

 

Many regulatory jurisdictions have implemented rules that provide financial incentives for the implementation of energy efficiency and demand response technologies, either by providing rebates or through the restructuring of utility rates. In the past, we have seen demand for our solutions altered by changes in regulation. We have also had to limit or alter our offerings to comply with regulatory requirements, and these changes have affected our revenue. In addition, deregulation may change the incentives for our customers or prospective customers to use our solutions. If changes in regulation reduce or negatively alter the demand for our solutions, our business and results of operations could be harmed. In order to counteract this risk, we have invested significant time and effort in understanding and attempting to impact government decisions that we believe will affect our market. These efforts, however, have not always been successful and may not succeed in the future.

 

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If we fail to respond to evolving technological changes, our products and solutions could become obsolete or less competitive.

 

Our industry is highly competitive and characterized by new and rapidly evolving technologies, techniques, standards, regulations, customer requirements and frequent product introductions. Accordingly, our results of operations depend upon, among other things, our ability to develop and introduce new products and solutions, as well as our ability to improve existing products. The process of developing new technologies and products is complex. If we are unable to develop enhancements to, and new features for, our existing products or if we are unable to develop new products that keep pace with technological developments or industry standards, our business could be harmed.

 

We continue to invest in new product offerings and the success of those offerings is uncertain. A few examples of such product development challenges are:

 

   

Over the last three years, we have invested significant resources in developing a thermostat offering. We have yet to see a significant return from that investment, as our development and sales growth has been slowed by market challenges. These challenges may continue, and our investment in this area may not yield returns.

 

   

We are developing an offering tailored specially for small and medium-sized businesses. The market for this offering is unproven, and our ability to successfully deliver the results our customers seek is uncertain.

 

   

We have invested considerable resources in developing a demand response offering. While the early results have been promising, it is possible that the market could be smaller than we have expected or that our product will not function as intended.

 

   

We also have other products in development; it is possible that none of those products will prove to be successful.

 

All of our research and development efforts are dependent upon our ability to deliver products and functionality in a timely and efficient manner. In the past, we have experienced delays delivering products, and while we have taken steps to improve the predictability of our research and development efforts, those efforts may not be successful. If we continue to experience delays in our ability to deliver new products and functionality, our business and growth rates would suffer.

 

Our success depends in part on our ability to deliver measurable outcomes, and our business may be harmed if our products became less effective or our results are questioned.

 

Our products deliver valuable measurable outcomes for our customers and receive favorable treatment from their regulators, both of which are important to our customers. Our ability to deliver expected results is dependent on numerous factors, including but not limited to the effectiveness of our approach and products, the cost of alternate sources of energy savings, the availability of data and our ability to effectively reach energy consumers. We may not be able to continue to deliver valuable measurable outcomes or we may find that our programs yield diminishing returns over time. In addition, it is possible that regulators will change their view of our results in a way that might harm our business overall. For example, if regulators were to treat our energy savings as less significant or less reliable than other efficiency programs, or if regulators were to alter how utilities are compensated for working with us, our business and results of operations may be harmed. If our ability to deliver results were to change, or if regulators were to view our results less favorably, our brand, business and results of operations may be harmed.

 

Because we recognize subscription revenue over the term of the contract, downturns or upturns in new sales will not be immediately reflected in our results of operations and may be difficult to discern.

 

We generally recognize subscription revenue from customers ratably over the terms of their contracts, which typically range from one to five years. As a result, most of the subscription revenue we report in each

 

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quarter is derived from the recognition of deferred revenue relating to subscriptions entered into during previous periods. Consequently, a decline in new or renewed subscriptions in any single quarter will likely have only a small impact on our revenue results for that quarter, but will negatively affect our revenue in future quarters. Accordingly, the effect of significant downturns in sales and market acceptance of our solutions, and potential changes in our pricing policies or rates of renewals, may not be fully reflected in our results of operations until future periods. We may be unable to adjust our cost structure to reflect the changes in revenue. In addition, a significant majority of our costs are expensed as incurred. As a result, increased growth in the number of our customers could result in our recognition of more costs than revenue in the earlier periods of the terms of our agreements. Our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term.

 

A limited number of our utility customers are responsible for a significant portion of our revenue and cash flow. A decrease in sales to these utility customers or delays in customer implementation and deployments could harm our results of operations and financial condition.

 

We operate in a large and concentrated market. A substantial portion of our revenue, profitability and cash flow depends on a limited number of utility customers, and we cannot easily replace a lost customer. As a result, there may be significant variability in our quarterly results if we were to lose one or more of our large customers.

 

For the year ended December 31, 2012, our ten largest customers by revenue represented 61% of our total revenue, with two clients, National Grid and Pacific Gas and Electric Company (“PG&E”), representing more than 10% of our total revenue at 15% and 14%, respectively. For the year ended December 31, 2013 our ten largest customers by revenue represented 62% of our total revenue, with three clients, National Grid, PG&E, and Exelon each representing more than 10% of our total revenue at 14%, 13% and 11%, respectively. Many of our fees are not due until we have actually begun to deliver our solutions and, as a result, are subject to delay. We have contracted to provide multiple services to National Grid, PG&E and Exelon, including processing and analyzing data and displaying results to their customers. We entered into an implementation and licensing agreement with National Grid in June 2009, which was renewed and now expires in December 2015, and a renewed application services agreement with PG&E in December 2012 with a term of 3 years. We have also entered into multiple agreements with Exelon subsidiaries, including Baltimore Gas & Electric (“BGE”), PECO and Commonwealth Edison. We entered into an agreement with BGE in March 2011 with an initial term expiring in February 2015 and a renewed agreement with Commonwealth Edison in February 2011 with a term expiring in May 2014, subject to certain additional limitations on the initial term. National Grid, PG&E, BGE and Commonwealth Edison may generally terminate their respective agreements in each case for cause upon written notice of certain uncured material breaches of contract by us, upon the bankruptcy or insolvency of the other party or under certain other circumstances. In addition, National Grid, PG&E, BGE and Commonwealth Edison may generally terminate their respective agreements for convenience upon prior written notice.

 

We expect that a limited number of utility customers will continue to account for a substantial portion of our revenue in future periods. Changes in the business requirements, vendor selection or purchasing behavior of our utility customers could significantly decrease our sales.

 

Many of our customer agreements provide our customers with the ability to terminate the agreement for convenience, which may limit our ability to forecast our revenue accurately or could harm our results of operations and financial condition.

 

Many of our customer agreements, including National Grid and PG&E, are subject to customer termination for any reason, including for the customer’s convenience following a specified notice period. In limited circumstances, we may be required to provide refunds or sales credits in addition to the loss of future revenue from these customers. If customers terminate their agreements with us for convenience, our results of operations may be harmed and our revenue forecasts may be incorrect.

 

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We have experienced rapid growth and organizational change in recent periods. If we fail to manage our growth effectively, our financial performance may suffer.

 

We have substantially expanded our overall business, customer base, employee headcount and operations in recent periods both domestically and internationally. We increased our total number of full-time employees from 162 employees as of December 31, 2010 to 465 employees as of December 31, 2013. Our expansion has placed, and our expected future growth will continue to place, a significant strain on our managerial, customer operations, research and development, sales and marketing, manufacturing, administrative, financial and other resources. We anticipate further growth in headcount will be required to address increases in our solution offerings and continued expansion. Our success will depend in part upon the ability of our management team to manage this growth effectively. To do so, we must continue to recruit, hire, train, manage and integrate a significant number of qualified managers and employees in specialized roles within our company, including in technology, sales and marketing. If our new employees perform poorly, or if we are unsuccessful in recruiting, hiring, training, managing and integrating these new employees, or retaining these or our existing employees, our business and results of operations may suffer.

 

In addition, to manage the expected growth of our headcount and operations, we will need to continue to improve our operational, financial, management and information technology infrastructure. Our anticipated additional headcount and capital investments will increase our costs, which will make it more difficult for us to address any future revenue shortfalls by reducing expenses in the short term. If we are unable to manage our growth successfully, our business and results of operations will be harmed.

 

The market for our products and solutions is still developing. If the market does not develop as quickly or as much as we expect, our business and growth rates could be harmed.

 

The market for our products and solutions is still developing, and it is uncertain whether our products and solutions will achieve and sustain high levels of demand and market acceptance, both domestically and internationally. Our near-term and long-term success will depend to a substantial extent on the willingness and ability of utilities, both domestically and internationally, to pursue energy efficiency, demand response and customer engagement programs. Utilities’ activities are governed by regulatory agencies, including public utility commissions, which may not create a regulatory environment that is conducive to the implementation of energy efficiency or demand response in a particular jurisdiction. Indeed, currently many utilities lack the economic motivation, regulatory requirements or financial incentives to deploy our technology. If utilities do not pursue energy efficiency, demand response or customer engagement or do so in fewer numbers or more slowly than we expect, our business and results of operations would be harmed.

 

Utilities in critical markets may fail to collect data or may be unable to collect current data that we require to provide our products and solutions.

 

Our cloud-based platform is dependent upon receiving specific data inputs from our customers such as current energy usage data. Without those inputs, our platform may be less reliable or effective or may not work and we may not be able to provide effective solutions. In markets where energy usage data is infrequently collected or where access to that data is restricted, including in international markets, we may prove unable to provide our products and solutions, or we may be forced to alter our products and solutions in a manner that reduces our ability to derive revenue from them. For example, the processes for data collection in Europe are still developing, and as a result, data may be more difficult to obtain or more expensive to access. If we are unable to access current data from our customers, our business and results of operations may be harmed.

 

Our quarterly results are inherently unpredictable and subject to substantial fluctuations and, as a result, we may fail to meet the expectations of securities analysts and investors, which could harm the trading price of our common stock.

 

Our results of operations, including our revenue, profitability and cash flows, may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. While our revenue has increased in recent periods, our revenue may not continue to increase or may decrease on a quarterly or annual basis.

 

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Factors that may affect the unpredictability of our quarterly results and cause our stock price to fluctuate include, but are not limited to:

 

   

long, and sometimes unpredictable, sales and customer implementation and deployment cycles;

 

   

changes in the mix of products and solutions sold;

 

   

our dependence on a limited number of customers;

 

   

the timing of deployment of our products and solutions by our customers, which can have a material effect on when we recognize related revenue under our revenue recognition policies;

 

   

changing market and competitive conditions;

 

   

failures of our solutions that may harm our reputation or result in contractual penalties or terminations;

 

   

product or project failures by our customers that result in the cancellation, slowing down or deferring of projects;

 

   

changes to our cost structure, including changes to our cost of postage, data acquisition, data storage and management, data security and labor;

 

   

delays in adopting our solutions associated with data privacy concerns;

 

   

changes in laws or regulations, directly affecting either our operations, those of our customers or utility consumers;

 

   

delays in regulatory approvals for our utility customers and utility customer implementations and deployments;

 

   

political and consumer sentiment and the related impact on the scope and timing of deployment of our products and solutions;

 

   

economic, regulatory and political conditions in the markets where we operate or anticipate operating;

 

   

the addition of new employees; and

 

   

extraordinary expenses such as litigation or other dispute-related settlement payments.

 

As a result, we believe that quarter-to-quarter comparisons of our results of operations are not necessarily a good indication of what our future performance will be. It is likely that in some future quarters our results of operations may be below the expectations of securities analysts or investors, in which case the price of our common stock would likely decline.

 

We operate in a competitive industry and our market share and results of operations may be harmed if we are unable to respond to our competitors effectively.

 

Competition in our market involves rapidly changing technologies, evolving regulatory requirements and industry expectations, frequent new product introductions and changes in customer requirements. To maintain and improve our competitive position, we must keep pace with the evolving needs of our utility customers and continue to develop and introduce new products, features and solutions in a timely and efficient manner. We compete with software suppliers to utilities. Our key competitors currently include Aclara, C3 Energy, Nest Labs (which was acquired by Google), Oracle, SAP and Tendril, as well as many other smaller providers. Certain of these companies have, and future competitors may have, substantially greater financial, marketing, technological and other resources than we do.

 

Additionally, we compete with energy efficiency providers that provide utilities with other efficiency programs and demand response companies that offer programs specifically focused on reduction in peak capacity. If these programs become more cost effective, it would harm our business. For example, if the cost of alternative efficiency approaches, such as light bulb replacement subsidies or home retrofits, decreased or if utilities could more easily deploy those measures on a large scale, our business could be harmed.

 

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We have also seen many companies imitate our products, solutions and tactics, and we expect that trend to continue. As we look to expand into new markets, we expect to face additional competitors that may be more established in specific geographies. We anticipate that in the future, additional competitors will emerge that offer a broad range of competing products and solutions.

 

Our business and financial performance could be harmed by changes in tax laws or regulations.

 

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time. Those enactments could harm our domestic and international business operations, and our business and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. These events could require us or our utility customers to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our utility customers to pay fines and/or penalties and interest for past amounts deemed to be due. If we raise our prices to offset the costs of these changes, existing and potential future utility customers may elect not to purchase our products and solutions in the future. Additionally, new, changed, modified or newly interpreted or applied tax laws could increase our utility customers’ and our compliance, operating and other costs, as well as the costs of our products. Further, these events could decrease the capital we have available to operate our business. The occurrence of any or all of these events could harm our business and results of operations.

 

In addition, we may be subject to sales, use and income tax audits by many tax jurisdictions throughout the world, many of which have not established clear guidance on the tax treatment of software-as-a-service based companies. Although we believe our income tax liabilities are reasonably estimated and accounted for in accordance with applicable laws and principles, an adverse resolution of one or more uncertain tax positions in any period could have a material impact on the results of operations for that period.

 

Our results of operations may be harmed if we are required to collect sales taxes for our products and solutions in jurisdictions where we have not historically done so.

 

Historically, we have not collected sales tax from our customers nor have we remitted such taxes in many states where we sell our products and solutions. Although we believe we are not obligated to collect sales taxes from our customers in those jurisdictions, states or one or more countries may seek to impose sales or other tax collection obligations on us, including for past sales by us or our utilities. A successful assertion that we should be collecting additional sales or other taxes on our products or solutions could discourage customers from purchasing our solutions or otherwise harm our business and results of operations.

 

We rely on our management team and need additional key personnel to grow our business, and the loss of key employees or inability to hire key personnel could harm our business.

 

Our success and future growth depend on the skills, working relationships and continued services of our management team and other key personnel. The loss of any member of our senior management team, and in particular our Chief Executive Officer, President or other key executives, could harm our business. All of our officers are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace.

 

Volatility or lack of performance in our stock price may affect our ability to retain our senior management and key personnel. Many of our longest-tenured employees, including members of our senior management and other key personnel with deep institutional knowledge, hold significant vested stock options and shares of our common stock. Employees may be more likely to leave us if the shares they own or the shares underlying their vested stock options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock. As a result of these factors, we may be unable to attract or retain qualified personnel. Our inability to retain the necessary personnel to run and grow our business could harm our business and results of operations.

 

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In addition, our future success will depend on our ability to attract, retain and motivate highly skilled management, product development, operations, sales, engineering and other personnel in the United States and abroad. Competition for these types of personnel is intense and we have experienced periods where we had difficulty hiring for critical roles. In particular, we have struggled at times to attract and hire sales executives and software developers who meet our standards. Even if we are able to hire qualified individuals, we may be unable to retain such individuals. Furthermore, if we hire from competitors or other companies, their former employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources.

 

Postal charges are one of our most significant costs. If postal rates or mailing costs increase, our cost of delivering our solutions could increase.

 

In each country where we deliver mailed paper reports, we are dependent upon the government mail carrier to deliver our products. We have very little ability to control postal expenses and a change in postal expenses could have a significant impact on our business. For example, the United States Postal Service (“USPS”) delivers all of our U.S. mail correspondence, and we are bound to accept any postage rate increases enacted by the USPS. In the past, we have seen the specific postage rate applied to our products change due to a change in how the USPS interpreted its classification rules. In January 2013, the USPS determined that these reports should be charged first class postage rates rather than standard mail rates, thereby increasing our postage cost significantly. These increased charges continued through June 2013 when we were able to modify our product to comply with classification rules for postage at the standard rate. During the six months ended June 30, 2013, our payments to the USPS increased by $2.9 million as a result of these first class postage rates. We have encountered similar concerns from other carriers to a lesser extent as well. Such increased charges harmed our business and our results of operations during this period. If the USPS or other mail carriers change their position as to our mailed reports or we change our product offerings again, our future results of operations could be harmed.

 

If we cannot maintain our environmental focus as we grow, we could lose the innovation, teamwork, passion and focus on execution that we believe contributes to our success.

 

We believe that a critical contributor to our success has been our focus on the environmental impact of our products and solutions. We believe that focus has driven innovation, increased attention to results and has allowed us to attract and retain highly talented individuals who are motivated by our mission driven culture. As we grow and change, we may find it difficult to maintain this critical aspect of our corporate culture. Any failure to preserve our culture could harm our ability to retain and recruit quality personnel, thereby harming our future success.

 

We have a limited operating history in an evolving industry, which makes it difficult to predict our future prospects and may increase the risk that we will not be successful.

 

We have a limited operating history in an evolving market that may not develop as expected. This limited operating history makes it difficult to effectively assess or forecast our future prospects. We have encountered and will continue to encounter risks and uncertainties frequently experienced by growing companies in the technology industry, such as the risks and uncertainties described in this prospectus. If our assumptions regarding these risks and uncertainties are incorrect or change due to changes in our markets, or if we do not address these risks successfully, our financial results and results of operations may differ materially from our expectations and our business may suffer.

 

Our marketing efforts depend significantly on our ability to receive positive references from our existing utility customers.

 

We operate in an industry with a limited number of buyers and reputation is particularly important as a result. Our customers often serve as references for each other, and they have been known to discuss the performance of our products and solutions with each other. Consequently, our marketing efforts depend significantly on our ability to call on our current utility customers to provide positive references. Given our

 

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limited number of utility customers, the loss or dissatisfaction of any customer could substantially harm our brand and reputation, inhibit the market acceptance of our products and solutions and impair our ability to attract new utility customers and maintain existing utility customers. Any of these consequences could harm our business, financial condition and results of operations.

 

Our business depends substantially on customers renewing, upgrading and expanding their solutions with us. Any decline in our customer renewals, upgrades and expansions may harm our future results of operations.

 

Our ability to grow depends substantially on our ability to expand our business with existing customers. To date, a significant portion of our growth has resulted from our ability to sell new products and solutions and expand existing products and solutions sold to current customers. We have limited historical data with respect to rates of customer renewals, upgrades and expansions so we may not accurately predict future trends in these areas. Our customers’ renewal rates may decline or fluctuate because of several factors, including their satisfaction or dissatisfaction with our solutions, the prices of our solutions, the prices of solutions offered by our competitors or reductions in our customers’ spending levels due to the macroeconomic environment or other factors. If our customers believe that our service offerings are not sufficiently scalable or effective and do not provide adequate security for the dissemination of information over the Internet, they will not expand their solutions with us, and our profitability and gross margin may be harmed. If our customers do not renew their subscriptions for our solutions, renew on less favorable terms or do not purchase additional functionality or subscriptions, our revenue may grow more slowly than expected or decline.

 

If the market for our cloud-based delivery model develops more slowly than we expect, our growth may slow or stall, and our results of operations would be harmed.

 

Use of cloud-based or software-as-a-service (“SaaS”) applications to manage and automate enterprise IT is at an early stage within our industry. We do not know whether the trend of adoption of enterprise SaaS solutions we have experienced in the past will continue in the future. In particular, many utilities have invested substantial personnel and financial resources to integrate legacy software into their businesses over time, and some have been reluctant or unwilling to migrate to SaaS. Furthermore, some utilities have been reluctant or unwilling to use SaaS because they have concerns regarding the risks associated with the security of their data and the reliability of the technology delivery model associated with these solutions. In addition, if other SaaS providers experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for SaaS solutions as a whole, including our service, may be negatively impacted. If the adoption of cloud-based or SaaS solutions does not continue, the market for our solutions may stop developing or may develop more slowly than we expect, either of which would harm our results of operations.

 

From time to time, we have worked and expect to continue to work with third parties to pursue sales opportunities. If we were unable to establish and maintain these relationships, or if our initiatives with these third parties are unsuccessful, our business and future growth may be harmed.

 

For some of our existing and anticipated future products and solutions, we expect to maintain and may seek to establish relationships with third parties in order to take advantage of market opportunities. For example, certain third parties act as energy efficiency program administrators to utilities, system integrators and local partners in international markets, and we will need to work with such third parties to maintain or grow our business in certain territories. Our success in such circumstances may depend both on our ability to maintain a relationship with the third party and the third party’s ability to maintain a relationship with the utility. In addition, these third-party vendors may offer competing products, partner with other providers or otherwise choose not to partner with us. In the event that we are unable to establish or maintain new relationships on favorable terms, or at all, our ability to successfully sell our existing and anticipated future products and solutions could be harmed.

 

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Security breaches involving our products or solutions, publicized breaches in similar products and solutions offered by others, or the public perception of security risks or vulnerability created by the deployment of new technologies in general, whether or not valid, could harm our business.

 

The security measures we have integrated into our platform and solutions that are designed to detect unauthorized activity and prevent or minimize security breaches and the unauthorized collection, use and disclosure of personal data may not function as expected and our products and solutions, those of other companies with whose products our products and solutions are integrated or interact, or even the products of other solutions providers may be subject to significant real or perceived security breaches.

 

Our platform collects, stores, compiles and analyzes potentially sensitive information related to consumers’ energy usage. We store and/or come into contact with sensitive consumer information and data. If, in handling this information, we, our partners or our utility customers fail to comply with privacy or security laws, we could face significant legal, financial, and reputational exposure to claims of government agencies, regulatory bodies, utility customers and consumers whose privacy is compromised. Even the perception that we, our partners or our utility customers have improperly handled sensitive, confidential information could have a negative effect on our business. In addition, third parties may attempt to breach our security measures or inappropriately use or access our software or the network hardware through computer viruses, physical or electronic break-ins, and other means. If a breach is successful, sensitive information may be improperly obtained, manipulated or corrupted, and we may face legal and financial exposure. In addition, a breach could lead to a loss of confidence in our products and solutions and our business could be harmed.

 

Our products and solutions may also be integrated with or interface with products and solutions sold by third parties, and as a result rely on the security of those products and their secure transmission of proprietary data over the Internet and cellular networks. Because we do not have control over the security measures implemented by third parties, we cannot ensure the complete integrity or security of such third-party products and transmissions.

 

Concerns about security or customer privacy may result in the adoption of legislation that restricts the implementation of technologies like ours or requires us to make modifications to our products such as limiting how we collect, use and store data, which could significantly limit the deployment of our technologies or result in significant expense to modify our products.

 

Any real or perceived security breach could harm our reputation and result in significant legal and financial exposure, including increased remediation costs and security protection costs, inhibit market acceptance of our products and solutions, halt or delay the deployment by utilities of our products and solutions, cause us to lose customers, harm our reputation, trigger unfavorable legislation and regulatory action, or inhibit the growth of the overall market for new products and solutions being sold to the utility industry. Any of these risks could harm our business, financial condition and results of operations.

 

Interruptions or delays in service from our third-party data center facilities, or problems with the third-party hardware or software that we employ, could impair the delivery of our solutions and harm our business.

 

We currently utilize data center facilities in the United States and Canada that are operated by third parties. These facilities may be vulnerable to damage or interruption from, among other things, fire, natural disaster, power loss, telecommunications failure, war, acts of terrorism, unauthorized entry, human error and computer viruses or other defects. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. We rely on software and hardware technology provided by third parties to enable us to provide these solutions. Any damage to, or failure of, these third-party data centers or the third-party hardware and software we employ, could result in significant and lengthy interruptions in our ability to provide our solutions to our utility customers and their subscribers. We do not carry business interruption insurance sufficient to compensate us for potentially significant losses that result from service interruptions and system failures. Such interruptions and system failures could reduce our revenue and bookings, cause us to issue credits or pay penalties, cause customers to terminate their agreements with us and harm our reputation and our ability to attract new utility customers.

 

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If our products contain defects or otherwise fail to perform as expected our reputation could be damaged, we could lose market share and, as a result, our financial condition or results of operations could be harmed.

 

Our software platform is complex and may contain defects or experience failures due to any number of issues. The satisfactory performance, reliability and availability of our platform is critical to our success. From time to time, we have found defects in our software, and new errors in our existing software may be detected in the future. If any of our products contain a material defect, do not function as anticipated, or do not safeguard customer data consistent with industry standards we may have to devote significant time and resources to find and correct the issue. Any system delays, interruptions or disruptions to our servers caused by telecommunications failures, computer viruses, physical break-ins, domain attacks, hacking or other attempts to harm our systems or servers that results in the unavailability or slowdown of our products or loss of data would reduce the attractiveness of our products. We may also experience interruptions caused by reasons beyond our control. Efforts to correct problems could divert the attention of our management team and other relevant personnel from other important tasks. Such failings might damage our reputation and relationships with utilities; result in the loss of business to competitors; result in fines or regulatory penalties against us; and result in litigation against us.

 

Our technology, products and solutions have only been developed in the last several years and we have had only limited opportunities to deploy and assess their performance in the field at full scale.

 

The current generation of our platform and solutions has been developed in the last several years and is continuing to evolve. Deploying and operating our technology is a complex endeavor and, until recently, had been done primarily in pilot programs. As the size, complexity and scope of our deployments have expanded, we have been able to test product performance at a greater scale and in a variety of new geographic settings and environmental conditions. These larger deployments have presented a number of unforeseen operational and technical challenges, which in some cases have caused delays and required us to commit significant resources to address these challenges. As the number, size and complexity of our deployments grow, we may continue to encounter unforeseen operational, technical and other challenges, some of which could cause significant delays and high deployment costs, which in turn may delay our ability to collect revenue, trigger contractual penalties, result in unanticipated expenses or damage to our reputation, each of which could harm our business, financial condition and results of operations.

 

To date, we have derived our revenue from a limited number of products and solutions. Our efforts to expand our product portfolio may not succeed, and may reduce our revenue growth rate.

 

To date, we have derived our revenue from a limited number of products and solutions. Any factor adversely affecting sales of one or more of these products and solutions, including market acceptance, product competition, performance and reliability, reputation, price competition and economic and market conditions, could adversely affect our business and results of operations. Our plan to expand our product and solution portfolio may not be successful, which may harm the growth of our business and our results of operations.

 

Material defects or errors in our data collection and analysis systems could damage our reputation, result in significant costs to us and impair our ability to sell our products.

 

Our data collection and analysis systems are complex and may contain material defects or errors. In addition, the large amount of data that we collect may cause errors in our data collection and analysis systems. Any defect in our data collection software, network systems, statistical projections or other methodologies could result in:

 

   

loss of customers;

 

   

damage to our brand;

 

   

lost or delayed market acceptance and sales of our products and solutions;

 

   

interruptions in the availability of our products and solutions;

 

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the incurrence of substantial costs to correct any material defect or error;

 

   

sales credits, refunds or liability to our customers;

 

   

diversion of development resources; and

 

   

increased warranty and insurance costs.

 

Any material defect or error in our data collection systems could adversely affect our reputation and results of operations.

 

Our customers frequently insist on customized products, which are often difficult for us to deliver in a timely and cost-effective manner. If we are not able to find a long-term solution for customer customization requests, our business and results of operations may suffer.

 

Our customers often request customized service that is costly and time consuming for us to deliver. While we try to avoid customizing our product for individual customers, customizations continue to take up valuable research and development resources. We are taking steps to make customization requests easier to fulfill, but those efforts may prove to be unsuccessful. If we are unable to make customization requests easier to fulfill, customer satisfaction would be negatively affected and our business and results of operations may suffer.

 

Our business may be harmed if it is alleged or found that our products infringe the intellectual property rights of others.

 

Our industry is characterized by the existence of a large number of patents and by litigation based on allegations of infringement or other violations of intellectual property rights. From time to time, third parties have claimed and may continue to claim that we are infringing upon their patents or other intellectual property rights. In addition, we may be contractually obligated to indemnify our utility customers or other third parties that use or resell our products in the event our products are alleged to infringe a third party’s intellectual property rights. In many cases, these indemnification obligations are uncapped. Responding to such claims, regardless of their merit, can be time consuming, costly to defend in litigation, divert management’s attention and resources, damage our reputation and brand and cause us to incur significant expenses. Even if we are indemnified against such costs, the indemnifying party may be unable to uphold its contractual obligations. Further, claims of intellectual property infringement might require us to redesign affected products, delay affected product offerings, enter into costly settlement or license agreements or pay costly damage awards or face a temporary or permanent injunction prohibiting us from marketing, selling or distributing the affected products. If we cannot or do not license the alleged infringed technology on reasonable terms or at all, or substitute similar technology from another source, our revenue and earnings could be harmed. Additionally, our utility customers may not purchase our products if they are concerned that our products infringe third-party intellectual property rights. This could reduce the market opportunity for the sale of our products and solutions. The occurrence of any of these events may harm our business, financial condition and results of operations.

 

In addition to this general risk, we are aware of specific patents that we could be accused of infringing. We believe we would have valid defenses available to us should we be accused of such infringement, but our defense may not be successful. Even if our defenses are valid, however, an accusation of patent infringement would be time consuming and costly to defend.

 

The success of our business depends on our ability to protect and enforce our intellectual property rights.

 

We rely on a combination of patent, trademark, trade dress, copyright, unfair competition and trade secret laws, as well as confidentiality procedures and contractual restrictions, to establish and protect our proprietary rights. These laws, procedures and restrictions provide only limited protection and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Further, the laws of

 

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certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third-party copying, infringement or use, which could harm our competitive position.

 

In recent years, in the United States and elsewhere, considerable doubt has been cast upon the validity of software patents as a whole. Were the underlying laws to change, such that we were no longer able to patent our software platform, our intellectual property rights might be more difficult to protect.

 

We cannot ensure that any of our pending applications will be granted or that any patents that may be issued will adequately protect our intellectual property. In addition, third parties have in the past and could in the future bring infringement, invalidity, co-inventorship, re-examination or similar claims with respect to any patents that may be issued to us in the future. Any such claims, whether or not successful, could be extremely costly to defend, divert management’s attention and resources, damage our reputation and brand, and harm our business and results of operations.

 

We may be required to spend significant resources to monitor and protect our intellectual property rights. In order to protect or enforce our patent rights, protect our trade secrets or know-how, or determine the enforceability, scope and validity of the proprietary rights of others, we may initiate patent litigation or other proceedings against third parties, such as infringement suits or interference proceedings. Any lawsuits or proceedings that we initiate could be expensive, take significant time and divert management’s attention from other business concerns. Litigation and other proceedings also put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. Additionally, we may provoke third parties to assert claims against us. We may not prevail in any lawsuits or other proceedings that we initiate and the damages or other remedies awarded, if any, may not be commercially valuable. The occurrence of any of these events may harm our business, financial condition and results of operations.

 

Some of our products rely on technologies developed or licensed by third parties. We may seek to license technology from third parties for future products and solutions. We may not be able to obtain or continue to obtain licenses and technologies from these third parties on commercially reasonable terms or at all. Our inability to retain our current third-party licenses or obtain third-party licenses required to develop new products or product enhancements could require us to obtain alternate technology that may be of lower quality or performance standards or at greater cost, or could require that we change our product and design plans, any of which could limit or delay our ability to manufacture and sell our products.

 

We use open source software in our products and solutions that may subject our products and solutions to general release or require us to re-engineer our products and solutions, which may harm our business.

 

We use open source software in connection with our products and solutions. From time to time, companies that incorporate open source software into their products have faced claims challenging the ownership of open source software and compliance with open source license terms. Therefore, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and make available any derivative works of the open source code on unfavorable terms or at no cost. Although we attempt to make sure open source software is only used in a manner that would not require us to disclose the source code to the related product or that would not otherwise breach the terms of an open source agreement, such use could inadvertently occur and we may be required to release proprietary source code, pay damages for breach of contract, re-engineer our products, discontinue the sale of products in the event re-engineering cannot be accomplished on a timely basis or take other remedial action that may divert resources away from our development efforts, any of which could harm our business, results of operations and financial condition.

 

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If we are unable to protect the confidentiality of our proprietary information, the value of our technology and products could be harmed.

 

In addition to patent-pending technology, we rely on our unpatented technology and trade secrets. We generally seek to protect this information by confidentiality, non-disclosure and assignment of invention agreements with our employees and contractors and with parties with which we do business. These agreements may be breached and we may not have adequate remedies for any such breach. We cannot be certain that the steps we have taken will prevent unauthorized use or reverse engineering of our technology. Moreover, our trade secrets may be disclosed to or otherwise become known or be independently developed by competitors. To the extent that our employees, contractors or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. These disputes could result in substantial litigation costs, monetary damages or restrictions on our ability to offer our products and solutions. If our intellectual property is disclosed or misappropriated, it would harm our ability to protect our rights and harm our business, financial condition and results of operations.

 

Developments in data protection laws and regulations may affect our solutions, which could harm our business.

 

Our solutions may be subject to data protection laws and regulations that impose a general framework for the collection, processing and use of personal data. Our platform and solutions rely on the transfer of data relating to individual energy usage and may be affected by these laws and regulations. It is unclear how the regulations governing the collection, use and disclosure of personal data in connection with privacy requirements will further develop in the United States and internationally, and to what extent this may affect our solutions. These developments could harm our business, financial condition and results of operations.

 

We are subject to international business uncertainties that could harm our business and results of operations or slow our growth.

 

Our ability to grow our business and our future success will depend to a significant extent on our ability to expand our operations and customer base worldwide. Operating in international markets requires significant resources and management attention and, other than our operations in the United Kingdom, France, Sweden, Australia, Hong Kong, Japan and New Zealand, we have limited experience entering new geographic markets. At present, we are opening an office in Odessa, Ukraine, to expand our research and development workforce. The Ukraine has experienced considerable political turmoil and this turmoil may impact our operations, which would in turn compromise our ability to develop our products at the pace and cost that we desire. This and other international efforts may not be successful. International sales and operations are subject to risks such as:

 

   

inability to localize our product;

 

   

lack of effectiveness of our solutions in new markets;

 

   

technology compatibility;

 

   

the imposition of government controls;

 

   

government expropriation of facilities;

 

   

lack of a well-established system of laws and enforcement of those laws;

 

   

lack of a legal system free of undue influence or corruption;

 

   

exposure to a business culture in which improper sales practices may be prevalent;

 

   

restrictions on the import or export of critical technology;

 

   

currency exchange rate fluctuations;

 

   

multiple and possibly overlapping tax regimes and adverse tax burdens;

 

   

compliance with anti-corruption and anti-bribery laws such as the U.S. Foreign Corrupt Practices Act or the U.K. Anti-Bribery Act of 2010;

 

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lack of availability of qualified third-party financing;

 

   

generally longer receivable collection periods than in the United States;

 

   

difficulties in staffing and managing foreign operations;

 

   

preference for local vendors;

 

   

burdens of complying with different permitting standards;

 

   

a wide variety of foreign laws and obstacles to the repatriation of earnings and cash;

 

   

difficulties in handling legal disputes in foreign jurisdictions; and

 

   

different or lesser protection of our intellectual property.

 

Fluctuations in the value of the U.S. dollar may impact our ability to compete in international markets. International expansion and market acceptance depend on our ability to modify our business approach and technology to take into account such factors as differing customer business models, product requirements and needs, the applicable regulatory and business environment, labor costs and other economic conditions. These factors may harm our future international sales and, consequently, our business, financial condition and results of operations and slow our future growth.

 

Federal, state and international laws regulating telephone and email marketing practices impose certain obligations on marketers, which could reduce our ability to expand our business.

 

We make telephone calls and send emails and text messages as part of our solutions. The United States regulates marketing by telephone, text message and email. The Telephone Consumer Protection Act prohibits companies from making telemarketing calls to numbers listed in the Federal Do-Not-Call Registry and imposes other obligations and limitation on making phone calls and sending text messages to consumers. The Federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the “CAN-SPAM Act”) regulates commercial email messages and specifies penalties for the transmission of commercial email messages that do not comply with certain requirements, such as providing an opt-out mechanism for stopping future emails from senders. We may need to comply with such laws and any associated rules and regulations. States and other countries have similar laws related to telemarketing and commercial emails. Additional or modified laws and regulations, or interpretations of existing, modified or new laws, regulations and rules, could prohibit or increase the cost of engaging with energy consumers and impair our ability to expand the use of our solutions, including our demand response solution, to more customers. Failure to comply with obligations and restrictions related to telephone, text message and email marketing could subject us to lawsuits, fines, statutory damages, consent decrees, injunctions, adverse publicity and other losses that could harm our business.

 

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could harm our results of operations and our ability to attract and retain qualified executives and board members.

 

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), as well as rules implemented by the Securities and Exchange Commission (“SEC”), the New York Stock Exchange (“NYSE”) and other applicable securities or exchange-related rules and regulations. In addition, our management team will also have to adapt to the requirements of being a public company. We expect complying with these rules and regulations will substantially increase our legal and financial compliance costs and make some activities more difficult, time consuming or costly, particularly when we are no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).

 

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As a public company, we also expect that it may be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

 

We are an “emerging growth company,” and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding an annual non-binding advisory vote on executive compensation and nonbinding stockholder approval of any golden parachute payments not previously approved. If we choose not to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, our auditors will not be required to attest to the effectiveness of our internal control over financial reporting. As a result, investors may become less comfortable with the effectiveness of our internal controls and the risk that material weaknesses or other deficiencies in our internal controls go undetected may increase. If we choose to provide reduced disclosures in our periodic reports and proxy statements while we are an emerging growth company, investors would have access to less information and analysis about our executive compensation, which may make it difficult for investors to evaluate our executive compensation practices. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions and provide reduced disclosure. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be harmed. We will remain an emerging growth company until the earliest to occur of: the last day of the fiscal year in which we have more than $1.0 billion in annual revenue; the date we qualify as a ‘‘large accelerated filer,’’ with at least $700 million of equity securities held by non-affiliates; the issuance, in any three-year period, by us of more than $1.0 billion in non-convertible debt securities; or the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

 

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have chosen to ‘‘opt out’’ of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

We have identified a material weakness in our internal control over financial reporting. Although we expect to make every effort to address this material weakness, we may find that we are unable to improve our internal control over financial reporting, which could make it difficult to maintain an effective system of internal control over financial reporting, reduce the reliability of our financial reporting, harm investor confidence in our company and affect the value of our common stock.

 

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report we file with the SEC. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting. However, our auditors will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until we are no longer an ‘‘emerging growth company’’ as defined in the JOBS Act if we take advantage of the exemptions available to us through the JOBS Act.

 

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We are in the very early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404.

 

In connection with the preparation of our consolidated financial statements for the year ended December 31, 2013, we and our independent registered public accounting firm identified a material weakness in the design and operation of our internal control over financial reporting. The material weakness relates to our financial statement close process and the lack of sufficient financial accounting and reporting expertise commensurate with our financial reporting requirements during this period. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

We are currently in the process of remediating the material weakness and are taking numerous steps that we believe will address the underlying causes of the material weakness, primarily through the hiring of additional accounting and finance personnel with technical accounting and financial reporting experience, enhancing and segregating duties within our accounting and finance department, and enhancing our internal review procedures during the financial statement close process. If we fail to effectively remediate deficiencies in our control environment or are unable to implement and maintain effective internal control over financial reporting and disclosure controls to meet the demands that will be placed upon us as a public company, including the requirements of Section 404 of the Sarbanes-Oxley Act, we may be unable to accurately report our financial results, or report them within the timeframes required by the SEC.

 

Even if we are able to report our financial statements accurately and in a timely manner, if we do not make all necessary improvements to address the material weakness, continued disclosure of a material weakness will be required in future filings with the SEC, which could cause our reputation to be harmed and our stock price to decline.

 

We may not be able to remediate this or any future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to express an opinion on the effectiveness of our internal controls when they are required to issue such opinion, investors could lose confidence in the accuracy and completeness of our financial reports, which could harm our stock price.

 

Acquisitions of other businesses, products or technologies could disrupt our business and harm our financial condition and results of operations.

 

In order to remain competitive, obtain key competencies or accelerate our time to market, we may seek to acquire additional businesses, products or technologies. We have not completed any acquisitions to date and we therefore have no experience in successfully acquiring and integrating additional businesses, products or technologies. If we identify an appropriate acquisition candidate, we may not be successful in negotiating the terms of the acquisition, financing the acquisition or effectively integrating the acquired business, product or technology into our existing business and operations. We may have difficulty integrating acquired technologies or products with our existing products and solutions. Our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired business, product or technology, including issues related to intellectual property, product quality or product architecture, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues. If we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted which could affect the market price of our stock. In addition, any acquisitions we are able to complete may not result in the synergies or other benefits we had expected to achieve, which could result in substantial write-offs. Further, contemplating or completing an acquisition and integrating an acquired business, product or technology will significantly divert management and employee time and resources.

 

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We may not be able to utilize a significant portion of our net operating loss carryforwards, which could harm our results of operations.

 

As of December 31, 2013, we had U.S. federal net operating loss carryforwards due to prior period losses of $58.3 million for U.S. federal purposes, which if not utilized will begin to expire in 2027. Realization of these net operating loss carryforwards is dependent upon future income, and there is a risk that our existing carryforwards could expire unused and be unavailable to offset future income tax liabilities, which could harm our results of operations.

 

In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), our ability to utilize net operating loss carryforwards or other tax attributes, in any taxable year may be limited if we have experienced or experience in connection with this offering or in the future an “ownership change.” A Section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws.

 

This offering or future issuances of our stock could cause an “ownership change.” It is possible that an ownership change, or any future ownership change, could have a material effect on the use of our net operating loss carryforwards or other tax attributes, which could harm our results of operations.

 

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

 

In the future, we may require additional capital to respond to business opportunities, challenges, acquisitions or unforeseen circumstances and may determine to engage in equity or debt financings or enter into credit facilities for other reasons. In the future, we may not be able to timely secure debt or equity financing on favorable terms, or at all. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to grow or support our business and to respond to business challenges could be limited.

 

Our business could be severely harmed by natural disasters or other catastrophes.

 

A significant catastrophic event such as war, acts of terrorism, natural disasters, such as earthquakes, fire or floods, loss of power, computer viruses, or global threats, including, but not limited to, the outbreak of epidemic disease, could disrupt our operations and impair deployment of our solutions by our utility customers, interrupt critical functions, cause our suppliers to be unable to meet our demand for parts and equipment, reduce demand for our products, prevent our utility customers from honoring their contractual obligations to us or otherwise harm our business. To the extent that such disruptions or uncertainties result in delays or cancellations of the deployment of our products and solutions, our reputation, business, results of operations and financial condition could be harmed.

 

Risks Related to Ownership of Our Common Stock and this Offering

 

Concentration of ownership among our existing executive officers, directors and their affiliates and our 5% stockholders may prevent new investors from influencing significant corporate decisions.

 

Upon completion of this offering, our executive officers, directors and holders of 5% or more of our outstanding common stock will beneficially own, in the aggregate, approximately         % of our outstanding shares

 

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of common stock. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. These stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control could have the effect of delaying or preventing a change of control of our company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders, which in turn could reduce the price of our common stock.

 

An active, liquid and orderly trading market for our common stock may not develop and you could lose all or part of your investment.

 

Prior to this offering, there has been no public market for shares of our common stock. The initial public offering price of our common stock will be determined through negotiation with the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares of common stock following this offering.

 

The price of our common stock may be volatile, and you could lose all or part of your investment.

 

The trading price of our common stock following this offering may fluctuate substantially and may be higher or lower than the initial public offering price. The trading price of our common stock following this offering will depend on a number of factors, including those described in this “Risk Factors” section, many of which are beyond our control and may not be related to our operating performance. These fluctuations could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid in this offering. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

   

price and volume fluctuations in the overall stock market from time to time;

 

   

volatility in the market prices and trading volumes of technology stocks;

 

   

changes in operating performance and stock market valuations of other technology companies generally, or those in our industry in particular;

 

   

sales of shares of our common stock by us or our stockholders;

 

   

failure of securities analysts to maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;

 

   

the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;

 

   

announcements by us or our competitors of new products;

 

   

the public’s reaction to our press releases, other public announcements and filings with the SEC;

 

   

rumors and market speculation involving us or other companies in our industry;

 

   

actual or anticipated changes in our results of operations or fluctuations in our results of operations;

 

   

actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;

 

   

litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;

 

   

developments or disputes concerning our intellectual property or other proprietary rights;

 

   

announced or completed acquisitions of businesses or technologies by us or our competitors;

 

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new laws or regulations or new interpretations of existing laws or regulations applicable to our business;

 

   

changes in accounting standards, policies, guidelines, interpretations or principles;

 

   

any significant change in our management; and

 

   

general economic conditions and slow or negative growth of our markets.

 

In addition, the stock market in general, and the market for technology companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

A total of             , or             %, of our total outstanding shares after the offering are restricted from immediate resale, but may be sold in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.

 

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our common stock. Based on shares outstanding as of December 31, 2013, we will have              shares of common stock outstanding after this offering. Of these shares, the common stock sold in this offering will be freely tradable in the United States, except for any shares purchased by our “affiliates” as defined in Rule 144 under the Securities Act of 1933. The holders of substantially all of the shares of outstanding common stock have agreed with the underwriters, subject to certain exceptions described in “Underwriters,” not to dispose of or hedge any of their common stock during the 180-day period beginning on the date of this prospectus, except with the prior written consent of Morgan Stanley & Co. LLC and Goldman, Sachs & Co. After the expiration of the 180-day restricted period, these shares may be sold in the public market in the United States, subject to prior registration in the United States, if required, or reliance upon an exemption from United States registration, including, in the case of shares held by affiliates or control persons, compliance with the volume restrictions of Rule 144.

 

Upon completion of this offering, stockholders owning an aggregate of 34,593,054 shares will be entitled, under contracts providing for registration rights, to require us to register shares of our common stock owned by them for public sale in the United States. In addition, we intend to file a registration statement to register the approximately              shares reserved for future issuance under our equity compensation plans. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and, in certain cases, lock-up agreements with the representatives of the underwriters referred to above, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the United States in the open market.

 

As restrictions end or pursuant to registration rights, sales of our common stock may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for you to sell shares of our common stock.

 

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Anti-takeover provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware Law, could impair a takeover attempt.

 

Our certificate of incorporation, bylaws and Delaware law contain or will contain provisions which could have the effect of rendering more difficult, delaying or preventing an acquisition deemed undesirable by our board of directors. Our corporate governance documents include or will include provisions:

 

   

creating a classified board of directors whose members serve staggered three-year terms;

 

   

authorizing “blank check” preferred stock, which could be issued by our board of directors without stockholder approval and may contain voting, liquidation, dividend and other rights superior to our common stock;

 

   

limiting the liability of, and providing indemnification to, our directors and officers;

 

   

limiting the ability of our stockholders to call and bring business before special meetings;

 

   

requiring advance notice of stockholder proposals for business to be conducted at meetings of our stockholders and for nominations of candidates for election to our board of directors;

 

   

controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;

 

   

providing our board of directors with the express power to postpone previously scheduled annual meetings and to cancel previously scheduled special meetings;

 

   

establishing that the number of directors is set by the board of directors;

 

   

providing that board vacancies be filled by the board of directors; and

 

   

limiting the ability to remove directors other than for cause.

 

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in our management.

 

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

 

Any provision of our certificate of incorporation, bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.

 

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways that may not yield a return.

 

The net proceeds from the sale of our shares of common stock by us in this offering may be used for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire complementary businesses, products, solutions or technologies. However, we do not have any agreements or commitments for any acquisitions at this time. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be invested with a view towards long-term benefits for our stockholders and this may not increase our results of operations or market value. Until the net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

 

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Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

 

The assumed initial public offering price of our common stock of $             per share, based on the midpoint of the price range on the cover page of this prospectus, is substantially higher than the net tangible book value per share of our outstanding common stock immediately after this offering. Therefore, if you purchase our common stock in this offering, you will incur immediate dilution of $              in the net tangible book value per share from the price you paid. In addition, following this offering, purchasers who bought shares from us in the offering will have contributed             % of the total consideration paid to us by our stockholders to purchase shares of common stock, in exchange for acquiring approximately             % of our total outstanding shares as of December 31, 2013 after giving effect to this offering. The exercise of outstanding stock options will result in further dilution.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, or if our actual results differ significantly from our guidance, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who covers us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

In addition, from time to time, we may release earnings guidance or other forward-looking statements in our earnings releases, earnings conference calls or otherwise regarding our future performance that represent our management’s estimates as of the date of release. Some or all of the assumptions of any future guidance that we furnish may not materialize or may vary significantly from actual future results. Any failure to meet guidance or analysts’ expectations could have a material adverse effect on the trading price or trading volume of our stock.

 

We do not expect to declare any dividends in the foreseeable future.

 

We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements within the meaning of the federal securities laws, and these statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:

 

   

our future financial performance, including our revenue, cost of revenue, gross profit or gross margin and operating expenses;

 

   

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

   

our predictions about industry and market trends;

 

   

our ability to increase the number of customers using our software;

 

   

our ability to attract and retain customers to use our products and solutions;

 

   

our ability to successfully expand in our existing markets and into new markets;

 

   

our ability to effectively manage our growth and future expenses;

 

   

our customers’ intention to deploy and further rollout our solutions;

 

   

our ability to maintain, protect and enhance our intellectual property;

 

   

our ability to comply with modified or new laws and regulations applying to our business; and

 

   

the attraction and retention of qualified employees and key personnel.

 

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

 

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described in “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

 

The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

 

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MARKET AND INDUSTRY DATA

 

This prospectus contains statistical data, estimates and forecasts that are based on independent industry publications, such as those published by Greentech Media, the Institute for Electric Innovation and Navigant Research, or other publicly available information, as well as other information based on our internal sources. Although we believe that the third-party sources referred to in this prospectus are reliable, neither we nor the underwriters have independently verified the information provided by these third parties. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under “Risk Factors” and elsewhere in this prospectus.

 

USE OF PROCEEDS

 

We estimate that the net proceeds from the sale of shares of our common stock that we are selling in this offering will be approximately $             million, based upon an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares from us is exercised in full, we estimate that our net proceeds would be approximately $             million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease the net proceeds that we receive from this offering by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of one million in the number of shares of common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $             million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

 

The principal purposes of this offering are to create a public market for our common stock and facilitate our future access to the public equity markets. We currently intend to use the net proceeds that we will receive from this offering for working capital and other general corporate purposes, including investing further in our sales and marketing and research and development efforts. We intend to use proceeds from this offering to further grow our business and to fund our growth strategies discussed in this prospectus. We may also use a portion of the net proceeds that we receive to acquire or invest in complementary businesses, products, services, technologies or other assets. We have not entered into any agreements or commitments with respect to any acquisitions or investments at this time.

 

We cannot specify with certainty the particular uses of the net proceeds that we will receive from this offering or the amounts we actually spend on the uses set forth above. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds that we receive in this offering in short-term and intermediate-term interest-bearing obligations, investment-grade investments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

 

The following table sets forth cash and cash equivalents, as well as our capitalization, as of December 31, 2013 as follows:

 

   

on an actual basis;

 

   

on a pro forma basis, giving effect to (i) the filing of our amended and restated certificate of incorporation, (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 19,246,714 shares of common stock and (iii) the automatic conversion of all outstanding debt under a subordinated convertible promissory note with a utility partner dated March 8, 2013 into              shares of common stock, based on an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, which conversion will occur prior to the completion of this offering, as if such conversion had occurred on December 31, 2013; and

 

   

on a pro forma as adjusted basis, giving effect to the pro forma adjustments set forth above and the sale and issuance by us of              shares of common stock in this offering, based on an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The pro forma as adjusted information set forth in the table below is illustrative only and will be adjusted based on the actual initial public offering price and other final terms of this offering. You should read this table together with our financial statements and related notes, and the sections titled “Selected Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

     December 31, 2013  
     Actual     Pro Forma      Pro Forma
As Adjusted
 
     (In thousands, except share and per
share amounts)
 

Cash and cash equivalents

   $ 28,819      $                    $                
  

 

 

   

 

 

    

 

 

 

Notes payable

     2,418        

Stockholders’ equity (deficit):

       

Series A, B and C convertible preferred stock, par value $0.000005 per share: 19,428,252 shares authorized, 19,246,714 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     67,693        

Preferred stock, par value $0.000005 per share: no shares authorized, issued and outstanding, actual; 25,000,000 shares authorized, no shares issued and outstanding, pro forma and pro forma as adjusted

            

Common stock, par value $0.000005 per share, 62,000,000 shares authorized, 22,113,125 shares issued and outstanding, actual; 500,000,000 shares authorized,                  shares issued and outstanding, pro forma; 500,000,000 shares authorized,              shares issued and outstanding, pro forma as adjusted

            

Additional paid-in capital

     9,407        

Treasury stock

            

Accumulated deficit

     (83,243     

Accumulated other comprehensive loss

     (120     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ equity (deficit)

     (6,263     
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ (3,845   $         $     
  

 

 

   

 

 

    

 

 

 

 

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If the underwriters’ option to purchase additional shares from us were exercised in full, pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and shares issued and outstanding as of December 31, 2013 would be $             million, $             million, $             million and              million, respectively.

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our cash and cash equivalents, additional paid-in capital, and total stockholders’ equity (deficit) by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

 

The number of shares of our common stock outstanding in the table above excludes the following:

 

   

7,789,720 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of December 31, 2013, with a weighted-average exercise price of $3.83 per share;

 

   

1,093,326 shares of common stock issuable upon the vesting of restricted stock units that were outstanding as of December 31, 2013;

 

   

283,950 shares of common stock issuable upon the vesting of restricted stock units that were granted after December 31, 2013; and

 

   

6,529,852 shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of 1,529,852 shares of common stock reserved for future issuance under our 2007 Stock Plan as of December 31, 2013, which shares will be added to the shares to be reserved under our 2014 Stock Incentive Plan, and 5,000,000 shares of common stock reserved for future issuance under our 2014 Stock Incentive Plan, which will become effective in connection with this offering, and shares that become available pursuant to provisions thereof that automatically increase the share reserves under the 2014 Stock Incentive Plan each year.

 

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DILUTION

 

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of common stock in this offering and the pro forma as adjusted net tangible book value per share of common stock immediately after completion of this offering.

 

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value (deficit) as of December 31, 2013 was $(12.6) million, or $(0.57) per share. Our pro forma net tangible book value (deficit) as of December 31, 2013 was $             million, or $             per share, based on the total number of shares of our common stock outstanding as of December 31, 2013, after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock as of December 31, 2013 into an aggregate of              shares of common stock and the automatic conversion of all outstanding debt under a subordinated convertible promissory note with a utility partner dated March 8, 2013, which conversions will occur immediately prior to the completion of this offering.

 

After giving effect to the sale by us of              shares of common stock in this offering at the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2013 would have been $             million, or $             per share. This represents an immediate increase in pro forma net tangible book value of $             per share to our existing stockholders and immediate dilution of $             per share to investors purchasing shares of common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution:

 

Assumed initial public offering price per share

      $               

Pro forma net tangible book value (deficit) per share as of December 31, 2013

   $                   

Increase in pro forma net tangible book value (deficit) per share attributable to new investors in this offering

     
  

 

 

    

Pro forma as adjusted net tangible book value per share immediately after this offering

     
     

 

 

 

Dilution per share to new investors in this offering

      $    
     

 

 

 

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $             , and would increase or decrease, as applicable, dilution per share to new investors in this offering by $             , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. In addition, to the extent any outstanding options to purchase common stock are exercised, new investors would experience further dilution. If the underwriters exercise their option to purchase additional shares from us in full, the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering would be $             per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $             per share.

 

The following table presents, on a pro forma as adjusted basis as of December 31, 2013, after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock immediately prior to the completion of this offering, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us,

 

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the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common stock and convertible preferred stock, cash received from the exercise of stock options, and the average price per share paid or to be paid to us at an assumed offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number      Percent     Amount      Percent    

Existing stockholders

     41,359,839                $ 71,288,961                $ 1.72   

New investors

            
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

        100   $                      100   $       
  

 

 

    

 

 

   

 

 

    

 

 

   

 

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by approximately $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions payable by us. In addition, to the extent any outstanding options to purchase common stock are exercised, new investors will experience further dilution.

 

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares. If the underwriters exercise their option to purchase additional shares in full from us, our existing stockholders would own             % and our new investors would own             % of the total number of shares of our common stock outstanding upon the completion of this offering.

 

The number of shares of our common stock to be outstanding after this offering is based on the number of shares of our common stock outstanding as of December 31, 2013 and excludes:

 

   

7,789,720 shares of common stock issuable upon the exercise of options to purchase common stock that were outstanding as of December 31, 2013, with a weighted-average exercise price of $3.83 per share;

 

   

1,093,326 shares of common stock issuable upon the vesting of restricted stock units that were outstanding as of December 31, 2013;

 

   

283,950 shares of common stock issuable upon the vesting of restricted stock units that were granted after December 31, 2013;

 

   

             shares of common stock issuable upon the conversion of the subordinated convertible promissory note with a utility partner dated March 8, 2013, based on an assumed initial public offering price of $             per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus; and

 

   

6,529,852 shares of common stock reserved for future issuance under our stock-based compensation plans, consisting of 1,529,852 shares of common stock reserved for future issuance under our 2007 Stock Plan as of December 31, 2013, which shares will be added to the shares to be reserved under our 2014 Stock Incentive Plan, and 5,000,000 shares of common stock reserved for future issuance under our 2014 Stock Incentive Plan, which will become effective in connection with this offering, and shares that become available pursuant to provisions thereof that automatically increase the share reserves under the 2014 Stock Incentive Plan each year.

 

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SELECTED FINANCIAL DATA

 

The following selected statement of operations data for the years ended December 31, 2011, 2012 and 2013 and the balance sheet data as of December 31, 2012 and 2013 have been derived from our audited financial statements included elsewhere in this prospectus. The selected statement of operations data for the year ended December 31, 2010 and the balance sheet data as of December 31, 2011 are derived from our audited consolidated financial statements not included in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future. You should read the following selected financial and other data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,  
     2010     2011     2012     2013  
     (In thousands, except per share amounts)  

Consolidated Statements of Operations Data:

        

Revenue

   $ 10,636      $ 28,746      $ 51,756      $ 88,703   

Cost of revenue(1)

     4,563        13,306        18,913        31,304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     6,073        15,440        32,843        57,399   

Operating expenses(1):

        

Sales and marketing

     7,120        13,648        21,338        30,551   

Research and development

     6,837        14,372        16,134        27,087   

General and administrative

     5,780        8,716        7,730        13,578   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,737        36,736        45,202        71,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (13,664     (21,296     (12,359     (13,817

Other income (expense), net

     1        (1     54        (321
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (13,663     (21,297     (12,305     (14,138

Provision for income taxes

                   27        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (13,663   $ (21,297   $ (12,332   $ (14,161
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common stock outstanding(2):

        

Basic and diluted

     16,398        17,836        19,442        21,121   

Net income (loss) per share(2):

        

Basic and diluted

   $ (0.83   $ (1.19   $ (0.63   $ (0.67

Pro forma net income (loss) per share (unaudited)(2):

        

Basic and diluted

         $     

 

  (1)   Stock-based compensation expense was allocated as follows:

 

     Year Ended December 31,  
       2010          2011          2012          2013    
     (In thousands)  

Cost of revenue

   $ 11       $ 87       $ 137       $ 197   

Sales and marketing

     120         340         484         1,348   

Research and development

     133         382         447         939   

General and administrative

     122         151         119         1,141   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 386       $ 960       $ 1,187       $ 3,625   
  

 

 

    

 

 

    

 

 

    

 

 

 
  (2)   See Note 10 to our audited financial statements for an explanation of the method used to calculate basic and diluted net loss per share attributable to common stockholders, pro forma basic and diluted net loss per share attributable to common stockholders and the weighted-average number of shares used in the computation of the per share amounts.

 

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     December 31,  
     2011      2012     2013  
     (In thousands)  

Balance Sheet Data:

       

Cash and cash equivalents

   $ 28,333       $ 24,597      $ 28,819   

Working capital (deficit)

     12,062         (1,729     (11,851

Property and equipment, net

     3,403         6,127        10,813   

Total assets

     36,779         42,637        63,135   

Deferred revenue

     17,132         32,395        52,390   

Total indebtedness

                    3,673   

Total stockholders’ equity (deficit)

     12,248         1,986        (6,263

 

Non-GAAP Financial Measures

 

Adjusted EBITDA is a financial measure that is not calculated in accordance with GAAP. We define adjusted EBITDA as net loss adjusted to exclude income tax provision, other income (expense), including interest, depreciation and amortization and stock-based compensation. Below, we have provided a reconciliation of adjusted EBITDA to our net loss, the most directly comparable financial measure calculated and presented in accordance with GAAP. Adjusted EBITDA should not be considered as an alternative to net loss or any other measure of financial performance calculated and presented in accordance with GAAP. Our adjusted EBITDA may not be comparable to similarly titled measures of other organizations because other organizations may not calculate adjusted EBITDA in the same manner as we calculate the measure.

 

For limitations of this non-GAAP financial measure and further explanation of such measure, see “Summary—Summary Financial Data—Other Financial Metrics.”

 

The following table presents a reconciliation of adjusted EBITDA to our net loss, the most comparable GAAP measure, for each of the periods indicated:

 

     Year Ended December 31,  
     2010     2011     2012     2013  
     (In thousands)  

Reconciliation of Net Loss to Adjusted EBITDA:

        

Net loss

   $ (13,663   $ (21,297   $ (12,332   $ (14,161

Provision for income taxes

                   27        23   

Other (income) expense, including interest

     (1     1        (54     321   

Depreciation and amortization

     202        626        1,599        3,766   

Stock-based compensation

     386        960        1,187        3,625   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (13,076   $ (19,710   $ (9,573   $ (6,426
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Financial and Other Data” and the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus.

 

Overview

 

Opower is a leading provider of cloud-based software to the $2.2 trillion utility industry. Utilities use our software platform to deliver key customer-facing applications that reduce energy demand and improve customer perception of the utility. Our software analyzes energy data and presents personalized insights to consumers in order to motivate reductions in energy consumption. These reductions are valued as a source of energy much like a conventional power plant. We believe we are poised to transform the way the utility industry meets energy demand.

 

Our software platform helps redefine the relationship between utilities and their customers, and we have a track record of motivating consumers to take action. Our growth has been fueled by our focus on big data software architecture, user experience and, above all, scalable results. We offer a growing set of integrated software solutions, Opower Energy Efficiency, Opower Customer Engagement, Opower Demand Response and Opower Thermostat Management. As of December 31, 2013, we had 93 customers in eight countries. Our customers include 27 of the 50 largest electric utilities in the United States, including Commonwealth Edison, Duke Energy, First Energy, National Grid, Pacific Gas & Electric, Southern California Edison and Xcel Energy, as well as E.ON, Electricitie de France and Energy Australia internationally. Our leadership position has enabled us to build one of the largest energy datasets in the world: we have energy data from 37% of U.S. households on our platform, as well as data from millions of international households.

 

We generate revenue primarily from subscription fees from utilities for use on our platform, generally based upon the number of households and businesses served and the solutions selected. Although the number of households and businesses has some impact on our revenue, the number of households or businesses served is not directly correlated with revenue. The price we receive per household or business varies for each customer. For this reason, we do not treat the number of households or businesses served as one of our key performance indicators for our business. However, we do monitor this metric to understand the general adoption of our solutions by our customers.

 

We deliver our solutions to utilities through our cloud-based platform. New customers typically contract with us for 12 to 36 months and then renew for one year or more. The weighted-average contract term in 2013 was 24.5 months.

 

 

Opower was formed in 2007. We currently have four major product solutions.

 

   

In 2007, we launched our first solution, Energy Efficiency. This solution focuses on reducing energy consumption through a data analytics-driven, behavioral science-informed program.

 

   

In 2010, we started offering Customer Engagement solutions, which provide utilities with a web application that delivers user-friendly energy consumption and billing information. This solution helps households and businesses make informed decisions, and thereby save money and energy. It offers utilities a better way to engage their customers, and thereby strengthen their brand.

 

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In 2012, we started offering Thermostat Management, which is designed to interact with third-party hardware and to deliver engaging user experiences while also creating energy efficiency and demand response opportunities for our utility customers.

 

   

In 2013, we launched Demand Response, aimed at reducing peak demand for energy while not requiring any hardware installations to function.

 

We believe both of these newest solutions, Thermostat Management and Demand Response, offer significant growth potential, but both are still in a nascent stage with an immaterial impact on our revenue to date.

 

Our growth is driven by acquiring new customers and expanding with existing customers. We continue to grow domestically and internationally. We continue to acquire new customers in the United States and internationally. Our number of utility customers has increased from 63, 61 of which resided in the United States, as of December 31, 2011 to 93 customers in 8 countries as of December 31, 2013. We have expanded with existing customers by cross selling different solutions and adding households and businesses that use our platform. The number of households and businesses on our platform has grown from 1.4 million at December 31, 2010 to 32.1 million at December 31, 2013.

 

Our investments have yielded significant revenue growth over the past few years. For the years ended December 31, 2011, 2012 and 2013, our revenue was $28.7 million, $51.8 million and $88.7 million, respectively. This represents revenue growth of 71% for our most recent fiscal year. Our net losses for the years ended December 31, 2011, 2012 and 2013 were $21.3 million, $12.3 million and $14.2 million, respectively. We have grown from 162 employees as of December 31, 2010 to 465 employees as of December 31, 2013.

 

Key Factors Affecting Our Performance

 

Investing in Growth. We will continue to focus on long-term growth. We believe that our market opportunity is large and underpenetrated and we will continue to invest significantly in sales and marketing to grow our customer base, expand with existing customers, grow internationally and drive additional revenue. We also expect to invest in research and development to enhance our platform and develop complementary solutions. To support our expected growth and our transition to a public company, we plan to invest in other operational and administrative functions. We expect to use the proceeds from this offering to fund these growth strategies and do not expect to be profitable in the near future.

 

We believe that our sales and marketing, research and development and general and administrative costs will decrease as a percentage of revenue in the long term as we are able to reach economies of scale. With this increased operating leverage, we expect our gross and operating margins to increase in the long term. However, in the short term, we intend to focus on the growth of the business and expect our total operating expenses to increase, and have a short-term negative impact on our adjusted EBITDA and operating margin.

 

Adding New Utility Customers. Our customer base is a key indicator of our market penetration, growth and future revenue. We believe that we are positioned to grow significantly for many years to come. With 93 customers as of December 31, 2013, we believe we have a substantial opportunity to expand our number of utility customers in the coming years. There are approximately 1,300 utilities worldwide with the scale and customer base that could successfully deploy our solutions. The number of new customers signed may vary period to period for several reasons, including the long length and general inconsistency of our sales cycle.

 

Expanding with and Cross-Selling to Existing Customers. Our existing customers continue to represent a large opportunity for us to expand to more households and businesses and to cross-sell additional solutions. As of December 31, 2013, only 16% of our customers have licensed more than one of our solutions. Additionally, in December 2013, we delivered our energy efficiency solution to nearly 12 million households across 93 utilities, representing approximately 10% of the 115 million households that those utilities served.

 

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Key Performance Indicators for Our Business

 

We regularly review a number of metrics to measure our performance, formulate financial projections, evaluate growth trends and determine business strategy. In addition to the metrics discussed below, we also review gross margin and operating expenses, which we discuss in the “Basis of Presentation” section.

 

     Year Ended December 31,  
     2011     2012     2013  
     (Dollars in thousands)  

Financial Metrics:

      

Revenue

   $ 28,746      $ 51,756      $ 88,703   

Period-over-period percentage increase

       80     71

Adjusted EBITDA(1)

   $ (19,710   $ (9,573   $ (6,426

Operating Metrics:

      

Total customers(2)

     63        78        93   

 

  (1)   We define adjusted EBITDA as net loss plus provision for income taxes; other (income) expense, including interest; depreciation and amortization; and stock-based compensation. Adjusted EBITDA is not calculated in accordance with GAAP. A reconciliation of this non-GAAP measure to the most directly comparable GAAP-based measure along with a summary of the definition and its material limitations are included in “Summary—Summary Financial Data—Other Financial Metrics.”
  (2)   We define our number of customers at the end of a period as the number of distinct buying entities with which we have signed agreements and who have committed to a minimum level of non-refundable fees for which services are to be provided or are being provided.

 

Basis of Presentation

 

Revenue

 

We offer subscriptions to our cloud-based data analytics platform. We derive our revenue from fees for these subscriptions. Subscription fees primarily pay for the ongoing integration of utility data into our software platform and the analysis and presentation of this data to energy consumers.

 

We recognize revenue on our subscription fees ratably over the contract term beginning on the date the service is available to the customer, which typically coincides with website launch or first report generation to households and businesses. Our fees are non-refundable once billed, are generally collected in advance of service delivery, and our contracts typically have a term of one to five years. We record amounts that have been billed as deferred revenue and these amounts are recognized evenly over the contract term. Because payment terms may be quarterly for some customers, the annualized value of the orders we enter into with our customers will not be completely reflected in deferred revenue at any single point in time. Accordingly, we do not believe that change in deferred revenue is an accurate indicator of future revenues for a given period of time. Setup fees, which tend not to provide stand-alone value, are recognized over the expected life of the customer relationship. We will continue to evaluate the length of the amortization period of the setup fees as we gain more experience with customers.

 

Cost of Revenue

 

Cost of revenue generally consists of information services necessary to perform data analysis, the costs of data center capacity, employee-related expenses, including salaries, benefits and stock-based compensation related to implementing, operating and servicing our internal applications, channel delivery fees, which includes printing and mailing for delivery of reports to utility customers, and amortization of internally capitalized software that delivers our services. In addition, we allocate a portion of overhead costs, including rent, information technology and employee benefit costs, to cost of revenue.

 

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Our cost of revenue is expensed as incurred and includes amortization of capitalized software. However, the related revenue for delivery of our services is deferred until commencement of delivery services and is recognized ratably over the related subscription term. Therefore, costs associated with delivering these services are not always expensed in the same period that revenue is recognized. Customer costs tend to be higher in the initial subscription year of a program based on the effort required to develop system integrations and match customer data.

 

Operating Expenses

 

Sales and Marketing. Sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing staff, including salaries, benefits, bonuses, stock-based compensation, travel and commissions. They also include the cost of advertising, online marketing, promotional events, corporate communications, product marketing and other brand-building activities. We expense sales commissions at the time of contract signing.

 

We intend to continue to invest in sales and marketing activities to expand our business domestically and internationally. We expect to hire additional sales personnel in the United States and internationally. We also intend to expand our sales offices globally, including in the United Kingdom, Singapore and Japan. As we scale our sales and marketing activities in the short to medium term, we expect these expenses to increase in absolute dollars as well as a percentage of revenue.

 

Research and Development. Research and development costs consist primarily of personnel and related expenses, including salaries, benefits and stock-based compensation, research and development consulting fees and allocated overhead. Development costs other than those qualifying for capitalization as internally developed software are expensed as incurred.

 

Our research efforts focus on improving our understanding of the way in which energy consumers use energy and the ways in which the behaviors of those users can be influenced. Additionally, development efforts have focused on creating a scalable data analytics platform with the capability of capturing, analyzing and reporting on large amounts of data captured in small intervals. We also continue to focus development efforts on adding new features and applications, and enhancing the functionality of our platform. In the short term, we expect research and development expenses to increase in absolute dollars as well as on a percentage of revenue basis as we add new platform functionality and expand our system infrastructure.

 

General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for accounting, executive, finance, human resources, legal, information technology and security and recruiting staff, including salaries, benefits, bonuses, stock-based compensation, professional fees, insurance premiums and allocated overhead.

 

We expect our general and administrative expenses to increase as we continue to expand our operations, hire additional personnel and transition from a private to a public company. As we transition to being a public entity, we expect to incur additional expense related to increased accounting and auditing services, increased outside counsel assistance, increased compliance requirements including filings with the Securities and Exchange Commission, and enhancing our internal control environment.

 

Other Income and Expenses. Other income and expenses consist primarily of interest income, interest expense and gains and losses related to foreign currency transactions. Interest income is income received primarily from deposits of cash and cash equivalents. Interest expense relates to interest incurred related to capital equipment leasing and on our outstanding note payable. Foreign exchange gains and losses relate to transactions denominated in currencies other than the functional currency of our entities.

 

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Results of Operations

 

The following tables set forth selected consolidated statement of operations data and such data as a percentage of total revenue for each of the periods indicated.

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Consolidated Statements of Operations Data:

      

Revenue

   $ 28,746      $ 51,756      $ 88,703   

Cost of revenue(1)

     13,306        18,913        31,304   
  

 

 

   

 

 

   

 

 

 

Gross profit

     15,440        32,843        57,399   

Operating expenses(1):

      

Sales and marketing

     13,648        21,338        30,551   

Research and development

     14,372        16,134        27,087   

General and administrative

     8,716        7,730        13,578   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     36,736        45,202        71,216   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (21,296     (12,359     (13,817

Other income (expense), net

     (1     54        (321
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (21,297     (12,305     (14,138

Provision for income taxes

            27        23   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (21,297   $ (12,332   $ (14,161
  

 

 

   

 

 

   

 

 

 

 

  (1)   Stock-based compensation was allocated as follows:

 

     Year Ended December 31,  
       2011          2012          2013    
     (In thousands)  

Cost of revenue

   $ 87       $ 137       $ 197   

Sales and marketing

     340         484         1,348   

Research and development

     382         447         939   

General and administrative

     151         119         1,141   
  

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 960       $ 1,187       $ 3,625   
  

 

 

    

 

 

    

 

 

 

 

     Year Ended December 31,  
       2011         2012         2013    

Percentage of Revenue:

      

Cost of revenue

     46     37     35

Gross margin

     54        63        65   

Operating expenses:

      

Sales and marketing

     47        41        34   

Research and development

     50        31        31   

General and administrative

     30        15        15   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     127        87        80   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (74     (24     (16

Other income (expense), net

                     
  

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (74     (24     (16

Provision for income taxes

                     
  

 

 

   

 

 

   

 

 

 

Net loss

     (74 %)      (24 %)      (16 )% 
  

 

 

   

 

 

   

 

 

 

 

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Years Ended December 31, 2012 and 2013

 

Revenue

 

       Year Ended December 31,           
         2012              2013              $ Change              % Change      
     (Dollars in thousands)  

Revenue

   $ 51,756       $ 88,703       $ 36,947         71

 

Revenue increased as a result of the addition of new customers and increased customer penetration as compared to the prior year. The number of customers increased from 78 as of December 31, 2012 to 93 as of December 31, 2013. Of the $36.9 million increase in revenue, expansions with existing customers contributed $28.6 million and new customers contributed $8.3 million to revenue for the year ended December 31, 2013. We increased customer penetration through expanding the number of households and businesses on previously deployed solutions and cross selling existing customers additional products. Price changes did not have a material impact on the year-over-year increase in revenue. International revenue was 3% and 10% of revenue for the years ended December 31, 2012 and 2013, respectively. We expect international revenue to continue to increase as a percentage of revenue going forward as we continue to expand our international sales presence.

 

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended December 31,        
         2012             2013             $ Change              % Change      
     (Dollars in thousands)  

Cost of revenue

   $ 18,913      $ 31,304      $ 12,391         66

Gross profit

     32,843        57,399        24,556         75

Gross margin

     63     65     

 

The increase in cost of revenue was due to both higher volume and an increased cost of delivery. Specifically, $3.9 million of the increase related to increased volume of services over the prior year. In addition, $3.6 million of the increase was related to a January 2013 U.S. Postal Service determination that mailed home energy reports should be charged first class postage rates for residential delivery. A subsequent modification to our energy reports allowed us to return to standard postage rates during the third quarter of 2013. We expect postage and delivery costs to further decrease as a percentage of revenue as we shift toward digital channels thereby increasing our gross margin in the long term.

 

Our gross margin improved as we were able to realize lower paper report production costs based on the scale we achieved, partially offset by the $3.6 million increase related to the U.S. Postal Service determination. On an absolute dollar basis, employee compensation and related costs increased by $1.8 million as our headcount increased from December 31, 2012 to December 31, 2013. These new employees were primarily focused on implementing and delivering our services. The new delivery of expanded products including those delivered via digital channels and costs associated with warehousing an increased amount of data increased costs by $1.1 million. The amortization of capitalized internal-use software costs increased by $0.8 million due to continued investment in our software products.

 

Sales and Marketing

 

       Year Ended December 31,          
         2012             2013             $ Change              % Change      
    

(Dollars in thousands)

 

Sales and marketing

   $ 21,338      $ 30,551      $ 9,213         43

Percentage of revenue

     41     34     

 

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From December 31, 2012 to December 31, 2013, the headcount of our sales and marketing staff increased, which combined with higher commission expense related to increased contract bookings, drove $6.3 million of the increased sales and marketing expenses. We also increased spending on sales and marketing-related travel and marketing events by $1.6 million in 2013. Allocations related to information technology and rent, market and regulatory consulting as well as customer relationship management software expenses further increased expenses by $1.0 million in 2013.

 

We expect sales and marketing expenses to increase in absolute dollars and as a percentage of revenue in the near to medium term, as we continue to increase the size of the sales and marketing staff both domestically and internationally. Additionally, we expect non-headcount driven marketing expenses will increase as we attempt to increase brand awareness and sponsor additional marketing events, including a user conference in February 2014, with the aim of attracting new customers and expanding our footprint with existing customers.

 

Research and Development

 

       Year Ended December 31,          
         2012             2013             $ Change              % Change      
    

(Dollars in thousands)

 

Research and development

   $ 16,134      $ 27,087      $ 10,953         68

Percentage of revenue

     31     31     

 

From December 31, 2012 to December 31, 2013, the headcount of our research and development staff increased, which drove $6.3 million of the increased research and development expense. Spending related to external consultants engaged to support product development increased by $2.0 million as compared to the prior year. Increased travel, information technology and rent allocations, as well as development and integrated software, further increased expenses by $1.1 million. Amortization of internally capitalized software related to research activities also increased by $0.7 million over the prior year. Additionally, during the year ended December 31, 2013, we recorded a non-cash impairment of $0.6 million related to a capitalized internal-use software project termination related to the development of a stand-alone mobile app.

 

We expect research and development expenses will increase in absolute dollars, and in the near term also as a percentage of revenue, as we continue to invest in new product capabilities and focus on developing our products for international markets, which may involve different requirements than domestic markets.

 

General and Administrative

 

       Year Ended December 31,          
         2012             2013             $ Change              % Change      
    

(Dollars in thousands)

 

General and administrative

   $ 7,730      $ 13,578      $ 5,848         76

Percentage of revenue

     15     15     

 

From December 31, 2012 to December 31, 2013, headcount increased across our accounting, finance, human resources, legal and recruiting departments, which drove $3.5 million of the increase in general and administrative expenses. This headcount growth was required to support overall company growth. Travel related to international expansion, software for back office systems, financial services and consultants and insurance related to our growth combined to increase expenses by $1.2 million in 2013. External legal fees increased by $0.6 million in conjunction with international expansion and other matters requiring specialist expertise.

 

We expect general and administrative expenses will continue to grow in absolute dollars as we continue to invest in our infrastructure with a greater number of employees. Additionally, as we plan to become a public reporting company, general and administrative expenses are likely to increase further.

 

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Other Income (Expense), Net

 

       Year Ended December 31,                
         2012             2013             $ Change             % Change      
    

(Dollars in thousands)

 

Other income (expense), net

   $ 54      $ (321   $ (375     N/M

Percentage of revenue

     0     0    

 

*N/M – Not meaningful.

 

For the year ended December 31, 2013, other income (expense), net, decreased primarily due to interest expense of $0.2 million related to our loan from E.ON SE and usage of capital leases to increase data center capacity. In addition, fluctuation in the value of foreign currency led to a $0.2 million foreign currency loss, primarily related to transactions denominated in Australian Dollars. We continue to monitor our foreign currency exposure to determine whether we should implement a foreign currency hedging program. These losses were partially offset by $0.2 million of rental income related to an office sublease agreement.

 

Years Ended December 31, 2011 and 2012

 

Revenue

 

     Year Ended December 31,                
         2011              2012              $ Change              % Change      
     (Dollars in thousands)  

Revenue

   $ 28,746       $ 51,756       $ 23,010         80

 

Existing customers contributed $14.0 million of additional revenue while new customers added $9.0 million in revenue in 2012. The number of customers increased from 63 at December 31, 2011 to 78 at December 31, 2012. International revenue as a percentage of revenue increased from none in 2011 to 3% in 2012.

 

Cost of Revenue, Gross Profit and Gross Margin

 

     Year Ended December 31,               
         2011             2012             $ Change              % Change      
     (Dollars in thousands)  

Cost of revenue

   $ 13,306      $ 18,913      $ 5,607         42

Gross profit

     15,440        32,843        17,403         113

Gross margin

     54     63     

 

The increase in cost of revenue was primarily driven by increased postage costs of $2.6 million, while report production costs held steady as volume increases were offset by volume production discounts, and labor costs increased by $1.3 million over the prior year.

 

Sales and Marketing

 

     Year Ended December 31,               
         2011             2012             $ Change              % Change      
     (Dollars in thousands)  

Sales and marketing

   $ 13,648      $ 21,338      $ 7,690         56

Percentage of revenue

     47     41     

 

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Salaries and related expenses drove $5.8 million of the increase in sales and marketing expenses. Of that amount, an increase of $1.6 million related to commissions. Travel, regulatory consultant and allocated rent expenses added $1.4 million of expense in 2012.

 

Research and Development

 

     Year Ended December 31,               
         2011             2012             $ Change              % Change      
     (Dollars in thousands)  

Research and development

   $ 14,372      $ 16,134      $ 1,762         12

Percentage of revenue

     50     31     

 

This increase was driven mainly by a headcount increase from December 31, 2011 to December 31, 2012. Salaries and related expenses increased by $3.6 million, offset by an increase of $3.0 million for capitalized software, which decreased research and development expenses. The percentage of development expenses that were capitalized increased from 2011 to 2012 due to a change in the nature of our development work, which caused research and development expenses to decrease as a percentage of revenue. We do not expect the trend of declining research and development expenses as a percentage of revenue to continue in the near future. An increase in depreciation related to infrastructure investment as well as increased allocated rent expenses contributed $1.1 million of the increased expense.

 

General and Administrative

 

     Year Ended December 31,              
         2011             2012             $ Change             % Change      
     (Dollars in thousands)  

General and administrative

   $ 8,716      $ 7,730      $ (986     (11 %) 

Percentage of revenue

     30     15    

 

The decrease in general and administrative expenses primarily related to $1.0 million decrease in rent expense due to increased allocation of rent expense to other departments based on headcount.

 

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Quarterly Results of Operations

 

The following tables set forth selected unaudited quarterly consolidated statements of operations data for each of the eight quarters in the period ended December 31, 2013. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this prospectus and, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the results of operations for these periods in accordance with generally accepted accounting principles. This data should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this prospectus. These quarterly results of operations are not necessarily indicative of our results of operations for a full year or any future period.

 

    Three Months Ended  
    March 31,
2012
    June 30,
2012
    Sept 30,
2012
    Dec 31,
2012
    March 31,
2013
    June 30,
2013
    Sept 30,
2013
    Dec 31,
2013
 
    (In thousands)        

Consolidated Statements of Operations Data:

               

Revenue

  $ 10,178      $ 11,727      $ 13,955      $ 15,896      $ 19,023      $ 21,229      $ 22,491      $ 25,960   

Cost of revenue(1)

    4,595        3,945        5,012        5,361        7,888        7,198        7,758        8,460   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    5,583        7,782        8,943        10,535        11,135        14,031        14,733        17,500   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses(1):

               

Sales and marketing

    4,448        5,168        5,763        5,959        6,193        6,953        7,826        9,579   

Research and development

    3,692        4,026        3,998        4,418        5,380        5,622        7,242        8,843   

General and administrative

    1,692        1,707        1,966        2,365        2,380        2,786        3,242        5,170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    9,832        10,901        11,727        12,742        13,953        15,361        18,310        23,592   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

    (4,249     (3,119     (2,784     (2,207     (2,818     (1,330     (3,577     (6,092

Other income (expense), net

    43        (37     51        (3     112        (640     393        (186
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (4,206     (3,156     (2,733     (2,210     (2,706     (1,970     (3,184     (6,278

Provision for income taxes

                  12        15        7        26        (9     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (4,206   $ (3,156   $ (2,745   $ (2,225   $ (2,713   $ (1,996   $ (3,175   $ (6,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (1)   Stock-based compensation was allocated as follows:

 

    Three Months Ended  
    March 31,
2012
    June 30,
2012
    Sept 30,
2012
    Dec 31,
2012
    March 31,
2013
    June 30,
2013
    Sept 30,
2013
    Dec 31,
2013
 
    (In thousands)        

Cost of revenue

  $ 34      $ 31      $ 35      $ 37      $ 34      $ 37      $ 58      $ 68   

Sales and marketing

    116        118        152        98        80        127        431        710   

Research and development

    98        107        120        122        167        172        323        277   

General and administrative

    34        31        31        23        31        94        366        650   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 282      $ 287      $ 338      $ 280      $ 312      $ 430      $ 1,178      $ 1,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Three Months Ended  
     March 31,
2012
    June 30,
2012
    Sept 30,
2012
    Dec 31,
2012
    March 31,
2013
    June 30,
2013
    Sept 30,
2013
    Dec 31,
2013
 

Percentage of revenue:

                

Cost of revenue

     45     34     36     34     41     34     34     33

Gross profit

     55        66        64        66        59        66        66        67   

Operating expenses:

                

Sales and marketing

     44        44        41        37        33        33        35        37   

Research and development

     36        34        29        28        28        26        32        34   

General and administrative

     17        15        14        15        13        13        14        20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     97        93        84        80        74        72        81        91   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (42     (27     (20     (14     (15     (6     (16     (23

Other income (expense), net

                                 1        (3     2        (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (42     (27     (20     (14     (14     (9     (14     (24

Provision for income taxes

                                                        
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (42 %)      (27 %)      (20 %)      (14 %)      (14 %)      (9 %)      (14 %)      (24 %) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Quarterly Trends

 

Our quarterly revenue has increased sequentially for all periods presented, primarily due to an increasing number of customers and increased sales to our existing customers. We expect both upselling to the existing customer base as well as new customer acquisition to continue to be a significant driver of revenue growth.

 

Total costs and expenses increased sequentially for all periods presented, primarily due to increased salary and related costs coinciding with an increase in the number of employees required to run our growing business.

 

Gross margin has generally increased over time from 55% in the three months ended March 31, 2012 to 67% for the three months ended December 31, 2013. However, gross margin decreased in the three months ended March 31, 2013, primarily due to increased costs related to energy reports delivered by the U.S. Postal Service. In January 2013, the U.S. Postal Service determined that these reports should be charged first class postage rates rather than standard mail rates, thereby increasing our postage cost. These charges continued through June 2013 when we were able to modify our product and energy report postage charges returned to the standard rate as customers converted to modified energy reports. In the long term, we expect gross margin to continue to increase as digital delivery becomes a higher percentage of our product mix. However, in the short to medium term, our gross margin may decrease as we enter new international markets in which we have yet to achieve efficiencies of scale.

 

Sales and marketing expenses grew sequentially over the periods primarily due to an expanding sales and marketing team and related expenses. While growing, research and development expenses have fluctuated due to increased amounts being capitalized related to software developed for internal use. General and administrative expenses grew sequentially related to increased costs required to support a growing business and will continue to increase as we prepare to be a public company as evidenced by the increased expenses in the third and fourth quarters of 2013 as we prepared for this offering.

 

Our quarterly results may fluctuate due to various factors affecting our performance. As noted above, we recognize revenue from subscription fees ratably over the term of the contract. Therefore, changes in our contracting activity in the near term may not be apparent as a change to our reported revenue until future periods. Most of our expenses are recorded as period costs and thus factors affecting our cost structure may be reflected in our financial results sooner than changes to our revenue.

 

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Liquidity and Capital Resources

 

As of December 31, 2013, our principal source of liquidity was cash and cash equivalents of $28.8 million, which were held for working capital purposes. Since our inception, we have financed our operations primarily through private placements of preferred stock, customer payments, exercises of options to purchase shares of common stock and, more recently, capital lease obligations and the E.ON SE loan.

 

In November 2010, we entered into a loan and security agreement for a $3.0 million secured revolving credit facility. In August 2013, we entered into an amended loan agreement increasing the revolving credit facility to $15.0 million. The loan contains various covenants that limit our other indebtedness, investments, liens and transactions. In addition, the loan contains financial covenants that require a minimum adjusted quick ratio and minimum cash balances. As of December 31, 2013, we were in compliance with each of these financial covenants and have not yet drawn on the facility.

 

In March 2013, we entered into a convertible loan agreement with E.ON SE, one of our utility customers, pursuant to which E.ON SE issued us a $2.5 million loan with an interest rate of 5% per year, compounding annually. The note matures and accumulated interest is due on March 8, 2016. The note becomes convertible into common stock in the event of an initial public offering with independent proceeds exceeding $20.0 million, a qualified private financing with independent proceeds exceeding $10.0 million, or in a non-qualified private financing with proceeds exceeding $10.0 million. In conversion, the loan and accumulated interest may convert at the option of the holder on a dollar value basis at a 12% discount from the offering or financing per share price. If we were to experience a change in control prior to conversion, we would have to repay 1.5 times the principal balance of the note as well as any accrued interest. For the year ended December 31, 2013, we recognized revenue of $1.3 million from our relationship with E.ON SE.

 

We believe our current cash and cash equivalents, cash flows from operations and amounts available under our loan agreements will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

 

The following table summarizes our cash flows for the periods indicated:

 

     Year Ended December 31,  
     2011     2012     2013  
     (In thousands)  

Net cash provided by (used in) operating activities

   $ (9,758   $ (22   $ 6,667   

Net cash used in investing activities

     (3,226     (4,326     (7,328

Net cash provided by financing activities

     1,125        569        4,908   

Effect of foreign exchange rate changes on cash and cash equivalents

     (17     43        (25
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (11,876   $ (3,736   $ 4,222   
  

 

 

   

 

 

   

 

 

 

 

Operating Activities

 

For the year ended December 31, 2013, operating activities provided $6.7 million in cash as compared to less than $0.1 million used for the year ended December 31, 2012. Positive cash flows in 2013 were driven largely by slower than anticipated hiring as we continue to seek additional qualified personnel, leading to our headcount being lower than forecasted. For the year ended December 31, 2013, the increase was primarily related to an increase in both deferred revenue of $20.0 million and accrued expenses of $1.9 million, partially offset by a combined $10.4 million increase in accounts receivable and prepaid expenses, all due to the growth in our business.

 

For the year ended December 31, 2012, operations used less than $0.1 million in cash as compared to a use of $9.8 million for the year ended December 31, 2011. Cash used for operations in 2012 primarily related to our net loss of $12.3 million, which was more than offset by $15.3 million of deferred revenue as subscription fees are typically billed and collected in advance of earning revenue. In 2011, the use was primarily related to our net loss of $21.3 million, which was partially offset by an increase of deferred revenue of $6.7 million and an increase in liabilities of $1.8 million.

 

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As we increase investments in sales and marketing and research and development, we expect that we will experience a net usage of cash flows from operations for fiscal year 2014.

 

Investing Activities

 

Cash used in investing activities for the year ended December 31, 2013 was $7.3 million compared to $4.3 million for the year ended December 31, 2012. For the year ended December 31, 2012, cash used in investing activities was $4.3 million as compared to $3.2 million in 2011. The primary use of cash for investing activities was for the purchase of equipment in all periods and the payment of salaries relating to the development of capitalized software for internal use.

 

Financing Activities

 

Cash provided by financing activities for the year ended December 31, 2013 was $4.9 million compared to $0.6 million for the year ended December 31, 2012. The increase was related to a $2.5 million loan from E.ON SE in 2013 and $2.8 million from the issuance of common stock upon the exercise of stock options. For the year ended December 31, 2012, cash provided by financing activities was $0.6 million as compared to $1.1 million in 2011, a change mainly driven by a $0.5 million decrease in the amount of proceeds received for the sale or issuance of common stock.

 

Commitments

 

As of December 31, 2012 and 2013, we had $1.4 million and $1.1 million, respectively, in letters of credit outstanding in favor of certain landlords for office space and collateralized as part of our secured loan agreement. To date, no amounts have been drawn against the letters, which renew annually and mature at various dates through September 2015.

 

Our principal commitments primarily consist of obligations under leases for office space, obligations under capital leases for equipment and notes payable. As of December 31, 2013, the future non-cancelable minimum payments under these commitments were as follows:

 

            Payments Due by Period  
     Total      Less than
1 Year
     1-2
Years
     3-5
Years
     More than
5 Years
 

Facilities leases

   $ 8,870       $ 4,376       $ 2,829       $ 1,665       $   

Capital lease obligations

     1,355         515         515         325           

Notes payable, including interest

     2,894                         2,894           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,119       $ 4,891       $ 3,344       $ 4,884       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

Off-Balance Sheet Arrangements

 

During the periods presented, we did not have any relationships with unconsolidated entities or financial partnerships, such entities often being referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

 

Critical Accounting Policies and Estimates

 

We prepare our financial statements and related notes in accordance with generally accepted accounting principles in the United States. Preparing the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses during the applicable periods. We base our estimates on historical experience and various other factors we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates, which may affect future financial statement presentation.

 

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We believe the assumptions and estimates associated with the following polices have the greatest potential impact on our financial statements: revenue recognition, stock-based compensation and income taxes.

 

Revenue Recognition

 

We generate revenue from the sale of cloud-based software solutions and related services to utilities on a subscription basis. Our software license terms typically last between one and five years in length. Our subscription contracts do not provide the right to take possession of the supporting software and grant limited access to our platform. Therefore, our arrangements are accounted for as service contracts. Revenue is recognized on a straight-line basis over the subscription term once sustained data processing commences. Our arrangements do not include general rights of return.

 

We begin to recognize revenue when all of the following criteria have been met:

 

   

Persuasive evidence of an arrangement exists;

 

   

Delivery has occurred;

 

   

The price is fixed or determinable; and

 

   

Collection is reasonably assured.

 

We provide two main subscription service deliverables: (i) data analytics services and (ii) web platform services. Data analytics services provide utility end users with information about their energy consumption through web, mobile applications, text message, email and mail channels. Web, and increasingly mobile platform, services provide utility end users the access to information about usage through a platform accessible via the utility’s web and mobile site as well as through a custom application. Generally, we sell these services in conjunction with one another, however, each service is able to operate independently, may be sold separately and, therefore each of the two main services has standalone value. Because of this standalone value, revenue from these services are recognized separately.

 

The accounting for the components of our revenue is in accordance with the guidance around multiple element revenue transactions. This guidance requires the allocation of revenue based on Vendor-Specific Objective Evidence (“VSOE”), Third-Party Evidence (“TPE”) or Best Estimate of Sales Price (“BESP”) in descending order. We are not able to determine VSOE or TPE for our deliverables as we do not sell deliverables independently and there are no third-party offerings that reasonably compare to our service. Therefore, we determine the selling prices of subscriptions to our services based on BESP.

 

In determining BESP, we analyze previous sales of our deliverables. Specifically, we value our product deliverables based on the number of households served or quantity and level of services to be performed. The BESP is the average price per household or per service per year. We review our pricing trends quarterly to ensure revenue is recognized consistently over multiple periods.

 

After we have determined the BESP of revenue that can be allocated to each deliverable based on the relative selling price method for bundled arrangements, we recognize the revenue for each deliverable based on the type of deliverable. For subscription service deliverables, we recognize the revenue on a straight-line basis over the term of the client arrangement. The weighted-average contract term in 2013 was 24.5 months. If any portion of our fee is contingent on a future deliverable, that portion of the revenue is deferred until the contractual requirement is no longer contingent. For set-up fees we recognize revenue over the expected customer relationship period.

 

We charge customers set-up fees at the initiation of new contracts. The set-up fees are deferred and recognized ratably over the expected customer relationship period. The corresponding set-up costs are expensed in the periods in which they are incurred.

 

Deferred revenue represents amounts billed to customers for which revenue has not yet been recognized. Deferred revenue represents unearned fees for which services have not been delivered and are expected to be delivered in the future.

 

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Table of Contents

Stock-Based Compensation

 

We recognize compensation related to stock options, including employee, consultant and non-employee director awards in the financial statements based on fair value. We estimate fair value of each option award on the grant date using the Black-Scholes option pricing model. Using this fair value, we recognize share-based compensation expense on a straight-line basis, net of forfeitures, over the requisite service period, which is typically four years. The awards typically expire ten years from the grant date.

 

Option pricing models require the input of highly subjective assumptions, including the fair value of the underlying common stock, the expected price volatility of the stock, risk-free interest rate, the expected term of the option and the expected stock dividend yield. To value our options, we used our best estimates. These estimates involve inherent uncertainties and the application of substantial judgment. If different assumptions are used, our share-based compensation could be materially different in the future.

 

We used the following assumptions in valuing our stock options:

 

Fair Value of Common Stock. Our stock is not publicly traded and, therefore, we must estimate the fair value of common stock as discussed in “—Common Stock Valuations.”

 

Volatility. We use the historical volatilities of a selected peer group as we do not have sufficient trading history to determine the volatility of our common stock. To select our peer group, we consider public enterprise cloud-based application providers that focus on a particular industry and contain a marketing component within their service offering. We intend to continue to rely on this information until a sufficient amount of historical information regarding the volatility of our own stock becomes available, or unless the circumstances change such that the identified companies are no longer similar to us.

 

Expected Term. The expected term represents the period that our option awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term, we have based our expected term on the simplified method available under GAAP.

 

Risk-Free Interest Rate. We use the implied yield available on U.S. Treasury zero-coupon bonds with an equivalent remaining term of the options for each option group to represent the risk-free interest rate.

 

Dividend Yield. We have not paid and do not expect to pay dividends and, therefore, we use a zero-percent dividend rate.

 

Once we have determined an estimated fair value, we adjust that value for expected forfeitures to represent the value of the award that we expect to vest. We estimate forfeitures based on a historical analysis of our actual forfeiture experience by employee and non-employee class. We recognize the expense on a straight-line basis over the requisite service period of the award. At the end of each period, we review the estimated forfeiture rate and, as applicable, make changes to the rate calculations to reflect new developments.

 

Our stock-based compensation expense for restricted stock units (“RSUs”) is estimated at the grant date based on the fair value of our common stock. Under our Amended and Restated 2007 Stock Plan, we are able to grant RSUs to domestic and international employees and other service providers. These RSUs vest upon the satisfaction of both a service condition and a performance condition. The standard service condition for RSUs is satisfied over a period of four years. The performance condition will be satisfied on the ear1ier of (i) 180 days after the effective date of this offering or (ii) the date of a change in control. The RSU shares are to be delivered no later than 30 days following the satisfaction of both the service and performance conditions.

 

Common Stock Valuations

 

Using the Black-Scholes model to estimate the fair value of share-based awards requires that we also estimate the fair value of the underlying common stock. Our board of directors estimated the fair value of our common stock

 

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at the time of each grant of share-based awards. To determine this value, our board of directors has considered input from management and an independent third-party valuation firm. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants (“AICPA”) Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Since the beginning of 2013, we have received monthly valuation reports of our common stock from an independent third-party valuation firm. The valuation firm has prepared contemporaneous valuation reports at the time of the grant of the share-based award. Our board of directors exercised reasonable judgment and considered numerous objective and subjective factors in making its fair value determinations. These factors include:

 

   

contemporaneous valuations performed by an independent third-party valuation firm;

 

   

the prices, rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

   

our actual operating and financial performance;

 

   

current business conditions and projections;

 

   

hiring of key personnel and the experience of our management;

 

   

the history of the company and the introduction of new services;

 

   

our stage of development;

 

   

our likelihood of achieving a liquidity event, such as an initial public offering or merger or acquisition of our company given prevailing market conditions;

 

   

illiquidity of share-based awards involving securities in a private company;

 

   

the market performance of comparable publicly traded companies; and

 

   

the U.S. and global capital market conditions.

 

In estimating the value of our common stock, our board of directors determined the equity value of the business by considering both market- and income-based approaches.

 

The market approach estimates value based on a comparison of the subject company to comparable public companies in a similar line of business. This method determines a market multiple of similar publicly traded companies and uses that multiple to estimate the value of the subject company. We derived the multiple of comparable companies using a ratio of the market value of invested capital less cash to the last twelve month revenue. Generally, a group of five cloud-based platform companies were used in each valuation through August 2013. Management selected these companies in conjunction with the outside valuation firm because they have similar recurring fee models and a meaningful portion of those fees relate to direct-to-consumer marketing.

 

The income-based approach estimates value based on the expectation of future cash flows that a company will generate and the residual value of the company after the forecasted period. The future cash flows are discounted using a discount rate derived based on companies of a similar type and risk profile. Additionally, we applied a discount to recognize the lack of marketability due to being a closely held company.

 

The enterprise values determined by the market-based and income-based approaches are then allocated to the common stock using the Option Pricing Method (“OPM”) and the Probability Weighted Expected Return Method (“PWERM”).

 

The OPM treats common stock and convertible preferred stock as call options on a company’s enterprise value with exercise prices based on the liquidation preferences of the convertible preferred stock. Under this method, the common stock only has value if the funds available for distribution to stockholders exceed the value of the liquidation preference at the time of an assumed liquidity event. The value assigned to the common stock

 

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is the remaining value after preferred stock is liquidated. The OPM prices the call option using the Black-Scholes model. The OPM model is used when the range of possible future outcomes is difficult to predict. We only used the OPM model for valuations completed prior to 2012.

 

The PWERM relies on a forward-looking analysis to predict the possible future value of the company. Under this method, discrete future outcomes, including IPO and non-IPO scenarios, are weighted based on our estimate of the probability of each scenario. The PWERM is used when discrete future outcomes can be predicted with reasonable certainty based on a probability distribution.

 

For valuations starting in December 2011, we began using the Hybrid Method to determine the common stock value. The Hybrid Method uses similar discrete events as included in the PWERM, but in addition to these discrete events the OPM is also used. The Hybrid Method is useful when certain discrete future outcomes can be predicted but also accounts for less certainty than the OPM model.

 

Beginning in June 2013, in conjunction with the May 2013 revision of the AICPA guidelines surrounding independent valuations, we identified and modeled discrete scenarios in a traditional PWERM analysis.

 

The following table summarizes all stock option grants from January 1, 2013 through the date of this prospectus:

 

Stock Option Grants

   Number of
Shares Underlying
Options Granted
     Weighted-Average
Exercise Price
Per Share
     Estimated
Fair Value
Per Share used for
Financial  Reporting
 

February 2013

     118,000       $ 3.19       $ 3.19   

April 2013

     347,750         4.19         4.19   

May 2013

     174,250         4.39         4.39   

June 2013

     309,500         4.69         4.69   

July 2013

     124,000         6.07         13.44   

August 2013

     1,615,082         6.62         13.44   

November 2013

     414,125         15.20         15.20   

 

As of December 31, 2013, unrecognized stock-based compensation related to unvested stock options was $19.3 million.

 

As of December 31, 2013, the board of directors and compensation committee approved a total of 1,093,326 RSUs. Total unrecognized stock-based compensation related to these awards was $15.0 million as of December 31, 2013, however no stock-based compensation expense will be recognized until the qualifying event for the awards’ performance-based vesting becomes probable. In the quarter in which this offering is completed, we will begin recording the unrecognized stock-based compensation expense over a weighted-average period of approximately four years on a straight-line basis, net of estimated forfeitures.

 

We considered the following factors in connection with determining the fair market value of our common stock at each of the following grant dates:

 

February 2013 Grants

 

We determined a fair market value of $3.19 per share. The following considerations were used to complete the valuation:

 

   

A hybrid PWERM analysis determined an enterprise value of $181.1 million.

 

   

A discount rate of 35% based on an estimated cost of capital.

 

   

A lack of marketability discount of 30%.

 

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Liquidity events were weighted as 35% for an initial public offering and 65% to a merger, acquisition, or continuation as a private company.

 

   

Benchmarked companies increased relative to the prior valuation.

 

April 2013 Grants

 

We continued to perform consistent with revenue projections in the first quarter of 2013. Higher cost of revenue was offset by less than expected sales and research and development expenses, resulting in increased profitability against projections. We determined a fair market value of $4.19 per share, increasing from the prior valuations due to a continued positive macroeconomic climate, revenue growth consistent with prior projections and reduction in the estimated time to a liquidity event. Our performance increased the likelihood of an initial public offering when estimating specific liquidity events.

 

The following considerations were used to complete the valuation:

 

   

A hybrid PWERM analysis determined an enterprise value of $231.2 million.

 

   

A discount rate of 33% based on an estimated cost of capital.

 

   

A lack of marketability discount of 28%.

 

   

Liquidity events were weighted as 37% for an initial public offering and 63% to a merger, acquisition, or continuation as a private company.

 

   

Benchmarked companies increased relative to the prior valuation.

 

May 2013 Grants

 

We continued to perform consistent with revenue projections in the second quarter of 2013. Higher cost of revenue continued to be offset by less than expected sales and research and development expenses. We determined a fair market value of $4.39 per share, increasing from the prior valuation due to company revenue growth consistent with prior projections and a shorter time to liquidity based on the passage of time, which was partly offset by negative macroeconomic conditions. Our performance continued to increase the likelihood of an initial public offering when estimating specific liquidity events.

 

The following considerations were used to complete the valuation:

 

   

A hybrid PWERM analysis determined an enterprise value of $237.7 million.

 

   

A discount rate of 32% based on an estimated cost of capital.

 

   

A lack of marketability discount of 28%.

 

   

Liquidity events were weighted as 38% for an initial public offering and 62% to a merger, acquisition, or continuation as a private company.

 

   

Benchmarked companies decreased relative to the prior valuation.

 

June 2013 Grants

 

We continued to perform consistent with revenue projections in the second quarter of 2013. Higher cost of revenue continued to be offset by less than expected sales and research and development expenses. We determined a fair market value of $4.69 per share, increasing from the prior valuations due to company revenue growth consistent with prior projections and a shorter time to liquidity based on the passage of time, which was partly offset by negative macroeconomic conditions. Our performance continued to increase the likelihood of an initial public offering when estimating specific liquidity events. As part of this valuation, we included multiple exit scenarios, each with a separate weighting and discount for lack of marketability.

 

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The following considerations were used to complete the valuation:

 

   

A PWERM analysis determined an enterprise value of $274.8 million.

 

   

A discount rate of 31% based on an estimated cost of capital.

 

   

A weighted-average lack of marketability discount of 24% based on discrete exit scenarios.

 

   

Liquidity events were weighted as 43% for an initial public offering and 57% to a merger, acquisition, or continuation as a private company.

 

   

Benchmarked companies decreased relative to the prior valuation.

 

July and August 2013 Grants

 

We continued to perform consistent with revenue projections in the third quarter of 2013. Cost of revenue returned to expectations and operating expenses were less than projected. We continued to obtain contemporaneous valuations and issue option grants throughout the period. As of September 2013, we estimated the fair market value of our common stock to be $13.44 per share. This increased from the prior valuations mainly due to the reassessment of comparable companies.

 

The following considerations were used to complete the valuation:

 

   

A PWERM analysis determined an enterprise value of $775.8 million.

 

   

A discount rate of 25% based on an estimated cost of capital.

 

   

A weighted-average lack of marketability discount of 18% based on discrete exit scenarios.

 

   

Liquidity events were weighted 65% toward an initial public offering and 35% toward a merger, acquisition, or continuation as a private company.

 

Third Quarter Fair Value of Common Stock for Financial Reporting Purposes

 

During September 2013, we completed the process of selecting investment banking firms. As part of this process, we amended the comparable company group used to estimate the fair value of our common stock using the market approach in order to (i) include additional companies with a software-as-a-service business model, (ii) reflect examples of comparable companies that the underwriters identified to us during our underwriter selection process for this offering and (iii) include certain companies that became public in the first six months of 2013. Due to the difference in valuation of these companies by the market, there was a significant increase in the multiples that management was using to estimate the enterprise value of the company. At the same time as this process was being undertaken, we consented to third-party purchases of shares from existing common shareholders at prices ranging from $13.00 to $15.00. This per-share value of common stock is consistent with the value of $13.44 per share determined as part of our estimate of fair value of common stock in September 2013. Based upon this additional benchmark information and evidence from a secondary market, we concluded that the $13.44 value determined in September 2013 should be utilized and will be applied for financial reporting purposes to value all transactions that occurred in the third quarter of 2013. Management believes that the factors that drove the significant increase were a shift in the manner in which we were viewed by investors and a general increase in the value of cloud-based solution companies during the third quarter of 2013. During the third quarter, we granted options to purchase 1.7 million shares of our common stock, which represents 65% of the total stock-based awards granted in the first nine months of 2013. Based upon an estimated fair value of $13.44, the total fair value of the awards granted in the third quarter of 2013 is $16.1 million.

 

November 2013 Grants

 

We continued to perform consistent with revenue projections in the fourth quarter of 2013. Cost of revenue was in line with our expectations and operating expenses were less than projected. We estimated the fair market

 

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value of our common stock to be $15.20 per share. This increased from the prior valuations mainly due to revenue growth consistent with prior projections, a shorter time to liquidity based on the passage of time, and the performance of our comparable companies.

 

The following considerations were used to complete the valuation:

 

   

A PWERM analysis determined an enterprise value of $865.0 million.

 

   

A discount rate of 24% based on an estimated cost of capital.

 

   

A weighted-average lack of marketability discount of 14% based on discrete exit scenarios.

 

   

Liquidity events were weighted as 74% for an initial public offering and 26% to a merger, acquisition, or continuation as a private company.

 

December 2013 Grants

 

We continued to perform consistent with revenue projections in the fourth quarter of 2013. Cost of revenue was in line with our expectations and operating expenses were less than projected. We estimated the fair market value of our common stock to be $16.52 per share. This increased from the prior valuations mainly due to revenue growth consistent with prior projections, a shorter time to liquidity based on the passage of time, and the performance of our comparable companies.

 

The following considerations were used to complete the valuation:

 

   

A PWERM analysis determined an enterprise value of $917.0 million.

 

   

A discount rate of 23% based on an estimated cost of capital.

 

   

A weighted-average lack of marketability discount of 12% based on discrete exit scenarios.

 

   

Liquidity events were weighted as 76% for an initial public offering and 24% to a merger, acquisition, or continuation as a private company.

 

Income Taxes

 

We account for income taxes using the asset and liability method. Under the liability method, we determine deferred tax liabilities and assets based on the tax rates expected to be in effect during the years in which the liability is expected to be paid. The primary cause of the difference in the payment of the tax liabilities is a difference between the financial statement value and the tax basis of revenue and expenses. When it is more likely than not that some or all of our net deferred tax assets will not be realized, we record a valuation allowance. In determining the necessity of valuation allowances, we consider our projected future taxable income and the availability of tax planning strategies. We have recorded a full valuation allowance against our U.S. deferred tax assets because we have determined that it is more likely than not that our net deferred tax assets will not be realized. In the future, if we determine that we will be able to realize our net deferred tax assets, we will adjust the allowance, which would increase our income in the period the determination is made.

 

Quantitative and Qualitative Disclosures about Market Risk

 

Foreign Currency Exchange Risk

 

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the euro, British Pound Sterling and the Australian Dollar. A 10% fluctuation of foreign currency exchange rates would have an immaterial effect on our results of operations and cash flows. We have hedged a portion of our contracts, but have not instituted a full hedging program. We expect our international operations to continue to grow in the near term, and we are continually monitoring our foreign

 

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currency exposure to determine when we should expand the program. The substantial majority of our agreements have been and we expect will continue to be denominated in U.S. dollars.

 

Interest Rate and Market Sensitivity

 

We had cash and cash equivalents of $28.8 million as of December 31, 2013. Our investments are considered cash equivalents and primarily consist of money market funds backed by U.S. Treasury Bills and certificates of deposit. The carrying amount of our cash equivalents reasonably approximates fair value due to the short-term maturities of these instruments. The primary objective of our investments is the preservation of capital to fulfill liquidity needs. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our portfolio, however, we do not believe an immediate 10% increase or decrease in the interest rates would have a material effect on the fair market value of our portfolio. We therefore do not expect our results of operations or cash flow to be materially affected by a sudden change in market interest rates.

 

We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot assure you that in the future our investments will not be subject to adverse changes in market value. In addition, we maintain significant amounts of cash and cash equivalents at one or more financial institutions that are in excess of federally insured limits and are exposed to counterparty risk.

 

Inflation Risk

 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. Nonetheless, if our costs were to become subject to inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

 

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BUSINESS

 

Overview

 

Opower is a leading provider of cloud-based software to the $2.2 trillion utility industry. Utilities use our software platform to deliver key customer-facing applications that reduce energy demand and improve customer perception of the utility. Our software analyzes energy data and presents personalized insights to consumers in order to motivate reductions in energy consumption. These reductions are valued as a source of energy much like a conventional power plant. We believe that we are poised to transform the way the utility industry meets energy demand.

 

Utilities face two critical challenges that our software is built to address. First, utilities are under political, regulatory and environmental pressure to build fewer power plants, find cleaner sources of fuel and keep rates low. In order to accomplish these goals, utilities implement energy efficiency and demand response programs, which reduce overall and peak usage. Regulatory mechanisms support these programs by compensating utilities for reducing usage. Second, utilities need to strengthen their customer relationships. In many parts of the world, utilities compete for customers, and therefore customer engagement is critical. In regulated markets, which include much of the United States, regulators reward utilities for improving customer satisfaction. Utilities committed an estimated $11 billion to energy efficiency, demand response and customer engagement programs in 2013 in an effort to address these two challenges.

 

Our software is replacing low-tech and hardware-intensive products. Alternative efficiency programs today primarily consist of subsidies for energy efficient products, such as air conditioners and light bulbs. A common residential demand response program is a decades-old hardware switch connected to a pager network that shuts off the consumer’s air conditioner. Utility marketing efforts are often limited to traditional mass market approaches, such as bus stop advertisements and television commercials. We are able to replace these programs because our software offers measurable results and a better return on investment to utilities when scaled. Our approach has improved customer sentiment metrics by a median of 6% and up to 10% in some cases and we helped utilities and their customers save over 1,900 gigawatt hours of energy in 2013.

 

We can embed our solutions within utilities’ websites, mobile applications and customer service interfaces, and deliver individualized emails, text messages, automated phone calls and mail. In the design of these consumer touch points, we apply behavioral science insights to actionable patterns identified by our proprietary data analytics engine, which analyzes hundreds of billions of energy usage data points. Our cloud-based platform is extensible and configurable, a necessity to accommodate our customers’ diverse needs on a single code base.

 

We have developed four interconnected solutions on our platform:

 

   

2007: Opower Energy Efficiency – Reports and alerts, via mail and email, that compare consumers’ energy use to their neighbors’ and provide targeted energy saving recommendations.

 

   

2010: Opower Customer Engagement Web, mobile, digital alerts and customer service applications that improve customer experience and streamline operations.

 

   

2012: Opower Thermostat Management Mobile and web applications that connect to third-party thermostats in order to control and optimize peak and overall HVAC utilization.

 

   

2013: Opower Demand Response – A zero-hardware solution consisting of near real-time text messages, email and automated phone alerts that motivates peak reductions in energy consumption.

 

We generate revenue from utilities by selling primarily multi-year subscriptions to our software. As of December 31, 2013, we served 93 utility customers in eight countries, including 27 of the 50 largest electric utilities in the United States. We have the opportunity to expand within these existing customers; for example, the average penetration of our Energy Efficiency solution is approximately 10% of our utility clients’ customer

 

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base. We believe our addressable market includes 1,300 electric and gas utilities worldwide, serving 650 million households and 60 million businesses.

 

Because our clients often provide us all of their energy data even when launching smaller programs, we currently manage data representing 37% of all U.S. residences. The scale and scope of this data enable us to better optimize the energy-saving performance of our programs and continually improve our pattern-matching algorithms. We share our proprietary cross-utility insights with our utility customers, and they see it as a valued benefit. We believe that as we grow, these network effects will continue to strengthen, and that these advantages give us a defensible leadership position.

 

We have experienced significant growth since our inception. Through our utility customers, we have increased the households we serve from 1.4 million in 2010 to 32.1 million in 2013. For the years ended December 31, 2011, 2012 and 2013, our revenue was $28.7 million, $51.8 million and $88.7 million, respectively, representing year-over-year revenue growth of 80% and 71%, respectively. We generated more than 90% of our revenue from annual recurring subscription fees in 2013. Because we believe our opportunity is large, we continue to invest significantly in our growth. As a result, we have generated net losses of $21.3 million, $12.3 million and $14.2 million in 2011, 2012 and 2013, respectively.

 

Utility Industry Background and Our Market Opportunity

 

Utilities operate in a highly regulated environment. Regulators review and approve capital expenditures and, in most markets, set the rates utilities charge their customers. In particular, regulators increasingly incentivize utilities to pursue energy efficiency and demand response, and place higher priority on better customer experience.

 

Key Industry Trends Affecting Utilities

 

Key trends affecting utilities include:

 

Regulators Prioritizing Energy Efficiency Over New Capacity. More than 25 U.S. states have enacted long-term energy efficiency resource standards, and these states account for over 61% of total U.S. electricity consumption. In order to incentivize efficiency, many states have “decoupled” their utilities, which means the utility’s revenue is no longer driven by energy sales. In non-decoupled states, regulators may incentivize efficiency by allowing the utility to recover the cost of the programs, earn their lost margin on energy sales, and in some cases, earn more on efficiency than they would on energy sales. For example, in California, Massachusetts, and Colorado not only are utilities spending billions of dollars on energy efficiency, they are also earning margins on energy efficiency that are comparable to their margin on delivered electricity. Specifically, they are earning an additional $85.9 million of annual profit from performance incentives, which translates to an additional 6.8% return. We believe this trend is likely to continue as long as efficiency remains less expensive than generation.

 

Similarly, the European Union adopted an Energy Efficiency Directive in October 2012 in order to ensure the achievement of its commitment to reduce emissions by 20% by 2020. In Asia and Latin America, rapid development, limited supply and government regulation and initiatives are also creating an imperative for energy saving measures.

 

Increasing Focus on Reducing Peak Demand. As it is for most large network providers, reducing peak demand is valuable for utilities. In fact, it also has become even more valuable as peak supply prices have gone up and as changing regulations have made it easier to sell energy reductions on par with supply. As a result, Navigant Research estimates that the global demand response market will grow to $5.8 billion in 2020. These same dynamics are at play in fast growing regions like Asia and South America, where demand response is needed to prevent shortages and blackouts.

 

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Baltimore Gas & Electric’s (BGE’s) recent smart meter case illustrates the value demand response holds out to utilities. Demand response made up 50% of BGE’s smart meter business case, and we estimate that smart meters will deliver $50 million of profit to the utility.

 

Changing Consumer Expectations. The widespread adoption of smartphones, mobile apps and social networking tools has changed the way consumers interact with their service providers. Yet direct communication between utilities and their customers has largely been limited to a once-a-month bill and negative events, such as power outages. This history has led to low customer satisfaction. Based on Net Promoter Scores, as of 2012, the utility industry had lower customer satisfaction than many other industries, including insurance, mobile telecom service, banking, supermarkets and automotive. The change in consumer expectations has led utilities to seek new communication tools. As a result, utilities are looking for services that can improve their relationship with their customers.

 

Increasing Data Available to Utilities. Smart meter rollouts continue to accelerate globally. According to a January 2013 IMS Research report, through the end of 2011 over 1.4 billion electricity meters were installed globally, of which 18% were smart meters. IMS projects smart meter penetration will increase to 35% of all electricity meters in 2016. Smart meters generate over 700 times more data than traditional meters, and this increase creates an opportunity for utilities to offer new services and analytics-driven insights for their customers. To date, most utilities have struggled to demonstrate the value of this data to consumers. In addition, the emergence of WiFi-enabled thermostats is likely to increase available energy data even further.

 

Increasing Competition. Over the past two decades, many countries and some U.S. states have separated the retail sale of energy from the generation, distribution and transmission of power. In these markets, competition among retail providers can be high, and customer retention is a challenge, with some utilities experiencing customer churn of more than 25% per year. In noncompetitive, or regulated, energy markets, other providers, such as rooftop solar contractors, are entering the market with products and services that threaten to disintermediate the utility. Utilities increasingly face the risk of disintermediation due to the rise of distributed generation such as solar power. All of these challenges mean that utilities must build deeper relationships with their customers.

 

The Opportunity for the Opower Solution

 

We believe our solutions give utilities greater returns than their historical options and, as a result, we expect to continue to grow our share of these large markets over time.

 

   

Energy Efficiency. In the U.S. alone, utilities spent $6.9 billion on electric efficiency in 2012. Since 2007, this spending has grown at a 21% CAGR, according to a July 2013 report from the Institute for Electric Innovation.

 

   

Demand Response. The global demand response market is projected to grow from $3.0 billion in 2013 to $5.8 billion in 2020, representing a CAGR of 10%, according to a second quarter 2013 report published by Navigant Research.

 

   

Customer Engagement. We believe that customer engagement is at the intersection of a number of markets for utilities, including customer billing and information systems, home energy management solutions and smart grid analytics. These markets are expected to grow from $4.1 billion in 2013 to $12.1 billion in 2020, representing a 17% CAGR, according to Navigant Research and Greentech Media.

 

Our solutions address a portion of each of these markets. Based on our internal analysis and industry experience, we estimate our addressable market opportunity to be at least $11 billion annually.

 

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Key Benefits to Utilities

 

The key benefits utilities derive from our solutions include:

 

Low Cost, Large Scale Energy Efficiency. We are able to cost-effectively drive energy efficiency results across millions of homes. As a result, for some utilities, our efficiency solution has become their single biggest source of residential energy savings. We typically deliver savings between $0.03 to $0.07 per kilowatt hour, whereas the average cost of electricity is $0.13 per kilowatt hour. Nearly all of our programs are measured via randomized control trials and validated by third parties.

 

Low Cost, Large Scale Residential Demand Response. Our software enables utilities to scale residential peak demand reductions by rapidly communicating with energy consumers. We do this by sending millions of customized text messages, emails and automated calls. In 2013, our first program has delivered promising initial results.

 

Improved Customer Satisfaction. Utilities have implemented our user-friendly solutions to increase customer satisfaction. Our platform delivers greater understanding of and control over energy consumption, which improves customer experience. We have surveyed over 30,000 energy consumers who receive our solutions. These consumers consistently report greater trust in their utility as a source of information, and they believe that the utility wants to help them save energy and money.

 

Reduced Cost to Serve. Utilities spend $6 billion annually on customer service. With our digital solutions, utilities can communicate with their customers through web and mobile applications, making interactions more cost effective and efficient. We believe this reduces customer service costs. Customer service software has been reducing the cost of service for a wide set of industries, but the utility industry has lagged behind.

 

Better Customer Engagement Technology. Our platform gives utilities the ability to deploy state-of-the-art technology for their customer communications, allowing them to reach and engage their customers across multiple channels with minimal effort. Much as next generation customer relationship management (“CRM”) software and digital marketing software have delivered significant value to enterprises globally, our solutions help utilities strengthen their relationships with their customers.

 

Network Effects. We have six years of experience working with industry leading utilities. Our large and growing energy dataset combined with our significant industry experience has caused many utilities to view us as a source of third-party benchmarking and industry knowledge. We believe we have reached a point of recognition in the industry whereby utilities use our data sets and insights in their decision-making.

 

Our Differentiated Approach

 

The key components of our differentiated approach are:

 

Highly Scalable Data Analytics Engine. We have built what we believe to be the most sophisticated data engine serving utilities. As of December 31, 2013, we have collected energy data from 52 million households and businesses aggregated from our utility customers. Our data analytics engine can process and analyze our vast data set and provide personalized insights to the households and businesses that our utility customers serve. For example, our data analytics engine allows us to predict customer bills and separate heating and cooling consumption from base load.

 

Cloud-Based Architecture. Our solutions are built on a cloud-based architecture and delivered through web and mobile applications, text message, email, phone and mail. We maintain a single version of our code base, that we deploy to all of our customers allowing them to receive new features and updates. In an industry that is accustomed to long term investments, the fact that our software is regularly updated at no added cost is a

 

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significant benefit. In addition, all of our products use the same platform, which makes it easier for clients to deploy our solutions cost effectively.

 

Intuitive User Experience Informed by Behavioral Science. An intuitive user experience and behavioral science are at the core of all of our solutions. We seek to change the habits of consumers by presenting realistic goals, encouragement and rewards. We use more than 40 behavioral science techniques such as loss language, normative comparisons and reciprocity to encourage utility customers to optimize their energy consumption.

 

Track Record of Measurable Results. We design our products to deliver measurable outcomes, which are necessary for utilities to meet their energy efficiency and demand response targets. We have 189 client years of results, and we believe this track record gives us a significant advantage over our competitors. Our approach to saving has been approved by regulators in 30 states, and that track record has strengthened our brand.

 

Our Growth Strategy

 

LOGO

 

The key elements of our growth strategy include:

 

Expand With Existing Customers. We see a significant opportunity to grow our revenue simply by expanding our presence within our existing customer base. Currently, our energy efficiency reports are deployed to 10% of households that our utility customers serve. Most of our utility customers initially purchase only one of our four solutions and deploy that initial solution to only a portion of their customers. Because all of our products help utilities improve their engagement with energy consumers, we believe that utilities will derive even greater benefits as they deploy additional solutions. Moreover, once a utility begins to send us its data, we can more easily roll out programs to additional households and businesses. We have a dedicated sales and customer service team to support these expansion opportunities within our customer base, and we plan to expand our domestic direct sales organization.

 

Win New Customers Globally. As of December 31, 2013, we had 93 utility customers in eight countries, yet we believe that there are approximately 1,300 utilities that could benefit from our solutions. To reach more of these potential customers, we are expanding our sales, marketing and regulatory efforts, in particular internationally. In 2013, the percentage of our revenue generated outside of the U.S. was 10% as compared to 3% in 2012. We recently expanded our international sales capabilities by increasing the size of our direct sales team in Europe. We plan to expand our direct sales organization in Japan, Singapore and the United Kingdom, and we believe that we have a large opportunity in parts of Asia and South America.

 

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Develop New Offerings on Our Industry Data Platform. Since we are a trusted partner, our customers often ask us to develop new offerings to meet their growing needs. These requests are increasingly central to our plans for growth. We have made, and will continue to make, significant investments to augment our platform to capture adjacent opportunities. For example, we recently developed our thermostat mobile app as a new solution that complements our other existing solutions. In addition, we believe our data is valuable as a platform for third-party application developers that want to build additional products or enhance their existing products by leveraging our data. Multiple utilities already use our application programming interfaces (“APIs”) to customize their customer engagement.

 

Focus on Gas and Electric Consumer Outcomes. From the outset, we have designed products that can deliver measurable changes in consumer behavior, which has been core to our success. We believe we can achieve more both with our existing solutions and through new products. We have focused and will continue to focus our research and development efforts to continue to improve outcomes for gas and electric consumers.

 

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Our Integrated Solutions

 

We provide utilities with the ability to meet energy efficiency and demand response targets, and improve customer engagement. Our solutions consist of:

 

Opower Energy Efficiency

 

Our energy efficiency solutions motivate customers to use less energy and participate in other energy efficiency programs. We send messages under the utility’s brand to households and businesses via email and mail. We also make web and mobile applications available to both consumers and customer service representatives. These tools take advantage of multiple data sources, which may include historical energy usage, billing data, past customer activity data, parcel data, demographic data, weather data and geo-location data. We deploy our energy efficiency solution in both legacy metering and smart meter environments.

 

LOGO

 

The key outbound components of our energy efficiency solution are:

 

   

Energy Reports. Our Energy Reports are sent by mail and email, typically under the utility’s brand. The reports use insights informed by behavioral science and personalized by our data analytics platform to provide customers with feedback on their energy usage. Key features include a comparison of customer’s usage to that of similar homes nearby, and targeted recommendations for how to decrease consumption. We have entered into agreements with utilities to provide similar Energy Reports to small- and medium-sized businesses (“SMBs”). Our SMB reports contain specialized insights and content based on specific business segments.

 

   

Smart Meter-Enabled Alerts and Emails. Smart meter data allows us to provide more frequent outreach and alerts based on customer usage patterns. Our weekly smart meter email reports are sent to energy consumers every week to give them a forecast of their coming bill, see their energy usage by day and get helpful insights on how to adjust their energy usage. Our Unusual Usage Alerts let residential consumers know in advance when they are on track for a high bill. The alerts are sent via email or text.

 

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We believe that our results, and our rigorous measurement of them, have been a key differentiator. Beginning with our very first deployment, we have created separate test and control groups so that we could accurately determine the impact of the information we provide. We generate energy savings of 1.5% to 2.5% per household on average across our programs. While small on a per customer basis, they result in massive savings for our utility customers when aggregated across their customer base. In 2013, our efficiency programs achieved over 1,900 gigawatt hours of energy savings, which includes savings from both electric and gas utilities. At average electricity prices in the United States, this would equate to $234.1 million of bill savings for consumers.

 

Opower Customer Engagement

 

LOGO

 

Our customer engagement solutions consist of:

 

Opower Web. Utilities embed our white-label web application into their customer-facing web site, enabling them to offer consumers both an intuitive user experience and better insight into energy consumption. Consumers can create energy savings plans, conduct virtual energy audits of their homes, view historical costs and compare rate plans. In addition, Opower Web provides context by explaining how customers’ energy usage compares to their neighbors’ and offering targeted recommendations for reducing costs. Utilities generally deploy our web applications to their entire residential service base, and often integrate our application with single sign-on authentication.

 

While our web application does not require smart meters, access to more data allows us to offer consumers greater insight. For example, utilities with smart meters can benefit from our patented usage disaggregation algorithm that separates heating, cooling and baseline energy consumption from a consumer’s energy usage, effectively conducting a remote audit of their home.

 

CSR Application. Our Customer Service Representatives (“CSR”) solution provides utility customer service representatives with relevant information about customers when they call their utility. The CSR solution allows customer service representatives to create online accounts, enroll customers to receive energy alerts through their preferred communication medium, update customer profiles, and provide energy management advice.

 

Rates Engine. Our rates engine supports utility adoption of time of use rates by analyzing cost data for energy consumers. It provides consumers with an hourly view of their energy costs, allows them to compare costs to previous months, performs bill forecasts at any point during the billing cycle, and simulates the cost impact of a customer changing rate plans or usage behavior.

 

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While described in this section, Opower Web and the Opower CSR application are also key parts of our energy efficiency and demand response solutions.

 

Opower Demand Response

 

LOGO

 

In 2012, we introduced our demand response solution, which enables utilities that have installed smart meters to broadly engage their residential customer base in demand response programs. Opower Demand Response functionality includes:

 

Peak Day Alerts. Our peak day alerts notify customers of “peak days” when electricity costs are the highest. These alerts can be delivered via text message, automated call and email.

 

Peak Day Feedback Reports. Our peak day feedback reports are sent to energy consumers following demand response events and provide detailed information about how a customer performed on a peak usage day. Reports include how much energy a customer saved, how much money the customer has earned and tips for how to save further in the future.

 

Although we believe our demand response solution offers significant growth potential, it is still in a nascent stage with an immaterial impact on our revenue to date.

 

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Opower Thermostat Management

 

In 2013, we introduced our thermostat software, a web and mobile application for consumers, which is paired with select third-party WiFi-enabled thermostat devices. With our software, utilities can provide their customers with remote control of their WiFi-enabled thermostat device through an intuitive, consumer-centric user interface. This enables utilities to achieve deep energy efficiency and demand response penetration in their residential service territories.

 

LOGO

 

Our thermostat software builds on our expertise in behavioral science and user design to drive energy savings. The software is also integrated with utility-directed demand response programs to deliver automated demand response.

 

Although we believe our thermostat software offers significant growth potential, it is still in a nascent stage with an immaterial impact on our revenue to date.

 

Our Technology

 

From our inception in 2007, we set out to build a proprietary cloud-based software platform for utilities. We believe our platform is more advanced and operates at greater scale than that of any of our competitors. We designed it to manage the large amount of data that utilities store in their internal systems as well as the accelerating volume of data available from today’s smart meters and smart grid infrastructure, and tomorrow’s thermostats and in-home devices. Our platform is capable of analyzing large volumes of data from disparate sources with rapid throughput and high availability in order to provide a variety of personalized, data-rich communications that drive measurable results.

 

Opower Data Integration System. Our data integration platform allows us to capture more than 100 different data attributes from both utilities and third parties and import both structured and unstructured data formats. We use Hadoop-distributed database technology to store a wide range of data including smart meter, program participation, demographic, weather, housing and geo-location data. This data integration system is capable of large-scale, low-latency imports in near-real time, which enables us to perform time-sensitive operations for our customers, like demand response. Our system imported and validated over 100 billion utility meter reads in 2013.

 

Big Data Analytics Engine. Our data platform leverages leading technologies such as Hadoop, Hive and HBase to analyze a wide variety of energy and third-party data. We have built our own proprietary batch

 

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processing system on top of our Hadoop cluster, it allows us to chain jobs, and start, stop and pause them. These key capabilities were critical for our enterprise applications and are not available today in popular NoSQL systems like Hadoop. We made these investments to surface insights for energy consumers. Our system can predict bills, detect energy usage anomalies and conduct a virtual audit of millions of homes by using a patent pending method of multivariate regression analysis. In addition, the system can utilize the 100 different data attributes to identify similar homes and supply customers with accurate and relevant neighbor comparisons.

 

Content Personalization Engine. Our engine is being built to sit on top of our big data analytic platform and allow us to target messages to consumers. Three key components in this engine are our event scheduling system, our high-level mark-up language for content design and our real-time segmentation tool. Our event scheduling system will ensure that messages go out at the most effective times and provide event and schedule-triggered messaging. Our high-level markup language will allow us to customize outbound communications with personalized data in very little time. In addition, our real-time segmentation tool automates the creation of customer segments that incorporate our insights into consumer behavior while allowing utilities to gain visibility, choice and speed in creating distinct customer experiences.

 

Outbound Pipeline. Our platform is capable of delivering millions of outbound messages in short time frames in order to meet the time-sensitive objectives of utilities. Our system synchronizes delivery of content across all channels—email, postal mail, text message and interactive voice response and generates graphically rich, channel-specific messages using lightweight markup language specific to each customer. The system provides high-fidelity monitoring to ensure that issues can be logged and addressed in real time.

 

Web and Mobile Engagement. In January 2012, we began refactoring our web platform, replacing server-side logic with client-side, Javascript-based rendering. This approach ensures consistency between desktop and mobile web browsers, and allows us to offer our utility clients access to the front-end code to extend and customize as they see fit. This is proving to be a significant advantage as we can significantly modify customer experiences without compromising our core engineering development.

 

Thermostat Management. Our thermostat platform integrates with select WiFi-enabled thermostat technologies using API-based technology, giving users the ability to control their thermostats with simple and intuitive user interfaces via mobile and the web. The thermostat web application has features for customers to enroll in their utility’s smart thermostat program, automatically recommending efficient settings, then communicating this information back to the utility and to the WiFi-enabled thermostat.

 

Security. We have been audited and certified as meeting SOC 2 Type 2 standards, which is an external audit and validation of the design and effectiveness of our data security controls. Our datacenters are SSAE-SOC 1 and Tier III certified. We encrypt data in transit via SSL with 128-bit encryption. Our platform is built with a defense in depth strategy, including firewalls, intrusion detection and prevention, role based access controls, and 24 x 7 monitoring. We are certified in accordance with the US-EU Safe Harbor Framework.

 

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Our Customers

 

We market and sell our products and solutions both to regulated and unregulated utilities. As of December 31, 2013, we had 93 utilities in 8 countries using one or more of our products. The following are our top 50 customers as of December 31, 2013 based on revenue in 2013:

 

AEP Indiana Michigan Power
AEP Ohio
Ameren Illinois
Arizona Public Service
Baltimore Gas & Electric (BGE)
Centerpoint Energy Arkansas
Centerpoint Energy Minnesota
Central Hudson Gas & Electric
Commonwealth Edison
Consumers Energy
DTE Energy Company
Efficiency Nova Scotia
Energy Trust of Oregon
Energy Australia

E.ON Sweden

E.ON UK

First Energy Met-Ed
First Energy Penelec
First Energy Potomac Edison
First Energy West Penn Power
Fort Collins Utilities
Georgia Power
Glendale Water & Power
Gulf Power
Hawaii Energy Efficiency

Indianapolis Power & Light

Louisville Gas and Electric
Mercury Energy
MidAmerican Energy
National Grid MA
National Grid NY
National Grid RI

Nicor Gas

Northern Indiana Public Service
NStar Electric
Orlando Utilities Commission
Pacific Gas & Electric (PG&E)
PacifiCorp Utah
PECO Energy
Pepco
PPL Electric Utilities
Progress Energy

Rochester Public Utilities

Seattle City Light
Southern California Edison
Southern Maryland Electric
Tuscon Electric Power
Vectren Energy Delivery
Xcel Energy Colorado
Xcel Energy Minnesota
 

 

Utilities using one or more of our products serve approximately 115 million households giving us a substantial opportunity to expand the amount of data in our platform from existing customers. We count as customers distinct buying entities, which in a few cases include multiple national or regional subsidiaries of large global utilities, as well as utilities for which we provide services through subcontracting arrangements.

 

Customer Case Studies

 

The following examples illustrate how our customers use our solutions:

 

Pacific Gas and Electric

 

Situation: Pacific Gas and Electric (“PG&E”) is a large investor-owned electric and gas utility with operations primarily in northern California. PG&E is one of the largest utilities in the United States with over 5 million customers, and it generates over $11 billion of revenue annually. PG&E was one of the first utilities in the U.S. to deploy smart meters. To enhance its customers’ experience, PG&E sought solutions that would allow customers to more effectively manage their energy consumption along with their smart meters.

 

Solutions and Benefits: PG&E initially selected our Customer Engagement solution in 2010. Since then, PG&E has also deployed our Energy Efficiency and our Thermostat Management solutions.

 

   

PG&E has deployed our Customer Engagement solution to integrate Opower content into PGE.com for all of its 5 million residential customers and 600,000 small business customers.

 

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Through our Energy Efficiency solution, PG&E mailed home energy reports to 230,000 of its customers in 2011 and increased that amount to over 900,000 customers as of December 31, 2013. These reports compare each household’s energy consumption to that of similar homes and provide customized recommendations to save energy.

 

   

In 2012, PG&E launched a pilot of our Thermostat Management solution. Our thermostat mobile app allows users to control the temperature in their home from anywhere and has succeeded in encouraging more efficient use of energy while driving high levels of customer satisfaction.

 

   

Since deploying our solutions, PG&E customers have saved over 250 GWh of combined electric and gas savings and an estimated $25 million on their electric bills.

 

Baltimore Gas & Electric

 

Situation: Baltimore Gas & Electric (“BGE”) is a large investor-owned electric and gas utility with operations primarily in Maryland. BGE provides service to more than 1.2 million customers and generates approximately $3 billion of revenue annually. In 2010, BGE was assessing ways to maximize return on investment from a smart meter investment. In addition, BGE was evaluating energy efficiency programs that it could deploy across its service territory. In 2012, BGE sought additional opportunities to reduce peak demand.

 

Solutions and Benefits: In 2010, BGE initially launched an Opower Energy Efficiency pilot to 25,000 households to assess the potential energy savings opportunity. Later in 2010, BGE developed a plan to provide customers with greater benefits from smart meters and chose to deploy our Customer Engagement and Energy Efficiency solutions. In 2012, following a four year pilot, BGE planned to launch peak-time-rebate pricing and communications to its entire residential customer base with smart meters. BGE chose Opower as their strategic partner for this program leveraging the Demand Response solution in the summer of 2013.

 

   

BGE is in the process of deploying our Energy Efficiency solution to over 1 million households with mailed and digital home energy reports that motivate a reduction in energy consumption.

 

   

BGE has deployed our Customer Engagement solution to integrate Opower content into BGE.com for all residential and small business customers with smart meters.

 

   

BGE uses our solutions to deliver Unusual Usage Alerts via email, text message and automated voice calls to notify their customers of higher than usual consumption intra-month and provide actionable advice on how to reduce consumption and lower their bill.

 

   

Our Demand Response solution was initially deployed to 300,000 residential customers in 2013 to provide peak-time-rebate pricing to its entire residential customer base with smart meters. We provided real-time alerts through email, text messages and automated voice calls offering consumers personalized insights on how to save energy and money on peak energy days. BGE’s program drove a reduction in consumption on those days. This program will be scaled to include 1.1 million BGE customers by 2015.

 

Centerpoint

 

Situation: Centerpoint is a large investor-owned natural gas delivery company that serves several markets in the United States including Arkansas, Louisiana, Minnesota, Mississippi, Oklahoma and Texas. Centerpoint serves over 5 million customers and generates more than $9 billion of revenue annually. In 2010, Centerpoint was looking for a solution in Minnesota with the goal of delivering energy savings and of promoting other legacy efficiency programs, such as Home Energy Squad, water heaters and low-flow shower heads.

 

Solution and Benefit: Centerpoint partnered with Opower to create an Energy Efficiency solution which was launched in spring 2010.

 

   

The Minnesota Energy Efficiency program that we developed together with Centerpoint grew from 50,000 customers in 2010 to 200,000 customers in 2013.

 

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In the first two years of the program, energy consumers saved $2 million on their gas bill.

 

   

Various promotions ranging from a Tide cold-water detergent coupon to home audits yielded increases in customer participation in utility programs of up to 30%.

 

   

To date, the Opower Energy Efficiency programs deployed by Centerpoint have been expanded 560% since launch and now reach over 330,000 Centerpoint customers in Arkansas, Minnesota and Oklahoma.

 

E.ON UK

 

Situation: E.ON UK is a retail electric and gas provider owned by E.ON SE, a large investor-owned utility with operations primarily in Europe. E.ON UK serves approximately 5 million households across the United Kingdom.

 

Solution and Benefits: E.ON UK deployed our Customer Engagement solution in 2013 as part of its effort to enhance its brand by providing a superior experience to customers. E.ON UK is seeking to promote customer loyalty and maintain its leadership position in its highly competitive, unregulated retail market.

 

   

E.ON UK launched a customer-facing website known as the Saving Energy Toolkit to over 5 million customers using our solution.

 

   

We enable E.ON UK to deliver personalized insights and easy-to-understand information to each of their households detailing their energy consumption.

 

Glendale Water and Power

 

Situation: Glendale Water and Power (“GWP”) is a municipally owned utility serving over 100,000 customers in California.

 

Solution and Benefits: GWP initially deployed our Energy Efficiency solution in 2009 and in 2011, expanded the use of our platform to include our Customer Engagement solution.

 

   

GWP initially launched our Energy Efficiency solution in 2009 to 25,000 customers and has since increased its deployment to 46,000 customers as part of a portfolio of programs to help city residents use less electricity and save money.

 

   

This program has consistently delivered an average savings rate in excess of 2.5% per year, delivering more than $3 million in aggregate savings to GWP customers.

 

   

In 2010, GWP deployed our Customer Engagement solution to all of their 70,000 residential customers in order to provide tools to manage these customers’ energy use.

 

Competition

 

We believe our primary competitors are other energy efficiency and demand response programs that utilities may choose to implement. We often compete to capture a share of the utility’s budget that is set aside for energy efficiency or demand response. To a lesser extent, we also compete with other technology providers such as point solution companies and horizontal software vendors.

 

Other Energy Efficiency or Demand Response Programs. We often compete with efficiency and demand response programs that utilities can choose to implement. These programs, which vary widely in their approach and their cost to the utility, include CFL light-bulb subsidies, appliance recycling and rebate programs, rebates for building upgrades, renewable energy incentives and load control switches for demand response.

 

Point Solution Companies. There are a number of companies, such as Aclara, C3 Energy, Nest Labs (which was acquired by Google) and Tendril, that offer point solutions that compete with some of the features present in our platform. Typically, these solutions include web portals, customer care applications and consumer home energy management solutions.

 

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Horizontal Software Vendors. Vendors such as Oracle and SAP offer software that can be customized to address some of the needs of utilities. Google, which has contracted to purchase Nest Labs, previously provided energy efficiency software in beta form to energy consumers.

 

We believe that we generally compare favorably with our competitors because of the breadth of functionality within our software platform, our ability to engage and motivate energy consumers, the amount of utility specific data on our platform and the results that we have demonstrated for existing utility customers.

 

Our Culture and Employees

 

We believe that having a strong company culture and set of values is critical to our success. We have assembled an extremely talented group of employees, and we pride ourselves on recruiting elite, mission-driven talent for every part of our organization. We believe that our unique mission is a differentiator and helps us recruit world-class talent.

 

As of December 31, 2013, we had 465 employees, including 133 in sales, regulatory and marketing, 188 in research and development, and 144 in services, operations and general and administrative capacity. As of December 31, 2013, we had 448 employees in the United States and 17 employees internationally.

 

Sales, Regulatory and Marketing

 

As of December 31, 2013, our sales, regulatory and marketing teams were comprised of 133 employees. We expect these teams to grow substantially in pursuit of the large and global market for our solutions. In 2013, our average selling price for a new customer was approximately $1.0 million in license fees per year, with a weighted-average contract term of 24.5 months and a typical sales cycle of 6 to 24 months.

 

Our sales and regulatory teams are structured regionally, while our marketing team is organized by solution. Together, these commercial teams pursue our growth strategy of addressing new markets, securing new customers, expanding existing customers and rolling out new products and services. We staff these teams to work closely together and size them according to the opportunity we see for each solution in each region on a bottoms-up basis.

 

Research and Development

 

As of December 31, 2013, our research and development teams were comprised of 188 employees. We expect these teams to grow substantially in support of our research and development roadmap. Our research and development expenses totaled $14.4 million, $16.1 million and $27.1 million for the years ended December 31, 2011, 2012 and 2013, respectively. We plan to continue to invest significant resources in developing new products and enhancing our existing software platform.

 

Customer Service

 

We provide support services for our software, including:

 

   

Analytics and Consumer Marketing Services. We assist customers in understanding program results by creating custom segmentations and propensity modeling, performing consumer satisfaction analysis and creating tailored consumer marketing to affect the promotional goals of each utility.

 

   

Enablement and Extensibility Services. We provide enablement services such as data acquisition and integration, single-sign-on (“SSO”) integration, data migration work and services around enabling utilities to use Opower APIs in different elements of their technology programs.

 

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Intellectual Property

 

We protect our intellectual property through a combination of trademarks, domain names, copyrights, trade secrets and patents, as well as contractual provisions and restrictions on access to our proprietary technology.

 

We registered “Opower” as a trademark in the United States, Australia, Canada, the European Community, Japan and New Zealand. We also have filed other trademark applications in the United States and certain other jurisdictions, and will pursue additional trademark registrations to the extent we believe it would be beneficial and cost effective.

 

As of February 28, 2014, we had one issued patent and seven patent applications pending in the United States, which seek to cover proprietary techniques relevant to our products. We intend to pursue additional patent protection to the extent we believe it would be beneficial and cost effective.

 

We are the registered holder of a variety of domestic and international domain names that include “Opower” and similar variations.

 

In addition to the protection provided by our intellectual property rights, we enter into confidentiality and proprietary rights agreements with our employees, consultants, contractors and business partners. Our employees and contractors are also subject to invention assignment agreements. We further control the use of our proprietary technology and intellectual property through provisions in both the general and product-specific terms of use on our website.

 

Facilities

 

Our corporate headquarters is located in Arlington, Virginia, where we currently lease approximately 52,253 square feet of space under lease agreements that expire in November 2016. We lease approximately 24,394 square feet of space in San Francisco, California under a lease agreement that expires in May 2015. We also lease facilities for our employees in London, United Kingdom, Singapore and Japan.

 

We anticipate leasing additional office space in all short- and medium-term future periods to support our growth. We intend to further expand our facilities or add new facilities as we add employees and enter new geographic markets, and we believe that suitable additional or alternative space will be available as needed to accommodate any such growth. However, we expect to incur additional expenses in connection with such new or expanded facilities.

 

Legal Proceedings

 

We are not a party to any material pending legal proceedings. From time to time we may be subject to legal proceedings and claims arising in the ordinary course of business.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table provides information regarding our executive officers and directors as of February 1, 2014:

 

Name

   Age     

Position(s)

Executive Officers:

     

Daniel Yates

     36       Founder, Chairman, Chief Executive Officer and Director

Alex Laskey

     37       Founder, President and Director

Thomas G. Kramer

     43       Chief Financial Officer

Alex Kinnier

     38       Senior Vice President, Product Management and User Experience

Jeremy Kirsch

     39       Senior Vice President, Worldwide Sales, Regulatory and Business Development

Rick McPhee

     41       Senior Vice President, Engineering

Roderick Morris

     41       Senior Vice President, Marketing and Operations

Michael Sachse

     36       General Counsel and Senior Vice President, Regulatory Affairs

Non-Employee Directors:

     

Mark McLaughlin(2)(3)

     48       Director

Dipchand Nishar(2)

     45       Director

Gene Riechers(1)

     58       Director

Marcus Ryu(1)(3)

     40       Director

Jon Sakoda(2)

     36       Director

Harry Weller(1)(3)

     44       Director

 

  (1)   Member of the audit committee.
  (2)   Member of the compensation committee.
  (3)   Member of the nominating and governance committee.

 

Each executive officer serves at the discretion of our board of directors and holds office until his successor is duly elected and qualified or until his earlier resignation or removal. There are no family relationships among any of our directors or executive officers.

 

Executive Officers

 

Daniel Yates co-founded Opower and has served as our Chief Executive Officer since June 2007 and as a member of our board of directors since June 2007. Mr. Yates was appointed our Chairman of the board of directors in February 2014. Prior to founding Opower, Mr. Yates was the founder and chief executive officer at Edusoft, an educational software company that was acquired by Houghton Mifflin Company. Mr. Yates holds a Bachelor of Arts in computer science from Harvard University.

 

We believe that Mr. Yates is qualified to serve as a member of our board of directors because of his experience and perspective as our Chief Executive Officer and founder.

 

Alex Laskey co-founded Opower and has served as our President since June 2007 and as a member of our board of directors since June 2007. Mr. Laskey holds a Bachelor of Arts in history of science from Harvard University.

 

We believe that Mr. Laskey is qualified to serve as a member of our board of directors because of his experience and perspective as our President and founder.

 

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Thomas G. Kramer has served as our Chief Financial Officer since November 2011. From 2000 to 2011, Mr. Kramer served as Chief Financial Officer of Cvent, Inc., a cloud-based enterprise software company in the event-management space. Prior to that, Mr. Kramer served as a consultant at the Boston Consulting Group. Mr. Kramer holds a Masters in Business Administration from Harvard Business School and a Masters of Science in economics from the Norwegian School of Economics.

 

Alex Kinnier has served as our Senior Vice President, Product Management and User Experience since July 2012. From 2011 to 2012, Mr. Kinnier served as a partner at New Enterprise Associates. From 2008 to 2011, Mr. Kinnier served as a partner at Khosla Ventures. Prior to that, Mr. Kinnier was a group product manager at Google Inc. Mr. Kinnier holds a Masters in Business Administration from Harvard Business School and a Bachelor of Arts in chemical engineering from Lehigh University.

 

Jeremy Kirsch has served as our Senior Vice President, Worldwide Sales, Regulatory and Business Development since July 2008. From 2000 to 2008, Mr. Kirsch held leadership positions in sales, business development and marketing for several technology companies, including L-1 Identity Solutions, Inc., an identity solutions company acquired by Safrom S.A., Viisage Technology, Inc. an identity solutions company, and Art Technology Group, an eCommerce software company acquired by Oracle. Prior to that, Mr. Kirsch was a special operations officer with the United States Navy. Mr. Kirsch holds a Masters in Business Administration from the MIT Sloan School of Management and a Bachelor of Arts in economics from Stanford University.

 

Rick McPhee has served as our Senior Vice President, Engineering since March 2012. From 2008 to 2012, Mr. McPhee served as vice president, engineering, at Fortify Software, a Hewlett-Packard Company. From 2005 to 2008, Mr. McPhee served as vice president, engineering, at Vormetric, a data security company. Mr. McPhee holds a PhD in computer science from the University of Oxford and a Bachelor of Science in computer science from University of Glasgow.

 

Roderick Morris has served as our Senior Vice President, Marketing and Operations since September 2012. From April 2010 to August 2012, Mr. Morris served as our Senior Vice President, Consumer Marketing and Operations. From 2009 to 2010, Mr. Morris served as vice president, marketing, at Vovici, a cloud customer feedback company. Mr. Morris holds a Masters in Business Administration from the Graduate School of Business at Stanford University and a Bachelor of Business Administration and a Bachelor of Arts in philosophy from the University of Texas at Austin.

 

Michael Sachse has served as our General Counsel and Senior Vice President, Regulatory Affairs since June 2013, and has served as our General Counsel and regulatory affairs lead since March 2009. From April 2008 to December 2008, Mr. Sachse served as communications director for Jim Himes for Congress. Prior to that, Mr. Sachse was an attorney at Patterson Belknap. Mr. Sachse holds a Juris Doctorate from Harvard Law School and a Bachelor of Arts in history from Amherst College.

 

Non-Employee Directors

 

Mark McLaughlin has served as our director since October 2013. Mr. McLaughlin has served as president and chief executive officer and as a member of the board of directors of Palo Alto Networks, Inc., a network security company, since 2011, and as the chairman of the board of directors since 2012. From August 2009 through 2011, Mr. McLaughlin served as president and chief executive officer and as a director at VeriSign, Inc., a provider of Internet infrastructure services, and from January 2009 to August 2009, Mr. McLaughlin served as president and chief operating officer at VeriSign. From 2000 through 2007, Mr. McLaughlin served in several roles at VeriSign, including as executive vice president, products and marketing. In 2011, President Barack Obama appointed Mr. McLaughlin to serve on the President’s National Security Telecommunications Advisory Committee. Mr. McLaughlin holds a Bachelor of Science from the U.S. Military Academy at West Point and a Juris Doctor from Seattle University School of Law.

 

We believe that Mr. McLaughlin is qualified to serve as a member of our board of directors because of his experience as a public company executive and his knowledge of the technology industry.

 

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Dipchand Nishar has served on our board of directors since August 2013. Mr. Nishar has served as senior vice president, products and user experience at LinkedIn Corporation since 2011, and served as its vice president, products from 2009 until 2011. Prior to that, Mr. Nishar served in several roles, including most recently as the senior director of products for the Asia-Pacific region at Google Inc. from 2003 to 2009. Mr. Nishar holds a Masters in Business Administration from Harvard Business School, Master of Science in electrical engineering from University of Illinois, Urbana-Champaign, and a Bachelor of Technology from the Indian Institute of Technology.

 

We believe that Mr. Nishar is qualified to serve as a member of our board of directors because of his experience as a public company executive and his knowledge of the technology industry.

 

Gene Riechers has served on our board of directors since September 2011. Mr. Riechers has served as the vice chairman of EverFi, Inc., an educational technology company, since 2012. From 2002 to 2011, Mr. Riechers was a general partner of Valhalla Partners, a venture capital firm. Mr. Riechers holds a Masters in Business Administration from Loyola College and a Bachelor of Science in accounting from Pennsylvania State University.

 

We believe that Mr. Riechers is qualified to serve as a member of our board of directors because of his experience as a seasoned investor, a current and former director of many companies and his financial and accounting expertise.

 

Marcus Ryu has served on our board of directors since August 2013. Mr. Ryu has served as president and chief executive officer of Guidewire Software, Inc., a publicly-traded software company that sells to the insurance industry, since 2010 and as a member of its board of directors since 2001. From 2001 to 2010, Mr. Ryu served in various other management positions at Guidewire. Prior to founding Guidewire, from 2000 to 2001, Mr. Ryu was vice president of strategy at Ariba, Inc., a software-as-a-service provider of collaborative business commerce solutions for buying and selling goods and services. Mr. Ryu holds a Bachelor of Arts in economics from Princeton University and a Bachelor of Philosophy from New College, Oxford University.

 

We believe that Mr. Ryu is qualified to serve as a member of our board of directors because of his experience as a public company chief executive officer and his knowledge of selling software into a large vertical industry.

 

Jon Sakoda has served on our board of directors since October 2008. Mr. Sakoda is a partner of New Enterprise Associates, a venture capital firm, which he joined in 2006. Prior to joining New Enterprise Associates, Mr. Sakoda co-founded IMlogic, Inc., which was acquired by Symantec Corporation, and served as its chief technology officer and vice president of products from 2001 to 2006. Prior to that, Mr. Sakoda was an analyst at Goldman, Sachs & Co. Mr. Sakoda currently serves on the board of directors of several private companies. Mr. Sakoda holds a Bachelor of Arts in chemistry from Harvard University.

 

We believe that Mr. Sakoda is qualified to serve as a member of our board of directors because of his experience as a seasoned investor, a current and former director of many companies and his knowledge of the software industry.

 

Harry Weller has served on our board of directors since October 2008. Mr. Weller is a general partner of New Enterprise Associates, a venture capital firm, which he joined in 2002. Prior to that, Mr. Weller was a partner of FBR Technology Venture Partners. Mr. Weller currently serves on the board of directors of several private companies. Mr. Weller holds a Masters in Business Administration from Harvard Business School and a Bachelor of Science in physics from Duke University.

 

We believe that Mr. Weller is qualified to serve as a member of our board of directors because of his experience as a seasoned investor, a current and former director of many companies and his knowledge of the software industry.

 

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Table of Contents

Codes of Business Conduct and Ethics

 

Prior to the completion of this offering, our board of directors will adopt a code of business conduct and ethics that will apply to all of our employees, directors and officers, including our Chief Executive Officer, Chief Financial Officer and other executive and senior financial officers.

 

Board of Directors