| Concentrations of Credit Risk | 2. Revenue from Contracts with Customers The Company adopted ASC 606 on January 1, 2017 using the modified retrospective method for all contracts not completed as of the date of adoption. For contracts that were modified before the effective date, the Company reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price in accordance with practical expedient ASC 606-10-65-1-(f)-4, which did not have a material effect on the adjustment to accumulated deficit. The reported results for 2017 reflect the application of ASC 606 guidance while the reported results for 2016 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred to herein as "legacy GAAP" or the "previous guidance". The adoption of ASC 606 represents a change in accounting principle that will more closely align revenue recognition with the delivery of the Company's services and will provide financial statement readers with enhanced disclosures. In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services. To achieve this core principle, the Company applies the following five steps: 1) Identify the contract with a customer A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. 2) Identify the performance obligations in the contract Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation. 3) Determine the transaction price The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Determining the transaction price requires significant judgment, which is discussed by revenue category in further detail below. 4) Allocate the transaction price to performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. 5) Recognize revenue when or as the Company satisfies a performance obligation The Company satisfies performance obligations either over time or at a point in time as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer. Disaggregation of Revenue The following table summarizes revenue from contracts with customers for the three and six month periods ended June 30, 2017 : Three Months Ended June 30, 2017 Six Months Ended June 30, 2017 Demand response $ 54,196 $ 88,680 Procurement solutions 7,278 14,035 Subscription software 4,468 8,967 Professional services 739 3,108 Total Revenues $ 66,681 $ 114,790 All of the Company's performance obligations, and associated revenue, are generally transferred to customers over time, with the exception of procurement solutions, which are generally transferred to the customer at a point in time. Demand Response Solutions The Company provides demand response solutions to grid operators and utility customers pursuant to contractual commitments over defined service delivery periods. These contracts typically include a single promise to stand ready, on a monthly basis, to deliver a set amount of curtailment (committed capacity) per month when and if called upon by the grid operator or utility. The Company has concluded this represents a series of distinct monthly services that are substantially the same, with the same pattern of transfer to the customer. Accordingly, the monthly promise to stand ready is accounted for as a single performance obligation. In order to provide this stand ready service, the Company utilizes a portfolio of C&I end-users that have the ability to curtail MW when called upon. The Company is the principal in these arrangements as it has control over the services prior to those services being transferred to the customer. Capacity fees are paid to the Company by the grid operators and utilities for its stand ready commitment to curtail MWs and are typically based on the Company's ability to deliver the committed capacity throughout the contractual delivery period. In general, if the Company fails to curtail the contracted MW during energy or test dispatches, the MW shortfall results in a penalty that could require the Company to reduce, or in some cases refund, fees paid by the customer during the contract period. Depending on the contract, penalties are limited to the particular month in which the shortfall occurs, or they are applied retrospectively, prospectively, or both retrospectively and prospectively. Due to these penalty provisions, capacity fees represent variable consideration. Certain contracts also provide additional consideration in the form of energy fees for actual curtailment of MW during an emergency dispatch. As energy fees are only paid in the event of an emergency dispatch, these fees also represent variable consideration. In order to determine the transaction price, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract. These estimates consider i) the contractual rate per MW, ii) penalty rates iii) the maturity of the C&I portfolio, iv) historical performance and v) the probability of future dispatch events. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. These estimates are re-assessed each reporting period as required. In the event of an emergency dispatch, any earned energy fees are associated and allocated to the specific month of performance, as these fees meet the criteria to allocate variable consideration to a distinct monthly service within a series of distinct services that comprise the single performance obligation. Therefore, energy fees are recognized in the month in which the Company is called upon to deliver on its stand-ready obligation to curtail capacity. The Company has concluded that contracts that do not include retrospective and/or prospective penalty provisions generally meet the allocation of variable consideration exception criteria, with the variable consideration for these contracts allocated to each distinct month in the series within the contract. The Company has concluded that contracts that contain retrospective and/or prospective penalty provisions do not meet this exception. The Company believes that an output measure based on the monthly contractual MW stand-ready obligation is the best representation of the "transfer of value" to the customer. Accordingly, the Company recognizes monthly revenue based on the proportion of committed stand-ready capacity obligation that has been fulfilled to date. Procurement Solutions The Company operates an on-line auction platform that streamlines the competitive bidding process between energy suppliers and end-users of energy. Contracts are executed with an energy supplier that entitles the Company to a commission once an auction is complete. These contracts include a single promise, which is the facilitation of a procurement contract between an energy supplier and an end-user, which generally range from one to four years. This is deemed to be a single performance obligation, which is satisfied when an auction is completed, as the Company has no further obligations under the contract. The Company is the agent in this transaction as it does not have control over the energy being provided to the end-users prior to the good being transferred to the customer. Consideration paid to the Company (by the energy supplier) is based on the end-user's energy consumption throughout the duration of the procured contract. The Company is only entitled to compensation if the energy supplier is paid by the end-user. As the consideration is dependent on energy consumption and payments made by the end-user, all consideration related to these contracts is variable. The Company estimates the amount of variable consideration to be included in the transaction price based on i) historical usage by the end-user, ii) contracted fees, iii) historical payment trends and iv) geographic trends throughout a class of similar end-users. The Company then constrains the variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the duration of the procurement contact. In order to determine if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. The revenue recorded upon the close of the auction is reflected as a contract asset that is realized over the contract period, subject to adjustments between actual usage and the original estimate. Subscription Software and Services The Company’s EIS provides a SaaS energy management application that enables the customer to address energy challenges, including energy cost visualization and budgeting, utility bill validation and payment, facility optimization, energy project tracking, reporting on sustainability and compliance, and peak energy demand and cost assessments. The Company generally offers these services under one to three year subscription agreements. These agreements typically include access to the SaaS platform, solution features and general support and maintenance. The Company has concluded that each promised service is delivered concurrently with all other promised service over the contract term and, as such, has concluded that these promises are a single performance obligation that includes a series of distinct services that have the same pattern of transfer to the customer. Consideration for the Company’s subscription arrangements consist of fixed, variable and usage based fees. The Company invoices a portion of the fees at the outset of the contract and then monthly or quarterly thereafter. Advance non-refundable fees, which are deemed to be fixed, are not separate performance obligations and are recognized as the performance obligation in the customer contract is satisfied. Monthly subscription fees are generally based on the number of sites and the level of services selected by the customer. These fees are subject to the execution of predefined performance criteria, resulting in variable consideration. The Company has concluded the monthly promised services generally meet the allocation of variable consideration exception criteria, which permits the variable consideration to be allocated to each distinct month as the monthly services are delivered to the customer. In addition, certain fees are unit-based, calculated on the number of transactions processed monthly. Usage based fees are deemed to be variable consideration that meet the allocation exception for variable consideration as they are specific to the month that the usage occurs. Usage based fees are fully constrained until the related usage occurs. The Company satisfies its performance obligation by providing access to its software-as-a-service over time, and processing transactions for usage based contracts. For non-usage based fees, the period of time over which the Company is performing is commensurate with the contract term because that is the period during which the Company has an obligation to provide the service. The performance obligation is recognized on time elapsed basis, by month for which the services are provided, once enablement/implementation is complete. For usage-based fees, revenue is recognized in the month in which the Company provides the usage to the customer. Professional Services The Company offers premium professional services that support the implementation of its EIS, including training and integration services, and professional service engagements to assist customers with their energy management strategy. These contracts generally have terms of one year or less. Services are either billed on a rate per hour or on a fixed monthly retainer basis. For the majority of these contacts, the Company has the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, the Company recognizes revenue based on the amount billable to the customer in accordance with practical expedient ASC 606-10-55-18. For other professional services contracts, the Company utilizes the input method and recognizes revenue based on labor hours expended to date relative to the total labor hours expected to be required to satisfy its performance obligation. Contracts with Multiple Performance Obligations The Company periodically enters into contracts, or multiple contracts at or near the same time, in which a customer may purchase a combination of EIS, procurement solutions, and/or professional services. These contracts include multiple promises that the Company evaluates to determine if the promises are separate performance obligations. Once the Company determines the performance obligations and the transaction price, including estimating the amount of variable consideration, the Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method or using the variable consideration allocation exception if the required criteria are met. The corresponding revenues are recognized as the related performance obligations are satisfied as discussed in the revenue categories above. Costs to Obtain and Fulfill a Contract The Company capitalizes commission expenses paid to internal sales personnel that are incremental to obtaining customer contracts. These costs are deferred in “prepaid expenses and other current assets”, net of any long term portion included in “other noncurrent assets”. This requires an evaluation of whether the commissions are in fact incremental and would not have occurred absent the customer contract. Costs to obtain a contract are amortized as sales and marketing expense on a straight line basis over the expected period of benefit. These costs are periodically reviewed for impairment. The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to cost of revenue as the Company satisfies its performance obligations. These costs, which are classified in "capitalized fulfillment costs" on the condensed consolidated balance sheets, principally relate to direct costs that enhance resources under the Company’s demand response contracts that will be used in satisfying future performance obligations. Financial Statement Impact of Adopting ASC 606 The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all contracts with customers that were not completed as of January 1, 2017 was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue guidance, the following adjustments were made to the consolidated balance sheet as of January 1, 2017: As Reported Adjustments Adjusted December 31, 2016 Demand Response Procurement Professional Services & Other Cost to Obtain or Fulfill a Contract January 1, 2017 Cash, cash equivalent and restricted cash $ 99,055 $ 99,055 Accounts receivable, net 36,722 $ (5,551 ) 31,171 Unbilled receivables 45,430 45,430 Contract assets — $ 1,719 23,359 25,078 Capitalized fulfillment costs 2,290 (1,613 ) 677 Prepaid expenses and other current assets 14,321 $ 2,007 16,328 Long lived assets 111,261 111,261 Other noncurrent assets 3,223 2,405 5,628 Contract assets, long term — 16,206 16,206 Total assets $ 312,302 $ 106 $ 34,014 $ — $ 4,412 $ 350,834 Accounts payable, accrued expenses, and other current liabilities $ 34,846 $ 2,624 $ 37,470 Accrued capacity payments 63,943 $ 1,630 65,573 Deferred revenue, current 8,193 (2,089 ) $ (413 ) $ 1,171 6,862 Deferred revenue, long term 2,665 2,665 Other noncurrent liabilities 7,521 2,710 10,231 Convertible senior notes 115,223 115,223 Total liabilities 232,391 (459 ) (413 ) 1,171 5,334 238,024 Accumulated deficit (304,745 ) 565 34,427 (1,171 ) (922 ) (271,846 ) Additional paid-in capital, accumulated other comprehensive loss, and non-controlling interest 384,656 384,656 Total stockholders’ equity 79,911 565 34,427 (1,171 ) (922 ) 112,810 Total liabilities and stockholders’ equity $ 312,302 $ 106 $ 34,014 $ — $ 4,412 $ 350,834 Demand Response Several of the Company's demand response contracts provide customers with a right of refund based on the Company's performance. Under the previous guidance, certain of these fees were not fixed or determinable and, as a result, the associated revenue was deferred until the completion of the contract. Under ASC 606, the Company estimates the variable consideration to be received and recognizes those amounts, subject to constraint, as the Company satisfies its performance obligation. In conjunction with the January 1, 2017 adoption of ASC 606, the Company adjusted accumulated deficit by $565 , reflecting the recognition of $3,808 of revenue and $3,243 of cost of revenues, for contracts that were not complete as of the date of adoption. Procurement Under the previous guidance, the fee for procurement services was not considered fixed or determinable until the associated energy usage occurred and, accordingly, revenue was recognized as the end-user consumed energy and fees became payable to the Company. Under ASC 606, the Company has satisfied its performance obligation upon completion of the auction, requiring the Company to estimate and recognize the variable consideration to be paid over the life of the contract, subject to constraint. In conjunction with the January 1, 2017 adoption of ASC 606, the Company reduced accumulated deficit by $34,427 , reflecting the revenue recognition for open contracts related to auctions completed prior to the adoption. Amounts recorded as accounts receivable under the previous guidance were reclassified to contract assets as the Company does not have an unconditional right to these amounts until the end-user utilizes energy and makes payment to the energy supplier. Please refer to Note 6 for further discussion of the indirect impact to goodwill as a result of the increased net assets of the Procurement reporting unit. Professional Services and Other Under the previous guidance, fees collected for training and integration services were deferred over the life of the corresponding subscription contract. Under ASC 606, these services are deemed distinct performance obligations and thus recognized as the Company satisfies its performance obligations. In addition, under ASC 605 certain multi-element contracts with resellers contained exclusivity clauses that the Company had recognized over the exclusivity term. Under ASC 606 the Company has determined exclusivity is not a distinct promised service. The net impact of these changes resulted in a $1,171 adjustment to accumulated deficit with an associated adjustment to deferred revenue. Cost to Obtain a Customer Contract Prior to the adoption of ASC 606, the Company expensed commissions paid to internal sales representatives for obtaining subscription software and professional service contracts. Under ASC 606, the Company currently capitalizes these incremental costs of obtaining customer contracts. In addition, commissions paid to external channel partners to secure procurement contracts were previously deferred and expensed upon cash receipt from energy suppliers, which closely aligned with the related pattern of revenue recognition. Under ASC 606, these commissions are estimated and recognized concurrently with the respective revenues upon successful completion of an auction. The net impact of these changes resulted in a $922 adjustment to accumulated deficit. Income Taxes The adoption of ASC 606 primarily resulted in an acceleration of revenue as of December 31, 2016, which in turn generated additional deferred tax liabilities that ultimately reduced the Company's net deferred tax asset position. As the Company fully reserves its net deferred tax assets in the jurisdictions impacted by the adoption of ASC 606, this impact was offset by a corresponding reduction to the valuation allowance. Impact of New Revenue Guidance on Financial Statement Line Items The following table compares the reported condensed consolidated balance sheet, statement of operations and cash flows, as of and for the six months ended June 30, 2017, to the pro-forma amounts had the previous guidance been in effect: As of June 30, 2017 Balance Sheet As reported Pro forma as if Cash, cash equivalent and restricted cash $ 66,598 $ 66,598 Accounts receivable, net 26,957 37,880 Unbilled receivables 892 876 Contract assets 43,256 — Capitalized fulfillment costs 1,345 1,745 Prepaid expenses and other current assets 15,606 13,550 Contract assets, long term 15,795 — Long lived assets 97,897 97,897 Other noncurrent assets 5,403 3,849 Total assets $ 273,749 $ 222,395 Accounts payable, accrued expenses, and other current liabilities $ 29,566 $ 29,566 Accrued capacity payments 45,410 25,912 Deferred revenue, current 5,127 14,150 Deferred revenue, long term 3,544 1,691 Other noncurrent liabilities 8,461 6,036 Convertible senior notes 117,290 117,290 Total liabilities 209,398 194,645 Accumulated deficit (322,228 ) (358,829 ) Additional paid-in capital, accumulated other comprehensive loss, and noncontrolling interest 386,579 386,579 Total stockholders’ equity 64,351 27,750 Total liabilities and stockholders’ equity $ 273,749 $ 222,395 Total reported assets were $51,354 greater than the pro-forma balance sheet, which assumes the previous guidance remained in effect as of June 30, 2017. This was largely due to contract assets recognized in connection with the Company’s energy procurement services and capitalized cost to obtain contracts. Total reported liabilities were $14,753 greater than the pro-forma balance sheet, which assumes the previous guidance remained in effect as of June 30, 2017. This was largely due to accrued fees due to procurement channel partners, partially offset by the ability to recognize certain deferred revenues associated with various demand response programs. Three Months Ended June 30, 2017 Six Months Ended June 30, 2017 Statement of Operations As reported Pro forma as if the previous accounting guidance was in effect As reported Pro forma as if the previous accounting guidance was in effect Demand Response $ 54,196 $ 32,789 $ 88,680 $ 65,985 Software 12,485 13,800 26,110 28,928 Total revenues 66,681 46,589 114,790 94,913 Cost of revenue 47,229 32,240 80,632 64,908 Gross profit 19,452 14,349 34,158 30,005 Selling and marketing 14,308 13,857 28,182 27,774 Other operating expenses 23,595 23,551 52,777 52,733 Total operating expenses 37,903 37,408 80,959 80,507 Loss from operations (18,451 ) (23,059 ) (46,801 ) (50,502 ) Non-operating expenses and noncontrolling interest 85 (241 ) 263 (192 ) Provision for income taxes (6 ) (6 ) (3,844 ) (3,844 ) Net loss attributable to EnerNOC, Inc. $ (18,372 ) $ (22,981 ) $ (50,382 ) $ (54,084 ) Net loss per common share Basic $ (0.61 ) $ (0.77 ) $ (1.69 ) $ (1.81 ) Diluted $ (0.61 ) $ (0.77 ) $ (1.69 ) $ (1.81 ) The following summarizes the significant changes on the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2017 as a result of the adoption of ASC 606 on January 1, 2017 compared to if the Company had continued to recognize revenues under ASC 605: • ASC 606 accelerated the recognition of revenue and fulfillment costs related to certain demand response contracts in which recognition was previously deferred until the end of the applicable contract term due to the fees not being fixed or determinable. This resulted in greater demand response revenues relative to legacy GAAP. • The lower software revenue under ASC 606, as compared to the previous guidance, primarily relates to energy procurement solutions. Under the previous guidance, energy procurement revenue would have been approximately $1,300 and $2,600 higher, respectively, for the three and six months ended June 30, 2017, than under ASC 606, where energy procurement revenue is now recorded upon the completion of procurement auctions as opposed to when actual energy usage occurs. • ASC 606 resulted in the amortization of capitalized commission costs that were recorded as part of the cumulative effect adjustment upon adoption. Amortization of these capitalized costs to selling and marketing expenses, net of commission costs that were capitalized in the quarter resulted in no meaningful impact on selling and marketing expenses in the quarter. The net impact of accounting for revenue under the new guidance increased net loss and net loss per share by $4,609 and $(0.16) per basic and diluted share, respectively for the three months ended June 30, 2017 and increased net loss and net loss per share by $3,702 and $(0.12) per basic and diluted share, respectively for the six months ended June 30, 2017. Six Months Ended June 30, 2017 Statement of Cash Flows As reported Pro forma as if Net loss $ (50,837 ) $ (54,084 ) Non cash adjustments to reconcile net loss to net cash flows from operating activities 23,004 22,712 Changes in operating assets and liabilities Accounts receivable, unbilled receivables and contract assets 31,433 46,757 Prepaid expenses and other assets (481 ) (4,746 ) Capitalized fulfillment costs (2,106 ) 3,206 Deferred revenue (1,856 ) 3,884 Accounts payable, accrued expenses and other current liabilities and accrued compensation (6,188 ) (24,950 ) Accrued capacity payments (20,903 ) (20,903 ) Other noncurrent liabilities (916 ) (726 ) Cash flows from operating activities $ (28,850 ) $ (28,850 ) The adoption of ASC 606 had no impact on the Company’s cash flows from operations. The aforementioned impacts resulted in offsetting shifts in cash flows throughout net loss and various changes in working capital balances. Contract Assets Deferred Revenue Current Non-Current Current Non-Current Balance at January 1, 2017 $ 25,078 $ 16,206 $ 6,862 $ 2,665 Balance at June 30, 2017 43,256 15,795 5,127 3,544 Revenue recognized during the six months ended June 30, 2017 from amounts included in deferred revenue at the beginning of the period was approximately $2,700 . Revenue recognized during the six months ended June 30, 2017 from performance obligations satisfied or partially satisfied in previous periods was approximately $2,100 . During the six months ended June 30, 2017 , the Company reclassified approximately $1,100 of contract assets to receivables as a result of the right to the transaction consideration becoming unconditional. The contract modifications entered into during the six months ended June 30, 2017 , which principally related to the Company’s demand response customer contracts, did not have a significant impact on the Company’s contract assets or deferred revenues. Transaction Price Allocated to Future Performance Obligations ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2017. The guidance provides certain practical expedients that limit this requirement. The Company has various contracts that meet the following practical expedients provided by ASC 606: 1. The performance obligation is part of a contract that has an original expected duration of one year or less. 2. Revenue is recognized from the satisfaction of the performance obligations in the amount billable to the customer in accordance with ASC 606-10-55-18. 3. The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation in accordance with ASC 606-10-25-14(b), for which the criteria in ASC 606-10-32-40 have been met. The following provides a discussion of the transaction price allocated to future performance obligations by service line as well as practical expedients applied by the Company. Demand Response Solutions As discussed above, each demand response program has unique contract delivery periods and penalty structures for which revenue may be reduced or refunded. Certain programs have an original expected duration less than one year (practical expedient 1 above) |
