OPOWER, INC. - FORM 10-Q

OPOWER, INC. - FORM 10-Q - May 10, 2016

Attached files

Attached files

OPOWER, INC. Reports

file	filename
EX-31.1 - EX-31.1 - OPOWER, INC.	d334188dex311.htm
EX-10.1 - EX-10.1 - OPOWER, INC.	d334188dex101.htm
EX-32.1 - EX-32.1 - OPOWER, INC.	d334188dex321.htm
EX-31.2 - EX-31.2 - OPOWER, INC.	d334188dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2016

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

For the transition period from to .

Commission file number 001-36377

Opower, Inc.

(Exact name of registrant as specified in its charter)


Delaware		26-0542549
(State or other jurisdiction of Incorporation or organization)		(I.R.S. Employer Identification No.)

1515 North Courthouse Road, 8th Floor Arlington, Virginia		22201
(Address of principal executive offices)		(Zip Code)

(703) 778-4544

(Registrant’s telephone number, including area code)

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

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

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

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

On April 30, 2016, 53,551,249 shares of the registrant’s Common Stock, $0.000005 par value, were issued and outstanding.

Opower, Inc.

Quarterly Report on Form 10-Q

Index


Part I — Financial Information		2

Item 1.	Financial Statements:	2

	Condensed Consolidated Balance Sheets (Unaudited)	2

	Condensed Consolidated Statements of Operations (Unaudited)	3

	Condensed Consolidated Statements of Comprehensive Loss (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28

Item 4.	Controls and Procedures	29

Part II — Other Information		30

Item 1.	Legal Proceedings

Item 1A.	Risk Factors	30

Item 6.	Exhibits	52

Signatures		53

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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, cash equivalents and investments 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;

•

our expectations regarding our costs and expenses; 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 Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q. 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q 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.

PART I — Financial Information

ITEM 1.

Financial Statements

OPOWER, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)


	March 31, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	17,057		$	25,931
Short-term investments		43,729			35,017
Accounts receivable, net		47,705			52,655
Prepaid expenses and other current assets		6,442			5,528

Total current assets		114,933			119,131

Long-term investments		28,805			36,464
Property and equipment, net		19,170			17,879
Other assets		737			287

Total assets	$	163,645		$	173,761

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	1,959		$	2,273
Accrued expenses		6,090			7,403
Deferred revenue		73,154			71,646
Accrued compensation and benefits		5,568			10,874
Other current liabilities		1,256			1,659

Total current liabilities		88,027			93,855

Deferred revenue		2,066			1,676
Other liabilities		123			95

Total liabilities		90,216			95,626

Commitments and contingencies (see Note 7)

Stockholders’ equity:
Preferred stock, par value $0.000005 per share — 25,000 shares authorized; none issued and outstanding as of March 31, 2016 and December 31, 2015		—			—
Common stock, par value $0.000005 per share — 500,000 shares authorized; 53,383 and 52,557 shares issued and outstanding as of March 31, 2016 and December 31, 2015,respectively		—			—
Additional paid-in capital		254,795			248,521
Accumulated deficit		(181,004	)		(169,853	)
Accumulated other comprehensive loss		(362	)		(533	)

Total stockholders’ equity		73,429			78,135

Total liabilities and stockholders’ equity	$	163,645		$	173,761

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

OPOWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2016			2015
Revenue:
Subscription	$	31,812		$	30,386
Services		4,877			3,035

Total revenue		36,689			33,421
Cost of revenue:
Subscription		10,198			8,430
Services		4,378			3,584

Total cost of revenue		14,576			12,014
Gross profit		22,113			21,407
Operating expenses:
Sales and marketing		15,861			14,501
Research and development		13,311			12,213
General and administrative		4,729			4,575

Total operating expenses		33,901			31,289

Operating loss		(11,788	)		(9,882	)
Other income (expense):
Gain (loss) on foreign currency		569			(1,032	)
Interest expense		(29	)		(1	)
Other, net		98			(4	)

Loss before income taxes		(11,150	)		(10,919	)
Provision for income taxes		1			55

Net loss	$	(11,151	)	$	(10,974	)

Weighted-average common stock outstanding:
Basic and diluted		52,939			50,523
Net loss per share:
Basic and diluted	$	(0.21	)	$	(0.22	)

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

OPOWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2016			2015
Net loss	$	(11,151	)	$	(10,974	)
Other comprehensive income (loss), net of reclassification adjustments:
Foreign currency translation		(43	)		(60	)
Unrealized gain on available-for-sale securities, net		214			—
Unrealized gain (loss) on hedge transactions, net		—			6

Total other comprehensive income (loss)		171			(54	)

Total comprehensive loss	$	(10,980	)	$	(11,028	)

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

OPOWER, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2016			2015
Operating Activities
Net loss	$	(11,151	)	$	(10,974	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		2,966			2,520
Stock-based compensation expense		7,091			5,004
Other		(422	)		1,036

Changes in operating assets and liabilities:
Accounts receivable		5,103			17,437
Prepaid expenses and other current assets		(868	)		(882	)
Other assets		(461	)		(87	)
Accounts payable		(318	)		585
Accrued expenses		(1,217	)		(1,177	)
Accrued compensation and benefits		(5,308	)		(1,686	)
Deferred revenue		1,860			(6,124	)
Other liabilities		(192	)		(376	)

Net cash provided by (used in) operating activities		(2,917	)		5,276

Investing Activities
Purchases of available-for-sale securities		(9,431	)		—
Sales and maturities of available-for-sale securities		8,442			—
Additions to property and equipment		(4,107	)		(2,366	)

Net cash used in investing activities		(5,096	)		(2,366	)

Financing Activities
Proceeds from issuance of common stock		720			835
Taxes paid related to net share settlement of equity awards		(1,803	)		(1,135	)
Principal payments on capital lease obligations		(183	)		(110	)

Net cash used in financing activities		(1,266	)		(410	)

Effect of exchange rate changes on cash and cash equivalents		405			(830	)

Net increase (decrease) in cash and cash equivalents		(8,874	)		1,670
Cash and cash equivalents, beginning of period		25,931			125,725

Cash and cash equivalents, end of period	$	17,057		$	127,395

Supplemental cash flow information
Cash paid for income taxes, net of tax refunds	$	10		$	254
Cash paid for interest		8			6

Supplemental disclosure of non-cash investing and financing activities
Accrued property and equipment purchases		178			570
Capitalized stock-based compensation		249			321
Vesting of common stock subject to repurchase		17			101

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

OPOWER, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Company Overview

Opower, Inc. (“Opower” or “the Company”) is a cloud-based software provider to the utility industry. Utilities use the Company’s software platform to deliver key client-facing applications that reduce energy demand and provide customer care. The Company’s software analyzes energy data and presents personalized insights to consumers in order to motivate reductions in energy consumption.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Opower and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

These unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. Therefore, these unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes to the Company’s significant accounting policies described in the Form 10-K that have had a material impact on our condensed consolidated financial statements and related notes.

In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the Company’s results of operations, financial position and cash flows have been included. The results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year. The year-end condensed balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP.

Reclassification

Certain items in the prior period financial statements have been reclassified for comparative purposes to conform to the current period presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in these consolidated financial statements and accompanying notes. Significant items subject to such estimates include revenue recognition, the useful lives and recoverability of property and equipment, stock-based compensation and income taxes. Actual results could differ significantly from those estimates.

Investments

Management determines the appropriate classification of investments at the time of purchase based upon management’s intent with regard to such investments. Investments are classified as available-for-sale at the time of purchase if they are available to support either current or future operations. This classification is re-evaluated at each balance sheet date. Investments not considered cash equivalents with remaining contractual maturities of

one year or less from the balance sheet date are classified as short-term investments, and those with remaining contractual maturities greater than one year from the balance sheet date are classified as long-term investments as maturities have been sequenced based upon expected cash needs to support current operations. All investments are recorded at their estimated fair value, and any unrealized gains and losses are recorded in accumulated other comprehensive income (loss). Realized gains and losses on sales and maturities of investments are recognized in the consolidated statements of operations in other income (expense).

The Company performs periodic evaluations to determine whether any declines in the fair value of investments below cost are other-than-temporary. The evaluation consists of qualitative and quantitative factors regarding the severity and duration of the unrealized loss, as well as the Company’s ability and intent to hold the marketable securities until a forecasted recovery occurs. The impairments are considered to be other-than-temporary if they are related to deterioration in credit risk or if it is likely that the underlying securities will be sold prior to a full recovery of their cost basis. Other-than-temporary fair value impairments are determined based on the specific identification method and are reported in other income (expense) in the consolidated statements of operations.

Fair Value Measurement

The Company applies fair value accounting for all financial assets and liabilities that are reported at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a defined three-tier hierarchy to classify and disclose the fair value of assets and liabilities on both the date of their initial measurement as well as all subsequent periods. The hierarchy prioritizes the inputs used to measure fair value by the lowest level of input that is available and significant to the fair value measurement. The three levels are described as follows:

•

Level 1: Observable inputs. Quoted prices in active markets for identical assets and liabilities;

•

Level 2: Observable inputs other than the quoted price. Includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets and amounts derived from valuation models where all significant inputs are observable in active markets; and

•

Level 3: Unobservable inputs. Includes amounts derived from valuation models where one or more significant inputs are unobservable and require the Company to develop relevant assumptions.

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification as of each reporting period.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash, cash equivalents, investments and accounts receivable. The Company maintains the majority of its cash, cash equivalents and investments with two financial institutions, both of which management believes to be financially sound and with minimal credit risk. The Company’s deposits periodically exceed amounts guaranteed by the Federal Deposit Insurance Corporation.

To manage accounts receivable risk, the Company monitors and evaluates the credit worthiness of its customers and maintains an allowance for doubtful accounts as deemed necessary. Collection efforts from long-established utilities have been historically successful, so the Company believes credit risk to be low.

The following table summarizes those customers who represented at least 10% of revenue or accounts receivable for the periods presented:


	Revenue						Accounts Receivable
	Three Months Ended March 31,						March 31,			December 31,
	2016			2015			2016			2015
Customer A		17	%		19	%		23	%		17	%
Customer B		13	%		*			19	%		31	%

*	= Represented less than 10%

Revenue Recognition

The Company derives its revenue from contractual agreements with utilities through subscriptions and services, which include analyzing data provided by the utilities and using that data to encourage utility customers to reduce energy consumption or improve satisfaction or both. The Company generates its revenue from subscriptions to its cloud-based data analytics platform and provision of services to its clients.

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. The Company provides two main subscription service deliverables: (i) data analytics services and (ii) web platform services. Revenue for subscription fees is generally recognized ratably over the contract term beginning on the date the service is available to the client, which typically coincides with website launch or first reports delivered to households. Subscription contracts typically have a term of one to six years. Our subscription contracts generally 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.

Service fees cover specific services performed for our utility clients, which may include program enablement services, research, program customizations and training, custom development on top of the Company’s software platform, as well as services provided by third party providers for which the Company is the principal in the arrangement with the client. Program enablement services, which tend not to provide stand-alone value, are deferred and recognized ratably over the expected customer relationship period, which is generally the greater of four years or the contract period. Services revenues are generally recognized over the term of the contract, or on a completed contract basis for deliverables that are determined to be separate units of accounting.

Cost of Revenue

Cost of revenue for subscriptions 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 operating and servicing our internal applications, channel delivery fees, including 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.

Cost of revenue for services primarily consists of personnel costs, including salaries, benefits and stock-based compensation, allocated overhead, and third-party costs.

Comprehensive Loss

Comprehensive loss consists of two components, net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that are recorded as a separate element of stockholders’ equity and are excluded from net loss. The Company’s other comprehensive loss is comprised of foreign currency translation adjustments, unrealized gains or losses on available-for-sale securities and unrealized gains or losses on hedge transactions.

Operating Segment

Operating segments are defined as components of a business that can earn revenue and incur expenses for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker (“CODM”) to decide how to allocate resources and assess performance. The Company’s CODM, the Chief Executive Officer, reviews consolidated results of operations to make decisions, therefore the Company views its operations and manages its business as one operating segment.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will supersede most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers: Topic 606, which defers the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The new revenue standard permits the choice of two transition methods. The Company may choose to use a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients or the modified retrospective approach may be used with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption in addition to increased footnote disclosures. In March 2016, the FASB issued Accounting Standards Update No. 2016-08: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), amending the principal-versus-agent implementation guidance set forth in ASU 2014-09. Among other things, ASU 2016-08 clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. In April 2016, the FASB issued Accounting Standards Update No. 2016-10: Identifying Performance Obligations and Licensing, which amends certain aspects of the guidance set forth in the FASB’s new revenue standard related to identifying performance obligations and licensing implementation. The Company is currently evaluating the future impact and method of adoption of these updates with respect to the consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, Intangibles—Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. ASU 2015-05 is effective for the Company on January 1, 2016, with early adoption permitted. The standard allows entities to apply the standard retrospectively or prospectively for all new transactions entered into or materially modified after the date of adoption. The Company adopted the guidance effective January 1, 2016 and it did not have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements to provide additional guidance to ASU 2015-03, which did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. ASU 2015-15 allows for the presentation of debt issuance costs as an asset regardless of whether or not there is an outstanding balance on the line-of-credit arrangement. ASU 2015-03 and ASU 2015-15 are effective for the Company on January 1, 2016, with early adoption permitted. The Company adopted the guidance effective January 1, 2016 and it did not have a material impact on its consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting

requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. Opower adopted this ASU on a prospective basis in the fourth quarter of fiscal 2015. No prior periods were retrospectively adjusted.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires, among other things, requires equity investments, except those accounted for under the equity method of accounting, or those that result in consolidation of the investee, to be measured at fair value with changes in fair value recognized in net income. The amendments require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). The amendments eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently in the process of evaluating the impact of the adoption, but does not expect adoption to have a material impact on our results of operations or financial position.

In February 2016, the FASB issued ASU No. 2016-02 , Leases (Topic 842), which supersedes existing guidance on accounting for leases in “Leases (Topic 840)” and generally requires all leases to be recognized in the statement of financial position. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. The Company is currently evaluating the effect that this ASU will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09: Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The amendments in this update simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective for the Company January 1, 2017, but early adoption is permitted. The Company is currently evaluating the impact of this update on the consolidated financial statements.

3. Fair Value Measurement

The following table summarizes the Company’s assets measured at fair value on a recurring basis, by level within the fair value hierarchy (in thousands):


	March 31, 2016								December 31, 2015
	Fair Value		Level 1		Level 2⁽²⁾		Level 3		Fair Value		Level 1		Level 2⁽²⁾		Level 3
Assets:
Cash equivalents ⁽¹⁾:
Money market funds	$	6,739	$	6,739	$	—	$	—	$	18,947	$	18,947	$	—	$	—

Total cash equivalents	$	6,739	$	6,739	$	—	$	—	$	18,947	$	18,947	$	—	$	—
Short-term investments:
Commercial paper	$	2,250	$	—	$	2,250	$	—	$	6,245	$	—	$	6,245	$	—
Corporate notes and bonds		36,432		—		36,432		—		27,093		—		27,093		—
Certificates of deposit		2,642		—		2,642		—		1,679		—		1,679		—
U.S. government and agency		2,405		—		2,405		—		—		—		—		—

Total short-term investments	$	43,729	$	—	$	43,729	$	—	$	35,017	$	—	$	35,017	$	—
Long-term investments:
Corporate notes and bonds	$	19,148	$	—	$	19,148	$	—	$	28,581	$	—	$	28,581	$	—
Certificates of deposit		—		—		—		—		959		—		959		—
U.S. government and agency		9,657		—		9,657		—		6,924		—		6,924		—

Total long-term investments	$	28,805	$	—	$	28,805	$	—	$	36,464	$	—	$	36,464	$	—

Total	$	79,273	$	6,739	$	72,534	$	—	$	90,428	$	18,947	$	71,481	$	—

⁽¹⁾	Includes money market funds associated with the Company’s overnight investment sweep account and investments in available-for-sale securities with contractual maturities of three months or less

⁽²⁾	All Level 2 instruments are valued using quoted prices for similar instruments

4. Cash Equivalents and Investments

The following table summarizes the Company’s unrealized gains and losses and estimated fair value of cash equivalents and investments in available-for-sale securities recorded in the consolidated balance sheets (in thousands):


	March 31, 2016									December 31, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Cash equivalents:
Money market funds ⁽¹⁾	$	6,739	$	—	$	—		$	6,739	$	18,947	$	—	$	—		$	18,947

Total cash equivalents	$	6,739	$	—	$	—		$	6,739	$	18,947	$	—	$	—		$	18,947
Investments ⁽²⁾:
Commercial paper	$	2,250	$	—	$	—		$	2,250	$	6,246	$	—	$	(1	)	$	6,245
Corporate notes and bonds		55,588		15		(23	)		55,580		55,861		—		(187	)	$	55,674
Certificates of deposit		2,640		2		—			2,642		2,640		—		(2	)	$	2,638
U.S. government and agency		12,063		3		(4	)		12,062		6,955		—		(31	)	$	6,924

Total investments	$	72,541	$	20	$	(27	)	$	72,534	$	71,702	$	—	$	(221	)	$	71,481

Total cash equivalents and investments	$	79,280	$	20	$	(27	)	$	79,273	$	90,649	$	—	$	(221	)	$	90,428

⁽¹⁾	Includes money market funds associated with the Company’s overnight investment sweep account and investments in available-for-sale securities with contractual maturities of three months or less

⁽²⁾	Includes short-term and long-term investments in available-for-sale securities

Unrealized losses related to investments were primarily a result of interest rate fluctuations, and none of the investments held as of March 31, 2016 have been in a continuous unrealized loss position for greater than one year. As of March 31, 2016, the Company did not consider any of its available-for-sale investments to be other-than-temporarily impaired.

The estimated fair value of the Company’s cash equivalents and investments in available-for-sale securities as of March 31, 2016, aggregated by investment category and classified by contractual maturity date, is as follows (in thousands):


	Less Than 1 Year		1 Year or Greater		Total
Money market funds	$	6,739	$	—	$	6,739
Commercial paper		2,250		—		2,250
Corporate notes and bonds		36,432		19,148		55,580
Certificates of deposit		2,642		—		2,642
U.S. government and agency		2,405		9,657		12,062

Total	$	50,468	$	28,805	$	79,273

5. Property and Equipment

Property and equipment consisted of the following (in thousands):


	March 31, 2016			December 31, 2015
Equipment	$	10,476		$	9,204
Software		29,649			26,685
Furniture and fixtures		383			383
Leasehold improvements		2,913			2,921

Total property and equipment	$	43,421		$	39,193
Accumulated depreciation and amortization		(24,251	)		(21,314	)

Total property and equipment, net	$	19,170		$	17,879

As of March 31, 2016 and December 31, 2015, the gross carrying amount of property and equipment includes computer equipment under capital leases with a cost basis of $1.7 million. Accumulated depreciation related to this computer equipment was $1.4 million and $1.2 million as of March 31, 2016 and December 31, 2015, respectively. Interest expense for the three months ended March 31, 2016 and 2015 was immaterial. As of March 31, 2016 and December 31, 2015, the total capital lease obligation was $0.3 million and $0.5 million, respectively, and recorded on the consolidated balance sheets as a component of other current liabilities and other liabilities.

Capitalized internal-use software costs are also included in property and equipment. During the three months ended March 31, 2016 and 2015, the Company capitalized $2.8 million and $2.4 million of these software development costs, respectively. The net book value of capitalized internal use software was $13.7 million and $12.9 million as of March 31, 2016 and December 31, 2015, respectively. Amortization expense related to capitalized internal-use software was $2.1 million and $1.8 million for the three months ended March 31, 2016 and 2015, respectively.

The following table represents a detailed breakout of depreciation and amortization expense as recorded in the condensed consolidated statements of operations (in thousands):


	Three Months Ended March 31,
	2016		2015
Subscription	$	1,300	$	1,095
Services		53		60
Sales and marketing		112		108
Research and development		1,425		1,212
General and administrative		76		45

Total	$	2,966	$	2,520

6. Debt

In June 2015, the Company renewed its revolving line of credit, originally entered in November 2010, with Silicon Valley Bank (“SVB”) for three years, maturing June 2018, and increased the availability to $30.0 million. The borrowing capacity under the revolving line of credit may be limited if certain financial ratios are not maintained. In the event these financial ratios fall below specified levels, the borrowing capacity at that time may not exceed 80% of eligible accounts receivable. Amounts drawn under the revolving line will accrue interest at either the prime rate or the LIBOR plus 250 basis points, at the Company’s election for each draw. Any amounts borrowed are collateralized by substantially all of the Company’s assets.

The agreement contains customary financial covenants and other affirmative and negative covenants. The agreement also includes a financial covenant requiring the Company to maintain a minimum Adjusted EBITDA. As of March 31, 2016, the Company had no balance outstanding under this agreement, was in compliance with all financial and non-financial covenants and had full borrowing capacity available.

7. Commitments and Contingencies

Operating and Capital Leases

The Company leases domestic office space in Arlington, Virginia and San Francisco, California, as well as international office space in Japan, Singapore, Ukraine and the United Kingdom. All leases are non-cancelable operating lease agreements that expire at various dates through 2018 and include renewal options.

In June 2013, the Company entered into a master lease agreement with a financing company. The agreement allows for the Company to lease eligible equipment purchases. Each lease has a 36 month term, payable in equal monthly installments with the exception of the first and final payments which are prorated based on a midmonth convention. The Company has accounted for the leases under the master lease agreement as capital leases. The weighted-average interest rate implicit in the leases was 5.5%.

A summary of lease commitments as of March 31, 2016 is as follows (in thousands):


Year ending December 31,	Operating Leases		Capital Leases
2016 (April—December)	$	4,642	$	302
2017		5,446		65
2018		1,339		—

		11,427		367

Less:
Amounts representing interest		—		15

Total lease obligations	$	11,427	$	352

Rent expense under operating leases was $1.5 million and $1.2 million for the three months ended March 31, 2016 and 2015, respectively.

Letters of Credit

As of March 31, 2016 and December 31, 2015, the Company had outstanding letters of credit totaling $1.1 million and $1.3 million, respectively, in connection with securing its leased office space. The outstanding amounts for the Arlington, Virginia and San Francisco, California offices are $0.6 million and $0.5 million, respectively, and both letters of credit remain outstanding as of March 31, 2016.

Contingencies and Indemnifications

In the ordinary course of business, the Company enters into contracts and agreements that may contain representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made in the future, but have not yet been made. The Company has not paid any claims or been required to defend any actions related to indemnification obligations. However, the Company could incur costs in the future as a result of indemnification obligations.

In accordance with its bylaws, the Company has indemnification obligations to its officers, directors, employees and agents (other than directors and officers) for certain events or occurrences, subject to certain limits, while they are serving at the Company’s request in such capacity. There have been no claims, and the Company has a director and officer insurance policy that enables it to recover a portion of any future claims.

In the ordinary course of business, the Company is subject to legal proceedings and claims related to intellectual property, employment, vendors or other business partners. The Company has accrued for estimated losses in the accompanying condensed consolidated financial statements for matters with respect to which it believes the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable. Although the outcome of these matters cannot be predicted with certainty, the Company does not believe that the resolution of these matters will have a material adverse effect on the consolidated financial position, future results of operations or cash flows.

8. Stockholders’ Equity

The Company had two classes of stock authorized as of March 31, 2016 and December 31, 2015, preferred stock and common stock. The Company is authorized to issue 25.0 million shares of preferred stock and authorized to issue 500.0 million shares of common stock.

Accumulated Other Comprehensive Income (Loss)

Other comprehensive loss is comprised of certain gains and losses that are excluded from net income under GAAP and instead recorded as a separate element of stockholders’ equity. The Company’s other comprehensive income (loss) consists of foreign currency translation adjustments resulting from the translation of the Company’s foreign subsidiaries whose functional currency is their respective local currency, as well as any unrealized gains or losses on the Company’s foreign currency derivative contracts and investments in available-for-sale securities.

The following table summarizes the activity for each component of accumulated other comprehensive income (loss) (in thousands):


	Foreign Currency Translation			Unrealized gain (loss) on hedge transactions		Unrealized Gain (Loss) on Available-for- Sale Securities			Accumulated Other Comprehensive Loss
Balance as of December 31, 2015	$	(312	)	$	—	$	(221	)	$	(533	)

Other comprehensive income (loss) before reclassifications		(43	)		—		214			171
Reclassifications to net income		—			—		—			—

Other comprehensive income (loss)		(43	)		—		214			171

Balance as of March 31, 2016	$	(355	)	$	—	$	(7	)	$	(362	)

9. Stock-Based Compensation

Stock Option Activity

A summary of stock option activity for the three months ended March 31, 2016 is summarized in the following table (in thousands, except time period and per share amounts):


	Options Outstanding			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value⁽¹⁾
Balance at December 31, 2015		3,933		$	4.71		6.1	$	24,158
Granted		—			—
Exercised		(478	)		1.51
Forfeited		(72	)		10.81

Balance at March 31, 2016		3,383		$	5.04		6.1	$	7,804

Vested and expected to vest after March 31, 2016		3,300		$	4.98		6.1	$	7,694
Exercisable at March 31, 2016		3,072		$	4.76		6.0	$	7,317

⁽¹⁾	Aggregate intrinsic value represents the difference between the fair value of the underlying common stock and the exercise price of outstanding, in-the-money stock options.

The following table summarizes additional information on stock option vesting and exercises (in thousands):


	Three Months Ended March 31,
	2016		2015
Total fair value of shares vested	$	959	$	1,288
Total intrinsic value of stock options exercised		3,089		4,242
Cash received from stock options exercised		720		835

Restricted Stock Unit Activity

A summary of restricted stock unit (“RSU”) activity for the three months ended March 31, 2016 is summarized in the following table (in thousands, except time period and per share amounts):


	RSUs Outstanding			Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Balance at December 31, 2015		5,164		$	11.92		6.3	$	54,535
Granted		826			8.43
Released		(567	)		12.25
Forfeited		(342	)		11.95

Balance at March 31, 2016		5,081		$	11.31		6.2	$	34,599

Expected to vest after March 31, 2016		4,312		$	11.28		6.2	$	29,364

Stock-Based Compensation Expense

Stock-based compensation expense is included in the condensed consolidated statements of operations within the following line items (in thousands):


	Three Months Ended March 31,
	2016		2015
Subscription	$	318	$	147
Services		406		265
Sales and marketing		2,854		1,888
Research and development		2,355		1,658
General and administrative		1,158		1,046

Total	$	7,091	$	5,004

Unrecognized Stock-Based Compensation

A summary of our remaining unrecognized compensation expense, net of estimated forfeitures, and the weighted-average remaining amortization period at March 31, 2016 related to our non-vested stock options and RSU awards is presented below (in thousands, except time period amounts):


	As of March 31, 2016
	Unrecognized Expense		Weighted-Average Amortization Period (Years)
Restricted stock units	$	41,002		2.4
Stock options		6,168		1.6

	$	47,170

10. Income Taxes

For the three months ended March 31, 2016 and 2015, the income tax provision for continuing operations is composed of state tax expense and foreign tax expense for the Company’s consolidated international subsidiaries.

The Company has evaluated the positive and negative evidence bearing upon the ability of its deferred tax assets to be realized. Based on the Company’s limited operating history and cumulative operating losses to date, management believes that it is more likely than not that the Company’s deferred tax assets would not be fully realized. Accordingly, the deferred tax assets have been fully reserved at March 31, 2016 and December 31, 2015.

To date, there have been no tax benefits recognized related to uncertain tax positions. The Company does not anticipate a material change in the unrecognized tax benefits in the next twelve months.

11. Net Income (Loss) Per Share

The Company computes net loss per share of common stock in conformity with the two-class method required for participating securities. Upon the closing of the IPO in April 2014, all shares of the Company’s outstanding convertible preferred stock automatically converted into shares of common stock. The Company considered all series of convertible preferred stock to be participating securities, as the holders of the preferred stock were entitled to receive a non-cumulative dividend on a pari-passu basis in the event that a dividend was paid on common stock. The Company also considers unvested restricted common stock and the shares issued

upon the early exercise of stock options that are subject to repurchase to be participating securities, because holders of such shares have dividend rights in the event a dividend is paid on common stock. The holders of all series of convertible preferred stock, prior to their conversion upon the closing of the IPO, and the holders of common stock subject to repurchase do not have a contractual obligation to share in the losses of the Company. As such, the Company’s net losses for the three months ended March 31, 2016 and 2015 were not allocated to these participating securities.

The following table summarizes the calculation of the Company’s basic and diluted net loss per share under the two-class method attributable to common stockholders for the three months ended March 31, 2016 and 2015 (in thousands, except per share amounts):


	Three Months Ended March 31,
	2016			2015
Numerator:
Net loss	$	(11,151	)	$	(10,974	)
Non-cumulative dividends to preferred stockholders		—			—

Net loss attributable to common stockholders	$	(11,151	)	$	(10,974	)

Denominator:
Weighted-average common stock outstanding, basic		52,939			50,523
Effect of potentially dilutive stock options and restricted stock units		—			—

Weighted-average common stock outstanding, diluted		52,939			50,523

Net loss per share, basic and diluted	$	(0.21	)	$	(0.22	)

Anti-Dilutive Shares Excluded

The following potential shares were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would have been anti-dilutive for the periods presented (in thousands):


	March 31,
	2016		2015
Stock options		3,383		5,320
Restricted stock units		5,081		3,270
Common stock subject to repurchase		25		108

		8,489		8,698

12. Geographic Information

Revenue generated for customers located in the United States was approximately 91% and 89% of revenue for the three months ended March 31, 2016 and 2015, respectively.

13. Subsequent Event

On May 1, 2016, the Company entered into a definitive agreement to be acquired by Oracle Corporation for $10.30 per share in cash. The transaction is valued at approximately $532 million, net of the Company’s cash. The Board of Directors has unanimously approved the transaction. The transaction is expected to close in 2016, subject to the Company’s stockholders tendering a majority of the Company’s outstanding shares and derivative securities exercised prior to the closing of the tender offer, certain regulatory approvals and other customary closing conditions.

ITEM 2.

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

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this document and the Risk Factors included in Item 1A of Part II of this Quarterly Report on Form 10-Q. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.

Overview

Opower is a leading provider of cloud-based enterprise software to the utility industry. Utilities use our customer engagement platform to manage energy demand and provide customer care.

Today, utilities depend on low-tech, hardware-intensive approaches to customer engagement. Opower replaces these solutions with a broad suite of applications that run on a single cloud-based platform. Our software enables utilities to send targeted customer communications automatically and across channels, including web, mobile, email, paper mail, phone, and SMS.

Opower’s messages use behavioral design and personalized insights — drawn from a proprietary analytics engine that processes hundreds of billions of customer data points — to motivate homes and businesses to take utility-defined actions, from saving energy to adopting new products and services.

Opower’s platform enables utilities to better manage energy demand, raise customer satisfaction, and lower service costs. The utility industry is large and cloud-based software is not deeply penetrated. We believe that we are uniquely positioned to transform the way the utilities engage their customers.

Opower generates revenue by selling primarily multi-year software subscriptions to utilities. Subscription fees are 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 client. 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 clients.

Our growth is driven by acquiring new clients, expanding existing clients, and increasing client penetration. New clients typically contract with us for one to six years and renew for one year or more. Our number of utility clients has increased from 63 as of December 31, 2011 to 100 clients as of December 31, 2015. We have expanded with existing clients 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 more than 60 million at December 31, 2015.

Our investments have yielded significant revenue growth over the past few years. For the years ended December 31, 2015, 2014 and 2013, our revenue was $148.7 million, $128.4 million and $88.7 million, respectively, and for the three months ended March 31, 2016 and 2015, our revenue was $36.7 million and $33.4 million, respectively. Our net losses for the years ended December 31, 2015, 2014 and 2013 were $44.9 million, $41.8 million and $14.2 million, respectively, and our net losses for the three months ended March 31, 2016 and 2015 were $11.2 million and $11.0 million, respectively. We have grown from 162 employees as of December 31, 2010 to 604 employees as of March 31, 2016.

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 in sales and marketing to grow our client base, expand with existing clients and drive additional revenue.

Adding New Utility Clients. Our client base is an indicator of our market penetration, growth, and future revenue. With 100 clients as of December 31, 2015, and an increasingly broad solution set, we believe we have an opportunity to expand our number of utility clients in the coming years. The number of new clients 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 Clients. Opower can grow its revenue significantly by expanding within our existing client base. Many utilities purchase only one of our platform’s solutions initially, then unlock additional platform capabilities as they deepen their customer engagement strategies. We have a dedicated sales and customer service team to support these expansion opportunities within our client base.

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.


	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Financial Metrics:
Total Revenue	$	36,689		$	33,421
Period-over-period percentage increase		10	%
Adjusted EBITDA⁽¹⁾	$	(1,731	)	$	(2,358	)

⁽¹⁾	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 “— Non-GAAP Financial Measures.”

Non-GAAP Financial Measures

To provide investors with additional information regarding our financial results, we have disclosed adjusted EBITDA, a financial measure that is not calculated in accordance with generally accepted accounting principles in the United States (“GAAP”). We define adjusted EBITDA as net loss adjusted to exclude our income tax provision, other income (expense), including interest, depreciation and amortization and stock-based compensation.

We disclose adjusted EBITDA 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.

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, the most directly comparable financial measure as measured in accordance with GAAP, to adjusted EBITDA for each of the periods indicated:


	Three Months Ended March 31,
	2016			2015
	(In thousands)
Reconciliation of Net Loss to Adjusted EBITDA:
Net loss	$	(11,151	)	$	(10,974	)
Provision for income taxes		1			55
Other (income) expense, including interest		(638	)		1,037
Depreciation and amortization		2,966			2,520
Stock-based compensation		7,091			5,004

Adjusted EBITDA	$	(1,731	)	$	(2,358	)

Basis of Presentation

Revenue

We offer subscriptions to our cloud-based data analytics platform and deliver services to our clients. We derive our revenue from fees for these subscriptions and services.

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. Revenue for subscription fees is generally recognized ratably over the contract term beginning on the date the service is available to the client, which typically coincides with website launch or first reports delivered to households. Subscription contracts typically have a term of one to six years.

Service fees cover specific services performed for our utility clients, which may include program enablement services, research, program customizations, custom development on top of our software platform, as well as services provided by third-party providers for which we are the principal in the arrangement with the client. Program enablement fees, which tend not to provide stand-alone value, are deferred and recognized ratably over the expected customer relationship period, which is generally the greater of four years or the contract period. Opower evaluates whether the other services provided represent separate units of accounting in each arrangement and, based on this assessment, revenue is recognized either ratably over the contract term or on a completed contract basis.

Our fees are generally non-refundable once billed and are generally collected in advance of service delivery. We record amounts that have been billed as deferred revenue. Payment terms vary by contract, therefore the annualized value of the orders we enter into with our clients 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.

Cost of Revenue

Cost of revenue for subscription primarily 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, including 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 compensation costs, to cost of revenue.

Cost of revenue for services primarily consists of employee compensation costs, including salaries, benefits and stock-based compensation expense, allocated overhead, and third-party and consultant costs.

Our cost of revenue for subscription and services is expensed as incurred. 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 in which revenue is recognized. In particular, the costs of implementing and configuring our software are typically recognized in advance of the related program enablement fees, though such fees are typically billed before they are incurred. As a result, client costs tend to be higher in the initial subscription year of a program based on the effort required to develop system integrations and match client data and gross margin may vary in periods where large new contracts are being implemented.

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.

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.

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 other supporting overhead costs not allocated to other departments.

Other Income and Expenses. Other income and expenses consist primarily of interest income, sublease income, interest expense, gains and losses related to foreign currency transactions and accretion expense. Interest income is primarily from investments in available-for-sale securities. Sublease income is related to an office sublease arrangement. Interest expense relates to interest incurred related to capital equipment leasing and on our note payable, which was converted to shares of common stock upon the closing of our IPO. Foreign exchange gains and losses relate to transactions denominated in currencies other than the functional currency of our entities. Accretion expense is related to premiums and discounts on investments in available-for-sale securities.

Results of Operations

Comparison of the Three Months Ended March 31, 2016 and 2015

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.


	Three Months Ended March 31,
	2016			2015
	(In thousands)
Consolidated Statements of Operations Data:
Revenue:
Subscription	$	31,812		$	30,386
Services		4,877			3,035

Total revenue		36,689			33,421
Cost of revenue⁽¹⁾:
Subscription		10,198			8,430
Services		4,378			3,584

Total cost of revenue		14,576			12,014
Gross profit		22,113			21,407

Operating expenses⁽¹⁾:
Sales and marketing		15,861			14,501
Research and development		13,311			12,213
General and administrative		4,729			4,575

Total operating expenses		33,901			31,289

Operating loss		(11,788	)		(9,882	)
Other income (expense), net		638			(1,037	)

Loss before income taxes		(11,150	)		(10,919	)
Provision for income taxes		1			55

Net loss	$	(11,151	)	$	(10,974	)

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


	Three Months Ended March 31,
	2016		2015
	(In thousands)
Subscription	$	318	$	147
Services		406		265
Sales and marketing		2,854		1,888
Research and development		2,355		1,658
General and administrative		1,158		1,046

Total stock-based compensation	$	7,091	$	5,004


	Three Months Ended March 31,
	2016			2015
	% of total revenue
Revenue:
Subscription		87	%		91	%
Services		13	%		9	%

Total revenue		100	%		100	%
Cost of revenue:
Subscription		28	%		25	%
Services		12	%		11	%

Total cost of revenue		40	%		36	%
Gross profit		60	%		64	%

Operating expenses:
Sales and marketing		43	%		43	%
Research and development		36	%		37	%
General and administrative		13	%		14	%

Total operating expenses		92	%		94	%

Operating loss		-32	%		-30	%
Other income (expense), net		2	%		-3	%

Loss before income taxes		-30	%		-33	%
Provision for income taxes		0	%		0	%

Net loss		-30	%		-33	%

Revenue


	Three Months Ended March 31,
	Three Months Ended March 31,
	2016		2015		$ Change		% Change
	2016		2015		$ Change		% Change
	(Dollars in thousands)
Revenue:
Subscription	$	31,812	$	30,386	$	1,426		5	%
Services		4,877		3,035		1,842		61	%

Total revenue	$	36,689	$	33,421	$	3,268		10	%

Subscription. The increase in subscription revenue for the three months ended March 31, 2016 was a result of the addition of new clients and the expansion of programs with existing clients. We consider an existing client to be a client that received services in, and for which either subscription or services revenue was recognized, during the three months ended March 31, 2015. Revenue from new clients increased $0.8 million for the three months ended March 31, 2016. Revenue earned from existing clients increased by $0.6 million, primarily driven by the expansion of the number of households and businesses on previously deployed solutions and the cross-selling of additional products. International revenue was 7% and 10% of revenue for the three months ended March 31, 2016 and March 31, 2015, respectively.

Services. The increase in services revenue for the three months ended March 31, 2016 was the result of additional client penetration, in particular from program customizations, which accounted for $1.2 million of the overall increase and an increase in third party service revenue, which accounted for a $0.7 million increase.

Cost of Revenue, Gross Profit and Gross Margin


	Three Months Ended March 31,
	2016			2015			$ Change		% Change
	2016			2015			$ Change		% Change
	(Dollars in thousands)
Cost of revenue:
Subscription	$	10,198		$	8,430		$	1,768		21	%
Gross margin		68	%		72	%
Services		4,378			3,584			794		22	%
Gross margin		10	%		-18	%

Total cost of revenue	$	14,576		$	12,014		$	2,562		21	%

Subscription. Cost of revenue increased by $0.8 million due to a higher volume of reports to utility clients. Employee compensation and related costs increased by $0.6 million as our headcount increased from March 31, 2015 to March 31, 2016. The amortization of capitalized internal-use software costs increased by $0.1 million due to continued investment in our software products.

Services. Employee compensation and related costs increased by $0.5 million as the number of employees implementing and delivering our services increased from March 31, 2015 to March 31, 2016. In addition, third-party costs increased $0.2 million from March 31, 2015 to March 31, 2016 as a result of the additional professional service launches in the three months ended March 31, 2016.

Gross margin was negatively impacted in the three months ended March 31, 2016 primarily due to increased costs related to higher volume of reports delivered to utility clients and increased employee compensation related costs associated with subscription launches.

Sales and Marketing


	Three Months Ended March 31,
	2016			2015			$ Change		% Change
	(Dollars in thousands)
Sales and marketing	$	15,861		$	14,501		$	1,360		9	%
% of total revenue		43	%		43	%

The increase in sales and marketing expense for the three months ended March 31, 2016 was primarily attributable to a $1.0 million increase in stock-based compensation primarily related to the recognition of compensation cost for restricted stock units. Expense related to company sponsored events and conferences increased by $0.6 million for the three months ended March 31, 2016. These increases were offset by a $0.2 million decrease in consulting costs for the three months ended March 31, 2016.

Research and Development


	Three Months Ended March 31,
	2016			2015			$ Change		% Change
	(Dollars in thousands)
Research and development	$	13,311		$	12,213		$	1,098		9	%
% of total revenue		36	%		37	%

The increase in research and development expense for the three months ended March 31, 2016 was primarily driven by a $0.7 million increase in stock-based compensation expense primarily related to the recognition of compensation cost for restricted stock units. The remainder of the increase is primarily related to a $0.2 million increase in consulting expenses and a $0.2 million increase in depreciation expense.

General and Administrative


	Three Months Ended March 31,
	2016			2015			$ Change		% Change
	(Dollars in thousands)
General and administrative	$	4,729		$	4,575		$	154		3	%
% of total revenue		13	%		14	%

General and administrative expense remained generally consistent for the three months ended March 31, 2016 compared to the prior year. The increase in general and administrative expense was primarily attributable to a $0.4 million increase in personnel-related costs, mainly driven by an increase in employee headcount and stock-based compensation expense. Salary and benefits expense increased by $0.3 million and stock-based compensation expense increased $0.1 million primarily related to the recognition of compensation cost for restricted stock units. These increases were offset by a $0.3 million decrease in consulting fees.

Other Income (Expense), Net


	Three Months Ended March 31,
	2016			2015			$ Change		% Change
	(Dollars in thousands)
Other income (expense)	$	638		$	(1,037	)	$	1,675		-162	%
% of total revenue		2	%		-3	%

The increase in other income (expense), net for the three months ended March 31, 2016 was primarily driven by a $0.6 million gain from foreign currency compared to a $1.0 million loss in the three months ended March 31, 2015. The gain was primarily a result of fluctuations in the value of the Canadian dollar, euro and British pound sterling in relation to the U.S. dollar.

Liquidity and Capital Resources

As of March 31, 2016, our principal sources of liquidity were cash, cash equivalents, and investments in available-for-sale securities totaling $89.6 million. Our cash equivalents and investments are comprised of money market funds, commercial paper, corporate notes and bonds, certificates of deposit and U.S. government and agency securities. Since our inception, we have financed our operations primarily through private placements of preferred stock, client payments, exercises of options to purchase shares of common stock and, more recently, capital lease obligations and our IPO.

In June 2015, we executed an amendment to our revolving credit facility that increased the availability from $15.0 million to $30.0 million. The credit facility contains financial covenants that require a minimum adjusted quick ratio and compliance with quarterly Adjusted EBITDA targets. In addition, the credit facility contains various negative covenants that limit our other indebtedness, investments, liens and transactions. As of March 31, 2016, we were in compliance with each of these financial covenants, had full borrowing capacity available and have not yet drawn on the facility.

We believe our current cash, cash equivalents, investments, cash flows from operations and amounts available under our credit facility 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:


	Three Months Ended March 31,
	2016			2015
	(In thousands)
Net cash provided by (used in) in operating activities	$	(2,917	)	$	5,276
Net cash used in investing activities		(5,096	)		(2,366	)
Net cash used in financing activities		(1,266	)		(410	)
Effect of exchange rate changes on cash and cash equivalents		405			(830	)

Net increase (decrease) in cash and cash equivalents	$	(8,874	)	$	1,670

Operating Activities

For the three months ended March 31, 2016, operating activities used $2.9 million in cash as compared to cash provided by operating activities of $5.3 million for the three months ended March 31, 2015. The cash used by operating activities for the three months ended March 31, 2016 was primarily related to our increase in investments in both sales and marketing and research and development, consisting primarily of payments of compensation to employees. Significant changes in our operating assets and liabilities included a decrease in accounts receivable of $5.1 million, an increase in deferred revenue of $1.9 million primarily related to billings in the fourth quarter of 2015 pursuant to the renewal and expansion of certain of our largest clients. Cash provided by operating activities for the three months ended March 31, 2015 was primarily related to collections of accounts receivable, partially offset by a $9.0 million decrease in deferred revenue and accrued costs.

Investing Activities

Net cash used in investing activities for the three months ended March 31, 2016 was $5.1 million, as compared to $2.4 million for the same period in 2015. The cash used in investing activities for the three months ended March 31, 2016 primarily related to purchases of available-for-sale securities of $9.4 million and purchases of property and equipment of $4.1 million, offset by sales and maturities of available-for-sale securities of $8.4 million. Net cash used in investing activities for the three months ended March 31, 2015 was related to purchases of property and equipment of $2.4 million.

Financing Activities

Net cash used in financing activities for the three months ended March 31, 2016 was $1.3 million, as compared to $0.4 million for the same period in 2015. The $0.9 million increase in cash used in financing activities for the three months ended March 31, 2016 is primarily related to a $0.7 million increase in taxes paid pursuant to the net share settlement of equity awards.

Application of Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. Accounting policies, methods and estimates are an integral part of the preparation of consolidated financial statements in accordance with U.S. GAAP and, in part, are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting

policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include:

•

Revenue recognition;

•

Stock-based compensation; and

•

Income taxes.

There were no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2016. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC for a more complete discussion of our critical accounting policies and estimates.

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.

ITEM 3.

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, Japanese yen and the Canadian dollar. A 10% fluctuation of foreign currency exchange rates would have an immaterial effect on our results of operations and cash flows. We previously hedged a portion of our contracts, but have not instituted a full hedging program. We are continually monitoring our foreign currency exposure in our international operations to determine if we should expand the hedging 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, cash equivalents and investments of $89.6 million as of March 31, 2016. Cash equivalents primarily consist of money market funds backed by commercial paper and certificates of deposit. Investments primarily consist of corporate notes and bonds, U.S. government and agency bonds and commercial paper. 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 primarily 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 our results of operations or cash flows

We do not believe our cash equivalents or investments have significant risk of default or illiquidity. While we believe our cash equivalents and investments do not contain excessive risk, we cannot assure you that they will not be subject to adverse changes in market value in the future. In addition, we maintain significant amounts of cash and cash equivalents and investments at two 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.

ITEM 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q.

Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of March 31, 2016, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 was recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information was accumulated and communicated to our management to allow timely decisions regarding required disclosure. Accordingly, we believe that the consolidated financial statements included in this Quarterly Report on Form 10-Q do fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Offer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II — OTHER INFORMATION

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not presently a party to any legal proceedings that, if determined adversely to us, we believe would individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition or cash flows.

ITEM 1A.

Risk Factors

Our business, financial condition and operating results are subject to various risks and uncertainties including those described below. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, also may become important factors that affect us. If any of the following risks or uncertainties, or others not specified below, materialize or occur, then our business, financial condition and operating results could be harmed substantially, and the market price of our stock could decline, perhaps significantly.

Risks Related to Our Business

The announcement and pendency of our agreement to be acquired by entities affiliated with Oracle Corporation could adversely affect our business.

On May 1, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with OC Acquisition LLC (“Parent”), Olympus II Acquisition Corporation, a wholly-owned subsidiary of Parent (“Purchaser”), and, solely for certain limited purposes, Oracle Corporation, the parent of Parent and Purchaser (“Oracle”), pursuant to which and upon the terms and subject to the conditions thereof, Parent has agreed that Purchaser will commence a cash tender offer (the “Offer”) to acquire all of our shares of common stock for a purchase price of $10.30 per share, net to the holders thereof, in cash, without interest thereon and subject to any required tax withholding, subject to the terms and conditions of the Merger Agreement.

Uncertainty about the effect of the proposed merger on our clients, employees, partners and other parties may adversely affect our business. Our employees may experience uncertainty about their roles or seniority following the merger. There can be no assurance that our employees, including key personnel, can be retained to the same extent that we have previously been able to attract and retain employees. Any loss or distraction of such employees could adversely affect our business and operations. In addition, we have diverted, and will continue to divert, significant management resources towards the completion of the transaction, which could adversely affect our business and operations.

Parties with which we do business may experience uncertainty associated with the merger and related transactions, including with respect to current or future business relationships with us. Uncertainty may cause clients to refrain from doing business with us, which could adversely affect our business, results of operations and financial condition.

The failure to complete the merger with entities affiliated with Oracle could adversely affect our business.

Completion of the merger with entities affiliated with Oracle is subject to several conditions beyond our control that may prevent, delay, or otherwise adversely affect its completion, including, without limitation, (i) at least a majority of the shares of the common stock having been validly tendered into and not withdrawn from the Offer, (ii) receipt of certain regulatory approvals, including expiration or termination of applicable waiting periods under antitrust and competition laws, (iii) the accuracy of the representations and warranties and compliance with the covenants contained in the Merger Agreement and (iv) other customary conditions. Many of the conditions to consummation of the Offer and the Merger are not within our control or the control of Parent, Purchaser or Oracle and none of us can predict when or if these conditions will be satisfied. If any of these conditions are not satisfied or waived, it is possible that the Merger will not be consummated in the expected

time frame or that the Merger Agreement may be terminated. If the proposed merger or a similar transaction is not completed, the share price of our common stock will drop to the extent that the current market price of our common stock reflects an assumption that a transaction will be completed. In addition, under circumstances defined in the Merger Agreement, we may be required to pay a termination fee of $20.0 million. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Finally, any disruption to our business resulting from the announcement and pendency of the merger and from intensifying competition from our competitors, including any adverse changes in our relationships with our clients, employees, partners and other parties, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, these relationships or our financial condition will not be adversely affected, as compared to the condition prior to the announcement of the merger, if the merger is not consummated.

While the merger is pending, we are subject to business uncertainties and contractual restrictions that could harm our operations and the future of our business or result in a loss of employees.

The Merger Agreement includes restrictions on the conduct of our business prior to the completion of the merger, generally requiring us to conduct our businesses in the ordinary course, consistent with past practice, and subjecting us to a variety of specified limitations absent Oracle’s prior written consent. We may find that these and other contractual arrangements in the Merger Agreement may delay or prevent us from or limit our ability to respond effectively to competitive pressures, industry developments and future business opportunities that may arise during such period, even if our management and board of directors think they may be advisable. The pendency of the merger may also divert management’s attention and our resources from ongoing business and operations. Our employees, customers and advertisers may have uncertainties about the effects of the merger. In connection with the pending Merger, it is possible that some customers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the merger. Similarly, current and prospective employees may experience uncertainty about their future roles with us following completion of the Merger, which may harm our ability to attract and retain key employees. If any of these effects were to occur, it could materially and adversely impact our revenues, earnings and cash flows and other business results and financial condition, as well as the market price of our common stock and our perceived acquisition value, regardless of whether the merger is completed. In addition, whether or not the merger is completed, while it is pending we will continue to incur costs, fees, expenses and charges related to the proposed merger, which may materially and adversely affect our business results and financial condition.

We have a history of losses and anticipate continued losses and negative operating cash flow in the future. We may not be able to achieve or sustain profitability on a quarterly or annual basis.

We have incurred significant losses to date, with an accumulated deficit of $181.0 million as of March 31, 2016. For the years ended December 31, 2015, 2014 and 2013, we incurred net losses of $44.9 million, $41.8 million and $14.2 million, respectively. We expect these net losses to continue. We also anticipate negative operating cash flow in the 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 clients 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 and implementation times for our products tend to be long and unpredictable. Even after we have convinced prospective clients of the need for, and value of, our products and solutions, our clients 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. In addition, the implementation and deployment of our solutions can be unpredictable due to contract negotiations, regulatory approvals, client-specific requests or acceptance protocols, other challenges with implementation, and other critical dependencies such as the installation of other products, including smart meters. Furthermore, the implementation and deployment of new products and solutions may require lengthy acceptance procedures and troubleshooting, which requires additional time and resources from us and our clients. These delays may lengthen our sales cycles and delay the recognition of revenue.

Our typical sales cycle across contracts is 4 to 28 months and our typical implementation cadence between contract signature and launch is 1 to 7 months. These periods can extend even longer in some cases. 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 client 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.

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 clients.

Our clients, products and solutions are subject to many federal, state, local and foreign laws and regulations. In many cases, our clients 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, clients and prospective clients may be required to gain approval (including approval to recover costs spent on our platform) from any of these organizations prior to implementing our solutions and maintain such approval during the pendency of such solutions, which could prevent, delay or otherwise negatively impact 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 clients’ buying patterns.

The utility industry is subject to increasing and changing regulations. 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 client’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, data protection and information security.

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 clients or prospective clients 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.

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, client 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 client expectations, 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:

•

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 have invested in adapting our products for international markets, where energy is often sold competitively. Client and utility expectations vary widely in these markets and it is possible that our products may be less successful in international and competitive markets. For example, in recent years we experienced a higher rate of non-renewals with international clients, saw slower sales growth in Europe and Asia and found that use of our energy efficiency product to drive utility client retention was less effective in international markets than we hoped. We may experience additional difficulty adapting our products and solutions for international markets.

•

We are investing in developing applications that integrate with utilities’ mission-critical operations, such as our Billing Advisor and Customer Service tools. These mission-critical applications will need to be sold to new buyers within utilities to whom we have not previously sold, and it is uncertain whether these applications or our efforts to sell to these new buyers will prove to be successful.

•

We previously invested significant resources in developing applications that work with thermostats sold by third parties. Sales of this offering did not grow as quickly as we had anticipated. We have yet

to see a significant return from that investment, as our development and sales growth have been slowed by market challenges. As a result, we have suspended further development of our thermostat offering. These challenges may continue, and our investment in this area may not yield returns.

•

We previously invested significant resources developing an offering for small and medium-sized businesses. Sales of this offering did not grow as quickly as we had anticipated. We have yet to see a significant return from that investment, as our development and sales growth have been slowed by market challenges. As a result, we have suspended further development of our offering for small and medium-sized businesses, choosing instead to partner with another company to deliver a comparable product. These challenges may continue, and our investment in this area may not yield returns.

•

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.

Many of our products deliver valuable measurable outcomes for our clients and receive favorable treatment from their regulators, both of which are important to our clients. 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 following the initial launch of our services, 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 clients ratably over the terms of their contracts, generally commencing on the initial launch of our services. Our contracts typically range from one to six years following launch. As a result, most of the subscription revenue we report in each 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 clients 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 clients must be recognized over the applicable subscription term.

A limited number of our utility clients are responsible for a significant portion of our revenue and cash flow. A decrease in sales to these utility clients or delays in client 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 clients, and we cannot easily replace a lost client. As a result, there may be significant variability in our quarterly results if we were to lose one or more of our large clients. In addition, particularly in the United States, there has been an increase in mergers and acquisitions among energy utilities in recent years. This trend may decrease the size of our potential client base, or may require us to make pricing concessions to large clients.

For the year ended December 31, 2015, our ten largest clients by revenue represented 62% of our total revenue, with two clients, Exelon and National Grid (through agreements with their individual subsidiaries), each representing at least 10% of our total revenue at 15% and 10%, respectively. Many of our fees are not due until we have actually begun to deliver our solutions and, as a result, payment of our fees and recognition of such revenue are frequently subject to delay. Our clients 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. We expect that a limited number of utility clients 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 clients could significantly decrease our sales.

Many of our client agreements provide our clients 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 client agreements, including agreements with certain of our historically larger clients, are subject to client termination for any reason, including for the client’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 clients. If clients terminate their agreements with us for convenience, our results of operations may be harmed and our revenue forecasts may be incorrect.

If we fail to retain qualified personnel, our financial performance may suffer.

We have expanded our overall business, revenue, client base and operations in recent years. This expansion has placed, and our expected future growth will continue to place, a significant strain on our managerial, client operations, research and development, sales and marketing, manufacturing, administrative, financial and other resources. Additionally, our executive officers and other key employees could terminate their relationship with us at any time.

Our future success depends upon our ability to continue to attract, train, integrate and retain highly skilled employees, particularly our senior management team, sales and marketing personnel, and research and development personnel. The loss of any member of our senior management team or other key employees, the diversion of attention of senior management to compensate for any such loss, an inability to attract and retain qualified personnel or delays in hiring required personnel, could harm our business, results of operations and financial condition.

In addition, to manage the expected growth of our operations, we will need to continue to improve our operational, financial, management and information technology infrastructure. Any additional headcount or capital investments may 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. In addition, client and utility expectations vary widely in international markets and it is possible that the market for our products and solutions may not prove as strong in international and competitive markets. We may find less market acceptance of our products and solutions internationally than we expected.

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

Our cloud-based platform is dependent upon receiving specific data inputs from our clients and other third parties 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 clients, 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.

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

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

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changes in the mix of products and solutions sold;

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our dependence on a limited number of clients;

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current clients not renewing or cancelling their existing agreements with us;

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

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changing market and competitive conditions;

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

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

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

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delays in adopting our solutions associated with data privacy concerns;

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

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delays in, or denials of, regulatory approvals for our utility clients and utility client implementations and deployments;

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

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

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the addition of new employees and the retention of existing employees; and

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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 client requirements. To maintain and improve our competitive position, we must keep pace with the evolving needs of our utility clients 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 IoT, EnerNOC, Schneider Electric, Silver Spring Networks, Simple Energy 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, with respect to our energy efficiency programs, 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.

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. In addition, tax laws in new jurisdictions in which we may conduct business in the future may not be as favorable as the equivalent laws in the jurisdictions in which we currently conduct business. 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 clients to pay additional tax amounts on a prospective or retroactive basis, as well as require us or our utility clients 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 clients 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 clients’ 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 (“SaaS”) 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 clients 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 clients 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, or utilities may take a different tax position from the position we would recommend. A successful assertion that we should be collecting additional sales or other taxes on our products or solutions could discourage clients from purchasing our solutions or otherwise harm our business and results of operations.

We rely on our management team and 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 and unvested stock options and shares of our common stock. Employees may be more likely to leave us if the shares they own, the shares that are expected to vest in the future or the shares underlying their vested and unvested stock options have significantly depreciated 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.

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. 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.

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 were founded in 2007 and the majority of our revenue growth has occurred since 2010. 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 Quarterly Report on Form 10-Q. 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 clients.

We operate in an industry with a limited number of buyers and reputation is particularly important as a result. Our clients 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 clients to provide positive references. Given our limited number of utility clients, the loss or dissatisfaction of any client could substantially harm our brand and reputation, inhibit the market acceptance of our products and solutions and impair our ability to attract new utility clients and maintain existing utility clients. Any of these consequences could harm our business, financial condition and results of operations.

Our business depends substantially on clients renewing, upgrading and expanding their solutions with us. Any decline in our client 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 clients. 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 clients. We have limited historical data with respect to rates of client renewals, upgrades and expansions so we may not accurately predict future trends in these areas. Our clients’ 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 clients’ spending levels due to the macroeconomic environment or other factors. If our clients believe that our service offerings are not sufficiently scalable, effective or do not provide adequate information security, they will not expand their solutions with us, and our profitability and gross margin may be harmed. In addition, our products and solutions may prove less effective meeting the needs of utilities in competitive and international markets and we may experience greater client attrition in these markets. If our clients 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 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 client 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.

In addition, we subcontract certain services to third parties in order to fulfill important commitments to our utility clients. For example, we work with a software provider that provides complementary small business and commercial client services for our utility clients. Any failure of a subcontractor to perform in accordance with their contract or to otherwise remain compliant with their commitments to us or to remain solvent could harm our business, financial condition and results of operations.

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 adopted may not function as expected or may prove insufficient to detect unauthorized activity and prevent or minimize (i) security breaches, (ii) the unauthorized collection, use and disclosure of personal data or other information, or (iii) loss, theft or corruption of information or personal data by parties entrusted with it. Additionally, we may not have adopted security measures similar to those of other companies that manage similar data as us. In each case, as a result, our products and solutions and the third-party products and solutions we utilize may be subject to significant real or perceived security breaches and other unauthorized collection, use, or disclosure of personal data or other information.

Our platform collects, stores, compiles and analyzes potentially sensitive information related to consumers’ energy usage. We store and/or come into contact with sensitive personally-identifiable information and other

consumer information and data. If, in handling this information, we, our partners or our utility clients 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 clients and consumers whose privacy is compromised. Even the perception that we, our partners or our utility clients 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 client 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, or data leak affecting us, our clients or regarding information similar to the type we collect, or the unauthorized collection, use or disclosure of information or personal data 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 clients, 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 data center facilities, or problems with the 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. 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 in part on software and hardware technology provided by third parties to enable us to provide these solutions. Any damage to, or failure of, these data centers or the hardware and software we employ, could result in significant and lengthy interruptions in our ability to provide our solutions to our utility clients 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 clients to terminate their agreements with us and harm our reputation and our ability to attract new utility clients.

The measures we have taken to mitigate service interruptions may be ineffective or inadequate and our disaster recovery planning may not be sufficient for all eventualities. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or internal controls, could adversely affect our ability to accurately forecast sales demand, achieve accuracy in the conversion of electronic data and records, and report financial and management information, including the filing of our quarterly or annual reports with the SEC, on a timely and accurate basis. Failure to properly or adequately address these issues, as well as to manage and protect our infrastructure, could result in the diversion of management’s attention and resources, adversely

affect our ability to manage our business and to meet our obligations to our clients, and materially adversely affect our business, financial condition and results of operations.

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 client 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:

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loss of clients;

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damage to our brand;

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

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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;

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sales credits, refunds or liability to our clients;

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diversion of development resources; and

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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 clients frequently insist on customized products, or products that we have otherwise not previously developed, 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 client customization requests, our business and results of operations may suffer.

Our clients often request customized service that is costly and time consuming for us to deliver. While we try to limit customization of our product for individual clients, customizations continue to take up valuable research and development resources and may delay the launch of our platform to some clients. 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, client 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 clients 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 clients 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, or allegedly are, infringing. We believe we would have valid defenses available to us if adjudicated, but our defense may not be successful. Even if our defenses are valid, however, responding to an accusation of patent infringement could 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 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. If the underlying laws were 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, financial condition and results of operations.

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. In particular, Public Utility Commissions in some states are developing breach notification and other privacy regulations that may be more stringent than privacy laws generally applicable in those states and may impose increased costs on utilities and their service providers. Additionally, in 2015, the European Court of Justice declared invalid the 20-year-old safe harbor framework on which we and thousands of other U.S. and European companies relied to comply with cross-border data transfer restrictions under European Union law. As a result, European businesses face uncertainty about their ability to lawfully transfer client data to U.S. vendors, such as Opower, and there is an increased risk of regulatory enforcement actions and fines against European and U.S. businesses that exchange European residents’ personal data. 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 client base worldwide. Operating in international markets requires significant resources and management attention and we have limited experience entering new geographic markets. We operate a subsidiary in Odessa, Ukraine, which we formed to expand our research and development and implementation workforce. Ukraine is experiencing significant unrest, which previously escalated into an armed conflict with Russia. In addition, the United States and other countries have placed economic sanctions on the Crimea region of Ukraine and numerous individuals and businesses in Ukraine. Additional sanctions are possible as the situation continues. The conflict and associated sanctions may impact our operations, which would in turn compromise our ability to develop our products at the pace and cost that we desire. The regulatory environment in the Ukraine may result in operational delays and regulatory compliance burdens that we may not be able to meet. Therefore, this and other international efforts may not be successful.

International sales and operations are subject to risks such as:

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inability to localize our product;

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lack of effectiveness of our solutions in new markets;

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technology compatibility;

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the imposition of government controls;

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government expropriation of facilities;

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

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

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

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restrictions on the import or export of critical technology;

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currency exchange rate fluctuations;

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multiple and possibly overlapping tax regimes and adverse tax burdens;

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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;

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generally longer receivable collection periods than in the United States;

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difficulties in staffing and managing foreign operations;

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preference for local vendors;

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burdens of complying with different permitting standards;

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

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difficulties in handling legal disputes in foreign jurisdictions; and

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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 client 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 (“TCPA”) 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 and our clients 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 clients. 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. Moreover, there has been a recent increase in litigation alleging violations of laws relating to telemarketing and a recent declaratory ruling by the Federal Communications Commission interpreting the TCPA is expected to

increase the exposure of companies that operate telephone and text messaging campaigns to class action litigation alleging violations of the TCPA. If we or our clients become subject to such litigation, it could result in substantial costs to our business and impair our ability to expand the use of our solutions.

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”).

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 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 had a material weakness in the past. If we fail to maintain effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect investor views of us and the value of our common stock.

In connection with the preparation of our consolidated financial statements for the year ended December 31, 2014, 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 related to our financial statement close process and the lack of sufficient financial accounting and reporting expertise commensurate with our financial reporting requirements during that period. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a 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.

Although we have remediated the material weakness described above as of December 31, 2015, there can be no assurance that such controls will effectively prevent material misstatements in our consolidated financial statements in future periods. We may experience control deficiencies or material weakness in the future, which could adversely impact the accuracy and timeliness of our future reporting and reports and filings we make with the SEC. If, in the future, we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to maintain an effective internal control environment could have a material adverse effect on the accuracy, timeliness and reliability of our financial reporting, which could in turn, have a negative effect on our financial condition and results of operations as well as the price of our publicly traded securities.

We are obligated to develop and maintain a system of effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may harm investor confidence in our company and, as a result, the value of our common stock.

We are required, pursuant to Section 404(a) of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our auditors will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404(b) 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.

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 independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may be subject to investigation or sanctions by the SEC.

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 client 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.

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, 2015, we had U.S. federal net operating loss carryforwards due to prior period losses of $133.5 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 our initial public 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.

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. 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 clients, 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 clients 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

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

As of April 30, 2016, our executive officers and directors and entities that are affiliated with them beneficially owned, in the aggregate, 48.00% of our outstanding shares 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.

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 may fluctuate substantially. The price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. For example, since shares of our common stock were sold in our IPO in April 2014 at a price of $19.00 per share, our stock price has ranged from $6.07 to $26.00 through April 30, 2016. The trading price of our common stock depends 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. Factors that could cause fluctuations in the trading price of our common stock include the following:

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

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

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

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

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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;

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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;

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

•

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

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

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any significant change in our management; and

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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. 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.

Future sales of shares by existing stockholders could cause our stock price to decline and the large number of shares eligible 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, and the perception that these sales could occur may also depress the market price of our common stock. As of April 30, 2016, we had 53,551,249 shares of common stock outstanding.

In addition, we have filed registration statements to register the 11,153,768 shares reserved for future issuance under our equity compensation plans. Subject to the satisfaction of applicable vesting periods, such shares of common stock issued upon exercise of outstanding options or settlement of restricted stock units will be available for immediate resale in the United States in the open market.

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.

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 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 provisions:

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

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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;

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

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

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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;

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

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

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

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

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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.

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.

ITEM 6.

Exhibits

The exhibits listed below are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

Incorporated by Reference

Exhibit
Number

Description

Form

Exhibit
Number

Filing Date

Filed or
Furnished
Herewith

2.1

Agreement and Plan of Merger, dated as of May 1, 2016, among Opower, Inc., OC Acquisition LLC, Olympus II Acquisition Corporation, and Oracle Corporation.

8-K

2.1

5/2/16

3.1

Fifth Amended and Restated Certificate of Incorporation of the Registrant.

10-Q

3.1

5/15/14

3.2

Amended and Restated Bylaws of the Registrant.

S-1

3.4

3/3/14

4.1

Form of common stock certificate of the Registrant.

S-1/A

4.1

3/24/14

10.1*

Master Agreement for the Purchase of Smart Energy Services Software and Services, between the Registrant and Exelon Business Services Company, LLC, for itself and as agent for Baltimore Gas and Electric Company, Commonwealth Edison Company and PECO Energy Company, dated February 25, 2016.

31.1

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

31.2

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.

32.1†

Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*	Confidential treatment has been requested with respect to certain portions of this exhibit. These portions have been omitted and submitted separately to the Securities and Exchange Commission.

†

The certification furnished in Exhibit 32.1 hereto is deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specifically incorporates it by reference.

SIGNATURES

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


Date: May 10, 2016		OPOWER, INC.

	By:	/s/ Thomas G. Kramer
		Thomas G. Kramer
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller reporting company