**UNITED****STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                      |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                               | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                          |
| **For the fiscal year ended June 30, 2007**                                                                                                                         |
| ** **                                                                                                                                                          |
| **OR**                                                                                                                                                              |
|                                                                                                                                                                |
| **o**                                                                                                                                                               | **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 333-138425**

** **

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**MxEnergy Holdings Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Delaware**                              | ** ** | **20-2930908**                        |
|-------------------------------------------|------------|---------------------------------------|
| (State  or Other Jurisdiction of          |       | (I.R.S.  Employer Identification No.) |
| Incorporation  or Organization)           |       |                                  |
|                                      |       |                                  |
| **595 Summer Street, Suite 300**          | ** ** | ** **                            |
| **Stamford, Connecticut**                 |       | **06901**                             |
| (Address  of Principal Executive Offices) |       | (Zip  Code)                           |

 

**(203) 356-1318**

(Registrant’s telephone number, including area code)

 

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Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 under the Securities Act. Yes o  No x

 

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or Section 15(d) of the Securities Act. Yes o  No x

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone)

 
| Large accelerated  filer o | Accelerated  filer o | Non-accelerated  filer x |
|---------------------------------|---------------------------|-------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes o  No x

 

As of August 31,2007, there were 3,421,937 shares of the Registrant’s common stock, par value$0.01 per share, outstanding. Documents incorporated by reference: **None**

 

 

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**MXENERGYHOLDINGS INC. ANNUAL REPORT**

**FOR THEFISCAL YEAR ENDED JUNE 30, 2007**

 

**TABLE OFCONTENTS**

 
| Item  Number | ** ** | ** **                                                                                                          | ** ** | **Page  Number** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------------|
|         |       |                                                                                                                |       |             |
|         |       | PART  I                                                                                                             |       | 1                |
| 1.           |       | Business                                                                                                            |       | 1                |
| 1A.          |       | Risk Factors                                                                                                        |       | 23               |
| 1B.          |       | Unresolved  Staff Comments                                                                                          |       | 31               |
| 2.           |       | Properties                                                                                                          |       | 31               |
| 3.           |       | Legal Proceedings                                                                                                   |       | 32               |
| 4.           |       | Submission  of Matters to a Vote of Security Holders                                                                |       | 32               |
|         |       |                                                                                                                |       |             |
|         |       | PART II                                                                                                             |       | 33               |
| 5.           |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 33               |
| 6.           |       | Selected  Financial Data                                                                                            |       | 34               |
| 7.           |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 38               |
| 7A.          |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       | 60               |
| 8.           |       | Financial  Statements and Supplementary Data                                                                        |       | 62               |
| 9.           |       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 104              |
| 9A.          |       | Controls and  Procedures                                                                                            |       | 104              |
| 9B.          |       | Other Information                                                                                                   |       | 105              |
|         |       |                                                                                                                |       |             |
|         |       | PART III.                                                                                                           |       | 106              |
| 10.          |       | Directors,  Executive Officers and Corporate Governance                                                             |       | 106              |
| 11.          |       | Executive  Compensation                                                                                             |       | 110              |
| 12.          |       | Security  Ownership of Certain Beneficial Owners and Management and Related  Stockholders Matters                   |       | 141              |
| 13.          |       | Certain  Relationships and Related Transactions, and Director Independence                                          |       | 144              |
| 14.          |       | Principal  Accountant Fees and Services                                                                             |       | 147              |
|         |       |                                                                                                                |       |             |
|         |       | PART IV.                                                                                                            |       | 148              |
| 15.          |       | Exhibits  and Financial Statement Schedules                                                                         |       | 148              |
|         |       |                                                                                                                |       |             |
|         |       | SIGNATURES                                                                                                          |       | 149              |

 

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS**

** **

Some statements in thisAnnual Report on Form 10-K, or Annual Report, are known as “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, or the Securities Act, and Section 21E of the Securities ExchangeAct of 1934, or the Exchange Act. Forward-looking statements may relate to,among other things:

 

•                  future performancegenerally;

 

•                  our business goals,strategy, plans, objectives and intentions;

 

•                  expectations concerningfuture operations, margins, profitability, attrition, bad debt, interest rates,liquidity and capital resources; and

 

•                  expectations regarding theeffectiveness of our hedging practices and the performance of suppliers,pipelines and transmission companies, storage operators, independent systemoperators, and other counterparties supplying, transporting, and storingphysical commodity.

 

These forward-lookingstatements include, but are not limited to, statements about our plans,objectives, expectations and intentions and other statements contained in thisAnnual Report that are not historical facts. When used in this Annual Report,the words “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates”and similar expressions are generally intended to identify forward-lookingstatements. Because these forward-looking statements involve known and unknownrisks and uncertainties, there are important factors that could cause actualresults, events or developments to differ materially from those expressed orimplied by these forward-looking statements, including our plans, objectives,expectations and intentions and other factors as set forth under Item 1A, RiskFactors, and elsewhere in this Annual Report. You should not place unduereliance on such forward-looking statements, which are based on the informationcurrently available to us and speak only as of the date on which this AnnualReport was filed with the SEC. We undertake no obligation to publicly update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.

 

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## **PART I.**

## ** **

## **ITEM1. BUSINESS**

## ** **

*Except as the context otherwise requires, references in this AnnualReport to “Holdings” refer to MxEnergy Holdings Inc., a Delaware corporation,and references to “MxEnergy,” “the Company,” “we,” “us,” “our,” or similarterms refer to Holdings together with its subsidiaries.*

* *

*References in this Annual Report to “RCEs” refer to residentialcustomer equivalents, each of which represents a natural gas customer with astandard consumption of 100 MMBtus per year or an electricity customer with astandard consumption of 10 MWhrs per year. These quantities represent theapproximate amount of natural gas or power used by a typical household in thenortheastern United States. “MMBtu” refers to a million British thermal units,a standard unit of heating equivalent measure for natural gas. A unit of heatequal to 1,000,000 Btus, or 1 MMBtu, is the thermal equivalent of almost 1,000cubic feet of natural gas. One billion cubic feet, or BCF, of gas is equal to 1,000,000 MMBTus.“MWhrs” refers to a million watt hours or a thousand kilowatt hours, which isthe amount of electric energy produced or consumed in a period of timeexpressed in megawatts.*

* *

**Our Business**

** **

***Overview***

*** ***

TheCompany was formed in 1999 to serve as a retail energy marketer. Holdings wasincorporated in Delaware in 2005, as part of a corporate restructuring. We arean independent energy provider of retail natural gas and electric power toresidential and commercial customers in deregulated markets in the U.S. andCanada. MxEnergy currently has natural gas customers located in 28 market areasacross 11 states and Ontario and British Columbia, Canada, and electricitycustomers in 13 market areas in Massachusetts, New York, Connecticut and Texas.

 

Weprovide customers a choice in natural gas and electricity supply withalternative price structures. We principally market two products:(i) fixed price contracts with terms of up to three years that provideconsumers with price protection against fluctuations in natural gas andelectricity prices and (ii) variable price contracts that are usuallypriced competitively with the price offered by the region’s incumbent utility.We derive margin or gross profit from the difference between the price at whichwe are able to sell natural gas or electricity to customers and the price atwhich we purchase the offsetting volumes. Both natural gas and electricity aresupplied to the consumer using the distribution infrastructure of therespective local distribution company, or LDC.

 

Itis our policy to match the estimated requirements of fixed price customers bypurchasing or hedging offsetting volumes of natural gas and electricity inadvance of entering into a fixed price contract with our customers. Due to theprice volatility of natural gas and electricity, we believe it more prudent topurchase anticipatory hedges in line with short term marketing estimates forsales of fixed price contracts to residential and small commercial customersinstead of purchasing hedges after such sales are made, when the cost of supplymight have moved up relative to the contracted price. Any unused anticipatoryhedges are typically sold within a short period of time or the volumes areapplied toward fixed price customers whose contracts come up for renewal. Inaddition, our forward hedged volumes are reduced by the amount of attrition weexpect to realize over the customers’ contract terms. By following a policy ofpurchasing or hedging all estimated fixed price mass market customer supplyobligations in advance, we expect to achieve more stable and predictable cashflows. Hedges for larger, commercial customers are purchased at the time ofsale.

 

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Wehave grown both organically and through acquisitions, having completed eightacquisitions since 1999. We classify our business interests into two reportablesegments for financial reporting purposes: natural gas and electricity. See ourconsolidated financial statements included elsewhere in this Annual Report formore information concerning segment financial data. On August 1, 2006, MxEnergyacquired substantially all of the assets of Shell Energy Services Company,L.L.C., referred to herein as SESCo, a wholly owned subsidiary of Shell OilCompany. At August 1, 2006, SESCo supplied natural gas to approximately 315,000residential and small commercial RCEs in the deregulated markets of Georgia andOhio. In May 2007, we acquired substantially all of the assets of Vantage PowerServices, L.P., referred to herein as Vantage, and began supplying power toapproximately 12,000 former RCEs of Vantage in and around Houston, Dallas/Ft.Worth and Corpus Christi, Texas. Our total sales for the years endedJune 30, 2007, 2006 and 2005 were $703.9 million, $362.6 million and$277.2 million, respectively.

 

***Recent Developments***

*** ***

DuringApril 2007, we obtained our power marketer license to sell electricity inthe State of Connecticut, and began offering power in Connecticut inMay 2007. 

 

OnMay 1, 2007, we commenced an offer to exchange all of our outstandingFloating Rate Senior Notes due 2011 which were not registered under theSecurities Act, referred to herein as the old notes, for an equal principalamount of our Floating Rate Senior Notes due 2011 which had been registeredunder the Securities Act, referred to herein as the new notes (the old notesand the new notes are collectively referred to herein as the notes). OnMay 30, 2007, we announced that we were restating our interim financial statementsfor the three and six months ended December 31, 2006 and were indefinitelyextending the expiration date of the exchange offer. The exchange offer wasterminated on June 27, 2007. On August 1, 2007, we commenced a newexchange offer for the old notes which closed on August 31, 2007. We exchanged$177,870,000 aggregate principal amount of old notes for an equal principalamount of new notes. Pursuant to the registration rights agreement relating tothe old notes, the interest rate applicable to the old notes increased by 0.25%per annum effective as of June 1, 2007 because we did not complete anexchange offer for the old notes by the 300th day following the issue date ofthe old notes. When the new exchange offer was completed on August 31, 2007, theold notes ceased accruing additional interest. As of June 30, 2007, the totaladditional interest accrued was approximately $111,000.

 

OnJune 22, 2007, we launched a conditional cash tender offer to purchase any orall of the outstanding old notes. In connection with the tender offer, wesolicited consents to effect certain proposed amendments to the indenturegoverning the notes. We revised the terms of the tender offer and consentsolicitation on July 30, 2007 and extended the expiration date to 5:00 p.m. onSeptember 14, 2007. On August 15, 2007, we terminated the tender offer andconsent solicitation.

 

***Commodity Supply***

*** ***

Each month, we purchasephysical natural gas and electricity to enable us to meet our estimated supplyobligations to our customer base and fix the margins for our variable pricednatural gas customer base. Physical supply is purchased from various naturalgas producers, marketers and energy trading firms in either a producing regionor at a delivery point that will enable us to deliver to the city gate of therespective LDCs. In some markets, we may enter into transactions with the LDCto purchase or sell natural gas to us in order to balance deliveries againstour customers’ expected usage. Prior to the SESCo acquisition, MxEnergypurchased natural gas and performed all natural gas hedging activity under an

 

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exclusive supply arrangement with Virginia Power Energy Marketing,referred to herein as VPEM. The agreement with VPEM expired on June 30,2007. Beginning July 1, 2007, we are able to purchase our physical gassupply from any counterparty. We currently have a portfolio of over 35 energysuppliers under standard North America Energy Standards Board, referred toherein as NAESB, contracts from whom we purchase our physical gas supply.

 

Concurrently with theclosing of the SESCo acquisition, we entered into a committed exclusive hedgefacility with Société Générale. Shortly after the closing of the SESCoacquisition, all forward hedged positions then in place between MxEnergy andVPEM were novated from VPEM to Société Générale. The hedge facility has aninitial term of two years with subsequent one year renewal terms. The hedgefacility provides us with the ability to enter into NYMEX-based natural gas andnatural gas basis swaps for a tenor of up to 39 months. Fees under thehedge facility include an annual management fee, a volumetric fee based on thetenor of the swap and fees to allow Société Générale to hedge its potentialrisks arising from material declines of natural gas market prices based on ouroverall hedge position with them.

 

The hedge facility issecured by a first lien on the customer contracts and a second lien onsubstantially all other assets of the Company. In addition, we provided$25.0 million of cash collateral for potential negative mark-to-marketchanges in the value of the forward hedged position. In April 2007, wereplaced the $25.0 million of cash collateral with a letter of credit.Under the hedge facility, we have the flexibility to either post cashcollateral or issue a letter of credit as margin for the hedge facility. Wewill not be required to post additional collateral beyond the initial marginrequirements unless our forward hedged positions exceed 65 BCF. Our forwardhedged positions as of June 30, 2007 was an unrealized loss of $18.4 millionand totaled approximately 18.7 BCF which provides us with the ability toincrease our forward hedged positions by approximately 250% before we would berequired to post any additional collateral.

 

We purchase physicalelectricity supply from the independent system operator, or ISO, for all ourpower customers in New York, Connecticut and Massachusetts. In the Texasmarket, we purchase physical power directly from various counterparties fordelivery to the Electric Reliability Council of Texas, referred to herein asERCOT, based on prices of the regional transmission organization, or RTO. Weenter into fixed-for-floating swap agreements with various counterparties tohedge the commodity risk for customers under fixed rate electricity contracts.These swap agreements are settled against the prices for physical electricitydetermined by the ISOs or RTO.

 

***Risk Management***

*** ***

Becauseour contracts require that we deliver full commodity requirements to many ofour customers and because our customers’ usage is impacted by factors such asweather, we typically purchase more or less commodity than our aggregatecustomer base consumes. In buying or selling excess volumes, we may be exposedto price volatility. In order to address the potential volumetric variabilityof our monthly deliveries for fixed priced customers, we implement varioushedging strategies to attempt to mitigate our exposure. 

 

Weutilize NYMEX and basis swaps to offset price risk associated with volumecommitments under fixed price contracts. The financial swaps are generallysettled against each month’s last trading day’s closing price for natural gaslisted on the NYMEX Henry Hub futures contract. The financial basis swaps aretypically settled against the first of the month published index prices atvarious trading points which relate to locations where we have customerobligations. Physical basis swaps are priced based on NYMEX last day settleplus or minus an agreed upon premium or discount. All of the swaps we haveexecuted have been done over the counter on a bilateral basis under the hedgefacility with Société

 

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Générale or with other credit-worthy counterparties. We only executefinancial swaps with investment grade rated entities.

 

Forfixed price natural gas, our hedging tools include: (i) maximizing the useof storage in our daily balancing market areas in order to give us theflexibility to offset volumetric variability arising from changes in winterdemand; (ii) increasing our winter volume estimates by up to 10% incertain markets that require daily balancing of customer demand in order tominimize the financial impact of high prices during greater-than-normal demandas a result of colder-than-normal weather conditions; (iii) entering intodaily swing contracts in selected daily balancing markets or call options overthe winter months to enable us to increase or decrease daily volumes if demandincreases with mitigated price exposure; and (iv) utilizing the flexibility topurchase put options on a portion of our fixed price requirements to mitigateexposure to falling prices if unused volume needs to be sold at prices lowerthan cost. Being geographically diversified in our delivery areas also permitsus, from time to time, to deploy commodity not being used in one area to otherareas, thereby mitigating potential increased prices for natural gas that wemay have otherwise had to acquire at higher prices to meet increased demand.Because we have a substantial amount of storage capacity and have forwardpositions up to 39 months in the future, we are able to take advantage oftemporary distortions in market prices caused by weather or other factors byentering into strategies that are neutral as to price and volume risk, whileallowing us to lower our supply costs. For fixed price electricity contracts,we purchase fixed price blocks of power to match anticipated demand from ourcustomers over the contract term.

 

Byfollowing our various hedging strategies, we are able to target stable andpredictable cash flows. We also mitigate the risk of changing volumes resultingfrom weather and attrition by signing up new customers and renewing existingcustomers onto new fixed price contracts at prices that reflect current marketprices as well as by hedges that are entered into to offset our anticipated butunrealized demand.

 

Forvariable priced customers, we typically pass on the financial impact of thevolumetric mismatches in subsequent months.

 

Ourrisk oversight committee is currently chaired by Stuart Porter, a member of ourboard of directors who has extensive commodity trading and risk managementexperience. The committee, whose members are appointed by the board of directors,establishes and oversees the execution of our credit risk management policy,supplier risk management policy and market price risk management policy. Therisk management policies are reviewed at least annually, and the committeetypically meets quarterly to assure that we have followed its policies and thatwe continue to be price neutral through proper commodity hedging. The committeeseeks to assure the application of our risk management policies to new productsand to any acquisition of new assets. The committee reports to the board ofdirectors on a regular basis as to the status of the risk management activitiesand positions. Commodity positions are typically reviewed and updated dailybased on information from our customer databases and pricing informationsources. On a weekly basis, a report is sent to our hedge facility providerthat includes, among other things, our total estimated volumetric sales andpurchase requirements, the net long or short position that may exist in anyforward month, and the mark-to-market of those positions. The risk policiescurrently require that any position with an exposure in excess of$1.0 million for more than one day must be mitigated promptly.

 

Oursupply department is responsible for executing NYMEX and basis hedges. Aposition report is distributed three times a week by the risk department to theChief Financial Officer, the Chief Operating Officer, the Chief ExecutiveOfficer and the supply department. Hedges are typically approved by the VicePresident of Supply; however, the Chief Operating Officer or the ChiefExecutive Officer may also approve the action recommended by the risk manager.

 

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Werefined our risk management policy in light of the SESCo acquisition. Allchanges to our risk management policy were approved by the risk oversightcommittee during the second fiscal quarter of 2007.

 

**Industry Overview**

** **

Historically,natural gas and electricity were distributed solely by vertically integratedutilities with monopoly franchises sanctioned by state and local governments.In exchange for a utility’s investment in infrastructure, utilities weregranted exclusive distribution rights and a guaranteed rate of return oninvestment. In recent years, the deregulation of the retail natural gas andelectricity industries has created a unique opportunity for independentnon-utility energy marketers to market natural gas and electricity supply andrelated products and services to retail consumers.

 

***Natural Gas***

*** ***

Asa result of the passage of the Natural Gas Act by the U.S. Congress in 1938,the natural gas industry became a government regulated industry. Subsequently,the industry began a process of wholesale deregulation in the early 1980s whichinitially led to increased supplies of natural gas and lower prices.Competition in the marketplace has led to innovation and created a dynamicindustry. Advances in technology have enhanced the ability to find, extract andtransport natural gas with greater efficiency and less cost.

 

Naturalgas is a commodity and is traded in a daily spot physical market as well as onregulated contract markets known as futures exchanges, in over-the-counterderivatives markets, and on electronic exchanges. The price of natural gas isdetermined by the market at various hubs or delivery points located around thecountry. The price changes throughout the course of the day based upon supplyand demand factors and the willingness of buyers and sellers to trade. Whilethere are thousands of pipeline delivery points, there are approximately 30major market hubs in the U.S. and Canada; these are generally production areaswhere pipes gather supply from the fields or intersections of interstatepipelines systems where buyers and sellers of natural gas agree to make or takedelivery. Thousands of contracts are bought and sold daily at these market hubsand various market tools are utilized to set the price for natural gas on adaily, monthly and longer basis. Prices may vary widely from hub to hub, reflectingregional market conditions. Most natural gas that is consumed in North Americais produced in the United States and Canada although a small but growingpercentage of natural gas is imported in the form of liquefied natural gas. Thegrowing volume of imported natural gas from supply sources that can ship theirnatural gas to competing bidders has the potential of affecting domesticnatural gas prices in the future. Pipeline transportation and trading hubs aresubject to inefficiencies and disruption as a result of a surplus or dearth ofsupply, weather-related and other events of force majeure such as hurricanes,flooding, explosion, and operational constraints relating to pipeline pressure,gas quality, and other factors. These inefficiencies and disruption can resultin rapid changes in prices or price volatility. This volatility issubstantially greater than other markets with which consumers are familiar suchas interest rates, public equity markets, currency markets, and markets foragricultural commodities.

 

Althoughthe wholesale price of natural gas is determined by market forces, the cost oftransportation of natural gas from the wellhead to the burner tip is stillhighly regulated. Regulated pipelines essentially act as common carriers. Anymarket participant desiring transportation services from such pipelines must beoffered such services on an equal basis with other market participants. Storagerates are also highly regulated. Natural gas can be stored in facilitieslocated in the production or market areas of the country and this storage alsois made available to market participants on a non-discriminatory basis. Instates which have deregulated the distribution of gas, LDCs may assigntransportation and

 

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storage assets to competitive retail energy marketers like us to meetthe needs of customers who were formerly served by the LDCs and for whom suchassets were contracted.

 

Competitiveretail natural gas providers procure natural gas supplies for delivery toend-use customers from a variety of wholesale natural gas suppliers, mostly ata relevant market hub, either through forward bilateral agreements or on a spotbasis. The bilateral agreements are often standardized among industryparticipants as in the case of the NAESB contract. Retail natural gas providersare responsible for delivering the supplies necessary to meet their customers’consumption needs to the LDCs. These deliveries are made to the LDCs at amutually agreed point, referred to as the “citygate,” on the LDCs pipelinedelivery system. These LDCs are responsible for delivering natural gas toretail customers from the citygate to the customer’s burner tip. LDCs typicallycharge fees for the use of their pipeline distribution systems.

 

Retailenergy marketers typically enjoy a cooperative and mutually beneficialrelationship with the local natural gas utilities providing the physicaldistribution. These LDCs earn predetermined rates of return on their investmentin infrastructure to provide the local distribution of energy. But typicallythey are not permitted to profit from the sale of the natural gas to theircustomers. Thus, they pass through to their customers the actual price of thecommodity that they paid. Customers may benefit from retail competition as aresult of the alternative product offerings that are available in competitiveretail markets, such as fixed forward prices. Likewise, LDCs may benefit fromretail competition because of the corresponding revenue they may receive frombilling, storage and transport services. As LDCs reduce their merchantactivities, retail energy marketers allow LDCs to focus on their corecompetency of local distribution, which typically constitutes a significantportion of most customers’ utility bills. In return, LDCs in many jurisdictionsperform the periodic customer service and billing functions on behalf of retailenergy marketers. In many markets they guarantee customer accounts receivable,assuming bad debt exposure for retail energy marketers, thus effectivelyreducing the marketer’s credit exposure to retail customer default.

 

Choiceprograms are implemented by regulators and law makers and are intended, inpart, to provide customers with alternative pricing structures and enhancedservices. According to the Energy Information Administration, or the EIA, astatistical agency of the U.S. Department of Energy, as of December 31,2006, 21 states and the District of Columbia had legislation or programs inplace that allow residential consumers and other small-volume natural gas usersto purchase natural gas from a company other than their traditional utilitycompany. Six states are in the process of implementing choice statewide andanother eight states have pilot or partial unbundling programs in place orawaiting development. The remaining states do not have any programs in place orhave discontinued their pilot programs. Where a state legislature or utilityregulatory authority has opened the door to competition, individual utilitiesmay or may not adopt rules implementing the new legislation or regulations.

 

Accordingto the EIA, approximately 35 million of the approximately 63.6 million totalresidential natural gas customers in the U.S. have access to choice programs,with approximately 4.2 million (or 12% of eligible customers) participating asof December 31, 2006. Given the broad and expanding support for acompetitive retail energy marketplace, coupled with the fact that only 12% ofthe eligible participants nationwide currently participate in choice programs,we believe that the growth opportunities for competitive retail marketers suchas the Company are considerable.

 

Allbut a few LDCs set the price of natural gas to consumers based upon theiractual commodity acquisition costs, including spot prices, transportation, andstorage, and change the price frequently throughout the year. The exceptions(Northern Indiana Public Service Company, New York State Electric &Gas Corporation and Rochester Gas & Electric Corporation) also offercustomers the ability to purchase natural gas at a fixed price for a term ofone or more years. In addition to the price of the

 

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commodity, consumers are also charged for the utility’s distributionservices and other services. These costs, which are generally based upon theLDC’s “rate base” or fixed assets and variable costs associated with thoseassets, can be more or less than the cost of the commodity portion of thecustomer’s bill. Utilities send their customers a bill to collect the cost ofcommodity plus distribution costs; these bills frequently differentiate betweenthe two categories of receivable. LDCs have various options, includingterminating service in the event customers do not pay their bills in a timelymanner. When an independent marketer like MxEnergy serves a customer, theutility may or may not continue to bill the customer. In the event the utilitybills the customer, the bill separately identifies the commodity portion of thebill as supplied by the marketer. In this case, the customer pays the utilityfor both distribution services and the commodity and the utility eitherguarantees the marketer’s portion of the bill or passes through to the retailmarketer the payments received from the customer with respect to the commodity.

 

***Electricity***

*** ***

Beginningin 1992, the U.S. electric utility industry began a process of deregulationwhich primarily served to unbundle generation, transmission, distribution andancillary services into separate components of a utility’s service. In 1996,some states, and some of the utilities within those states, proceeded to allowtheir end-use customers direct access to marketers, enabling them to purchaseelectricity from an entity other than the local utility in a competitive retailmarket. These proceedings created new, non-utility, competitive retailelectricity marketers such as MxEnergy.

 

Aswith natural gas, competition in the electricity service industry is intendedto provide consumers with a choice of multiple retail suppliers and is expectedto promote product differentiation and enhanced services.

 

Theelectricity distribution infrastructure in place prior to deregulation remainslargely unchanged. By paying usage fees, non-utility retail electricity providersare now able to use this established electricity network for the delivery ofenergy to their customers.

 

Mostelectricity grids and wholesale market clearing activities are managed by athird party entity typically known as an independent system operator, or ISO,or a regional transmission organization, or RTO, each of which manages suchactivities in a particular region. The ISO or RTO is an entity that hasultimate control over the bulk transmission system in a particular geographicarea. The entity is responsible for system reliability and ensures thatphysical electricity transactions between market participants are managed insuch a way as to assure that proper electricity reserve margins are in place,grid capacity is maintained and supply and demand are in near perfect balancein real-time.

 

TheFederal Energy Regulatory Commission, or FERC, which regulates, among otherthings, the distribution and marketing of electricity and the transportation byinterstate pipelines of natural gas in the United States, has deregulated thewholesale electricity market by allowing energy marketers and utilities who donot have market power to sell wholesale electric power at market rates (i.e.,whatever rate the buyer and seller agree upon), as opposed to requiring thatprices be cost-based (i.e., based on the supplier’s cost of selling thewholesale electricity).

 

FERChas further encouraged competition in the wholesale bulk power markets bypromulgating, in 1996, open access transmission rules (Order No. 888), whichhave led to the increasing commoditization of electricity markets. FERC’s openaccess transmission rules require transmission providers under its jurisdictionto allow eligible customers access to their transmission systems at cost-basedrates. This has enabled purchasers of wholesale power to access a larger numberof potential suppliers, thereby enhancing competition.

 

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Wholesaleelectricity (or bulk power), once purchased and sold almost exclusively betweentraditional utilities under bilateral agreements, is now traded by an array ofdifferent market participants on organized markets, including hourly, daily,and monthly spot markets, power exchanges, and financial markets, such asregulated futures and options markets, which further enhances competition. Thewholesale price of electricity is largely set by competitive markets that nowexist in many regions of the country.

 

Retailelectricity marketers procure electricity supplies for delivery to end-usecustomers from a variety of wholesale electricity producers or merchantgeneration companies, either through term bilateral agreements or on a spotbasis. The physical distribution of electricity to retail customers remains theresponsibility of the local utility, which collects fees for use of itssystems. Some states also allow the utility to provide additional services,such as reading meters, generating customer bills, collecting bills and takingrequests for service changes or emergency services, while in other states theutility is not allowed or chooses not to perform these services.

 

Presently,19 states have either enacted enabling legislation or issued regulatory ordersto proceed with retail direct access.

 

**Our Competitive Strengths**

** **

We are one of a small numberof successful retail energy marketers in the growing deregulated market. Webelieve we are well-positioned relative to our competitors and possess acombination of strengths that will enhance our ability to continue to grow.

 

***Significant RiskManagement Expertise***

*** ***

Wedeliver fixed price, full requirements product offerings for commodities thatare volatile, and as such, may be periodically exposed to price volatility andvolumetric changes. In order to address the potential price and volumevariability of future deliveries, we implement various hedging strategies tomitigate our exposure. For fixed price contracts, which represent approximately55% of our business, we reduce our exposure to potentially high spot energyprices by following a policy of hedging all estimated customer consumptionobligations in advance. Additional hedging tools include: (i) maximizingthe use of storage in our daily balancing market areas in order to give us theflexibility to offset volumetric variability arising from changes in winterdemand; (ii) increasing our winter volume estimates by up to 10% incertain markets that require daily balancing of customer demand, in order tominimize the financial impact of high prices during greater-than-normal demandas a result of colder-than-normal weather conditions; (iii) entering intodaily swing contracts in selected daily balancing markets or call options overthe winter months to enable us to increase or decrease daily volumes if demandincreases or decreases; and (iv) utilizing the flexibility to purchase putoptions on a portion of our fixed price requirements to mitigate exposure tofalling prices if unused volume needs to be sold at prices lower than cost. Wehave historically demonstrated the effectiveness of our risk managementstrategies through our ability to maintain margins during the highly volatilecommodity price environment of recent years and during periods of variation inseasonal temperatures, including, for example, the winter quarter of 2006-2007 whenheating degree days were 5% lower than the 30-year average. Our mix of fixedprice and variable price customers affords us additional flexibility to supplyvariable price customers with unused, pre-purchased commodity supply in periodsof lower-than-expected usage.

 

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Our risk management policiesand hedging track record have enabled us to maintain generally stable marginsfor fixed-rate natural gas sales despite volatility in gas prices:

 

 

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(1)           The increase is due to fixed pricecustomer contracts acquired from SESCo without corresponding fixed pricehedges.

 

(2)           The spread is equal to the fixedprice weighted average sales price less the hedge price for a given period.

 

***Attractive Customer Base***

*** ***

Wehave approximately 347,300 residential, small and mid-market commercial RCEsunder fixed price contracts. In addition, we have approximately 284,100residential, small to mid-market commercial RCEs under variable pricecontracts. Among the retail marketers and wholesale merchants, competition ismost intense for the larger volume commercial and industrial accounts. Ourprimary target customer segments are residential and small to mid-market commercialcustomers. As of June 30, 2007, no single customer accounted for more than 1.7%of our volume.

 

Asof June 30, 2007, approximately 93% of our RCEs are natural gas customers. Thestates in which we operate allow contracts to be automatically renewed forfixed terms or otherwise extended based upon procedures set forth in eachstate. Historically, we have experienced a high renewal rate of approximately90% of customers with fixed rate contracts. Bad debt expense associated withour customer base has also historically been low at approximately 1% of totalsales. Since we participate in 28 different LDC markets, we believe we areuniquely positioned to take advantage of marketing opportunities as presentedand to deploy a regional marketing focus.

 

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***Successful Track Record ofAcquiring and Integrating Retail Customer Businesses and Customer Portfolios***

*** ***

Through our acquisitions, wehave demonstrated an ability to integrate businesses and retain customers successfully.Since our inception in 1999, we have completed the following acquisitions:

 
| **Date**       | ** ** | **Company**                     | ** ** | **No. and Type of RCEs** |
|----------------|------------|---------------------------------|------------|----------------------------------------------|
| May 2000       |       | Keyspan Energy                  |       | 18,000 natural gas                           |
| March 2001     |       | Summit Energy                   |       | 15,000 natural gas                           |
| September 2001 |       | Energy.com                      |       | 5,000 natural gas                            |
| February 2003  |       | Nicor Gas                       |       | 28,000 natural gas                           |
| March 2004     |       | Total Gas &  Electric, Inc. |       | 90,000 natural gas  13,000 electricity       |
| November 2005  |       | Castle Power LLC                |       | 53,000 natural gas                           |
| August 2006    |       | SESCo                           |       | 315,000 natural gas                          |
| May 2007       |       | Vantage                         |       | 12,000 electricity                           |

 

Many of these acquisitionswere in markets that were not previously served by MxEnergy and thereforeprovided new marketing opportunities.

 

***Experienced ManagementTeam***

*** ***

Several members of oursenior management team have extensive experience in energy risk management andretail marketing as well as in creating, developing and managing businesses andrisk on behalf of major international corporations. Jeffrey Mayer, ourPresident and Chief Executive Officer, is a trained lawyer and has over 28 yearsof experience as an expert in energy derivatives including futures, swaps, andoptions. Mr. Mayer’s prior experience includes serving as a ManagingDirector at Sempra Trading Corporation, as the Chairman of AIG ClearingCorporation and AIG Securities Corporation and in various roles at Goldman,Sachs & Co., including serving as the Chief Counsel of its J. AronCommodities Division and manager of its Energy Futures Department. StevenMurray, our Chief Operating Officer, served in the Royal Dutch Shell group ofcompanies over a period of 25 years in a variety of roles, most recentlyas President and Chief Executive Officer of SESCo. Other significant roles heldby Mr. Murray at Royal Dutch Shell included President and Chief ExecutiveOfficer of Shell Trading US Co. and Director of Shell Chemicals Risk ManagementServices. Chaitu Parikh, our Chief Financial Officer, spent five years with aBig Four accounting firm and, prior to joining MxEnergy, worked with threederegulated energy firms in Canada and the United States for over six years.Carole R. (“Robi”) Artman-Hodge, our Executive Vice President, has over29 years of experience as a commercial banker, energy credit and energyand commodity finance specialist, including positions in the Project Financeunit of Bank of Ireland, the Natural Resources unit of ING and the TreasuryMarketing unit of Banque Paribas.

 

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***Geographically DiverseOperations***

*** ***

Our diversified geographicalcoverage provides several benefits to us, including flexibility in productofferings and marketing campaigns, broad demographic mix, diversified creditexposure and economies of scale. Our multi-state approach helps protect us fromthe risk of a single LDC default, a material regulatory change in a singlejurisdiction, extreme local weather patterns or localized economic downturn. Inaddition, operating in multiple regions allows us to utilize a diverse naturalgas transportation and storage infrastructure and capitalize on our regionalsupply and pricing knowledge.

 

***Guaranteed AccountsReceivable***

 

As of June 30, 2007,approximately 45% of our accounts receivable were with residential and smallcommercial customers that were guaranteed by the LDCs at a weighted averagediscount rate of approximately 1%. Such discount is effectively the cost ofservice to guarantee the receivable. In cases where receivables are guaranteedby the LDC, we are exposed only to the credit risk of the LDC, rather than thatof our actual customers. As of June 30, 2007, 100% of our accounts receivablein guaranteed markets were with investment grade LDCs. We assume the creditrisk for approximately 15% of the total volume billed by LDCs on our behalf andfor the remaining 40% of the total volume billed by us. 

 

| **Guaranteed  Accounts Receivable by Jurisdiction****(%  of Total Load)** |
|---------------------------------------------------------------------------|
| ** **                                                                |
|                                                                           |

 

***Committed andKnowledgeable Equity Ownership***

 

Our primary stockholdersinclude Charterhouse Group Inc., or Charterhouse, Greenhill Capital Partners,or GCP, and Denham Commodity Partners Fund LP (formerly known as SowoodCommodity Partners Fund LP and prior to that Lathi LLC, a wholly ownedsubsidiary of Harvard Management Company), referred to herein as Denham. Thesestockholders have made equity investments that have provided us with sufficientfinancial capital to grow and support our business. These stockholders have anin-depth understanding of the energy and financial markets, and providestrength and insight for our activities and strategy. Charterhouse is a NewYork-based, middle-market private equity investment firm with a focus onbuyouts, build-ups and growth capital financings. Since its inception in 1973,Charterhouse has invested more than $1.9 billion in over 100 platformbusinesses on behalf of global institutional investors through its limitedpartnerships. GCP is an affiliate of Greenhill & Co., Inc., anindependent global investment banking firm. GCP manages several private equityfunds which total

 

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$1.3 billion in capital, focusing on the energy, financialservices and telecommunications industries. Denham and its affiliated fundshave investments in assets and companies that provide goods and services incommodity markets, primarily in the energy sector.

 

**Our Competitive Strategies**

** **

Our retail energy salesdepend upon our ability to identify and enter profitable, deregulated, retailenergy markets, manage the cost of customer acquisitions, integrate acquiredbusinesses successfully, retain customers and attract new customers in ourexisting markets. The principal components of our strategy are to:

 

***Offer a CompetitivelyPriced, Differentiated Product***

*** ***

Our fixed price productoffering is differentiated from that offered to consumers by most incumbentLDCs and many of our other competitors. We offer our customers a fixed priceproduct with a term of up to three years in contrast to the floating rate,market-priced product of most LDCs and many of our other competitors. Webelieve we are one of few retail marketers that offer a fixed price productthat extends for a three year term. By offering energy supply at fixed prices,residential and commercial consumers are protected from volatile and potentiallyhigher energy prices. We also offer a variable price product which is designedto be competitive with the variable price product offered by the LDCs. Weselectively focus on markets that have rate structures, market rules, consumerdemographics, energy consumption patterns and liquidity for risk managementproducts that enable us to provide value added products offering flexibility toour customers at an acceptable margin. We continue to explore other attractiveproduct opportunities that may be marketable in the changing energy markets,including, among others, capped products, capped escalating fixed rateproducts, descending rate fixed products, seasonal fixed rate products,partially fixed rate products and a flat rate bill product where the customer paysthe same monthly amount with no annual or seasonal true up.

 

***Maintain Prudent Hedgingand Risk Management Policies***

*** ***

Our leadership team hassubstantial experience managing risk in energy companies and maintainsconservative risk management policies with a strong emphasis on price andvolumetric neutrality. We employ a risk manager who is responsible formonitoring our hedge book and ensuring compliance with our risk managementguidelines. Our board of directors has a risk oversight committee which typicallymeets quarterly to, among other things, review and revise risk managementpolicies.

 

Our strategy is to minimizeour risk or hedge positions and not enter into speculative trading positions.As a marketing company, we hedge up to one month of anticipated contract salesto residential and small commercial customers. In the case of commercialcustomers, we hedge the contract sale at the time of execution. By following apolicy of hedging our estimated customer supply obligations in advance or, inthe case of more price sensitive, higher-volume commercial customers, at thetime of contract execution, we are able to achieve more stable and predictablecash flows. In addition, we employ a strategy of taking advantage ofopportunities to reduce our costs through the efficient management of ourstorage assets. In executing this strategy, we follow our risk managementpolicy of maintaining price and volume neutral positions.

 

***Build and Maintain anExcellent Commodity Supply Team***

*** ***

The retail energy supplybusiness demands excellence in managing the procurement, transport, storage andbalancing of commodity supply. We have recruited a team of professionals withexpertise not only in natural gas and electricity supply generally but also inthe supply to our specific markets. This

 

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expertise is essential to procure commodity and transport, and tonominate and schedule commodity on interstate pipelines and LDC systems. Webelieve the addition of key members of the SESCo team in our Houston officecontinues to bolster our expertise.

 

***Pursue Organic Growth andOpportunistic Acquisitions***

*** ***

We plan to continue to growour customer base by aggressively pursuing growth opportunities bothorganically and through acquisitions. Given the broad and expanding support fora competitive retail energy marketplace, coupled with the fact that only 12% ofthe eligible participants nationwide currently participate in deregulatedprograms, we believe the growth opportunities for competitive retail marketerslike us are considerable. We have developed a set of criteria for identifyingattractive markets and for acquiring, integrating and retaining customerbusiness in such markets. We intend to expand our distribution of natural gaswithin our existing markets and to move into new LDC markets by leveraging oursuccess in prior acquisitions, our customer care platform and our establishedmulti-channel marketing system. As a result of the acquisition of a robustcustomer data base system plus billing and collections platform as part of theSESCo acquisition, we foresee an ability to penetrate further into themid-market commercial segment in territories where we do not currently marketto such customers.

 

***Maintain a Low CostOperating Structure***

*** ***

We aim to keep our overheadcosts low by (i) relying on incentivized sales personnel and(ii) selectively outsourcing certain sales and marketing, customerservicing, systems and web-development functions. We also attempt to keep ourdirect customer acquisition costs to a level that can be repaid within one year’sgross margins and expect that we will effectively enjoy an annuity fromsubsequent years of supply. Advertising continues to be a relatively smallcomponent of our sales and marketing expenses.

 

***Uphold High CustomerService Standards***

*** ***

In order to ensure customersatisfaction and minimize attrition, we maintain a call center in Maryland witha staff exclusively dedicated to customer inquiries, enrollments and renewals.For our Georgia and Ohio markets, we are using an outsourced call centerservice located in Florida which has proven to be compliant with our customercare performance metrics. We have extended the former SESCo contract with thisgroup of outsourced call centers. We aim to maintain the highest standards incustomer service. We track our call center metrics and measure them againstindustry standards and our target customer service levels. We continuouslystrive for improvement in our customer service levels by tracking the number ofdropped calls, average hold time, nature of inquiry or complaint, anddisposition time.

 

To reduce the potential forunethical marketing practices by sales agents, we have implemented thefollowing processes to achieve our objectives: (i) recorded independent thirdparty verification calls on sales, including those made door to door,(ii) recorded telemarketing sales calls and periodic quality assurancecalls to customers and remote call monitoring; (iii) incorporated legalreview and submission of telemarketer scripts and marketing materials to LDCsand public utility commissions for review; (iv) mailed welcome letterswith terms and conditions; and (v) conducted audits to ensure complianceby marketers with all Federal Trade Commission, or FTC, LDC, and local publicutility commission rules, regulations and guidelines.

 

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***Leverage Our Investment InInformation Systems***

*** ***

We have identified what webelieve are the best customer relationship management software, billing engine,weather forecasting and risk-management software systems available. We haveworked with vendors to customize these systems to operate our back-officefunctions, including customer enrollment, inventory management, forecasting,risk management settlement and billing. This combination of purchased softwareand internally developed systems creates a powerful, integrated solution thathas been continuously improved with automated interfaces and processefficiencies. A streamlined information system allows us to avoid delays in thelaunch of commercial operations into new markets, maintain an attractive cost structuredue to minimal support staff requirements, ensure superior customer service,aid in our sales and marketing efforts and manage exposure to significant pricevariations and exchange data through electronic data interface systems with thelegacy systems of the respective LDCs. These information systems create astrong leveraging opportunity for growth.

 

**Core Products and Services**

** **

Our core business is theretail sale of natural gas and electricity to end-use customers. We offernatural gas and electricity service to customers under contracts with terms ofup to three years**.** We offer fixedand variable price products and, in the case of natural gas, several otherinnovative pricing programs designed to cap prices or manage the risks ofenergy volatility. The positive difference between the sales price of energy toour customers and the sum of the wholesale cost of our energy supplies, hedgingcosts, transmission costs and ancillary services costs provides us with a grossprofit margin. The natural gas and electricity we sell are generally meteredand delivered to our customers by the local utilities. The local utilitiesfrequently provide billing and collection services on our behalf. Currently,Georgia is the only natural gas market where the local utility does not providebilling and collection services on our behalf for residential and commercialcustomers.

 

We aim to keep our productssimple in order to facilitate marketing to residential and small commercialcustomers. Our fixed rate product protects consumers from increases in the unitprice of natural gas or electricity for a term of up to three years. Inmarketing this product, we do not promise savings as a consumer could pay moreif local utility prices, which are based on variable market prices, fall duringthe term of the fixed rate contract. We offer customers different variations onthe fixed rate product if they wish.  Forexample, customers may wish to have fixed rate protection only for the wintermonths while letting the summer price float with the market. We also haveoffered some customers a cap product in which their price floats with themarket but cannot exceed a fixed rate cap. Because of the high volatility ofenergy products like natural gas and electricity, the cost of such caps, whichmust be hedged with call options, is very high. Our variable rate product issimilar to utility variable rate pricing but without the cost recovery factorsthat frequently conceal from customers the true cost of energy supplied by theutilities. By using alternative supply arrangements, we are sometimes able tosupply customers with commodity at a price lower than the utility’s tariffpricing which often includes costly items such as firm transportation.

 

We sell natural gas andelectricity at contracted prices based on the real-time demand or usage of ourcustomers. We buy natural gas and electricity in the wholesale market in timespecific, bulk or block quantities, usually at fixed prices. We manage thedifferences between the actual sales demand of our customers and our bulk orblock purchases by buying and selling any shortfall or excess in the spotmarket. Independent system operators, or ISOs, and regional transmissionorganizations, or RTOs, which manage transmission infrastructure in a particularregion, perform real-time load balancing for each of the electric grids inwhich we operate. Similarly, balancing is performed by the utilities or LDCs,for each of the natural gas markets in which we operate. We are charged orcredited by the ISOs and LDCs for balancing of our electricity and natural gaspurchased and sold for our account.

 

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For medium and largecommercial customers, we enter into bilateral agreements which set out ourresponsibilities to deliver natural gas to the customer and the customer’sresponsibilities to pay for the natural gas. For a residential or smallcommercial customer to switch from the local utility offering to one of ourrate plans requires that the customer confirm its enrollment in writing, in arecorded telephone call or through an internet enrollment. Enrollment requiresdisclosing the customer’s utility account number, visible on the customer’sbill, and in some cases the customer’s meter number. Upon enrollment, we areresponsible for uploading to the applicable utility customer details, includingname, address, and account or meter numbers. Utilities must accept the customerenrollment before we are required to flow gas or electricity to the customer.Acceptance rates vary, in our experience, from 50-100% of enrollments. Once acustomer has been accepted, the utility advises us of the customer’s annual,monthly and in some cases, daily consumption needs, and we must meet thoseneeds by supplying energy to locations determined by the utility. Periodically,the utility will read the customer’s meter and send a monthly bill to thecustomer which lists us as the supplier. In addition to meter reading andgenerating bills (except in Georgia and Texas) for our residential and smallcommercial customers, the utility will provide emergency service andmaintenance on the customer’s account.

 

**Generation of Revenue**

** **

We primarily generaterevenue through retail sales of natural gas to residential and small commercialcustomers. As of June 30, 2007, we had approximately 631,400 RCEs,approximately 43,300 of which were derived from our electricity operations,with approximately 55% under fixed priced contracts and approximately 45% undervariable priced contracts. For the year ended June 30, 2007, approximately 97%of our sales were derived from the supply of natural gas and the remainingsales were derived from the supply of electricity.  See “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” for more informationregarding our revenue sources. 

 

**Our Customers and Markets**

** **

As of June 30, 2007, wedelivered natural gas to approximately 588,100 RCEs in 28 LDC markets andelectricity to approximately 43,300 RCEs in twelve market areas across 13states and the Provinces of Ontario and British Columbia, Canada. In addition,during April 2007, we obtained our power marketer license to sell electricityin the State of Connecticut, and began offering power in Connecticut in May2007. Additionally, in May 2007, we purchased the assets of Vantage and beganto serve approximately 12,000 RCEs in the State of Texas shortly thereafter. Webegan delivering electricity to customers in Connecticut beginning in July2007. 

 

Our customer base consistsof residential, small and mid-market commercial customers. Our business is notdependent upon any one customer or a single territory or market. As of June 30,2007, no single customer accounted for more than 1.7% of our volume. Our multi-stateapproach allows us to benefit from a diverse stream of sales, capitalize oneconomies of scale and realize synergies from our existing business. Inaddition, our multi-state approach allows us to be insulated from the risk of asingle LDC default, a material regulatory change in a single jurisdiction,extreme local weather patterns or a localized economic downturn.

 

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The following mapillustrates the regions in which we are currently active in the U.S. and Canadaand the respective number of RCEs as of June 30, 2007:

 

**MxEnergy Service Territory(RCEs)**

 

 
| **Territories** | ** ** | **% Total** | ** ** |
|-----------------|------------|------------------|------------|
|            |       |             |       |
| Georgia         |       | 33               | %          |
| Ohio            |       | 20               | %          |
| New York        |       | 14               | %          |
| Michigan        |       | 8                | %          |
| Indiana         |       | 6                | %          |
| New Jersey      |       | 6                | %          |
| Illinois        |       | 4                | %          |
| Massachusetts   |       | 3                | %          |
| Pennsylvania    |       | 2                | %          |
| Texas           |       | 2                | %          |
| Maryland        |       | <1            | %          |
| Kentucky        |       | <1            | %          |
| Ontario         |       | <1            | %          |
| Florida         |       | <1            | %          |

 

***Natural Gas***

*** ***

As of June 30, 2007, we hadapproximately 588,100 natural gas RCEs, with approximately 57% under fixed pricedcontracts and approximately 43% under variable priced contracts. Ourfixed-price customer contracts have an average remaining life of 12 months. Dueto both our history of acquisitions and organic growth, we have enjoyed steadyexpansion of our natural gas customer base. From 2001 to 2007, our natural gasRCEs grew from 81,120 to approximately 588,100.

 

During 2005, as a result ofnew telemarketing regulations (i.e., FTC guidelines and Do Not Call listings),we transitioned many of our outsourced marketing companies to new, fullycompliant companies. We experienced a decline in customers between 2004 and2005 due to the impact of transitioning third-party marketing efforts. Sincethe beginning of the last quarter of fiscal 2006, we have experienced a declinein customers, largely due to customer attrition related to the SESCoacquisition, as well as challenging pricing and marketing conditions. However,in general, new customers gained through organic growth and acquisitions haveoffset the number of customers lost, evidenced by our growing customer baseover time.

 

As of June 30, 2007, we wereactively marketing natural gas across 28 LDC markets in 11 states (Florida,Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, New York,Ohio and Pennsylvania) and the Provinces of Ontario and British Columbia inCanada. All of these markets are open for direct access purchasing of naturalgas from retail marketers.

 

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***Electricity***

*** ***

MxEnergy has taken aconservative approach in entering the deregulated retail electricity market.There are currently 19 states that are open for direct access sales to end usecustomers of electricity. We are evaluating each market to determine which aremost advantageous to enter. Our intent is to develop this business organicallyand through acquisitions, as well as by leveraging potential cross-sellingopportunities with our natural gas business. We believe offering both naturalgas and electricity to the same customer leverages our existing infrastructureand decreases customer churn.

 

MxEnergy entered thederegulated retail electricity market in 2004 via the acquisition of Total Gasand Electric, Inc., referred to herein as TG&E. The acquisition providedMxEnergy with a New York electric customer base. In addition, during April2007, we obtained our power marketer license to sell electricity in the Stateof Connecticut, and began offering power in Connecticut in May 2007. We begandelivering electricity to customers in Connecticut beginning in July 2007. InMay 2007, we acquired the assets of Vantage and began to serve approximately12,000 RCEs in Texas shortly thereafter. As of June 30, 2007, we servicedapproximately 43,300 RCEs in New York, Massachusetts and Texas. Of such RCEs,23% were fixed and 77% were variable price contracts.

 

***Renewals and Attrition***

*** ***

At the end of each customercontract term, customer contracts in most of our markets are renewed uponnotification by the marketers unless the customer indicates otherwise. Wenotify customers about the expiration of their contract with a letter, which ismailed in advance of expiration in accordance with applicable law andregulation. The letter indicates that the contract will automatically renew andsets forth the new contract terms, leaving the customer the option to declineservice. From 2005 to 2007, approximately 90% of MxEnergy’s customers thatreceived such notification of contract expiration ultimately renewed theircontracts.

 

From 2005 to 2007, MxEnergyexperienced an average annual in-contract customer attrition rate ofapproximately 23%, which we believe is consistent with the industry average.In-contract customer attrition for the year ended June 30, 2007 wasapproximately 26%, due to customer losses experienced in connection with theSESCo acquisition, as well as challenging pricing and market conditions.Average annualized in-contract customer attrition for July and August 2007 wasapproximately 23%. In-contract customer attrition has generally improved everymonth since December 2006. The loss of customer accounts in all the abovementioned periods was primarily due to: (i) customer-initiated switches,(ii) residential moves and (iii) customer payment defaults. We haveinstituted a “move” program to follow customers who have moved within anotherarea serviceable by us, offering the ability to re-establish their rate plan.Generally, new customers gained through organic growth and acquisitions haveoffset the number of customers lost, evidenced by our growing customer baseover time.

 

**Sales and Marketing**

** **

We have developed a strong,differentiated brand that is “personality-driven.” Our brand message offerscustomers the ability to control their energy rates and better manage theirhousehold (or business) budgets. Through the use of a distinct logo and twoiconic animated characters, our product proposition is presented in aneasy-to-understand message. We aim to achieve a tone and manner ofcommunication that is friendly and approachable and marketing materials thatare distinctly different from those of our competitors by avoiding the look andfeel of a traditional utility company.

 

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Our year-round sales andmarketing efforts focus on three strategic areas of concentration: attractingnew customers, retaining and renewing existing customers and winning backformer customers who have cancelled or switched to the local utility or anothersupplier.

 

***Branding &Customer Communications***

*** ***

We differentiate ourselvesthrough our branded communications to our customer. We strive to simplify allmarketing communications and impart practical, straight-forward information.

 

To acquire new customers, weemploy an integrated marketing mix that consists of multiple combinations ofdirect marketing, traditional and online media, public relations and localevent participation. Our goal is to have direct marketing efforts, whichinclude outbound telemarketing to both residential and small commercialcustomers, direct sales (outside sales focusing on small and mid-marketcommercial customers), and direct mail targeted to high purchase propensityresidential and small commercial customers, all of which account for themajority of our total tactical marketing mix.

 

To retain existingcustomers, we rely on our highly-trained internal and external customer carerepresentatives. Customers requesting cancellation of service are providedhelpful information on the volatility of natural gas rates and encouraged toretain the benefits of long-term rate protection, if appropriate. Weproactively contact customers who have moved to another area we service. Wepermit customers to remain on an existing contract if the move has occurredwithin 30 days following cancellation notice.

 

If we receive notificationfrom an LDC that a customer has cancelled or switched to another supplier, wewill attempt communication through both mail and phone, encouraging thecustomer to reconsider his decision, reminding him of penalties he may incurand, in some cases, offering a new rate plan.

 

We frequently refine ourmarketing methodologies to target favorable customers. We rely on dataanalytics obtained from past marketing campaigns to guide future targetmarketing efforts. Many natural gas and electricity marketing variables arestudied including but not limited to: geographic regions; demographic profiles(age, gender, home ownership, income, presence of children); consumerparticipation in retail choice programs; product rate plan type; volumetricusage; seasonality; competitor offerings; weather patterns; changes in state orfederal regulations; sales channel effectiveness and national consumer trendresearch. We model customer purchase, retention and renewal behaviorsrespective to product offerings and lifecycles.

 

Developing new andinnovative marketing programs remains an ongoing objective. We are currentlydeveloping programs to offer our products to under-served customerconstituencies in multicultural markets. We recently developed bilingualmarketing materials and customer contracts in Spanish. We have employedbilingual sales and customer care representatives to better serve our Spanish-speakingcustomers. We plan to replicate our efforts in other multi-cultural markets.

 

We plan to continue our effortsto target new movers through agency-led initiatives and through outboundtelemarketing efforts aimed at newly connected phone numbers.

 

We will increase our localpresence in-market through greater participation in LDC energy fairs andrelated home owner and commercial business events. Additionally, we plan toincrease our membership and participation in associations that can fosterdirect sales prospects (e.g., business associations, chamber of commerce,service organizations, etc.).

 

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We have developedattractive, contemporary, mid-market, commercial marketing materials that serveto differentiate us from competitors. Our innovative rate plans and genuinesales consultancy approach are highlighted throughout our mid-market,commercial communications. We complement our sales force efforts with targetedmail and e-mail communications to energy decision makers. Such communicationswill serve to impart important information and invite consideration of futureenergy needs.

 

***On-line Enrollment***

*** ***

We have invested in web sitefunctionality and revamped our website at www.mxenergy.com to allow a customerto enroll with us 24/7. Detailed information about our company, our productsand special promotional opportunities provide us with an efficient, low costmeans of transacting with customers. Many energy marketers do not have on-lineenrollment capability and force the prospective customer into calling a callcenter for more information.

 

***Public Relations***

*** ***

We have actively encouragedthe press to publish articles on deregulated energy offerings and play anactive, public role in informing customers that they have the ability to choosetheir energy supplier. We seek to position ourselves as industry leaders inpress articles and releases. We believe our interviews with reporters oftenserve to increase awareness of our company and add credibility to our productofferings. Articles in the press have generated calls to our call center whichare sometimes converted into sales.

 

***Product Offerings***

*** ***

We offer multiple productofferings to customers so that at any given time, potential customers canchoose which product meets their household or business needs. We aim to beflexible and to respond quickly to market conditions to ensure that our offersmatch consumer interests. Unlike competitors offering one product choice at atime, our ability to present the customer with multiple product choicesconfirms our overall commitment to customer satisfaction.

 

We aim to keep our productssimple in order to facilitate marketing to residential and small commercialcustomers. Our fixed rate product protects consumers from increases in the unitprice of natural gas or electricity for a term of up to three years. Inmarketing this product, we do not promise savings as a consumer could pay moreif local utility prices, which are based on variable market prices, fall duringthe term of the fixed rate contract. We offer customers different variations onthe fixed rate product if they wish. For example, customers may wish to havefixed rate protection only for the winter months while letting the summer pricefloat with the market. We also have offered some customers a cap product inwhich their price floats with the market but cannot exceed a fixed rate cap.Because of the high volatility of energy products like natural gas andelectricity, the cost of such caps, which must be hedged with call options, isvery high. Our variable rate product is similar to utility variable ratepricing but without the cost recovery factors that frequently conceal fromcustomers the true cost of energy supplied by the utilities. By usingalternative supply arrangements, we are sometimes able to supply customers withcommodity at a price lower than the utility’s tariff pricing which oftenincludes costly items such as firm transportation.

 

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**Competition**

** **

Inmarkets that are open to competitive choice of retail energy suppliers, ourprimary competition comes from utility-affiliated retail marketers and small tomid-size independent retail energy companies. Competition is based primarily onproduct offering, price and customer service.

 

Thecompetitive landscape differs in each utility service area, and within eachtargeted customer segment. For residential and small commercial customers inmost service territories, our primary competition comes from utility-affiliatedmarketing companies and small to mid-size independent retail energy companies.Over the last several years, a number of utility-affiliated marketing companieshave exited this segment of the market. For the mid-market commercial customer,competitive challenges come from both the utility and its affiliated marketingcompany, as well as other independents. However, this segment is still theleast targeted segment among our competition due to the difficulty in balancingcost of acquisition and margin objectives. The large commercial, institutionaland industrial segments are very competitive in most markets with nearly allcustomers having already switched away from the utility to an alternateprovider. National affiliated utility marketers, energy producers and otherindependent retail energy companies often compete for customers in thissegment. Historically, we have not focused on this segment.

 

Increasingour market share depends on our ability to convince customers to switch to ourservice. The local utilities and their affiliates have the advantage oflong-standing relationships with their customers, and they have longeroperating histories, greater financial and other resources, and greater namerecognition in their markets than we do. In addition, local utilities have beensubject to many years of regulatory oversight and thus have significantexperience regarding the regulators’ policy preferences, as well as a criticaleconomic interest in the outcome of proceedings concerning their revenues andterms and conditions of service. The incumbent’s advantages in many markets areintended to be limited, however, by regulatory structures that, for example,prohibit the incumbent from offering non-standard service and pricingstructures, minimize the opportunity for the regulated business to subsidizethe unregulated business and limit the ability of the utility to solicitcustomers that have switched. In Georgia, however, the incumbent utility hasfully exited the retail segment.

 

Inmany cases, LDCs actively support deregulation and have welcomed the entry ofretail energy marketers. By relieving LDCs of the need to engage in riskmanagement, retail energy marketers allow LDCs to focus on their corecompetency of local distribution, which typically constitutes a significantportion of most customers’ utility bills. Many LDCs assume customer bad debtexposure since this encourages more market entrants and supports continuedderegulation. LDCs may recover the bad debt expense as part of their tariffrates. The interests of retail energy marketers and most LDCs are thus highlyaligned, providing crucial support for continued deregulation, while increasingpenetration of the retail energy marketer model. We have successfully forgedstrong relationships with many of the LDCs throughout our service territories.

 

Mostcustomers who switch away from the local utility do so for economic benefit orprice stability. Once switched, customer retention is based on continuedcompetitive pricing, reliability of supply and customer service.

 

Some of our competitors,including local utilities, have formed alliances and joint ventures in order tocompete in the restructured retail electricity and natural gas industries. Manycustomers of these local utilities may decide to stay with their longtimeenergy provider if they have been satisfied with their

 

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service in the past. Therefore it may be difficult for us to competeagainst local utilities and their affiliates.

 

**Information Systems**

** **

Wemaintain a number of information systems for capturing customer, accounting,supply forecasting and risk management information. These systems wereoperating on hardware within all four of our offices, including locations inConnecticut, Maryland, New Jersey and Texas, but, over the past fiscal year, wemoved substantially all of these systems to an outside service provider inHouston. Further, to supplement our business continuity plans, we alsoestablished backup systems in our Maryland office.

 

Giventhe inherent challenges of managing multiple systems, the informationtechnology team is expected to consolidate our six existing customerrelationship management tools into one or two. Furthermore, the multiplebilling platforms are expected to be consolidated into our Lodestarapplication.

 

Weare also in the in the process of converting our demand forecasting and riskmanagement operations from internally developed Excel spreadsheets to thirdparty software systems developed by New Energy Associates and Sungard. We arecurrently utilizing this system and will continue to make enhancements duringfiscal 2008.

 

Ourweb site is hosted offsite with a full-time employee serving as webmaster. Itis custom developed by an outsourced marketing company.

 

Weperform daily backup of our key servers and maintain backup tapes for a periodof four weeks before they are overwritten. We also perform a month-end backupof key servers and keep such data for a period of six months to one year. Allbackup tapes are stored offsite at a secure storage facility on a weekly basis.

 

Wecurrently replicate our email and various other production servers to ensureavailability of our critical systems. We are in the process of increasing thisfunctionality to additional servers. Our managed hosting facility in Houstonmaintains 24/7 security and has stand-alone power generation to keep thedatacenter functional in the case of an extended power outage.

 

We have taken a multi-tieredapproach to protecting our network from malware and intrusions. We employendpoint security that includes locked down routers, dual firewalls, and othersecurity appliances. These are supplemented with anti-spyware and virusprotection on all workstations and windows servers. These applications aremonitored and updated to respond pro-actively and successfully to changingthreats.

 

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**Employees**

** **

As of June 30, 2007, we hadapproximately 195 full-time employees and one part-time employee in the UnitedStates and Canada. None of our employees are subject to collective bargainingagreements, and we believe that our relationship with our employees is good.

 

**Environmental Matters**

** **

We do not view potentialenvironmental liabilities as a significant concern. We do not have physicalcustody or control of the natural gas or any facilities used to transport itand title to the natural gas sold to our customers is passed at the same pointat which we accept title from our natural gas suppliers.

 

**Where You Can Find MoreInformation**

** **

Ourfilings with the United States Securities and Exchange Commission, or SEC, areavailable to the public over the internet at the SEC’s website at www.sec.gov.You may also read and copy any document we file at the SEC’s public referenceroom located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SECat 1-800-SEC-0330 for further information on the operation of the publicreference room. Our filings with the SEC are also available free of charge tothe public under the SEC Filings section of our website, www.mxholdings.com, assoon as reasonably practicable after we electronically file such reports withor furnish such reports to the SEC. The information contained on this internetsite is not incorporated by reference in this Annual Report. You may alsorequest a copy of these filings, at no cost, by writing to us at: MxEnergyHoldings Inc., 595 Summer Street, Suite 300, Stamford, Connecticut 06901,Attention: Chief Financial Officer, or by calling us at (203) 356-1318.

 

The website atwww.mxholdings.com contains information concerning us and our subsidiaries.This website is separate from our consumer website, www.mxenergy.com. Theinformation contained on our internet sites and those of our subsidiaries isnot incorporated by reference in this Annual Report.

 

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**ITEM1A. RISK FACTORS**

** **

Any of the following riskscould materially adversely affect our business, financial condition andoperating results. The risks described below are not the only risks facing us.Additional risks and uncertainties not currently known to us or which we currentlydeem to be immaterial may also materially and adversely affect our business,financial condition and operating results.

 

**Risks Related To OurBusiness**

** **

***We may not fully hedge ourcommodity supply or other market positions against changes in commodity pricesand consumption volumes, and our risk management policies and hedgingprocedures may not work as planned, which would adversely affect our business.***

*** ***

To provide energy to ourcustomers, we purchase the relevant commodity in the wholesale energy markets,which are often highly volatile. It is our policy to match estimatedrequirements of our customers by purchasing offsetting volumes of natural gasand electricity. To lower our financial exposure related to commodity pricefluctuations and changes in consumption volumes, we routinely enter intocontracts to hedge our fixed price sale commitments, fuel requirements andinventory of natural gas, as well as fixed price sale commitments and line lossof electricity.

 

We have contractualobligations to many of our customers to provide full requirements service andas a result, our hedging procedures require constant monitoring and adjustment.Failure to continue to use valid assumptions may lead to inappropriate hedgingpositions. In addition, there are a number of factors that are beyond ourcontrol, such as risk of loss from counterparties’ nonperformance, volumetricrisks related to customer demand and seasonal fluctuations. Although we try topurchase anticipatory hedges that represent volume we expect to sell toresidential and small commercial customers for up to one month of projectedmarketing, we are exposed to the risk of a shortfall in marketing that couldresult in our purchases exceeding our supply commitments to those customers. Wecannot fully protect ourselves against these factors and if our risk managementpolicies are insufficient, this will have a detrimental effect on our business.

 

***Our customers mayterminate their contracts at any time, and the resulting attrition can resultin a cost of cover for previously purchased fixed price hedges and physicalsupplies, which could have a negative impact on our financial results.***

*** ***

Customers are subject to theterms of written contracts which are governed by the tariff rules of utilitiesand LDCs as well as regulations administered by public service commissions.Although our fixed price contracts with residential customers may have terms ofup to three years, those customers may terminate their contracts at any timefor a termination fee that, in most cases, is relatively modest and does notbear any relation to our costs or lost profit with respect to the remainder ofthe contract. Our small and mid-market commercial customers cannot terminatetheir fixed price contracts without triggering a damages provision designed tocover the cost related to the termination of those contracts. However, seekingto enforce contracts for relatively small volumes is often impractical. As aresult, we depend on our hedging strategies to cover the costs related to terminationsby residential and small commercial customers. To hedge effectively againstterminations, we must, at the inception of the contracts, attempt to accuratelyforecast the number of residential and small commercial customers that willterminate their contracts prior to the end of their term. If we experience anumber of cancellations greater than originally forecasted and if we are notable to replace terminating customers with new customers, our financial resultsmay be negatively impacted.

 

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***We may not have sufficientliquidity to hedge market risks effectively or conduct our business which wouldadversely affect our financial condition.***

*** ***

We enter into physicalhedges and financial hedges for our natural gas supply obligations. MxEnergyhistorically entered into financial hedges for its natural gas supplyobligations, under agreements with VPEM, a wholly owned subsidiary of DominionResources Inc. Under our hedge facility, we enter into financial hedges forour supply with Société Générale. To date, we have been successful atnegotiating arrangements that do not require us to provide cash margining forchanges in the market value of forward positions. Under the hedge facility, weposted an initial $25.0 million of cash collateral, but no additionalamounts are required for changes in market prices of the commodity unless ourforward hedged positions exceed 65 BCF. In April 2007, we replaced the$25.0 million of cash collateral with a letter of credit. Under the hedgefacility, we have the flexibility to either post cash collateral or issue aletter of credit as margin for the hedge facility. These hedging arrangementsare for a limited duration and typically need to be renegotiated or replacedevery two to five years. We may not be able to replace these agreements uponexpiration under similar terms and may be required to provide guarantees,letters of credit, or additional cash collateral to protect counterpartiesagainst the risk of our default or insolvency.

 

In addition, our contractualagreements with LDCs require us to maintain restricted cash balances or lettersof credit as collateral for the performance risk associated with the futuredelivery of natural gas. These collateral requirements may increase as we growour customer base. Additionally, we must post letters of credit with ournatural gas and electricity supply providers. The amount of such credit supportthat must be provided typically is based on the volume of the commoditypurchased in any given month. Significant movements in market prices can resultin our being required to provide cash collateral and letters of credit in verylarge amounts. The effectiveness of our operations may be dependent on theamount of collateral available to enter into or maintain these contracts, andliquidity requirements may be greater than we anticipate or are able to meet.Without a sufficient amount of working capital to post as collateral in supportof performance guarantees or as cash margin, we may not be able to manage pricevolatility effectively or to implement our strategy. An increase in demandsfrom our counterparties to post letters of credit or cash collateral maynegatively affect our liquidity position and financial condition.

 

***Our financial swap agreementsare settled against published index prices which could cease to be reliable orcould become unavailable.***

*** ***

We hedge our forwardexposures through a combination of physical supply purchase and financial swapagreements. Financial swap agreements may be settled against monthly NYMEXsettlement prices or against index prices published by various industrypublications. NYMEX settlement prices could be affected by supply and demandfactors at the Henry Hub delivery point of the contract which are not presentelsewhere in the country. Accordingly, the NYMEX settlement prices may cease toreflect accurately the market price of natural gas. Likewise, index prices formarket areas in which our customers are located, and which are contained indaily and monthly publications, are published based on private polling ofindustry participants and therefore may be distorted, deliberately orunintentionally, thereby ceasing to be an accurate gauge of market pricing inthose areas.

 

In the event either NYMEXsettlement prices or published index prices were to become unavailable or ceaseto be reliable, we and our counterparties could seek to find a replacementprice that would more accurately or reliably reflect the market prices that weare hedging. However, there is no certainty that such efforts would besuccessful.

 

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***Our financial resultsfluctuate on a seasonal and quarterly basis and are susceptible to changingweather conditions and commodity price fluctuations.***

*** ***

Our business is affected byweather. Consequently, our overall operating results fluctuate substantially ona seasonal basis, and the pattern of this fluctuation may change depending onthe nature and location of any customer we acquire and the terms of anycontract to which we become a party. Weather conditions directly influence thedemand for electricity and natural gas and affect the price of energycommodities.

 

Generally, demand forelectricity peaks in the summer and demand for gas peaks in the winter. Recentgrowth in natural gas-fired electric generation has introduced a secondary peakfor natural gas in the summer. Typically, when winters are warmer than expectedand summers are cooler than expected, demand for energy is lower, resulting inless electric and gas consumption than forecasted. Likewise, when winters arecolder than expected or summers warmer, consumption may be greater than we havehedged and greater than we are able to meet with storage, swing supply or fullrequirements contracts that we have negotiated. Depending on prevailing marketprices for electricity and gas, these and other unexpected conditions mayreduce our sales or increase our costs and negatively impact our results ofoperations. We may experience lower consumption volumes and, therefore, lowersales. We may experience losses from the purchase of additional volumes athigher prices or the sale of excess volumes at prices below acquisition cost.Our failure to anticipate changing weather demands or to effectively manage oursupply in response to changing demands could negatively impact our financialresults.

 

In addition, our marketingefforts may be hindered in a market where our offers are less competitiverelative to price offerings of the utilities or other marketers. Utilitieshistorically react more slowly to changing commodity prices, whereas ourproducts generally reflect the prevailing market prices. These factors mayresult in less effective marketing or higher than anticipated attrition.

 

***The accounting for our hedgingactivities may increase the volatility in our quarterly and annual financialresults.***

*** ***

We engage in price-riskmanagement activities related to our natural gas and electricity purchases inorder to economically hedge our exposure to commodity price risk. Through theuse of financial and physical derivative contracts, we attempt to balance ourphysical and financial purchases and sales commitments. These derivatives areaccounted for in accordance with Statement of Financial Accounting Standards,or SFAS, No. 133, “Accounting for Derivative Instruments and HedgingActivities,” as amended and interpreted. SFAS No. 133 requires us torecord all derivatives on the balance sheet at fair value. Changes in the fairvalue of a derivative as a result of fluctuations in the underlying commodityprices, are recognized immediately in earnings, unless the derivative qualifiesfor hedge accounting treatment. Since MxEnergy has not designated thederivative instruments as hedges for accounting purposes under SFAS No. 133,changes in forward prices of natural gas and electricity will cause volatilityin our earnings. As a result, we are unable to fully anticipate the impact thatour risk management decisions may have on our quarterly and annual operatingresults.

 

***We depend on our billingsystems and the utilities with whom we have billing service agreements, and webear the related credit risk for certain customers. If these customers fail topay their bills as they become due, it may adversely affect our financial condition.***

*** ***

We are responsible for thebilling and collection functions for all of our customers in Georgia, Floridaand Texas and our mid-market commercial customers in our New York, New Jerseyand Ohio markets. This

 

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group of customers represents approximately 40% of our total volumes.In these markets we bear the risk of customers’ failure to pay their utilitybills. With the exception of customers in Georgia and Texas, we only have theability to terminate our agreement with customers for non-payment, not toterminate their electric or gas service. Even if we terminate service tocustomers who fail to pay their utility bill, we remain liable to our suppliersof electricity and natural gas for the cost of those commodities. Furthermore,in the Georgia market, we are responsible for billing the distribution chargesfor the local utility and are at risk for these charges, in addition to thecost of the commodity, in the event customers fail to pay their bills. Thefailure of our customers to pay their bills or our failure to maintain adequatebilling and collection procedures could materially adversely affect ourbusiness.

 

For approximately 60% of ourRCEs, we have billing service agreements with utilities that require theutilities to prepare and send a bill to our customers and collect the cost ofenergy supply from customers before remitting the proceeds to us. The majorityof these utilities have guaranteed the payment of the energy supply portion ofcustomer bills net of a pre-determined discount. We rely on the utilities toperform timely and accurate billing under these agreements. As we grow, theproportion of customers we serve that are billed by utilities could increase.The bankruptcy of a utility could result in a default in the utilities’ paymentobligations to us.

 

The number of territorieswithin which we provide natural gas and electricity supply poses a constantchallenge that demands considerable personnel, management time and resources.Each territory requires unique and often varied electronic data interfacesystems. Rules that govern the exchange of data may be changed by LDCs. Incertain instances, we must rely on manual processes and procedures and fromtime to time, we have had difficulties uploading new customer files, contractrates and changes on a timely basis. Our failure to provide the local utilitieswith accurate billing information to include on the customer bills couldnegatively impact our results of operations.

 

***We depend on localtransportation and transmission facilities of third parties to supply ourcustomers. Our financial results may be harmed if transportation andtransmission availability is limited or unreliable.***

*** ***

We depend on transportationand transmission facilities owned and operated by utilities and other energycompanies to deliver the electricity and natural gas we sell to customers.Under the regulatory structures adopted in most jurisdictions, we are requiredto enter into agreements with local incumbent utilities for use of the localdistribution systems and to establish functional data interfaces necessary toserve our customers. Any delay in these negotiations or our inability to enterinto reasonable agreements could delay or negatively impact our ability to servecustomers in those jurisdictions, which could have a materially adverse impacton our business, results of operations, and financial condition.

 

We also depend on localutilities for maintenance of the infrastructure through which we deliverelectricity and natural gas to our customers. We are limited in our ability tocontrol the level of service the utilities provide to our customers. Anyinfrastructure failure that interrupts or impairs delivery of electricity ornatural gas to our customers could cause customer dissatisfaction, which couldmaterially adversely affect our business.

 

If transportation ortransmission is disrupted, or transportation or transmission capacity isinadequate, our ability to sell and deliver products may be hindered. Such disruptionscould also hinder our providing electricity or natural gas to our customers andmaterially adversely affect our financial results.

 

Regulations in many marketsrequire that meter reading and the billing and collection processes be retainedby the local utility. In those states, we also are required to rely on thelocal utility to provide

 

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us with our customers’ information regarding energy usage. Ourinability to confirm information received from the utilities may negativelyimpact our sales and results of operations.

 

***We are subject tocompetition in each of our markets.***

*** ***

While there are barriers toentry, we operate only in markets that are open to alternate energy suppliers.Competition is based primarily on product offering, price and customer service.We generally face competition in those markets from utility-affiliated retailmarketers and small to mid-size independent retail energy companies. Some ofthese competitors or potential competitors may be larger and better capitalizedthan we are.

 

Increasing our market sharedepends on our ability to convince customers to switch to our service. Thelocal utilities have the advantage of long-standing relationships with theircustomers, longer operating histories, greater financial strength and greatername recognition than we do. In addition, customers are less familiar with thefixed price product that we offer, and we may not be successful in educatingpotential customers about the benefits of fixed price energy supply nor of theother products we offer. Convincing customers to switch to a new company forthe supply of a critical commodity such as electric power or natural gas is achallenge. If our marketing strategy is not successful, our business, resultsof operations and financial condition will be materially adversely affected.

 

***We depend on continuedstate and federal regulation to permit us to operate in deregulated segments ofthe electric and gas industries. If competitive restructuring of the electricor gas utility industries are altered, reversed, discontinued or delayed, ourbusiness prospects and financial results could be materially adverselyaffected.***

*** ***

The regulatory environmentapplicable to the electric and gas LDC distribution systems has undergonesubstantial change over the past several years as a result of restructuringinitiatives at both the state and federal levels. These initiatives have had asignificant impact on the nature of the electric and gas LDCs. We have targetedthe deregulated segments of the electric and gas markets created by theseinitiatives. Regulations may be revised or reinterpreted or new laws andregulations may be adopted or become applicable to us or our operations. Suchchanges may have a detrimental effect on our business.

 

In certain deregulatedelectricity markets, proposals have been made by governmental agencies and/orother interested parties to re-regulate areas of these markets. Other proposalsto re-regulate may be made and legislated or other attention to the electricand gas restructuring process may delay or reverse the deregulation process orinterfere with our ability to do business. If competitive restructuring of theelectric and gas markets is altered, reversed, discontinued or delayed, ourbusiness prospects and financial results would be negatively impacted.

 

***We may not be able tomanage our growth successfully. Any such failure could overly burden ourresources and lead to poor customer satisfaction in our services.***

*** ***

We intend to continue tomake investments in complementary companies, assess new product offerings andapply new technologies for our business development. If we buy a company orbusiness, we may experience difficulty integrating that company’s personnel andoperations. In addition, the key personnel of the acquired company may decidenot to work for us. Furthermore, if we acquire the residential or smallcommercial businesses of an incumbent utility or other energy provider in aparticular market, the customers of that entity may not be under any obligationto use our services. If we make other types of acquisitions, we may experiencedifficulty in assimilating the acquired technology or products into ouroperations. These difficulties could disrupt our ongoing business, distract ourmanagement and employees, and increase our expenses.

 

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The growth of our operationswill depend upon, among other things, our ability to expand our customer basein our markets and to enter new markets in a timely manner at reasonable costs.In addition, we anticipate that our employee base will grow to accommodate ourincreased customer base. As we expand our operations, we may encounterdifficulties integrating new customers and employees as well as any legacysystems of acquired entities. We also may experience difficulty managing thegrowth of a portfolio of customers that is diverse both with respect to thetypes of service offerings, applicable market rules and the infrastructure forproduct delivery.

 

Expanding our operationsalso may require continued development of our operating and financial controlsand may place additional stress on our management and operational resources. Ifwe are unable to manage our growth and development successfully, our operatingresults and financial condition could be materially adversely affected.

 

***We may need to raiseadditional capital, which may not be available. This could jeopardize ourfinancial position.***

*** ***

Our business requiressubstantial capital to fund growth through organic marketing or acquisition,for supporting working capital, for the purchase of natural gas and electricitysupply to meet our customers’ needs, and for the credit requirements of forwardphysical supply.

 

We may need to incur additionaldebt in order to fund working capital, finance other acquisitions or for otherpurposes. We cannot be certain that we will be able to obtain such additionalfinancing on favorable terms or at all. If we need additional capital andcannot raise it on acceptable terms, our financial condition and business willbe materially adversely affected.

 

We believe our lines ofworking capital financing are sufficient to meet our current and anticipatedneeds, but these lines may be reduced in accordance with the terms of suchagreements. Moreover, in the event our needs change, either because of growthor higher energy costs, additional lines may be necessary and there can be noassurance that such arrangements will be available on terms acceptable to us orat all.

 

***We previously identified amaterial weakness in the design and operation of our internal controls as ofJune 30, 2006 which continued to exist as of March 31, 2007. While we believethat such material weakness no longer exists, we have not yet tested our newlyimplemented controls and there can be no assurance that such controls willeffectively prevent material misstatements in our consolidated financialstatements in future periods.***

*** ***

In connection with the auditof MxEnergy’s financial statements for the year ended June 30, 2006, weand our independent auditors reported to the audit committee of our board ofdirectors that certain significant deficiencies in internal controls, whenevaluated in the aggregate, resulted in a material weakness in the design andoperation of our internal controls as of June 30, 2006 and which we andour independent auditors believed continued to exist as of March 31, 2007.Specifically, the material weakness in our controls and procedures led to arestatement of our condensed consolidated financial statements for the threeand six months ended December 31, 2006.

 

A material weakness isdefined as a deficiency, or a combination of deficiencies, in internal controlover financial reporting, such that there is a reasonable possibility that amaterial misstatement of the company’s annual or interim financial statementswill not be prevented or detected on a timely basis.

 

In response to theseidentified control deficiencies, we implemented certain disclosure controlenhancements, policies and procedures. See “Item 9A. Controls and Procedures”for more information.

 

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As of June 30, 2007, management has concludedthat the material weakness identified in prior periods no longer exists as webelieve we have designed and implemented an effective control environment. While we believe that such materialweakness no longer exists, we have not yet tested our newly implementedcontrols and there can be no assurance that such controls will effectivelyprevent material misstatements in our consolidated financial statements infuture periods.

*** ***

***Our success depends on keymembers of our management, the loss of whom could disrupt our businessoperations.***

 

We depend on the continuedemployment and performance of key management personnel. A number of our seniorexecutives have substantial experience in consumer and energy markets that haveundergone regulatory restructuring and have extensive risk management andhedging expertise. We believe their experience will be important to oursuccess. If our key executives do not continue in their present roles and arenot adequately replaced, our business operations could be materially adverselyaffected. In addition, if certain key executives are not retained or notreplaced with replacements acceptable to the lenders under our revolving creditfacility, such failure to so retain or replace such individuals could give riseto a default under our revolving credit facility.

 

**Risks Related To OurIndebtedness**

 

***Our substantial debtobligations could adversely affect our financial health and prevent us fromfulfilling such obligations, including our obligations under the notes, and wemight have difficulty obtaining more financing.***

 

We have a substantial amountof indebtedness in relation to our equity. As of June 30, 2007, we hadapproximately $185.4 million total outstanding indebtedness and $101.4 millionin issued letters of credit (plus an additional $110.0 million of unusedavailability under our revolving credit facility and $1.0 million ofunused availability under our credit facility with Denham, referred to hereinas the Denham credit facility). Our substantial debt obligations could haveimportant consequences. For example, they could:

 

•                  make it more difficult for us to satisfy ourobligations with respect to the notes;

 

•                  increase our vulnerability to general adverseeconomic and industry conditions;

 

•                  require us to dedicate a substantial portionof our cash flow from operations to payments on our debt obligations, therebyreducing the availability of our cash flow to fund working capital, capitalexpenditures, acquisitions and other general corporate purposes;

 

•                  limit our flexibility in planning for, orreacting to, changes in our business and the markets in which we operate;

 

•                  place us at a competitive disadvantagecompared to our competitors that have less debt; and

 

•                  limit our ability to borrow additional funds.

 

We may incur substantialadditional indebtedness in the future. The terms of the indenture governing thenotes and our credit facilities will allow us to incur additional debt subjectto certain limitations. If new debt is added to current debt levels, therelated risks described above could intensify. If such debt financing is notavailable when required or is not available on acceptable terms, we may be

 

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unable to grow our business, take advantage of business opportunities,respond to competitive pressures or refinance maturing debt, any of which couldhave a material adverse effect on our operating results and financialcondition.

 

***Our interest expense wouldincrease if interest rates increase which would have a negative impact on ourfinancial performance.***

 

As of June 30, 2007, we had$178.0 million of outstanding floating rate debt and the ability to incurup to $110.0 million of additional floating rate debt under our revolvingcredit facility. In August 2006, we entered into interest rate swaps tohedge the floating rate interest expense on the notes. The swaps arefixed-for-floating and settle against the six month LIBOR rate. The fixed ratesunder the swaps range from 5.68% to 5.72%. The total notional amount of theinterest rate swaps is $130 million with an initial weighted average termof approximately four years. Any increase in short-term interest rates wouldresult in higher interest costs which would increase our interest expense. A 1%change in LIBOR, after taking into account the average outstanding notionalamount of our interest rate swap agreements, would result in our interestexpense fluctuating approximately $0.5 million per year based on ouraverage monthly balance for the twelve month period ended June 30, 2007. Whilewe may utilize interest rate swaps to hedge portions of our floating rateexposure, we may not be successful in renewing or obtaining additional hedgeson acceptable terms or at all, which could have a material adverse effect onour ability to service our outstanding indebtedness, including the notes.

 

***We will require asignificant amount of cash to service our debt obligations. Our ability togenerate cash depends on many factors beyond our control, including cash flowfrom our operating subsidiaries. If certain of our subsidiaries cannot makedistributions to us, or such distributions decrease, we may not be able to makepayments on the notes.***

 

Our ability to make paymentson and to refinance our debt, including the notes, and to fund planned capitalexpenditures and expansion efforts and any strategic acquisitions we may makein the future, if any, will depend on our ability to generate cash in thefuture. This, to a certain extent, is subject to general economic, financial,competitive and other factors that are beyond our control.

 

Holdings has no operationsexcept for those conducted through our operating subsidiaries. Accordingly, ouronly material source of cash, including cash to make payments on or to redeemthe notes, comes from distributions with respect to our ownership interests inour operating subsidiaries that are derived from the earnings and cash flowgenerated by such operating subsidiaries. Distributions to us from our operatingsubsidiaries will depend on:

 

•                  the financial performance of our operatingsubsidiaries;

 

•                  covenants contained in our debt agreements;

 

•                  covenants contained in other agreements towhich we or our subsidiaries are or may become subject;

 

•                  business and tax considerations; and

 

•                  applicable law, including laws regarding thepayment of distributions.

 

Based on the current levelof operations of our subsidiaries, we believe that our cash flow fromoperations, together with available cash and available borrowings under ourcredit facilities, would be adequate to meet liquidity needs through at leastJune 30, 2008. However, there can be no assurance that

 

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our business will generate sufficient cash flow from operations in thefuture, that our currently anticipated growth in net sales and cash flow willbe realized on schedule or that future borrowings will be available to us in anamount sufficient to enable us to repay indebtedness, including the notes, or tofund other liquidity needs. We may need to refinance all or a portion of ourindebtedness, including the notes, on or before maturity. There can be noassurance that we will be able to refinance any of our indebtedness oncommercially reasonable terms or at all.

 

**ITEM1B. UNRESOLVED STAFF COMMENTS**

 

None.

 

## **ITEM2. PROPERTIES**

 

We lease all of ourproperties. Our corporate functions, including marketing, finance, riskmanagement and legal, as well as our corporate headquarters are located inStamford, Connecticut, and we also have offices in New Jersey, Texas andMaryland. During fiscal 2007, we moved several of our operational functions toHouston, Texas, including information technology, customer data solutions,accounting operations and collections. We believe that the majority of ourintegration goals have been achieved, with a small number of targeted personnelremaining in former locations. We believe that our properties are suitable andadequate for the business conducted therein, are being appropriately used andhave sufficient capacity for the present intended purposes.

 

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## **ITEM3. LEGAL PROCEEDINGS**

## ** **

From time to time, we are aparty to claims and legal proceedings that arise in the ordinary course of business.We do not believe that any such proceedings to which we are currently a partywill have a material impact on our results of operations and financialposition.

 

## **ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

## ** **

No matters were submitted toa vote of security holders during the fiscal quarter ended June 30, 2007.

 

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## **PART II.**

## ** **

**ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

 

There is no establishedtrading market for our common stock, par value $.01 per share. As of August 31,2007, there were approximately 65 holders of record of our common stock.

 

**Dividend Policy and Restrictions**

 

We have never declared orpaid any cash dividends on our common stock and do not intend to pay any cashdividends on our common stock in the foreseeable future. Currently we intend toretain any future earnings to finance the expansion of our business and forgeneral corporate purposes. Our board of directors, in its discretion, has theauthority to declare and pay dividends on our common stock provided there arefunds legally available to do so.

 

We are restricted in ourability to pay distributions under various covenants of our debt agreements. See“Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations,” for a more detailed description of our revolving creditfacility and the notes.

 

33

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## **ITEM 6. SELECTED FINANCIALDATA**

 

The selected consolidated financial data presentedbelow under the captions “Statement of Income Data” and “Balance Sheet Data” asof and for each of the years in the five-year period ended June 30, 2007 arederived from our audited consolidated financial statements. The consolidatedfinancial statements as of June 30, 2006 and 2007 and for each of the years inthe three-year period ended June 30, 2007, and the reports theron, are includedelsewhere in this Annual Report. The following financial information should beread in conjunction with, and is qualified by reference to, “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour consolidated financial statements and notes thereto, included elsewhere inthis Annual Report. Amounts are in thousands, except RCEs and per MMBtu data.

 
| ** **                                                                               | ** ** | **Years Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                               | ** ** | **2007 (a)**                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                     |       |                                    |       |   |   |   |   |   |   |   |   |
| **Statement  of Income Data**                                                            |       |                                    |       |   |   |   |   |   |   |   |   |
| Sales of natural  gas and electricity(b)(c)                                              |       | $                                       | 703,926    |   | $ | 362,561 |   | $ | 277,196 |   | $ | 185,659 |   | $ | 102,475 |   |
| Cost of goods  sold (excluding depreciation and amortization below):                     |       |                                    |       |   |   |   |   |   |   |   |   |
| Cost of natural  gas and electricity sold                                                |       | 552,028                                 |       | 392,612 |   | 255,724 |   | 172,178 |   | 106,240 |   |
| Realized (gains)  losses from risk management activities                                 |       | 33,039                                  |       | (82,983 | ) | (37,608 | ) | (15,892 | ) | (18,578 | ) |
| Unrealized  (gains) losses from risk management activities                               |       | 17,079                                  |       | 79,897 |   | (16,004 | ) | (46,360 | ) | (17,889 | ) |
| Total cost of  goods sold(b)                                                             |       | 602,146                                 |       | 389,526 |   | 202,112 |   | 109,926 |   | 69,773 |   |
| Gross profit  (loss) (excluding depreciation and amortization below)                     |       | 101,780                                 |       | (26,965 | ) | 75,084 |   | 75,733 |   | 32,702 |   |
| Operating  expenses:                                                                     |       |                                    |       |   |   |   |   |   |   |   |   |
| General and  administrative expenses                                                     |       | 53,779                                  |       | 22,623 |   | 17,938 |   | 11,597 |   | 5,386 |   |
| Reserves and  discounts                                                                  |       | 4,725                                   |       | 3,395 |   | 4,533 |   | 3,432 |   | 1,753 |   |
| Depreciation and  amortization(d)                                                        |       | 27,730                                  |       | 8,504 |   | 6,166 |   | 6,894 |   | 906 |   |
| Advertising and  marketing expenses                                                      |       | 4,781                                   |       | 2,096 |   | 2,359 |   | 408 |   | — |   |
| Total operating  expenses                                                                |       | 91,015                                  |       | 36,618 |   | 30,996 |   | 22,331 |   | 8,045 |   |
| Operating profit  (loss)                                                                 |       | 10,765                                  |       | (63,583 | ) | 44,088 |   | 53,402 |   | 24,657 |   |
| Interest  expense, net                                                                   |       | 33,058                                  |       | 3,200 |   | 2,858 |   | 3,109 |   | 2,197 |   |
| Income (loss)  before income tax benefit (expense)                                       |       | (22,293                                 | )          | (66,783 | ) | 41,230 |   | 50,293 |   | 22,460 |   |
| Income tax  benefit (expense)                                                            |       | 8,495                                   |       | 27,001 |   | (18,142 | ) | (20,117 | ) | (2,971 | ) |
| Net income  (loss)                                                                       |       | $                                       | (13,798    | ) | $ | (39,782 | ) | $ | 23,088 |   | $ | 30,176 |   | $ | 19,489 |   |
| **Other  Data**                                                                          |       |                                    |       |   |   |   |   |   |   |   |   |
| No. of RCEs(e)                                                                           |       | 631,000                                 |       | 387,000 |   | 348,000 |   | 361,000 |   | 226,000 |   |
| Sales in MMBtu’s  (in thousands)                                                    |       | 57,064                                  |       | 35,488 |   | 32,957 |   | 25,771 |   | 19,961 |   |
| Sales per  MMBtu(f)                                                                      |       | $                                       | 11.93      |   | $ | 9.74 |   | $ | 8.03 |   | $ | 7.04 |   | $ | 5.13 |   |
| Gross profit per  MMBtu(g)                                                               |       | $                                       | 2.01       |   | $ | 1.39 |   | $ | 1.75 |   | $ | 1.11 |   | $ | 0.74 |   |
| Adjusted  EBITDA(h)                                                                      |       | $                                       | 60,113     |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   | $ | 8,370 |   |
|                                                                                     |       |                                    |       |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data (at period end)**                                                  |       |                                    |       |   |   |   |   |   |   |   |   |
| Total current  assets                                                                    |       | $                                       | 254,814    |   | $ | 67,517 |   | $ | 157,122 |   | $ | 122,363 |   | $ | 46,646 |   |
| Customer  acquisition costs, net                                                         |       | 38,954                                  |       | 10,822 |   | 7,171 |   | 10,439 |   | 7,393 |   |
| Total assets                                                                             |       | 332,750                                 |       | 97,969 |   | 191,592 |   | 162,221 |   | 57,697 |   |
| Total current  liabilities                                                               |       | 88,792                                  |       | 29,894 |   | 74,640 |   | 60,607 |   | 32,921 |   |
| Redeemable  convertible preferred stock(i)                                               |       | 29,357                                  |       | 29,357 |   | 29,357 |   | 29,730 |   | — |   |
| Total debt                                                                               |       | 185,404                                 |       | — |   | 21,379 |   | 27,221 |   | 22,561 |   |
| Total  liabilities, redeemable convertible preferred stock and stockholders’ equity |       | 332,750                                 |       | 97,969 |   | 191,592 |   | 162,221 |   | 57,697 |   |
|                                                                                          |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

34

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| (a) | Effective July 1, 2006, the Company adopted the  provisions of SFAS No. 123R, “Share-Based Payment (revised). For more  information, see Notes 2 and 12 to our consolidated financial statements  included elsewhere in this Annual Report.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Electricity sales and related cost of goods sold  started in April 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (c) | Sales growth in 2005 and 2006 primarily resulted  from the acquisition of Total Gas & Electric, Inc. effective  April 2004 and the acquisition of certain natural gas customer contracts  of Castle Power LLC effective November 2005, respectively. The increase  in sales in 2006 was also attributable to higher natural gas prices. Results  for the year ended June 30, 2007 include the operations of SESCo  beginning on August 1, 2006. For more information, see Note 3 to our  consolidated financial statements included elsewhere in this Annual Report.                                                                                                                                                                                                                                                    |
| (d) | Beginning July 1, 2005, direct response advertising  costs which consist primarily of hourly-based telemarketing costs associated  with proven customer generation, are capitalized and amortized over the estimated  average life of a customer in accordance with the provisions of Statement of  Position No. 93-7 “Reporting on Advertising Costs.” In 2003 and prior  years, MxEnergy amortized capitalized customer acquisition costs over a seven  year period. A change was made in 2004 to conform the amortization to the  estimated average life of a customer contract of three years, based on the  most recent information available. MxEnergy accounted for this change as a  change in estimate. The effect of this change is reflected in 2004 and  resulted in an incremental charge of approximately $4.6 million. |
| (e) | Represents gas and electricity RCEs serviced at end  of period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (f) | For the year ended June 30, 2007, includes  passthrough revenue of approximately $54.5 million and fee income of  approximately $17.1 million. Passthrough revenue and fee income for prior  fiscal years was not material.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (g) | Adjusted to exclude the effect of unrealized gains  or losses from risk management activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (h) | Management believes that Adjusted EBITDA is a  measure commonly used by financial analysts in evaluating operating  performance and liquidity of companies, including energy companies.  Management also believes that this measure allows a standardized comparison  between companies in the energy industry, while minimizing the differences  from depreciation policies, financial leverage, hedging strategies and tax  strategies. Accordingly, management believes that Adjusted EBITDA is useful  in assessing our operating performance and liquidity. Adjusted EBITDA, as  used herein, is not necessarily comparable to similarly titled measures of  other companies.                                                                                                                                                                        |

 

EBITDA is defined as net income(loss) before provision (credit) for income taxes, interest expense anddepreciation and amortization. Adjusted EBITDA is defined by management as netincome (loss) before provision (credit) for income taxes, interest expense,depreciation and amortization, stock compensation and unrealized gains (losses)from risk management activities. Management believes the items excluded fromEBITDA to calculate Adjusted EBITDA are not indicative of true operatingperformance or liquidity of the business and reflect non-cash charges.Therefore, we believe that EBITDA would not provide an accurate reflection ofthe economic performance of the business since it includes the unrealized gains(losses) from risk management activities without giving effect to theoffsetting changes in market value of the underlying customer contracts, whichare being economically hedged. In addition, as the underlying customercontracts are not marked to market, the unrealized gains (losses) from riskmanagement activities do not offer an accurate indication of the ultimate cashimpact to the business, as the ultimate cash impact to the business is notdeterminable until delivery of natural gas under the customer contracts and theassociated realized gain (loss) on risk management activity.

 

Management uses Adjusted EBITDAfor a variety of purposes including assessing the performance and liquidity ofthe Company, allocating resources for operational initiatives (e.g.,establishing margins on sales initiatives), allocating resources for businessgrowth strategies (e.g., considering acquisition opportunities), determiningnew marketing initiatives, determining market entry, rationalizing of internalresources, estimating the equity value of the Company, including its variousequity instruments (such as common stock, preferred stock, stock options andwarrants), and assessing compensation incentives for employees. Management alsoprovides financial performance measures to its senior executive team andsignificant shareholders with an emphasis on Adjusted EBITDA, on a consolidatedbasis, as the appropriate basis in which to measure the performance andliquidity of the business. Furthermore, certain financial covenants in ourrevolving credit facility contain ratios based on EBITDA and the items excludedto calculate Adjusted EBITDA, as defined above. Accordingly, management and itssignificant shareholders utilize Adjusted EBITDA as the primary measure whenassessing the operating performance and liquidity of the business.

 

35

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EBITDA and Adjusted EBITDA havelimitations as analytical tools in comparison to operating income or othercombined income data prepared in accordance with GAAP. Some of theselimitations are:

 

•                  theydo not reflect cash outlays for capital expenditures or contractualcommitments;

 

•                  theydo not reflect changes in or cash requirements for, working capital;

 

•                  theydo not reflect the interest expense or the cash requirements necessary toservice interest or principal payments, on indebtedness;

 

•                  theydo not reflect income tax expense or the cash necessary to pay income taxes;

 

•                  althoughdepreciation and amortization are non-cash charges, the assets beingdepreciated and amortized will often have to be replaced in the future, andEBITDA and Adjusted EBITDA do not reflect cash requirements for suchreplacements;

 

•                  AdjustedEBITDA does not reflect the impact of earnings or charges resulting frommatters we consider not to be indicative of our ongoing operations; and

 

•                  othercompanies, including other companies in our industry, may calculate thesemeasures differently than as presented in this Annual Report, limiting theirusefulness as a comparative measure.

 

Because of these limitations,EBITDA and Adjusted EBITDA and the related ratios should not be considered as ameasure of discretionary cash available to invest in business growth or reduceindebtedness. For more information, see the consolidated financial statementsand related notes included elsewhere in this Annual Report.

 

The following table represents areconciliation of net income (loss) for each of the five years in the periodended June 30, 2007 to EBITDA and Adjusted EBITDA.

 
| ** **                                                           | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | **(dollars in thousands)**    | ** ** |
| Net income  (loss)                                                   |       | $                                       | (13,798    | ) | $ | (39,782 | ) | $ | 23,088 |   | $ | 30,176 |   | $ | 19,489 |   |
| Add: Interest  expense, net                                          |       | 33,058                                  |       | 3,200 |   | 2,858 |   | 3,109 |   | 2,197 |   |
| Income tax  (benefit) expense                                        |       | (8,495                                  | )          | (27,001 | ) | 18,142 |   | 20,117 |   | 2,971 |   |
| Depreciation and  amortization                                       |       | 27,730                                  |       | 8,504 |   | 6,166 |   | 6,894 |   | 906 |   |
| EBITDA                                                               |       |                                    | 38,495     |   |   | (55,079 | ) |   | 50,254 |   |   | 60,296 |   |   | 25,563 |   |
| Subtract:  Unrealized gains (losses) from risk management activities |       | (17,079                                 | )          | (79,897 | ) | 16,004 |   | 46,360 |   | 17,889 |   |
| Add: stock  compensation expense                                     |       | 4,539                                   |       | 911 |   | 2,033 |   | 1,894 |   | 696 |   |
| Adjusted EBITDA                                                      |       | $                                       | 60,113     |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   | $ | 8,370 |   |

 

36

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The following table provides areconciliation of Adjusted EBITDA to net cash (used in) provided by operatingactivities.

 

| ** **                                                                            | ** ** | **Years ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Adjusted EBITDA                                                                       |       | $                                       | 60,113     |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   | $ | 8,370 |   |
| Interest  expense, net                                                                |       | (33,058                                 | )          | (3,200 | ) | (2,858 | ) | (3,109 | ) | (2,197 | ) |
| Income tax  benefit (expense)                                                         |       | 8,495                                   |       | 27,001 |   | (18,142 | ) | (20,117 | ) | (2,971 | ) |
| Deferred tax  (benefit) expense                                                       |       | (14,449                                 | )          | (32,764 | ) | 6,552 |   | 19,730 |   | 2,872 |   |
| Unrealized  losses on interest rate swaps and amortization of deferred financing fees |       | 7,906                                   |       | 1,057 |   | 349 |   | 207 |   | — |   |
| Non-cash  amortization of SESCo and Castle contracts                                  |       | 11,891                                  |       | (3,276 | ) | — |   | — |   | — |   |
| Change in assets  and liabilities, net of effects of acquisition:                     |       |                                    |       |   |   |   |   |   |   |   |   |
| Net inflow  (outflow) in restricted cash and short term investments                   |       | (623                                    | )          | 6,953 |   | 2,195 |   | (192 | ) | (7,723 | ) |
| Accounts  receivable                                                                  |       | 3,453                                   |       | (13,003 | ) | 3,271 |   | 1,976 |   | (3,079 | ) |
| Inventories                                                                           |       | (1,712                                  | )          | (2,685 | ) | (72 | ) | (970 | ) | (7,012 | ) |
| Margin deposit  on hedge facility                                                     |       | —                                  |       | — |   | — |   | — |   | — |   |
| Option premiums                                                                       |       | 1,835                                   |       | (1,834 | ) | — |   | — |   | — |   |
| Income taxes  receivable                                                              |       | 5,184                                   |       | (5,535 | ) | — |   | — |   | — |   |
| Security  deposits and other assets                                                   |       | (993                                    | )          | 2,645 |   | 895 |   | (4,610 | ) | (311 | ) |
| Accounts payable  and accrued liabilities                                             |       | 35,878                                  |       | (5,320 | ) | 1,283 |   | 2,646 |   | 11,259 |   |
| Deferred revenue                                                                      |       | 5,061                                   |       | 865 |   | 1,538 |   | — |   | — |   |
| Net cash (used  in) provided by operating activities                                  |       | $                                       | 88,981     |   | $ | (3,367 | ) | $ | 31,294 |   | $ | 11,391 |   | $ | (792 | ) |
| Net cash used in  investing activities                                                |       | $                                       | (132,920   | ) | $ | (18,825 | ) | $ | (8,296 | ) | $ | (16,154 | ) | $ | (12,376 | ) |
| Net cash  provided by (used in) financing activities                                  |       | $                                       | 174,788    |   | $ | (25,345 | ) | $ | 24,396 |   | $ | 7,718 |   | $ | 5,115 |   |

 

(i)             We have reflected our Series A ConvertiblePreferred Stock outside of the equity section under the provisions of SECAccounting Series Release 268 (Reg. S-X 5-02.28) which require thatredeemable equity securities be presented separately from “stockholders’ equity”if they are redeemable at the option of the holder, or at a fixed date and afixed price, or redemption is otherwise beyond the control of the issuer. Theholders of our Series A Convertible Preferred Stock will have the right to“put” such stock to Holdings after June 30, 2009 if the fair market valueof our common stock as of the date a notice of redemption is delivered is at alevel that would not provide such holders an annualized internal rate of returnof at least 25% on their investment. For a more detailed

 

37

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description of our Series A ConvertiblePreferred Stock, see Note 11 to MxEnergy’s consolidated financialstatements included elsewhere in this Annual Report.

 

**ITEM 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

The following discussionshould be read in conjunction with our consolidated financial statements andthe notes thereto included elsewhere in this Annual Report. The followingdiscussion contains forward-looking statements that involve risks anduncertainties. Our actual results could differ materially from the resultsanticipated in these forward-looking statements as a result of factorsincluding, but not limited to, those described under “Item 1A. Risk Factors.”

 

**Overview**

** **

We are a retail energymarketing company primarily engaged in the marketing and sale of natural gasand electricity to residential and commercial accounts throughout the easternhalf of the United States and in Ontario and British Columbia, Canada. We servea diverse portfolio of customers across several LDC markets with both fixedrate and variable rate contracts. This diversification in customer segment,geography, and sales product helps to mitigate our risk from volatility inmarket prices and weather-related demand. We intend to maximize operatingincome through continued customer growth, improved operational performance,opportunistic acquisitions and the efficient procurement and risk management ofour commodity supply positions. As natural gas accounts for approximately 97%of our fiscal year 2007 sales, the operating results of our electricitysegment, which was initiated in fiscal 2004, are not discussed herein due toimmateriality. The Company classifies its business interests into tworeportable segments: natural gas and electricity. Previously, the Company hadclassified its business into three reportable segments: residential and smallcommercial natural gas (mass market), mid-market commercial natural gas andelectricity. During the fourth quarter of fiscal 2007, management decided thatmass market gas and mid-market commercial gas should no longer be reported asseparate segments. The reasons for the change, as well as additionalinformation concerning our segment reporting, are included in our consolidatedfinancial statements included elsewhere in this Annual Report.

 

The Company was formed in1999 to serve as a retail energy marketer. Holdings was incorporated inDelaware in 2005, as part of a corporate restructuring. As of June 30, 2007, weserved approximately 631,400 RCEs across 28 LDC gas markets and 12 electricitymarket areas in 13 states and the Provinces of Ontario and British Columbia,Canada. In addition, during April 2007, we obtained our power marketer licenseto sell electricity in the State of Connecticut, and began offering power inConnecticut in May 2007. We began delivering electricity to customers inConnecticut beginning in July 2007. The business has expanded through acombination of organic growth and acquisitions. During fiscal year 2007, weacquired:

 

•                  substantially all of the assets of Vantage,and began supplying power to approximately 12,000 former RCEs of Vantage in andaround Houston, Dallas/Ft. Worth and Corpus Christi, Texas; and

 

•                  substantially all of the assets of SESCo, aportfolio of 315,000 residential and small commercial natural gas RCEs in thederegulated markets of Georgia and Ohio;

 

In addition to Vantage andSESCo, we have successfully completed the acquisition of six additionalcustomer portfolios since our inception.

 

38

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Our financial performance isaffected by many factors. Approximately 60% of our RCEs are billed forcommodity charges directly by the LDC on our behalf. Accordingly, we areexposed to credit risk from utilities that collect and remit customer paymentsas well as from a number of customers that pay us directly. Our operatingresults would be negatively affected by defaults in such payments. Receivablesfrom approximately 45% of our RCEs are guaranteed by LDCs, all of which areinvestor-owned utilities with an investment grade rating from Moody’s InvestorsService, Inc. or Standard & Poor’s Ratings Services. The remaining 55%of our annual volume is exposed to credit risk of the end use customer.

 

Our risk management strategyis to hedge 100% of our forecasted consumption volumes on our fixed pricecustomer contracts. The sufficiency of such hedges is affected by unanticipatedattrition and by changes in weather-related volumetric demand. Averagein-contract customer attrition for the fiscal years 2005 through 2007 wasapproximately 23%. In-contract customer attrition for the year ended June 30,2007 was approximately 26%, due to customer losses experienced in connectionwith the SESCo acquisition, as well as challenging pricing and marketconditions. Average annualized in-contract customer attrition for July andAugust 2007 decreased to approximately 23%. In-contract customer attrition hasgenerally improved every month since December 2006. The loss of customeraccounts in all the above mentioned periods was primarily due to:(i) customer-initiated switches, (ii) residential moves and(iii) customer payment defaults. We use historical experience to determinethe amount of in-contract attrition to project demand from fixed pricecustomers over the terms of their contracts. If the actual demand from fixedprice customers is significantly different from our projection, we may sufferfinancial losses if the market price of gas has increased or decreased from theoriginal hedge price. Customer demand is also impacted by weather. We useutility-provided historical, actual or forward projected customer volumes as abasis for our forecasted volumes and mitigate the risk of winter volumefluctuation for some customers by purchasing excess fixed rate hedges for up to10% of normalized winter projections. Should winter weather demand exceed ourweather-normalized projections or if weather is warmer than normal and volumesare less than projected, our financial results may suffer.

 

We use both physicalinstruments and derivative financial instruments to reduce our exposure tofluctuations in the price of natural gas. We account for derivatives under theprovisions of SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” as amended and interpreted. SFAS No. 133 requires allderivatives to be carried on the balance sheet at fair value. We enter intophysical forward contracts to purchase and sell natural gas and power. Suchcontracts are derivative financial instruments based on the provisions of SFAS No. 133.As of June 30, 2007, MxEnergy had documented that all of these physical forwardpurchase and sale contracts met the “normal purchases and normal sales”exception under SFAS No. 133 and accordingly, such contracts were notcarried on the balance sheet at fair value. All contracts documented for the “normalpurchases and normal sales” exception are accounted for as executory contractswith the corresponding purchase and sale recorded for accounting purposes atthe time title to the natural gas or power passes. If a derivative isdesignated as a cash flow hedge, changes in the fair value of the derivativeare recorded in accumulated other comprehensive income and recognized as acomponent of cost of natural gas and electricity sold in the condensed consolidatedstatements of operations when the hedged item affects earnings. Derivativesthat are not designated as hedges or that do not qualify for hedge accountingtreatment must be adjusted to fair value through earnings. Since we have notdesignated any of our derivatives as cash flow hedges, any change in theforward price of natural gas or electricity will be reflected in the statementof operations as unrealized gains or losses from risk management activities.The underlying fixed price contracts that are being hedged do not meet thedefinition of a derivative under SFAS No. 133 and as a result, thecorresponding change in fair value of these customer contracts is not reflectedin the statement of operations. The application of this accounting treatmentresults in earnings volatility.

 

39

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In addition to thevolatility described above, we incur volatility from quarter to quarterassociated with gains and losses on settled hedges relating to natural gas ininventory. Inventory is typically purchased from April to October and drawndown from November through March. Since a portion of the inventory is used tosatisfy delivery obligations to fixed priced accounts over the winter months,we hedge the associated price risk using derivative contracts. Any gains orlosses associated with settled derivative contracts are reflected in thestatement of operations as a component of cost of goods sold under the caption “Realizedgains or losses from risk management activities.” As a portion of these settledhedges are used to mitigate the price risk associated with the inventorypurchases, we may experience a timing difference between when the gain or losson the hedge is recognized in the statement of operations and when the gas isconsumed by the customer and sales are recognized.

 

We rely on utilities toprovide billing and collection of receivables from residential and smallcommercial customers as well as to provide other services. As of June 30, 2007,receivables from approximately 45% of our volumetric RCEs were guaranteed bythe utilities at a weighted average discount rate of approximately 1%. Should autility increase the discount or discontinue the guarantee of such receivables,the forecasted margin for the fixed rate contracts currently in place may bereduced. We incorporate into the calculation of our fixed prices the currentprevailing billing charges, switching fees, volumetric conversion rates, andother such factors. Though we are advised in advance of future changes in theseitems through tariff filings and notices by the utilities, ultimate changes inthese charges, fees, rates and other factors could take place prior to thetermination date of current fixed price contracts and could negatively impactprojected margin on these contracts.

 

We market to new customersusing direct mail, internet, telemarketing, and door to door channels. Based onhistorical experience plus costs associated with specific contracts, ourmarketing costs for a new customer are estimated and revised from time to time.Should marketing expenses exceed those which we have forecasted, our financialresults could be negatively impacted.

 

In determining the sellingprice for fixed and variable customers, we target a per unit gross profitrather than a percentage gross margin. The target margin is set in relation tothe cost of acquiring new customers with the objective of earning acontribution margin in excess of the acquisition cost of a customer within thefirst year. We consider all direct variable costs associated with servicing newcustomers prior to application of the per unit margin. Since we are targeting aper unit gross profit and commodity prices are highly volatile, a gross marginpercentage would not be a meaningful indicator of financial performance.

 

**Market and Regulatory**

 

MxEnergy currently hasnatural gas customers in 28 LDC markets in 11 states and Ontario and BritishColumbia, Canada and electricity customers in 13 market areas in four states.Among other things, tariff filings by LDCs for changes in the billing rate totheir regulated customers in the markets in which we operate may significantlyimpact the viability of our sales and marketing plans and our overall operatingand financial results. Although regulatory requirements are determined,administered and monitored by the public utility commission, or PUC, of eachstate, operating rules and rate filings for each utility are unique.Accordingly, we generally treat each utility distribution territory as adistinct market.

 

***Natural Gas***

 

At June 30, 2007, weprovided natural gas to approximately 588,100 RCEs in 28 LDC markets withinFlorida, Georgia, Illinois, Indiana, Kentucky, Michigan, Maryland, New Jersey,New York, Ohio, Pennsylvania and Ontario and British Columbia, Canada. Due torecent and significant decreases in the price of natural gas, a number of LDCshave decreased rates to their regulated customers. Although the

 

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impact of these price decreases cannot currently be estimated, they arenot anticipated to adversely impact our financial results.

 

In Ohio, we provide naturalgas service to residential and small commercial customers in the Dominion EastOhio Gas, or DEO, Vectren and the Columbia Gas of Ohio service areas. InMay 2006, the PUC of Ohio approved the first phase of a plan whereby DEOwill cease performing the merchant function. The first phase was a wholesaleauction of the supply associated with the customers served by the utility andthe required approval by the PUC of Ohio, in each case, which occurred inAugust 2006. The second phase is anticipated to start by 2008 and could involvethe transfer of the utility customers to retail energy marketers. We are takingan active role in the regulatory process for reviewing and implementing rulesthat will govern phase two of the deregulation plan. While the ultimate outcomeof this is unknown, at this point, the process it is not expected to adverselyimpact our financial results.

 

During January 2007, weobtained our gas marketer license to market natural gas in the Terasen marketin British Columbia. We began selling natural gas to customers in the Terasenmarket in May 2007.

 

As natural gas accounts forapproximately 97% of our fiscal year 2007 sales, our operating results aresignificantly impacted by the price movement in natural gas. Price volatilityin the natural gas market generally exceeds volatility in most energy and othercommodity markets. There are various factors that contribute to pricevolatility in the natural gas market, including basic supply and demand,pipeline capacity, storage capacity and weather. The prices of natural gasduring the year ended June 30, 2007 were at a two-year low, which providesus with both opportunities and challenges. During our recent history we havebeen able to effectively manage our business through volatile marketconditions.

 

***Electricity***

 

At June 30, 2007, weprovided electricity to approximately 43,300 RCEs in twelve market areas withinthe States of New York, Massachusetts and Texas. In addition, during April2007, we obtained our power marketer license to sell electricity in the Stateof Connecticut, and began offering power in Connecticut in May 2007. We begandelivering electricity to customers in Connecticut beginning in July 2007.

 

In May 2007, theCompany, through its subsidiary MxEnergy Electric Inc., acquiredsubstantially all of the assets of Vantage, and began supplying power toapproximately 12,000 former RCEs of Vantage in and around Houston, Dallas/Ft.Worth and Corpus Christi, Texas. As part of the acquisition of the Vantageassets, the Company will also pay to Vantage an established percentage of therealized net margin associated with the purchased contracts for the originalcontract term up to a maximum of two years after the closing. These marginsharing payments are not expected to be material. There are no current ratecases or filings in the states we offer electricity that are anticipated toimpact our financial results.

 

**Recent Developments**

 

OnMay 1, 2007, we commenced an offer to exchange all of the outstanding oldnotes, for an equal principal amount of the new notes. On May 30, 2007, weannounced that we were restating our interim financial statements for the threeand six months ended December 31, 2006 and were indefinitely extending theexpiration date of the exchange offer. The exchange offer was terminated onJune 27, 2007. On August 1, 2007, we commenced a new exchange offer forthe old notes which closed on August 31, 2007. We exchanged $177,870,000aggregate principal amount of old notes for an equal principal amount of newnotes. Pursuant to the registration rights agreement relating to the old notes,the interest rate

 

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applicable to the old notes increased by 0.25% per annum effective asof June 1, 2007 because we did not complete an exchange offer for the oldnotes by the 300th day following the issue date of the old notes. When the newexchange offer was completed on August 31, 2007, the old notes ceased accruingadditional interest. As of June 30, 2007, the total additional interest accruedwas approximately $111,000.

 

On June 22, 2007, welaunched a conditional cash tender offer to purchase any or all of theoutstanding old notes. In connection with the tender offer, we solicitedconsents to effect certain proposed amendments to the indenture governing thenotes. We revised the terms of the tender offer and consent solicitation onJuly 30, 2007 and extended the expiration date to 5:00 p.m. on September 14,2007. On August 15, 2007, we terminated the tender offer and consentsolicitation.

 

***Internal Controls***

 

In connection with the auditof our consolidated financial statements for the year ended June 30, 2006,we and our independent auditors reported to the audit committee of our board ofdirectors that certain significant deficiencies in internal controls, whenevaluated in the aggregate, resulted in a material weakness in the design andoperation of our internal controls as of June 30, 2006 and which we andour independent auditors believed continued to exist as of March 31, 2007.This material weakness led to a restatement of our condensed consolidatedfinancial statements for the three and six months ended December 31, 2006.As of June 30, 2007, management has concluded that the material weaknessidentified in prior periods no longer exists as we believe we have designed andimplemented an effective control environment. While we believe that suchmaterial weakness no longer exists, we have not yet tested our newlyimplemented controls. We will begin testing controls during fiscal year 2008using our co-sourced internal audit team. See “Item 9A. Controls and Procedures”for more information.

 

***Adjusted EBITDA***

 

Management believes thatAdjusted EBITDA is a measure commonly used by financial analysts in evaluatingoperating performance and liquidity of companies, including energy companies.Management also believes that this measure allows a standardized comparisonbetween companies in the energy industry, while minimizing the differences fromdepreciation policies, financial leverage, hedging strategies and taxstrategies. Accordingly, management believes that Adjusted EBITDA is the mostrelevant financial measure in assessing our operating performance andliquidity. Adjusted EBITDA, as used herein, is not necessarily comparable tosimilarly titled measures of other companies.

 

EBITDA is defined as netincome (loss) before provision (credit) for income taxes, interest expense anddepreciation and amortization. Adjusted EBITDA is defined by management as netincome (loss) before provision (credit) for income taxes, interest expense,depreciation and amortization, stock compensation and unrealized gains (losses)from risk management activities. Management believes the items excluded fromEBITDA to calculate Adjusted EBITDA are not indicative of true operatingperformance or liquidity of the business and reflect non-cash charges.Therefore, we believe that EBITDA would not provide an accurate reflection ofthe economic performance of the business since it includes the unrealized gains(losses) from risk management activities without giving effect to theoffsetting changes in market value of the underlying customer contracts, whichare being economically hedged. In addition, as the underlying customercontracts are not marked to market, the unrealized gains (losses) from riskmanagement activities do not offer an accurate indication of the ultimate cashimpact to the business, as the ultimate cash impact to the business is notdeterminable until delivery of natural gas under the customer contracts and theassociated realized gain (loss) on risk management activity.

 

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Management uses AdjustedEBITDA for a variety of purposes including assessing the performance andliquidity of the Company, allocating resources for operational initiatives(e.g., establishing margins on sales initiatives), allocating resources forbusiness growth strategies (e.g., considering acquisition opportunities),determining new marketing initiatives, determining market entry, rationalizingof internal resources, estimating the equity value of the Company, includingits various equity instruments (such as common stock, preferred stock, stockoptions and warrants), and assessing compensation incentives for employees.Management also provides financial performance measures to its senior executiveteam and significant shareholders with an emphasis on Adjusted EBITDA, on aconsolidated basis, as the appropriate basis in which to measure theperformance and liquidity of the business. Furthermore, certain financialcovenants in our revolving credit facility contain ratios based on EBITDA andthe items excluded to calculate Adjusted EBITDA, as defined above. Accordingly,management and its significant shareholders utilize Adjusted EBITDA as theprimary measure when assessing the operating performance and liquidity of thebusiness.

 

EBITDA and Adjusted EBITDAhave limitations as analytical tools in comparison to operating income or othercombined income data prepared in accordance with GAAP. Some of theselimitations are:

 

•                  they do not reflect cash outlays for capitalexpenditures or contractual commitments;

 

•                  they do not reflect changes in or cashrequirements for, working capital;

 

•                  they do not reflect the interest expense orthe cash requirements necessary to service interest or principal payments, onindebtedness;

 

•                  they do not reflect income tax expense or thecash necessary to pay income taxes;

 

•                  although depreciation and amortization arenon-cash charges, the assets being depreciated and amortized will often have tobe replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cashrequirements for such replacements;

 

•                  Adjusted EBITDA does not reflect the impactof earnings or charges resulting from matters we consider not to be indicativeof our ongoing operations; and

 

•                  other companies, including other companies inour industry, may calculate these measures differently than as presented inthis Annual Report, limiting its usefulness as a comparative measure.

 

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Because of theselimitations, EBITDA and Adjusted EBITDA and the related ratios should not beconsidered as a measure of discretionary cash available to invest in businessgrowth or reduce indebtedness. For more information, see the consolidatedfinancial statements and related notes included elsewhere in this AnnualReport.

 

The following tablerepresents a reconciliation of net income (loss) for each of the five years inthe period ended June 30, 2007 to EBITDA and Adjusted EBITDA.

 
| ** **                                                           | ** ** | **Years Ended June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                           | ** ** | **(dollars in thousands)**    | ** ** |
| Net income  (loss)                                                   |       | $                                       | (13,798    | ) | $ | (39,782 | ) | $ | 23,088 |   | $ | 30,176 |   | $ | 19,489 |   |
| Add: Interest  expense, net                                          |       | 33,058                                  |       | 3,200 |   | 2,858 |   | 3,109 |   | 2,197 |   |
| Income tax  (benefit) expense                                        |       | (8,495                                  | )          | (27,001 | ) | 18,142 |   | 20,117 |   | 2,971 |   |
| Depreciation and  amortization                                       |       | 27,730                                  |       | 8,504 |   | 6,166 |   | 6,894 |   | 906 |   |
| EBITDA                                                               |       |                                    | 38,495     |   |   | (55,079 | ) |   | 50,254 |   |   | 60,296 |   |   | 25,563 |   |
| Subtract:  Unrealized gains (losses) from risk management activities |       | (17,079                                 | )          | (79,897 | ) | 16,004 |   | 46,360 |   | 17,889 |   |
| Add: stock  compensation expense                                     |       | 4,539                                   |       | 911 |   | 2,033 |   | 1,894 |   | 696 |   |
| Adjusted EBITDA                                                      |       | $                                       | 60,113     |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   | $ | 8,370 |   |

 

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The following table provides areconciliation of Adjusted EBITDA to net cash provided by (used in) operatingactivities, net cash used in investing activities and net cash (used in)provided by financing activities for each of the five years in the period endedJune 30, 2007.

 

| ** **                                                                            | ** ** | **Years ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                  |       | **(dollars  in thousands)**             |       |
| Adjusted EBITDA                                                                       |       | $                                       | 60,113     |   | $ | 25,729 |   | $ | 36,283 |   | $ | 15,830 |   | $ | 8,370 |   |
| Interest  expense, net                                                                |       | (33,058                                 | )          | (3,200 | ) | (2,858 | ) | (3,109 | ) | (2,197 | ) |
| Income tax  benefit (expense)                                                         |       | 8,495                                   |       | 27,001 |   | (18,142 | ) | (20,117 | ) | (2,971 | ) |
| Deferred tax  (benefit) expense                                                       |       | (14,449                                 | )          | (32,764 | ) | 6,552 |   | 19,730 |   | 2,872 |   |
| Unrealized  losses on interest rate swaps and amortization of deferred financing fees |       | 7,906                                   |       | 1,057 |   | 349 |   | 207 |   | — |   |
| Non-cash  amortization of SESCo and Castle contracts                                  |       | 11,891                                  |       | (3,276 | ) | — |   | — |   | — |   |
| Change in assets  and liabilities, net of effects of acquisition:                     |       |                                    |       |   |   |   |   |   |   |   |   |
| Net inflow  (outflow) in restricted cash and short term investments                   |       | (623                                    | )          | 6,953 |   | 2,195 |   | (192 | ) | (7,723 | ) |
| Accounts  receivable                                                                  |       | 3,453                                   |       | (13,003 | ) | 3,271 |   | 1,976 |   | (3,079 | ) |
| Inventories                                                                           |       | (1,712                                  | )          | (2,685 | ) | (72 | ) | (970 | ) | (7,012 | ) |
| Margin deposit  on hedge facility                                                     |       | —                                  |       | — |   | — |   | — |   | — |   |
| Option premiums                                                                       |       | 1,835                                   |       | (1,834 | ) | — |   | — |   | — |   |
| Income taxes  receivable                                                              |       | 5,184                                   |       | (5,535 | ) | — |   | — |   | — |   |
| Security  deposits and other assets                                                   |       | (993                                    | )          | 2,645 |   | 895 |   | (4,610 | ) | (311 | ) |
| Accounts payable  and accrued liabilities                                             |       | 35,878                                  |       | (5,320 | ) | 1,283 |   | 2,646 |   | 11,259 |   |
| Deferred revenue                                                                      |       | 5,061                                   |       | 865 |   | 1,538 |   | — |   | — |   |
| Net cash (used  in) provided by operating activities                                  |       | $                                       | 88,981     |   | $ | (3,367 | ) | $ | 31,294 |   | $ | 11,391 |   | $ | (792 | ) |
| Net cash used in  investing activities                                                |       | $                                       | (132,920   | ) | $ | (18,825 | ) | $ | (8,296 | ) | $ | (16,154 | ) | $ | (12,376 | ) |
| Net cash provided  by (used in) financing activities                                  |       | $                                       | 174,788    |   | $ | (25,345 | ) | $ | 24,396 |   | $ | 7,718 |   | $ | 5,115 |   |

 

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**Results of Operations**

** **

Natural gas accounts forapproximately 97% of our total sales which exposes us to a high degree ofseasonality in our cash flows and income earned throughout our fiscal year. Weutilize a considerable amount of cash from operations and borrowings under ourrevolving credit facility to fund working capital, primarily inventorypurchases, during the months of April through October each calendar year(primarily our last and first fiscal quarters). We sell the majority of ournatural gas during the months of November through March of each calendar year(primarily our second and third fiscal quarters). We expect the significantseasonality impacts to our cash flows and income earned will continue duringfuture periods.

 

***Year Ended June 30, 2007 Compared with Year Ended June 30, 2006***

*** ***

The number of RCEs for thefiscal year ended June 30, 2007 totaled 631,400, an increase of 63%, or244,400 RCEs, over the prior year. The increase was primarily related to theRCEs acquired in the SESCo acquisition in August 2006, and to a lesserextent, the Vantage acquisition in May 2007.

 

Sales for the fiscal year endedJune 30, 2007 were $703.9 million, an increase of$341.4 million, or 94%, compared to the prior year, primarily due to theSESCo acquisition, and to a lesser extent, electricity customers acquiredthrough increased marketing activity. In addition, revenues for the year endedJune 30, 2007 included passthrough revenues of approximately $54.5 million andfee income of approximately $17.1 million. Passthrough revenues and fee incomewere not material for the year ended June 30, 2006, since these revenues areprimarily related to the assets acquired in the SESCo acquisition. The averageselling price per unit of natural gas increased by $2.19 to $11.93 per MMBtu,largely due to the higherprice of natural gas when fixed price customers were added or renewed and feeincome realized from certain of the customers acquired in the SESCoacquisition. MxEnergy sold approximately 57.1 billion cubic feet, or BCF, ofgas in 2007 compared to approximately 35.5 BCF in 2006. The increased volume islargely attributable to the customers acquired in connection with the SESCoacquisition. However, overall usage per customer decreased from the same periodin the prior year as a result of warmer-than-normal weather experienced in theMidwestern and Northeastern United States during the six months ended March 31,2007, which is considered our winter season.

 

Gross profit for the fiscalyear ended June 30, 2007 was $101.8 million compared to a gross lossof $27.0 million in the prior year. The increase in gross profit of $128.8million includes the effect of unrealized losses from our risk managementactivities of $17.1 million for the year ended June 30, 2007, as compared to$79.9 million for the year ended June 30, 2006, resulting from changes inforward natural gas prices during the respective periods in relation to thecontracted forward prices. This impact should be fully or partially offset infuture periods by higher or lower gross profit, as physical gas is delivered tocustomers during the remaining terms of their fixed rate contracts. Theincrease in gross profit is also attributable to customer contracts acquired inconnection with the SESCo acquisition.

 

We have elected not todesignate any derivative instruments as hedges in accordance with theprovisions of SFAS No. 133. Accordingly, any changes in derivative fairvalue must be adjusted through unrealized losses or gains from risk managementactivities in the consolidated statements of operations as evidenced by the$17.1 million and $79.9 million of unrealized losses on risk managementactivities previously discussed. In addition, our decision not to perform hedgeaccounting can have an impact on earnings as the losses (gains) from realizedrisk management activities may impact earnings during a different period than theassociated margin achieved from the physical sale of natural gas. The lack ofutilizing hedge accounting creates a poor matching of recording our realizedgains and losses in the value

 

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of our hedge positions with the recognition of the underlying customercontract margins. The specific timing of recognition of losses (gains) mayoccur in either previous or subsequent periods. Each period we do not performhedge accounting is specifically impacted by realized gains or losses from riskmanagement activities recorded in the prior period, which under hedgeaccounting may have been deferred in the prior period and recorded in thecurrent period, and gains or losses from realized risk management activities recordedin the current period which under hedge accounting may have been deferred inthe current period and recorded in the subsequent period. Under hedgeaccounting, deferring realized gains or losses from risk management activitieswould ensure that such realized gains or losses are recorded in the same periodas the associated margin achieved (i.e., the hedging gains and losses would berecorded in the same period as the item being hedged affects earnings).

 

In our segment analysis, weevaluate performance based on several factors of which the primary financialmeasure is gross profit adjusted to exclude the effect of any unrealized gainsor losses from risk management activities. We classify our business interestsinto two reportable segments: natural gas and electricity. The combinedadjusted gross profit for the year ended June 30, 2007, was$118.9 million, an increase of $65.9 million over the prior year. Aswe do not perform hedge accounting, this increase includes an estimated $1.1 millionof estimated net losses recorded in the current year as compared to $3.8 millionof estimated net losses recorded in the prior year related to the settlement ofrisk management activities associated with inventory. The impact of theestimated $1.1 million and $3.8 million of realized losses for the yearended June 30, 2007 and 2006, respectively, assumes our hedge accountingwould have been 100% effective. The overall increase in adjusted gross profitbetween the periods is primarily due to margin earned on customer contractsacquired in connection with the SESCo acquisition.

 

Operating expenses for thefiscal year ended June 30, 2007 were $91.0 million, an increase of149% from $36.6 million in the prior year, primarily due to increasedoverall costs in connection with the SESCo acquisition. Depreciation andamortization expenses were $27.7 million compared to $8.5 million inthe prior year, an increase of $19.2 million, or 226%. Depreciation andamortization expenses consist of depreciation and amortization on fixed assetsand amortization expenses on customer acquisition costs, which are generallyamortized over the estimated three-year life of a customer. Depreciation andamortization expenses on fixed assets were $8.2 million compared to$2.3 million in the prior year, an increase of $5.9 million, or 257%.The increase in depreciation and amortization expenses on fixed assets duringfiscal 2007 is attributable to additional depreciable assets acquired inconjunction with the SESCo acquisition. Amortization expense on customeracquisition costs were $19.5 million compared to $6.2 million in the prioryear, an increase of $13.3 million, or 215%. The increase in amortizationexpenses on customer acquisition costs is attributable primarily to additionalcustomer related intangible assets acquired in conjunction with the SESCoacquisition. General and administrative expenses, which consist primarily ofsalary and related compensation expenses, customer care costs, professionalfees and overhead, were $53.8 million compared to $22.6 million inthe prior year, an increase of $31.2 million, or 138%. This increase wasprimarily due to increased staffing levels and related costs, higher customercare costs and increased overhead related to the SESCo acquisition. The increasein general and administrative expenses was also attributable to an increase instaffing levels and professional fees due to: (a) improving the segregation ofduties within the Company and its overall control environment; (b) the hiringof a Big Four accounting firm (other than Ernst & Young LLP, ourindependent registered public accounting firm) to become our internal-auditservice provider; and, (c) the additional accounting and legal fees associatedwith the various filings we made during fiscal year 2007 with the SEC,including registration statements and periodic reports. We also recordedrationalization charges of $1.2 million and compensation expenses of $0.8million for management bonuses related to the SESCo acquisition during the yearended June 30, 2007. Advertising and marketing expenses were $4.8 millioncompared to $2.1 million in the prior year, an increase of$2.7 million, or 128%. The increase in advertising and marketing expensesis due to the increased scope of the business resulting from the SESCoacquisition and additional activity in the

 

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electricity markets. Reserves and discounts were $4.7 million comparedto $3.4 million in the prior year, an increase of $1.3 million, or 39%. Theincrease was primarily due to an increase in the bad debt provision required toaccount for revenue generated on customers acquired from SESCo, partiallyoffset by the DEO LDC eliminating its 1% fee that was charged in the prioryear.

 

For the year endedJune 30, 2007, we recorded a $8.5 million income tax benefit comparedto $27.0 million in the prior year. The decrease from the prior year isattributable to the decrease in pre-tax losses between the periods, of whichall significant changes were previously discussed. See Note 10 to ourJune 30, 2007 consolidated financial statements included elsewhere in thisAnnual Report for more information.

 

Adjusted EBITDA for thefiscal year ended June 30, 2007 was $60.1 million compared with$25.7 million, an increase of $34.4 million, or 134%, compared to theprior year. Adjusted EBITDA is a non-GAAP performance and liquidity measure.See “— Adjusted EBITDA” above for the definition of Adjusted EBITDA and areconciliation of Adjusted EBITDA to net income (loss) and net cash (used in)provided by operating activities. The increase of $34.4 million over theprior year was due primarily to an increase in gross profit earned on customercontracts acquired in connection with the SESCo acquisition. Also included inthe increase is an estimated net loss of $1.1 million in the currentperiod as compared to an estimated net loss of $3.8 million recorded inthe prior year related to the settlement of risk management activitiesassociated with inventory. The net gains and losses on risk managementactivities are largely offset in subsequent periods by the associated effect onmargins when the inventory is sold to customers under fixed rate contracts.

 

***Year Ended June 30, 2006 Compared with Year Ended June 30, 2005***

*** ***

The number of RCEs for thefiscal year ended June 30, 2006 totaled 387,000, an increase of 11%, or39,000 RCEs, over the prior year. The increase was primarily related to theRCEs acquired in the acquisition of Castle Power LLC, referred to herein asCastle, in November 2005.

 

Sales for the fiscal yearended June 30, 2006 were $362.6 million, up $85.4 million, or31%, compared to the prior year, primarily due to higher natural gas prices infiscal year 2006 and accounts purchased from Castle. The average selling priceper unit increased by $1.71 to $9.74 per MMBtu. In addition, MxEnergy soldapproximately 35.5 BCF of gas in 2006 compared to approximately 33.0 BCFin 2005. The increased volume is attributable to the customers acquired fromCastle during the year. However, overall usage by customers decreased over theprior year due to the warmer-than-normal weather experienced in thenortheastern United States during the quarter ended March 2006, the peakusage months for natural gas.

 

Gross loss for the fiscalyear ended June 30, 2006 was $27.0 million compared to gross profitof $75.1 million in the prior year. The decrease in operating results isprimarily related to unrealized losses on risk management activities of$79.9 million and unrealized gains from risk management activities of$16.0 million for the years ended June 30, 2006 and 2005,respectively, resulting from a decline in forward natural gas prices over thepast fiscal year. This impact should be fully offset in future periods byhigher gross profit, as physical gas is delivered to customers during theremaining terms of their fixed rate contracts.

 

We have elected not todesignate any derivative instruments as hedges in accordance with theprovisions of SFAS No. 133. Accordingly, any changes in derivative fairvalue must be adjusted through unrealized losses or gains from risk managementactivities in the consolidated statements of operations as evidenced by the$79.9 million and $16.0 million of unrealized losses on risk managementactivities previously discussed. In addition, our decision not to perform hedgeaccounting can have an impact on

 

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earnings as the losses (gains) from realized risk management activitiesmay impact earnings during a different period than the associated marginachieved from the physical sale of natural gas. The lack of utilizing hedgeaccounting creates a poor matching of recording our realized gains and lossesin the value of our hedge positions with the recognition of the underlyingcustomer contract margins. The specific timing of recognition of losses (gains)may occur in either previous or subsequent periods. Each period we do notperform hedge accounting is specifically impacted by realized gains or lossesfrom risk management activities recorded in the prior period, which under hedgeaccounting may have been deferred in the prior period and recorded in thecurrent period, and gains or losses from realized risk management activitiesrecorded in the current period which under hedge accounting may have beendeferred in the current period and recorded in the subsequent period. Underhedge accounting, deferring realized gains or losses from risk managementactivities would ensure that such realized gains or losses are recorded in thesame period as the associated margin achieved (i.e., the hedging gains andlosses would be recorded in the same period as the item being hedged affectsearnings).

 

In our segment analysis, weevaluate performance based on several factors of which the primary financial measureis gross profit adjusted to exclude the effect of any unrealized gains orlosses from risk management activities. We classify our business interests intotwo reportable segments: natural gas and electricity. The combined adjustedgross profit for the year ended June 30, 2006, was $53.0 million, adecrease of $6.1 million over the same period in the prior year. As we donot perform hedge accounting, this decrease includes an estimated $3.8 millionof estimated net losses recorded in the current year and $3.1 million ofnet gains recorded in the prior year related to the settlement of riskmanagement activities associated with inventory. The discussion of the impactof the estimated $0.7 million of realized losses and estimated$3.1 million of realized gains on our earnings for the year endedJune 30, 2006 and 2005, respectively, assumes our hedge accounting wouldhave been 100% effective. The overall decrease in adjusted gross profit betweenthe periods is primarily due to the impact of a one time $5.7 million gainrealized from the sale of an unnecessary hedge position during fiscal 2005.

 

Operating expenses for thefiscal year ended June 30, 2006 were $36.6 million, up 18.1% from$31.0 million in the prior year primarily due to increased overhead associatedwith the addition of personnel in the information technology, marketing, andfinance areas, along with positions required to support the Castle acquisition.Advertising and marketing expenses were $2.1 million compared to$2.4 million in the prior year, down $0.3 million or 13%. Thedecrease in advertising and marketing expenses is due to both an increasedfocus during fiscal 2006 on hourly-based telemarketing to obtain new customers(which are capitalized as customer acquisition costs beginning in fiscal 2006)and a reduction of opportunities during fiscal 2006 to attract new customersbased on high prices of natural gas, which resulted in reduced generaladvertising and marketing efforts. Customer acquisition costs are amortizedover the average life of a customer, three years, and are included indepreciation and amortization expenses in the statements of operations.Depreciation and amortization expenses were $8.5 million compared to$6.2 million in the prior year, up $2.3 million or 38%. Depreciationand amortization expenses consist of depreciation and amortization on fixedassets and amortization expenses on customer acquisition costs. Depreciationand amortization expenses on fixed assets were $2.3 million compared to$1.2 million in the prior year, up $1.1 million or 91%. The increasein depreciation and amortization expenses on fixed assets during fiscal 2006 isattributable to a significant increase in capitalized computer equipment andsoftware during fiscal 2006, primarily related to the purchase of a new riskmanagement system, enhancements to our customer relationship management systemand purchases of various computer equipment due to an increase in staff acrossthe business. Amortization expense on customer acquisition costs were $6.2 millioncompared to $5.0 million in the prior year, up $1.2 million or 24%.The increase in amortization expenses on customer acquisition costs isattributable to increased hourly-based telemarketing costs which generated anincrease in customers during fiscal year 2006 as previously discussed.Offsetting these net increases was a reduction of $1.1 million in reserves

 

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and discounts due to an improvement in credit quality associated withour customer base. Several LDCs that previously did not guarantee receivablesamended their programs to guarantee receivables, resulting in a lower discountor reserve rate.

 

For the year endedJune 30, 2006, MxEnergy recorded a $27.0 million income tax benefitcompared to an $18.1 million income tax expense in the prior year. Thechange from the prior year is attributable to the change from pre-tax incomefor the year ended June 30, 2005 compared to pre-tax loss for the yearended June 30, 2006 of which all significant changes were previouslydiscussed. For more information, see Note 10 to our consolidated financialstatements included elsewhere in this Annual Report.

 

Adjusted EBITDA for thefiscal year ended June 30, 2006 was $25.7 million, down from$36.3 million, or 29%, compared to the prior year. Adjusted EBITDA is anon-GAAP performance and liquidity measure. See “— Adjusted EBITDA” above forthe definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA tonet income (loss) and net cash (used in) provided by operating activities. Thedecrease of $10.6 million over the prior year was due tolower-than-average consumption associated with warmer-than-normal weatherconditions in fiscal 2006 and the impact of a one-time $5.7 million gainrealized in fiscal 2005 from the sale of a hedge position that was deemed to nolonger be required. Also included in the net decrease of $10.6 million isan estimated net loss of $3.8 million in the current period as compared toan estimated net gain of $3.1 million recorded in the same period in theprior year related to the settlement of risk management activities associatedwith inventory. The net gains and losses on risk management activities arelargely offset in subsequent periods by the associated effect on margins whenthe inventory is sold to customers under fixed rate contracts.

 

***Year Ended June 30, 2005 Compared with Year Ended June 30, 2004***

*** ***

The number of RCEs for thefiscal year ended June 30, 2005 totaled 348,000, down 13,000, or 4%,compared to the prior year. The decrease was related to new telemarketingregulations (specifically, FTC guidelines and “Do Not Call” lists). MxEnergytransitioned many of its outsourced marketing companies to new fully compliantcompanies. MxEnergy experienced a slight decline in customers due to the impactof transitioning third party marketing efforts during the year.

 

Sales for the fiscal yearended June 30, 2005 were $277.2 million, up $91.5 million, or49%, compared to the prior year. The increase in sales was principally due tohigher natural gas sales volume in the period. MxEnergy sold approximately33,000 MMBtu of gas in 2005 compared to approximately 26,000 MMBtu in 2004. Theincreased volume is attributable to a full year of sales associated withcustomers acquired in the TG&E acquisition. In addition, during the fiscalyear ended June 30, 2005, the average selling price per unit increased by$0.99 to $8.03 per MMBtu as market prices were higher.

 

Gross profit for the fiscalyear ended June 30, 2005 totaled $75.1 million, down $0.6 million,or 1%, compared to the prior year. The decrease was related to a reduction inunrealized gains from risk management activities of $30.4 million.Adjusting for unrealized gains from risk management activities, gross profit in2005 increased by $29.7 million over the prior year. The increase isprimarily related to higher sales volume during the year and increased per unitmargin. As commodity prices increased during the period, MxEnergy increased itsunit margin to compensate for increased financing and bad debt costs. Inaddition, a $5.7 million gain was recorded from the sale of a hedgeposition that was deemed to no longer be required to meet projected fixed pricecustomer demand.

 

Operating expenses for thefiscal year ended June 30, 2005 were $31.0 million compared to$22.3 million in the prior year, up $8.7 million, or 39%. Theincrease reflects the effect of increased business activity during the year.Personnel costs were higher as MxEnergy incurred a full year of costs

 

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associated with the acquisition of TG&E. Stock compensation chargesof $2.0 million and $1.9 million are included in general andadministrative expenses for the fiscal year ended June 30, 2005 and thefiscal year ended June 30, 2004, respectively.

 

General and administrativeexpenses for the fiscal year ended June 30, 2005 were $17.9 millioncompared to $11.6 million in the prior year, up $6.3 million, or 54%.The increase reflects increased billing and related costs associated with theincreased number of customers served during the year. MxEnergy also incurred afull year of rent expense associated with the addition of the TG&E office.MxEnergy incurred $2.0 million in increased costs associated with salesand marketing during the fiscal year ended June 30, 2005 compared to theprior year. The increase is due to costs associated with the development of anew branding strategy for MxEnergy. In addition, MxEnergy incurred costsassociated with a direct mail campaign that was launched during the year; nosuch costs were incurred in the prior year.

 

Reserves and discounts forthe fiscal year ended June 30, 2005 were $4.5 million compared to$3.4 million in the prior year, up $1.1 million, or 32%. The increasereflects higher sales activity during the year. The cost of reserves anddiscounts decreased by 11% to 1.6% of sales in 2005 over the prior year due toan improvement in the credit profile of customers served.

 

For the year endedJune 30, 2005, income tax expense decreased by approximately$2.0 million to $18.1 million. The decrease related to lower earningsfrom operations offset by an increase in the tax rate to 44% from 40% in theprior period. The current period includes an additional tax impact related toprior year adjustments and an increase in the statutory rate. For moreinformation, see Note 10 to our consolidated financial statements includedelsewhere in this Annual Report.

 

Adjusted EBITDA for thefiscal year ended June 30, 2005 was $36.3 million, up$20.5 million, or 129%, compared to the prior year. Adjusted EBITDA is anon-GAAP performance and liquidity measure. See “— Adjusted EBITDA” above forthe definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA tonet income (loss) and net cash provided by operating activities.

 

During the 2005 fiscal year,MxEnergy realized a gain of $5.7 million on the sale of forward hedgedpositions that were no longer required to meet future customer obligations. Inaddition, increased volume associated with a full year of activity from theaccounts acquired in the TG&E acquisition combined with an increase in theaverage margin per unit by 39% contributed to the increased Adjusted EBITDAover the prior year.

 

**Liquidity and Capital Resources**

** **

Our principal sources ofliquidity for funding our ongoing operations are cash from operations andavailability under our revolving credit facility with Société Générale. Ourliquidity requirements arise primarily from our obligations incurred inconnection with customer acquisition costs and the funding of our overallseasonal working capital needs. Because we sell natural gas and electricity, weare subject to material variations in short-term indebtedness under ourrevolving credit facility on a seasonal basis, due to the timing of commoditypurchases to meet customer demands. For the years ended June 30, 2007,2006 and 2005, the average amount of short-term borrowings under our creditfacility, including seasonal borrowings, was $0, $20.2 million and$20.8 million, respectively. For the year ended June 30, 2008, weestimate that we will not have to draw cash borrowings under our revolvingcredit facility to meet our seasonal working capital requirements. We may usethe available portion of our revolving credit facility and the Denham creditfacility, after taking into account our seasonal needs and outstanding lettersof credit, for acquisitions and other permitted purposes.

 

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As of June 30, 2007,MxEnergy had $136.9 million of cash on hand. During fiscal 2007, we usedcash provided by operating activities of $89.0 million, proceeds from the saleof the notes of $185.2 million, $11.0 million of net proceeds from ourDenham credit facility and a $3.3 million cash deposit to fund the purchaseprice of the SESCo acquisition of $126.0 million, to fund the purchaseprice of $0.7 million for the Vantage acquisition, customer acquisition costsof $7.6 million, capital expenditures of $1.9 million, debt financingcosts of $9.3 million, the repurchase of the notes of $11.7 million, thepurchase of $0.5 million of common stock for cancellation and to increase cashbalances by $130.8 million.

 

As of June 30, 2006,MxEnergy had $6.1 million of cash on hand. During fiscal 2006, we usedcash balances of $47.5 million, net inflow of cash from restricted cash andshort term investments of $7.0 million and cash received from the exercise ofoptions and warrants of $0.5 million to fund operating activities of $10.3million, the purchase of a customer portfolio from Castle of $3.2 million, acash deposit and other costs in connection with the SESCo acquisition of $3.3million, customer acquisition costs of $6.2 million, capital expenditures of$6.2 million, net payments of debt of $16.4 million, repayments of long-termborrowings of $5.0 million, $2.3 million of debt financing costs and purchasesof $2.1 million of common stock for cancellation.

 

As of June 30, 2005,MxEnergy had $53.6 million of cash on hand and $21.4 million inoutstanding borrowings owed to VPEM. During fiscal 2005, we used cash fromoperations of $29.1 million, inflow of cash from restricted cash and short terminvestments of $2.2 million, net proceeds from loan activities of $3.4 million,proceeds from the issuance of common stock and exercise of warrants of $0.8million and proceeds from a note receivable related to the issuance of ourSeries A convertible preferred stock of $30.1 million to fund the purchase ofTG&E of $2.0 million, customer acquisition costs of $3.8 million, capitalexpenditures of $2.5 million, repayments of long-term borrowings of $9.2million, purchases of $0.7 million of common stock for cancellation and toincrease cash balances by $47.4 million

 

***Our Hedge Facility***

 

Prior to entering into theold credit facility with Société Générale in December 2005, MxEnergyutilized a supplier finance arrangement with VPEM. In September 2002,MxEnergy entered into a five-year Energy Marketing Agreement with VPEM,referred to herein as the EMA. The EMA provided for exclusive physical supplyin specified LDC territories and, prior to December 2005, allowed MxEnergyto borrow amounts based on the level of our trade receivables and inventories.The terms of the loans varied but were generally due in either 60-day or300-day increments for receivables and inventory. Interest under the loansaccrued at prime to prime plus 2% depending on the term of the advance. Inaddition, the EMA provided for borrowings of up to $6.5 million to meetcertain collateral requirements with LDCs (including third party guarantees)which accrued interest at 3% per annum. The EMA provided us with the ability toenter into NYMEX Henry Hub and natural gas basis swaps for terms of up to39 months without having to post any cash collateral for margining. Administrativefees and other volumetric based expenses also applied to the total financingcosts of the EMA. The EMA was secured by a first lien on all of MxEnergy’sassets prior to the closing of the credit facility in December 2005.

 

In conjunction with theclosing of the old credit facility in December 2005, the EMA was amendedto eliminate the provision for cash borrowings and the $6.5 million forguarantees. In addition, we had to satisfy all physical and financial purchaseson industry standard credit terms. Any physical gas purchases from VPEM inexcess of $25.0 million were required to be collateralized with cash orletters of credit. The agreement with VPEM expired on June 30, 2007.Beginning July 1, 2007, we were able to purchase our physical gas supplyfrom any counterparty. We currently have a portfolio of over 35 energysuppliers under standard NAESB contracts from whom we purchase our physical gassupply.

 

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The hedge facility withSociété Générale replaced the financial hedging component of the EMA includingthe $25.0 million of open credit on physical gas purchases, as previouslydiscussed. We posted an initial balance of $25.0 million in cashcollateral as margin for the hedge facility. In April 2007, we replacedthe $25.0 million of collateral with a letter of credit. Under the hedgefacility, we have the flexibility to either post cash collateral or issue aletter of credit as margin for the hedge facility. We will not be required topost additional collateral beyond the initial margin requirements unless ourforward hedged positions exceed 65 BCF. Our forward hedged positions as of June30, 2007 was an unrealized loss of $18.4 million and totaled approximately 18.7BCF which provides us with the ability to increase our forward hedged positionsby approximately 250% before we would be required to post any additionalcollateral.

 

***Our Revolving CreditFacility***

 

Under our revolving creditfacility, MxEnergy Inc. and MxEnergy Electric Inc. are permitted toborrow up to the lesser of (x) $280.0 million (which may be increasedto up to $400.0 million under certain circumstances) and (y) theamount of the then applicable borrowing base. Borrowings under our revolvingcredit facility generally bear interest at a fluctuating rate based upon a baserate or a Eurodollar rate plus an applicable margin. The applicable margin forbase rate loans was 1.375% per annum and the applicable margin for Eurodollarloans was 2.375% per annum through August 20, 2007. Such interest rates will bere-established quarterly based on certain leverage ratios, at rates no higherthan were applicable during the initial period. The current applicable marginfor base rate loans is 0.75% per annum and the current applicable margin forEurodollar loans is 1.75% per annum. All outstanding borrowings under ourrevolving credit facility are due on December 19, 2008. Letters of creditissued under our revolving credit facility will incur charges ranging from1.375% to 2% per annum.

 

Our revolving creditfacility contains customary covenants that restrict certain activitiesincluding, among others, limitation on capital expenditures, disposal ofproperty and equipment, incurrence of additional indebtedness, issuance ofcapital stock and dividend payments. Financial covenants under our revolvingcredit facility include, among others, minimum tangible net worth, minimumworking capital and interest coverage, each as defined in our revolving creditfacility, which was amended on April 6, 2007 to reflect changes in thefinancial thresholds of certain covenants. Our revolving credit facility alsocontains customary events of default.

 

As of June 30, 2007, we werein compliance with the covenants under our revolving credit facility and weexpect to continue to be in compliance during the next twelve months (i.e.,through June 30, 2008). Because we have been in compliance with the covenantsin our revolving credit facility, these covenants have not had a materialimpact on our operations, financial condition and results of operations.However, in the future, our ability to secure financing for our operations orotherwise pursue our business plan could be limited by these covenants, and ifwe are unable to obtain financing for our operations or otherwise pursue ourbusiness plan, our growth may be impaired and our revenues may decline.

 

***Our Floating Rate SeniorNotes due 2011***

 

The indenture governing thenotes contains covenants that limit our ability and the ability of oursubsidiaries to, among other things, incur additional debt or issue certainpreferred shares; pay dividends on, redeem or repurchase our capital stock ormake other restricted payments; make investments; create certain liens; sellcertain assets; enter into agreements that restrict the ability of oursubsidiaries to make dividend or other payments to us; guarantee indebtedness;engage in transactions with affiliates; prepay, repurchase or redeem the notes;create or designate unrestricted subsidiaries; and consolidate, merge ortransfer all or substantially all of our assets and the assets of oursubsidiaries on a consolidated basis. If a change of control, as defined in theindenture governing the notes, were to occur, we will be obligated to make anoffer to purchase the notes, in whole or in part, at a price equal to 101% ofthe aggregate

 

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principalamount of the notes, plus accrued and unpaid interest, if any, to the date ofpurchase. If a change in control were to occur, we may not have thefinancial resources to repay all of our obligations under the notes.

 

Unlike our revolving creditfacility, the restrictive covenants in the indenture governing the notesprimarily limit our ability to incur additional debt, make distributions orengage in other actions rather than require us to maintain certain financialratios or levels. Consequently, the covenants in the indenture have not had asignificant impact on our operations, financial condition and results ofoperations. However, in the future our ability to secure financing for ouroperations could be limited by these covenants, and if we are limited in ourability to obtain financing, our operations, financial condition and results ofoperations could be adversely affected.

 

In August 2006, weentered into interest rate swap agreements to hedge the floating rate interestexpense on the notes. The swaps are fixed-for-floating and settle against thesix month LIBOR rate. The fixed rates under the swaps range from 5.68% to 5.72%per annum. The total notional amount of the interest rate swaps is $130.0million with an initial weighted average term of four years. None of theinterest rate swap agreements have been designated as a hedge under SFAS No. 133;accordingly, changes in the market value of the interest rate swaps have beenand will be charged to interest expense, net.

 

On December 13, 2006,we purchased $12.0 million of the $190.0 million aggregate principal amount ofnotes outstanding, and paid accrued interest of approximately $0.6 million,from an existing bond holder at 92% of face value. We obtained the $11.0million to re-purchase the notes from proceeds under the Denham creditfacility. The purchase of the $12.0 million in aggregate principal amount ofnotes resulted in us recording a gain on early extinguishment of debt ofapproximately $0.4 million, which is net of the write-off of approximately $0.6million, relating to a pro rata portion of the original issue discount of 2.5%on the notes and unamortized debt issuance costs. The $0.4 million was recordedas interest income and reported net of interest expense in our consolidated statementof operations for the year ended June 30, 2007.

 

Effective as of June 1,2007, the interest rate applicable to the old notes increased by 0.25% perannum because an exchange offer for the old notes was not completed by the300th day following the issue date of the old notes. The interest rateapplicable to the old notes increased another 0.25% per annum beginning on August 30,2007, because we still had not completed an exchange offer. The old notesceased to accrue additional interest when we completed the new exchange offeron August 31, 2007. As of June 30, 2007, the total additionalinterest accrued was approximately $111,000.

 

***Denham Credit Facility***

 

Our subsidiary, MxEnergyInc., entered into an amended and restated loan agreement with Denham (formerlyknown as Sowood Commodity Partners Fund LP) on November 14, 2003, whichloan agreement was amended on March 22, 2004. We may borrow up to$12.0 million under the Denham credit facility. Amounts borrowed under theDenham credit facility may be repaid and reborrowed from time to time. On December 13,2006, we borrowed $11.0 million under the Denham credit facility to repurchase$12.0 million in aggregate principal amount of the notes outstanding.

 

Borrowings under the Denhamcredit facility bear interest at a rate of 9% per annum. All outstandingborrowings under the Denham credit facility will be due on May 14, 2009 orsuch later date as approved by Denham in its sole discretion. Borrowings underthe Denham credit facility are secured by a pledge of substantially all of theassets of MxEnergy Inc. As of June 30, 2007, $11.0 million was 

 

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outstandingunder the Denham credit facility. As of June 30, 2006, no amounts wereoutstanding under the Denham credit facility.

 

The Denham credit facilitycontains operating and financial covenants. These financial and operationalcovenants are based on definitions contained in the Denham credit facility. Thefinancial and operational covenants require MxEnergy Inc. to maintain,among other things, minimum forward book values, minimum total asset values,minimum qualified customer accounts and minimum consolidated EBITDA.

 

As of June 30, 2007, wewere in compliance with the covenants under the Denham credit facility. Becausewe have been in compliance with the covenants in the Denham credit facility,these covenants have not had a material impact on our operations, financialcondition and results of operations. However, in the future, our ability tosecure financing for our operations or otherwise pursue our business plan couldbe limited by these covenants, and if we are unable to obtain financing for ouroperations or otherwise pursuing our business plan, our growth may beimpaired and our revenues may decline. We expect to remain in compliancewith the covenants under the Denham credit facility through at least June 30,2008.

 

***Other***

 

Credit terms from oursuppliers of natural gas and electricity often require us to post collateralagainst our energy purchases. In addition, many of the LDCs behind which weserve customers require that we provide collateral to secure our deliveryobligations. We currently finance these collateral obligations with letters ofcredit under our revolving credit facility or from available cash. Increases inthe amount of security we are required to post could adversely affect ourliquidity. As of June 30, 2007, we had $101.4 million in letters ofcredit, $0.2 million in restricted cash and $0.5 million in deposits usedas collateral in connection with LDC operating agreements or to support energypurchases. Total availability under our revolving credit facility as of June 30,2007 was $110.0 million.

 

Estimates for liquidityrequirements are highly dependent on then current market conditions includingforward prices for energy and market volatility. In determining our liquidityneeds, we assume that we will not be provided with any unsecured credit fromthird parities.

 

Based upon our currentplans, level of operations and business conditions, we believe that ourrestricted and unrestricted cash, cash generated from operations, availabilityunder revolving credit facility and Denham credit facility and the net proceedsreceived by us from the sale of the notes will be sufficient to meet our capitalrequirements and working capital needs for the next fiscal year.

 

***Employee Restructuring***

 

In August 2006, weapproved and announced to employees a plan to move certain of our operations toHouston, Texas in connection with the SESCo acquisition. The terms of therationalization plan, which are specific to each employee affected, includevarious employee benefit cost components such as severance, retention bonusesand reimbursement of relocation costs. Certain of the employee benefit costsare contingent on future events, such as continued employment during definedtransition periods. We estimate the maximum rationalization charges for theplan, all of which relate to employee severance and benefits, will amount toapproximately $1.3 million. We recorded rationalization charges of $1.2million and paid rationalization charges of $0.8 million during the year ended June 30,2007. We expect to record $0.1 million of rationalization charges duringfiscal year 2008 and to pay $0.5 million of such employee severance andbenefits during fiscal year 2008, utilizing cash flows from operations. All 

 

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rationalizationcharges have been recorded to general and administrative expenses in theconsolidated statement of operations.

 

**Summaryof Contractual Obligations**

 

Thefollowing table discloses aggregate information about MxEnergy’s contractualobligations and commercial commitments as of June 30, 2007 (in millions):

 
| ** **                                           | ** ** | **Outstanding** | ** ** | **Less  Than  1 Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|-----------------------------|------------|--------------------|------------|--------------------|------------|----------------|------------|-----------|------------|
| Notes(1)                                             |       | $               | 178.0      |                        | $          | —             |       | $                  | —     |           | $          | 178.0     |       | $ | — |   | $ | 178.0 |   |
| Our  revolving credit facility(2)                    |       | —          |       | —                      |       | —             |       | —             |       | —         |       | —    |       |
| Denham  credit facility(3)                           |       | 11.0            |       | —                      |       | 11.0               |       | —             |       | —         |       | 11.0      |       |
| Société  Générale Hedge Facility |       | 1.0             |       | 1.0                         |       | —             |       | —             |       | —         |       | 1.0       |       |
| Operating  leases                                    |       | 4.4             |       | 0.9                         |       | 1.8                |       | 0.4                |       | 1.3            |       | 4.4       |       |
| Unconditional  purchase obligations(4)               |       | 2.9             |       | 2.3                         |       | 0.6                |       | —             |       | —         |       | 2.9       |       |
| Unconditional  purchase obligations(5)               |       | 76.7            |       | 57.1                        |       | 19.6               |       | —             |       | —         |       | 76.7      |       |
| Redeemable  convertible preferred stock(6)           |       | 31.0            |       | —                      |       | —             |       | 31.0               |       | —         |       | 31.0      |       |
| Total                                                |       | $               | 305.0      |                        | $          | 61.3               |       | $                  | 33.0       |           | $          | 209.4     |       | $ | 1.3 |   | $ | 305.0 |   |

 

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(1) Excludesannual interest expense, estimated to be $24.0 million, and includes $3.6million of debt discount.

(2) Excludesannual interest expense and $101.4 million in issued letters of credit.

(3) On December 13,2006, we borrowed $11.0 million under the Denham credit facility to repurchase$12.0 million in aggregate principal amount of the notes outstanding. Thebalance outstanding at June 30, 2007 is reflected based on the contractualtermination date of our Denham credit facility. This amount excludes annualinterest expense, estimated to be approximately $1.0 million.

(4) Representsforward physical basis contracts and only the fixed portion thereof. 

(5) Representsforward physical basis contracts and only the variable portion thereof. Thevariable portion is indexed  as the NYMEXsettle price for the corresponding delivery month in which the natural gas ispurchased. The  estimated contractual obligationsare based on the NYMEX forward curve as of June 30, 2007 for allcorresponding  delivery months. 

(6) Excludes$1.6 million of issuance costs, excludes annual dividends and does notgive effect to redemption at the  fairmarket value of the shares of our Series A Convertible Preferred Stock.The holders of our Series A Convertible Preferred Stock will have the right to “put” such stock to Holdingsafter June 30, 2009. Redemption value is $31.0 million. For a more detailed description, see Note 11 to ourconsolidated financial statements included elsewhere in this Annual Report.

 

**Off-Balance Sheet Arrangements**

** **

As of June 30, 2007, wedid not have any off-balance sheet arrangements.

 

**Critical Accounting Policies**

** **

The preceding discussion andanalysis of our financial condition and operating results are based on ourconsolidated financial statements which have been prepared in conformity withU.S. generally accepted accounting principles. Our significant accountingpolicies are more fully described in the notes to our consolidated financialstatements included elsewhere in this Annual Report. The preparation of ourfinancial statements requires us to make difficult and subjective judgments,often as a result of the need to make estimates of matters that are inherentlyuncertain. In applying these policies, management uses its judgment todetermine the appropriate assumptions to be used in the determination ofcertain estimates. On an on-going basis, we evaluate our estimates which arebased on historical experience, weather data, terms of existing customercontracts, and various other assumptions that we believe to be reasonable 

 

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underthe circumstances. Our actual results may differ from these estimates andassumptions. The accounting policies discussed below are those that we considerto be critical to an understanding of our financial statements because theirapplication places the most significant demands on our ability to judge theeffect of inherently uncertain matters on our financial results. For all ofthese policies, we caution that future events rarely develop exactly asforecast, and the best estimates routinely require adjustment. This informationshould be read in conjunction with our consolidated financial statementsincluded elsewhere in this Annual Report.

 

***Revenue Recognition***

 

We recognize revenue fromthe sale of natural gas and electricity in the period in which the commodity isconsumed by customers. Our customers are billed monthly at various datesthroughout the month. We accrue for revenues applicable to gas and electricityconsumed by customers but not yet billed under the cycle billing method. Theseunbilled revenues are determined by estimating the volume consumed by comparingactual and normalized weather and multiplying by the average sales price perunit for each respective market area or customer class. These estimates areactualized in subsequent periods when the meters are read and any change inestimates is reflected in operations in the period determined. Due to theseasonality of our business, such estimates may vary significantly fromquarter to quarter.

 

***Allowance for DoubtfulAccounts***

 

For those customers where weassume the credit risk associated with non-payment, we provide an allowance fordoubtful accounts based on the age of the receivable, payment history of thecustomer and past loss experience. We write-off receivable balances whenaccounts are transferred to outside collection agencies. If the financial conditionof our customers were to deteriorate, resulting in an impairment of theirability to make payments, additional allowances may be required.

 

***Customer Acquisition Costs***

 

As of June 30, 2007,MxEnergy had a net carrying value of $39.0 million of customer acquisitioncosts representing the purchase price of customer contracts acquired throughbulk acquisitions and from direct response marketing through independent thirdparties. These costs are capitalized and generally amortized over the estimatedthree-year average life of a customer. Beginning July 1, 2005, directresponse advertising costs, which consist primarily of hourly-basedtelemarketing costs associated with proven customer generation, are capitalizedand amortized over the estimated three-year average life of a customer inaccordance with the provisions of Statement of Position No. 93-7 “Reportingon Advertising Costs.” In 2003 and prior years, MxEnergy amortized these costsover a seven-year period. The change was made to conform the amortization tothe estimated average life of a customer contract based on the most recentinformation available to MxEnergy. For more information, see Note 2 to ourconsolidated financial statements included elsewhere in this Annual Report.

 

Recoverability of customeracquisition costs is measured by a comparison of the carrying amount of theassets to the future net cash flows expected to be generated by the asset andby considering specific assumptions for customer attrition, per unit grossprofit, and operating costs. These assumptions are based on our internalforecasts and our past historical experience. If an impairment were to beidentified, it could result in additional expense recorded in our consolidatedstatement of operations.

 

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***Derivative and HedgingActivities***

 

We utilize both physical andderivative financial instruments to reduce our exposure to fluctuations in theprice of natural gas and electricity. Commodity derivatives used as hedgescould include futures, forwards, swaps and options which can be either exchange-tradedinstruments or bilateral contracts with counterparties. We enter into physicalforward contracts to purchase and sell natural gas and power. Such contractsare derivative financial instruments based on the provisions of SFAS No. 133.As of June 30, 2007, MxEnergy had documented that certain of thesephysical forward purchase and sale contracts met the “normal purchases andnormal sales” exception under SFAS No. 133 and accordingly, such contractswere not carried on the balance sheet at fair value. All contracts documentedfor the “normal purchases and normal sales” exception are accounted for asexecutory contracts with the corresponding purchase and sale recorded foraccounting purposes at the time title to the natural gas or power passes.Settlements on derivative contracts not documented for the “normal purchasesand normal sales” exception are realized monthly, generally based upon thedifference between the contract price and the settlement price as quoted onNYMEX or other published index. We account for such derivatives under theprovisions of SFAS No. 133. SFAS No. 133 requires all derivativeinstruments to be carried on the balance sheet at fair value. We have notelected to designate any of the derivatives or hedges under SFAS No. 133,and accordingly, any changes in fair value must be adjusted throughunrestricted losses (gains) from risk management activities in the consolidatedstatements of operations. The application of SFAS No. 133 results inincreased volatility in earnings due to the impact market prices have on themarket positions and financial instruments that we have entered into. Indetermining the fair value of these derivative/financial instruments we usequoted market prices, third party brokers’ quotes, estimates, variousassumptions, and management judgment. The amount of forward derivativeinstruments that do not have a quoted market price or a third party brokerquote is not significant. We have implemented risk management controls andlimits to monitor our risk position and ensure that hedging performance is inline with agreed-upon objectives.

 

**New Accounting Standards**

 

The following new accountingstandards were issued, but not yet adopted by MxEnergy as of June 30,2007.

 

In June 2006, theFinancial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes—an interpretation of FASB StatementNo. 109”, or FIN No. 48. FIN No. 48 clarifies the accounting foruncertainty in income taxes by prescribing a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Theinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosure. FIN No. 48is effective for us on July 1, 2007. We are currently evaluating theimpact of adopting FIN No. 48 on our financial condition, results of operationsand cash flows.

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements”, or SFAS No. 157,which provides guidance for using fair value to measure assets and liabilities.SFAS No. 157 also responds to investors’ requests for expanded informationabout the extent to which a company measures assets and liabilities at fairvalue, the information used to measure fair value, and the effect of fair valuemeasurements on earnings. SFAS No. 157 applies whenever other standardsrequire (or permit) assets or liabilities to be measured at fair value but doesnot expand the use of fair value in any new circumstances.

 

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Under SFAS No. 157,fair value refers to the price that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participantsin the market in which the reporting entity transacts. SFAS No. 157clarifies the principle that fair value should be based on the assumptionsmarket participants would use when pricing the asset or liability. In supportof this principle, SFAS No. 157 establishes a fair value hierarchy thatprioritizes the information used to develop those assumptions. The fair valuehierarchy gives the highest priority to quoted prices in active markets and thelowest priority to unobservable data, for example, the reporting entity’s owndata. Under the standard, fair value measurements would be separately disclosedby level within the fair value hierarchy.

 

The provisions of SFAS No. 157are effective for financial statements issued for fiscal years beginning after November 15,2007, and interim periods within those fiscal years (i.e., our fiscal yearended June 30, 2009). Earlier application is encouraged, provided that thereporting entity has not yet issued financial statements for that fiscal year,including any financial statements for an interim period within that fiscalyear. We have not yet determined the impact of adopting SFAS No. 157 on our financialstatements.

 

**Inflation**

** **

We do not believe inflationhas a significant effect on our operations.

 

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## **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

## ** **

Market risks relating to ouroperations result primarily from changes in commodity prices and interestrates. In the normal course of business, we also have limited foreign currencyrisk associated with our Canadian operations. We employ established policiesand procedures to manage our exposure to these risks. Other informationrelevant to this can be found in our consolidated financial statements includedelsewhere in this Annual Report.

 

**CommodityPrice Risk**

 

We are exposed to commodityprice variability in natural gas and electricity to meet projected demand underfixed priced contracts. We utilize both physical and derivative financialinstruments to reduce our exposure to fluctuations in the price of natural gasand electricity. Commodity derivatives used as hedges typically have includedswaps and options executed under the EMA and prospectively under the hedgefacility. At June 30, 2007, our hedging instruments were due to expirethrough October 2010.

 

We have adopted a riskmanagement policy to measure and limit market risk and credit risk associatedwith our fixed price portfolio. Our policy requires us to maintain a balancedposition at all times and does not permit speculative trading. We have anindependent risk management department within the Company responsible formonitoring and enforcement of such policies. The risk policy currently requiresthat any underlying NYMEX position exposure in excess of $1.0 million formore than one day be promptly mitigated.

 

In addition, we utilize aninternally developed modified variance/co-variance “value-at-risk”, or VAR,model to estimate a maximum potential loss in the fair value of our natural gasportfolio. The key assumptions for our VAR model include (1) the higher of10- and 30-day NYMEX volatility, (2) the net open position foranticipatory hedges and (3) a 99.73% confidence interval. We also run VARbased on an assumed 10,000 RCE anticipatory hedge using the same assumptions.

 

The estimated maximumpotential loss in our fixed price natural gas portfolio using our actual netopen position using the VAR model were approximately $820,000 and $470,000 asof the end of each month for the years ended June 30, 2007 and 2006,respectively, and the estimated maximum potential loss in our fixed pricenatural gas portfolio using an assumed 10,000 RCE anticipatory hedge calculatedusing the VAR model as of the end of each month for the years ended June 30,2007 and 2006 were approximately $389,000 and $872,000, respectively.

 

**CreditRisk**

 

We are exposed to creditrisk in our risk management activities. Credit risk relates to the lossresulting from the nonperformance by a counterparty of its contractualobligations. Historically, we executed all of our fixed price positions underthe EMA which includes a master netting agreement that mitigates theoutstanding credit exposure. Under our hedge facility, our risk managementactivities are with an AA-/Aa2 rated financial institution. To the extent wepurchase financial hedges or physical commodity from other counterparties, ourrisk policy provides for ongoing financial reviews, established credit limitsas well as monitoring, managing and mitigating credit exposure.

 

We also are exposed tocredit risk in our sales activities. As of June 30, 2007, approximately45% of our RCEs were guaranteed by the LDCs at a weighted average discount rateof approximately 1%. Such discount is the cost of service to guarantee thereceivable. In cases where receivables are guaranteed by the LDC, we areexposed only to the credit risk of the LDC, rather than that of our actualcustomers. As of June 30, 2007, 100% of our accounts receivable inguaranteed markets were with investment grade 

 

60

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LDCs.We assume the credit risk for approximately 15% of the total volume billed byLDCs on our behalf and for the remaining 40% of the total volume billed by us.

 

**InterestRate Risk**

 

We are exposed tofluctuations in interest rates under our revolving credit facility. Effective August 4,2006, we also became exposed to fluctuations in interest rates under the notes.As of June 30, 2007, $174.4 million aggregate principal amount of thenotes were outstanding, which is net of $3.6 million of original issuediscount. In anticipation of issuing the notes, we entered into interest rateswap agreements during fiscal 2007. Such interest rate swap agreements will beutilized to manage our exposure to interest rate fluctuations on the notes.These agreements effectively convert interest rate exposure from a variablerate to a fixed rate of interest. See our consolidated financial statementsincluded elsewhere in this Annual Report for an outline of the principal andnotional amounts, interest rates, fair values and other terms required toevaluate the expected cash flows from these debt agreements.

 

Based on the averageoutstanding amount of our variable rate indebtedness during the year ended June 30,2007, a one percentage point change in the interest rates for our variable rateindebtedness, net of the effects of the interest rate swaps, would haveimpacted our annual interest expense by an aggregate of approximately $0.5million. Based on the expected average outstanding amount of our variable rateindebtedness in fiscal year 2008, a one percentage point change in the interestrates for our variable rate indebtedness would impact fiscal year 2008 interestexpense by an aggregate of approximately $0.5 million, after taking intoaccount the average outstanding notional amount of our interest rate swapagreements.

 

61

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**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM AND CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE**

 
| ** **                                                                                                   | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                         |       |     |
| Report of Independent Registered  Public Accountant Firm                                                     |       | 63       |
| Consolidated Balance Sheets at June 30,  2007 and 2006                                                  |       | 64       |
| Consolidated  Statements of Operations for the years ended June 30, 2007, 2006 and  2005                |       | 65       |
| Consolidated  Statements of Stockholders’ Equity for the years ended June 30, 2007,  2006 and 2005 |       | 66       |
| Consolidated  Statements of Cash Flows for the years ended June 30, 2007, 2006 and  2005                |       | 67       |
| Notes to  Consolidated Financial Statements                                                                  |       | 68       |
| Schedule II                                                                                             |       |     |
| Valuation and  Qualifying Accounts for the years ended June 30, 2007, 2006 and 2005                     |       | 103      |

 

62

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**Report ofIndependent Registered Public Accounting Firm**

 

TheBoard of Directors and ShareholdersMxEnergy Holdings Inc.

 

Wehave audited the accompanying consolidated balance sheets of MxEnergy HoldingsInc. as of June 30, 2007 and 2006, and the related consolidated statementsof operations, stockholders’ equity, and cash flows for each of the three yearsin the period ended June 30, 2007. Our audits also included the financialstatement schedule listed in the Index at Item 15. These financialstatements and schedule are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. We were not engagedto perform an audit of the Company’s internal control over financialreporting. Our audits included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion. An audit also includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of MxEnergy HoldingsInc. at June 30, 2007, and 2006, and the consolidated results of itsoperations and its cash flows for each of the three years in the period ended June 30,2007, in conformity with U.S. generally accepted accounting principles. Also,in our opinion, the related financial statement schedule, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall material respects the information set forth therein.

 

Asdiscussed in Note 2 to the consolidated financial statements, effective July 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123R,*Share-Based Payments*.

 
|                     |   | /s/  Ernst & Young LLP |
|--------------------------|--------|---------------------------------|
|                     |   |                            |
| Stamford,  Connecticut   |
| September 26,  2007 |

 

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**MxEnergyHoldings Inc.**

**Consolidated Balance Sheets**

**(Dollarsin thousands)**

 
| ** **                                                                                                                                          | ** ** | **June 30** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|-------------|
| ** **                                                                                                                                          | ** ** | **2007**         | ** **  | **2006** | ** ** |
| **Assets**                                                                                                                                          |       |             | ** **  |   |   |
| Current  assets:                                                                                                                                    |       |             | ** **  |   |   |
| Cash  and cash equivalents                                                                                                                          | ** ** | **$**            | **136,942** | ** ** | $ | 6,093 |   |
| Restricted  cash and short-term investments                                                                                                         | ** ** | **1,050**        | ** **  | 427 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $5,259 and $3,285 in  2007 and 2006, respectively                                   | ** ** | **45,427**       | ** **  | 31,575 |   |
| Inventories                                                                                                                                         | ** ** | **56,547**       | ** **  | 18,499 |   |
| Current  portion of unrealized gains from risk management activities                                                                                | ** ** | **50**           | ** **  | 1,664 |   |
| Income  taxes receivable                                                                                                                            | ** ** | **351**          | ** **  | 5,535 |   |
| Deferred  income taxes                                                                                                                              | ** ** | **9,136**        | ** **  | 1,046 |   |
| Other  current assets                                                                                                                               | ** ** | **5,311**        | ** **  | 2,678 |   |
| Total  current assets                                                                                                                               | ** ** | **254,814**      | ** **  | 67,517 |   |
| Customer  acquisition costs, net of accumulated amortization of $38,752 and $19,173 in  2007 and 2006, respectively                                 | ** ** | **38,954**       | ** **  | 10,822 |   |
| Fixed  assets, net                                                                                                                                  | ** ** | **17,849**       | ** **  | 8,637 |   |
| Unrealized  gains from risk management activities                                                                                                   | ** ** | **—**       | ** **  | 1,272 |   |
| Deferred  income taxes                                                                                                                              | ** ** | **9,754**        | ** **  | 3,395 |   |
| Deposit  on SESCo asset purchase agreement and other capitalized costs                                                                              | ** ** | **—**       | ** **  | 3,348 |   |
| Other  assets, net                                                                                                                                  | ** ** | **11,379**       | ** **  | 2,978 |   |
| Total  assets                                                                                                                                       | ** ** | **$**            | **332,750** | ** ** | $ | 97,969 |   |
|                                                                                                                                                |       |             | ** **  |   |   |
| **Liabilities, redeemable convertible preferred  stock and stockholders’ equity**                                                              |       |             | ** **  |   |   |
| Current  liabilities:                                                                                                                               |       |             | ** **  |   |   |
| Accounts  payable and accrued liabilities                                                                                                           | ** ** | **$**            | **32,957**  | ** ** | $ | 12,495 |   |
| Accrued  commodity purchases                                                                                                                        | ** ** | **31,297**       | ** **  | 14,544 |   |
| Current  portion of unrealized losses from risk management activities                                                                               | ** ** | **17,074**       | ** **  | 452 |   |
| Deferred  revenue                                                                                                                                   | ** ** | **7,464**        | ** **  | 2,403 |   |
| Total  current liabilities                                                                                                                          | ** ** | **88,792**       | ** **  | 29,894 |   |
|                                                                                                                                                |       |             | ** **  |   |   |
| Unrealized  losses from risk management activities                                                                                                  | ** ** | **3,586**        | ** **  | 3,325 |   |
| Floating  Rate Senior Notes due 2011                                                                                                                | ** ** | **174,364**      | ** **  | — |   |
| Denham  credit facility                                                                                                                             | ** ** | **11,040**       | ** **  | — |   |
| Total  liabilities                                                                                                                                  | ** ** | **277,782**      | ** **  | 33,219 |   |
|                                                                                                                                                |       |             | ** **  |   |   |
| Redeemable  convertible preferred stock ($31 million redemption value)                                                                              | ** ** | **29,357**       | ** **  | 29,357 |   |
|                                                                                                                                                |       |             | ** **  |   |   |
| Commitments                                                                                                                                         | ** ** | ** **       | ** **  |   |   |
|                                                                                                                                                |       |             | ** **  |   |   |
| Stockholders’  equity:                                                                                                                         |       |             | ** **  |   |   |
| Common  stock, par value $0.01, 10,000,000 shares authorized; 3,404,277 and 3,388,815  shares issued and outstanding in 2007 and 2006, respectively | ** ** | **34**           | ** **  | 34 |   |
| Additional  paid-in capital                                                                                                                         | ** ** | **21,367**       | ** **  | 17,355 |   |
| Unearned  stock compensation                                                                                                                        | ** ** | **(22**          | **)**       | (115 | ) |
| Accumulated  other comprehensive loss                                                                                                               | ** ** | **(129**         | **)**       | (40 | ) |
| Retained  earnings                                                                                                                                  | ** ** | **4,361**        | ** **  | 18,159 |   |
| Total  stockholders’ equity                                                                                                                    | ** ** | **25,611**       | ** **  | 35,393 |   |
| Total  liabilities, redeemable convertible preferred stock and stockholders’ equity                                                            | ** ** | **$**            | **332,750** | ** ** | $ | 97,969 |   |

 

*See accompanying notes.*

 

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**MxEnergyHoldings Inc.**

**Consolidated Statements of Operations**

**(Dollarsin thousands)**

 
| ** **                                                                             | ** ** | **Years ended June 30** | ** **  |
|----------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|
| ** **                                                                             | ** ** | **2007**                               | ** **  | **2006** | ** ** | **2005** | ** ** |
|                                                                                   |       |                                   | ** **  |   |   |   |   |
| Sales  of natural gas and electricity                                                  | ** ** | **$**                                  | **703,926** | ** ** | $ | 362,561 |   | $ | 277,196 |   |
| Cost  of goods sold (excluding depreciation and amortization):                         |       |                                   | ** **  |   |   |   |   |
| Cost  of natural gas and electricity sold                                              | ** ** | **552,028**                            | ** **  | 392,612 |   | 255,724 |   |
| Realized  losses (gains) from risk management activities                               | ** ** | **33,039**                             | ** **  | (82,983 | ) | (37,608 | ) |
| Unrealized  losses (gains) from risk management activities                             | ** ** | **17,079**                             | ** **  | 79,897 |   | (16,004 | ) |
| ** **                                                                             |       | **602,146**                            | ** **  | 389,526 |   | 202,112 |   |
| Gross  profit (loss)                                                                   | ** ** | **101,780**                            | ** **  | (26,965 | ) | 75,084 |   |
|                                                                                   |       |                                   | ** **  |   |   |   |   |
| Operating  expenses:                                                                   |       |                                   | ** **  |   |   |   |   |
| General  and administrative expenses                                                   | ** ** | **53,779**                             | ** **  | 22,623 |   | 17,938 |   |
| Advertising  and marketing expenses                                                    | ** ** | **4,781**                              | ** **  | 2,096 |   | 2,359 |   |
| Reserves  and discounts                                                                | ** ** | **4,725**                              | ** **  | 3,395 |   | 4,533 |   |
| Depreciation  and amortization                                                         | ** ** | **27,730**                             | ** **  | 8,504 |   | 6,166 |   |
| Total  operating expenses                                                              | ** ** | **91,015**                             | ** **  | 36,618 |   | 30,996 |   |
|                                                                                   |       |                                   | ** **  |   |   |   |   |
| Operating  profit (loss)                                                               | ** ** | **10,765**                             | ** **  | (63,583 | ) | 44,088 |   |
| Interest  expense—net of interest income of $4,299, $1,061 and $614, respectively | ** ** | **33,058**                             | ** **  | 3,200 |   | 2,858 |   |
| (Loss)  income before income tax benefit (expense)                                     | ** ** | **(22,293**                            | **)**       | (66,783 | ) | 41,230 |   |
| Income  tax benefit (expense)                                                          | ** ** | **8,495**                              | ** **  | 27,001 |   | (18,142 | ) |
| Net  (loss) income                                                                     | ** ** | **$**                                  | **(13,798** | **)** | $ | (39,782 | ) | $ | 23,088 |   |

 

*Seeaccompanying notes.*

 

65

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**MxEnergyHoldings Inc.**

**Consolidated Statements of Stockholders’ Equity**

**(Dollarsin thousands)**

 
| ** **                                                                                  | ** ** | **Common Stock  Par Value** | ** ** | **Additional   Paid-in Capital** | ** ** | **Unearned Stock  Compensation** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Retained  Earnings** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|---------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|------------------------|------------|---------------------------------------|------------|
| Balance  at June 30, 2004                                                              |       | $                                     | 33         |                                       | $          | 14,923                                |       | $                                           | (176       | )                      | $          | —                                |       | $ | 34,853 |   | $ | 49,633 |   |
| Issuance  of common stock                                                                   |       | 1                                     |       | 797                                        |       | —                                |       | —                                      |       | —                 |       | 798                                   |       |
| Warrants  issued to employees                                                               |       | —                                |       | 2,022                                      |       | (2,022                                | )          | —                                      |       | —                 |       | —                                |       |
| Purchase  and cancellation of treasury shares                                               |       | (1                                    | )          | (666                                       | )          | —                                |       | —                                      |       | —                 |       | (667                                  | )          |
| Amortization  of stock compensation                                                         |       | —                                |       | —                                     |       | 2,033                                 |       | —                                      |       | —                 |       | 2,033                                 |       |
| Warrants  issued in connection with the offering of redeemable convertible preferred  stock |       | —                                |       | 368                                        |       | —                                |       | —                                      |       | —                 |       | 368                                   |       |
| Tax  benefit on issuance of common stock from warrants                                      |       | —                                |       | 670                                        |       | —                                |       | —                                      |       | —                 |       | 670                                   |       |
| Comprehensive  income:                                                                      |       |                                  |       |                                       |       |                                  |       |                                        |       |                   |       |                                  |       |
| Net  income                                                                                 |       | —                                |       | —                                     |       | —                                |       | —                                      |       | 23,088                 |       | 23,088                                |       |
| Foreign  currency translation                                                               |       | —                                |       | —                                     |       | —                                |       | (4                                          | )          | —                 |       | (4                                    | )          |
| Comprehensive  income                                                                       |       |                                  |       |                                       |       |                                  |       |                                        |       |                   |       | 23,084                                |       |
| Balance  at June 30, 2005                                                              |       | 33                                    |       | 18,114                                     |       | (165                                  | )          | (4                                          | )          | 57,941                 |       | 75,919                                |       |
| Issuance  of common stock                                                                   |       | 2                                     |       | 530                                        |       | —                                |       | —                                      |       | —                 |       | 532                                   |       |
| Unamortized  stock compensation                                                             |       | —                                |       | 861                                        |       | (861                                  | )          | —                                      |       | —                 |       | —                                |       |
| Purchase  and cancellation of treasury shares                                               |       | (1                                    | )          | (2,150                                     | )          | —                                |       | —                                      |       | —                 |       | (2,151                                | )          |
| Amortization  of stock compensation                                                         |       | —                                |       | —                                     |       | 911                                   |       | —                                      |       | —                 |       | 911                                   |       |
| Comprehensive  loss:                                                                        |       |                                  |       |                                       |       |                                  |       |                                        |       |                   |       |                                  |       |
| Net  loss                                                                                   |       | —                                |       | —                                     |       | —                                |       | —                                      |       | (39,782                | )          | (39,782                               | )          |
| Foreign  currency translation                                                               |       | —                                |       | —                                     |       | —                                |       | (36                                         | )          | —                 |       | (36                                   | )          |
| Comprehensive  loss                                                                         |       |                                  |       |                                       |       |                                  |       |                                        |       |                   |       | (39,818                               | )          |
| Balance  at June 30, 2006                                                              |       | 34                                    |       | 17,355                                     |       | (115                                  | )          | (40                                         | )          | 18,159                 |       | 35,393                                |       |
| Issuance  of common stock                                                                   |       | —                                | ** ** | **22**                                     | ** ** | **—**                            | ** ** | **—**                                  | ** ** | **—**             | ** ** | **22**                                | ** ** |
| Unamortized  stock compensation                                                             | ** ** | **—**                            | ** ** | **2,219**                                  | ** ** | **(2,219**                            | **)**      | **—**                                  | ** ** | **—**             | ** ** | **—**                            | ** ** |
| Purchase  and cancellation of treasury shares                                               |       | —                                | ** ** | **(654**                                   | **)**      | **—**                            | ** ** | **—**                                  | ** ** | **—**             | ** ** | **(654**                              | **)**      |
| Stock  compensation expense                                                                 |       | —                                | ** ** | **2,227**                                  |       | —                                |       | —                                      |       | —                 | ** ** | **2,227**                             | ** ** |
| Tax  benefit on issuance of common stock from options                                       | ** ** | **—**                            | ** ** | **198**                                    | ** ** | **—**                            | ** ** | **—**                                  | ** ** | **—**             | ** ** | **198**                               | ** ** |
| Amortization  of stock compensation                                                         | ** ** | **—**                            | ** ** | **—**                                 | ** ** | **2,312**                             | ** ** | **—**                                  | ** ** | **—**             | ** ** | **2,312**                             | ** ** |
| Comprehensive  loss:                                                                        | ** ** | ** **                            | ** ** | ** **                                 | ** ** | ** **                            | ** ** | ** **                                  | ** ** | ** **             | ** ** | ** **                            | ** ** |
| Net  loss                                                                                   | ** ** | **—**                            | ** ** | **—**                                 | ** ** | **—**                            | ** ** | **—**                                  | ** ** | **(13,798**            | **)**      | **(13,798**                           | **)**      |
| Foreign  currency translation                                                               | ** ** | **—**                            | ** ** | **—**                                 | ** ** | **—**                            | ** ** | **(89**                                     | **)**      | **—**             | ** ** | **(89**                               | **)**      |
| Comprehensive  loss                                                                         | ** ** | ** **                            | ** ** | ** **                                 | ** ** | ** **                            | ** ** | ** **                                  | ** ** | ** **             | ** ** | **(13,887**                           | **)**      |
| Balance  at June 30, 2007                                                              | ** ** | **$**                                 | **34**     | ** **                                 | **$**      | **21,367**                            | ** ** | **$**                                       | **(22**    | **)**                  | **$**      | **(129**                              | **)**      | **$** | **4,361** | ** ** | **$** | **25,611** | ** ** |

 

*Seeaccompanying notes.*

 

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**MxEnergyHoldings Inc.**

**Consolidated Statements of Cash Flows**

**(Dollarsin thousands)**

 
| ** **                                                                                           | ** ** | **Years ended June 30** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                           | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating activities**                                                                             |       |                                   |       |   |   |   |   |
| Net  (loss) income                                                                                   |       | $                                      | (13,798    | ) | $ | (39,782 | ) | $ | 23,088 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by (used in) operating  activities: |       |                                   |       |   |   |   |   |
| Unrealized  losses (gains) from risk management activities                                           |       | 17,079                                 |       | 79,897 |   | (16,004 | ) |
| Stock  compensation expense                                                                          |       | 4,539                                  |       | 911 |   | 2,033 |   |
| Depreciation  and amortization                                                                       |       | 27,730                                 |       | 8,504 |   | 6,166 |   |
| Deferred  tax (benefit) expense                                                                      |       | (14,449                                | )          | (32,764 | ) | 6,552 |   |
| Unrealized  losses on interest rate swaps and amortization of deferred financing fees                |       | 7,906                                  |       | 1,057 |   | 349 |   |
| Non-cash  amortization of SESCo and Castle contracts                                                 |       | 11,891                                 |       | (3,276 | ) | — |   |
| Changes  in assets and liabilities, net of effects of acquisitions:                                  |       |                                   |       |   |   |   |   |
| Net  inflow (outflow) in restricted cash and short term investments                                  |       | (623                                   | )          | 6,953 |   | 2,195 |   |
| Accounts  receivable                                                                                 |       | 3,453                                  |       | (13,003 | ) | 3,271 |   |
| Inventories                                                                                          |       | (1,712                                 | )          | (2,685 | ) | (72 | ) |
| Option  premiums                                                                                     |       | 1,835                                  |       | (1,834 | ) | — |   |
| Income  taxes receivable                                                                             |       | 5,184                                  |       | (5,535 | ) | — |   |
| Security  deposits and other assets                                                                  |       | (993                                   | )          | 2,645 |   | 895 |   |
| Accounts  payable and accrued liabilities                                                            |       | 35,878                                 |       | (5,320 | ) | 1,283 |   |
| Deferred  revenue                                                                                    |       | 5,061                                  |       | 865 |   | 1,538 |   |
| Net  cash provided by (used in) operating activities                                                 |       | 88,981                                 |       | (3,367 | ) | 31,294 |   |
| **Investing activities**                                                                             |       |                                   |       |   |   |   |   |
| Purchase  of assets of Shell Energy Services Company L.L.C. (“SESCo”)                      |       | (126,044                               | )          | — |   | — |   |
| Deposit  on SESCo asset purchase agreement and other capitalized costs                               |       | 3,348                                  |       | (3,348 | ) | — |   |
| Purchase  of assets of Vantage Power Services, L.P.                                                  |       | (732                                   | )          | — |   | — |   |
| Purchase  of customer portfolio from Castle Power LLC (“Castle”)                           |       | —                                 |       | (3,150 | ) | — |   |
| Purchase  of Total Gas & Electric, Inc., net of cash acquired                          |       | —                                 |       | — |   | (2,003 | ) |
| Customer  acquisition costs                                                                          |       | (7,610                                 | )          | (6,149 | ) | (3,843 | ) |
| Purchases  of fixed assets                                                                           |       | (1,882                                 | )          | (6,178 | ) | (2,450 | ) |
| Net  cash used in investing activities                                                               |       | (132,920                               | )          | (18,825 | ) | (8,296 | ) |
| **Financing activities**                                                                             |       |                                   |       |   |   |   |   |
| Proceeds  from loans                                                                                 |       | 6,000                                  |       | 210,123 |   | 193,748 |   |
| Repayments  of loans                                                                                 |       | (6,000                                 | )          | (226,502 | ) | (190,390 | ) |
| Debt  financing costs                                                                                |       | (9,345                                 | )          | (2,347 | ) | — |   |
| Repayments  of long-term debt                                                                        |       | —                                 |       | (5,000 | ) | (1,000 | ) |
| Proceeds  from Denham credit facility                                                                |       | 23,040                                 |       | — |   | — |   |
| Repayments  of Denham credit facility                                                                |       | (12,000                                | )          | — |   | (8,200 | ) |
| Proceeds  from bridge loan                                                                           |       | 190,000                                |       | — |   | — |   |
| Repayment  of bridge loan                                                                            |       | (190,000                               | )          | — |   | — |   |
| Proceeds  from senior notes, net of discount of $4.75 million                                        |       | 185,250                                |       | — |   | — |   |
| Repurchase  of senior notes                                                                          |       | (11,723                                | )          | — |   | — |   |
| Issuance  of common stock and exercise of warrants                                                   |       | 22                                     |       | 532 |   | 798 |   |
| Purchase  of common stock for cancellation, net of tax benefit                                       |       | (456                                   | )          | (2,151 | ) | (667 | ) |
| Proceeds  from note receivable, net of $0.9 million in issuance costs                                |       | —                                 |       | — |   | 30,107 |   |
| Net  cash provided by (used in) financing activities                                                 |       | 174,788                                |       | (25,345 | ) | 24,396 |   |
| Net  increase (decrease) in cash                                                                     |       | 130,849                                |       | (47,537 | ) | 47,394 |   |
| Cash  and cash equivalents at beginning of year                                                      |       | 6,093                                  |       | 53,630 |   | 6,236 |   |
|                                                                                                 |       |                                   |       |   |   |   |   |
| Cash  and cash equivalents at end of year                                                            |       | $                                      | 136,942    |   | $ | 6,093 |   | $ | 53,630 |   |
|                                                                                                 |       |                                   |       |   |   |   |   |
| **Supplemental cash flow information**                                                               |       |                                   |       |   |   |   |   |
| ** **                                                                                           |       |                                   |       |   |   |   |   |
| Income  taxes paid                                                                                   |       | $                                      | 753        |   | $ | 12,223 |   | $ | 11,473 |   |
|                                                                                                 |       |                                   |       |   |   |   |   |
| Interest  paid                                                                                       |       | $                                      | 17,345     |   | $ | 3,710 |   | $ | 3,183 |   |

 

*Seeaccompanying notes.*

 

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**MxEnergyHoldings Inc.**

**Notes to Consolidated Financial Statements**

 

**1. Organization and Business**

 

MxEnergyHoldings Inc. (“Holdings”) was incorporated on January 24, 2005 as aDelaware corporation. Holdings was formed as part of a corporatereorganization which was completed in the year ended June 30, 2005. Thetwo principal operating subsidiaries of Holdings are MxEnergy Inc. and MxEnergyElectric Inc. which are engaged in the marketing and supply of natural gas andelectricity, respectively. Holdings and all operating and holding subsidiaries (collectively,the “Company”) operate in 36 market areas located in 14 states and theProvinces of Ontario and British Columbia in Canada.

 

Aspart of the reorganization, the common and preferred stockholders ofMxEnergy Inc. became stockholders of Holdings on a one-for-one basis. Thepurpose of the reorganization was to split the gas and electric businesses intoseparate entities. Since all transactions were between entities under commoncontrol, there was no accounting impact as a result of the reorganization.

 

**2. Summary of SignificantAccounting Policies**

** **

**Principles of Consolidation**

** **

Theconsolidated financial statements include the accounts of Holdings and alloperating and holding subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**Use of Estimates**

** **

Thepreparation of consolidated financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Actual results could differ from thoseestimates.

 

**Revenue Recognition**

** **

Revenuesfrom the sale of natural gas and electricity are recognized in the period inwhich the commodity is consumed by customers. Sales of natural gas andelectricity are generally billed by the local distribution companies (“LDC”),acting as the Company’s agent, on a monthly cycle basis. The billing cycles forcustomers do not coincide with the accounting periods used for financialreporting purposes. The Company follows the accrual method of accounting forrevenues whereby revenues applicable to gas and electricity consumed bycustomers, but not yet billed under the cycle billing method, are estimated andaccrued along with the related costs, and included in operations. Suchestimates are refined in subsequent periods upon obtaining final informationfrom the LDC. Any change in estimates is reflected in operations in the perioddetermined. As a result of the acquisition of substantially all of the assetsof SESCo (see Note 3. Acquisitions, for additional information), revenuesinclude passthrough revenues, which represent transportation charges billed tocustomers and charged by the LDC to the Company. There is a correspondingamount in cost of goods sold. For the year ended June 30, 2007,passthrough revenues approximated $54.5 million. Transportation and storagecosts are included as a component of cost of goods sold. Unbilled accountsreceivable were approximately $14.3 million and $4.7 million at June 30,2007 and 2006, respectively. Revenues from the sale of natural gas andelectricity are reflected net of any applicable sales tax.

 

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**Cash and Cash Equivalents**

** **

**The Company’s cash and cash equivalents consist primarilyof cash on deposit and money market accounts.**

** **

**Restricted Cash andShort-Term Investments**

** **

Restrictedcash and short-term investments at June 30, 2007 and 2006 consist of cash,certificates of deposit with maturities ranging from 30 days to one year fromthe date of purchase and money market funds, the majority of which are held assecurity backing letters of credit and surety bonds which are required byseveral of the local distribution companies, utility commissions and pipelinestariffs and regulations. Certificates of deposit are stated at cost whichapproximates fair value due to the short-term maturity of the instruments.

 

**Inventories**

** **

Inventoriesconsist of natural gas held by third parties on the Company’s behalf and arevalued at the lower of cost or market on a weighted-average cost basis.

 

**Other Assets, Net**

** **

Themajority of other assets pertain to deferred financing costs and prepaidlicenses, which are being amortized to expense over the term of the relateddebt or useful life of the related asset, and goodwill arising from businesscombinations Accumulated amortization related to deferred financing costs was$6.6 million and $1.2 million as of June 30, 2007 and 2006, respectively.Amortization expense related to deferred financing costs was $5.4 million, $0.6million and $0.3 million for the years ended June 30, 2007, 2006 and 2005,respectively, and is included in interest expense, net.

 

Goodwillis accounted for in accordance with Statement on Financial Accounting Standard(“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”).The Company has included in other assets in the consolidated balance sheets$3.8 million of goodwill associated with the Company’s natural gas segment asof June 30, 2007 related to the SESCo acquisition (see Note 3.Acquisitions, for additional information). SFAS No. 142 requires a portionof goodwill be charged to expense only when it is impaired. The Company willtest, at least on an annual basis, its goodwill for impairment. Since werecorded the goodwill associated with the SESCo acquisition during the fourthquarter of fiscal 2007 in connection with the final allocation of the purchaseprice, we have not yet performed such test. The Company will perform suchtest on an annual basis, beginning April 1, 2008. An impairment exists ifthe estimate of future undiscounted cash flows generated by the assets is lessthan the carrying value of the assets. If impairment is determined to exist,any related impairment loss is then measured by comparing the fair value of theassets to their carrying value. The Company will also assess goodwill forimpairment if events or changes in circumstances may indicate animpairment of goodwill exists.

 

**Fair Value of FinancialInstruments**

** **

Thecarrying amounts of the Company’s financial instruments (accounts receivableand accounts payable) approximate fair value due to their short-term nature.Additionally, the fair values of the Company’s New York Mercantile Exchange (“NYMEX”)based derivative instruments are estimated based on quoted market prices. Fairvalues of basis swaps are based on quotes received from the Company’s primarysupplier as no quoted published market exists for these derivative instruments.The carrying amount of long-term debt approximates fair value based on thecommercial terms of the debt agreement.

 

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**Allowance for DoubtfulAccounts**

** **

Manyof the LDCs through which the Company delivers gas and electricity guaranteecustomer billings or amounts due for consumed gas and electricity. Theguarantee discounts range from zero to 5% of billed accounts receivable and arecharged to reserves and discounts in the consolidated statements of operationsas revenue is recorded.

 

Inmarkets where no such guarantees or purchases exist, the Company provides anallowance for doubtful accounts based on the age of the receivable, paymenthistory of the customer and past loss experience. The Company generally writesoff receivable balances when accounts are transferred to outside collectionagencies.

 

AtJune 30, 2007 and 2006, the Company had gross accounts receivable where noguarantee of receivables exists of approximately $29.7 million and $13.7million, respectively.

 

**Concentration of Credit Risk**

** **

Priorto August 1, 2006, the Company, through its Energy Marketing Agreement(the “EMA”) with Virginia Power Energy Marketing, Inc. (“VPEM”) engaged intransactions with VPEM for the purchase of derivative instruments and physicalnatural gas purchases. With limited exceptions, the EMA was exclusive and, as aresult, predominantly all of the Company’s transactions were with VPEM. TheCompany was party to a master netting agreement which mitigated the exposure tocredit risk as the Company had borrowings from VPEM under the Agreement (seeNote 4). Beginning July 1, 2007, the Company has been able topurchase its physical gas supply from any counterparty. We currently have aportfolio of over 35 energy suppliers under standard North American EnergyStandards Board (“NAESB”) contracts from whom we purchase our physical gassupply, most of which are subject to a master netting agreement.

 

OnAugust 1, 2006, the Company entered into a committed exclusive hedgefacility (the “Hedge Facility”) with Société Générale.

 

TheHedge Facility has an initial term of two years with subsequent one-yearrenewal terms. The Hedge Facility provides the Company with the ability toenter into NYMEX natural gas and natural gas basis swaps for a tenor of up to39 months. Fees under the Hedge Facility include an annual management fee,a volumetric fee based on the tenor of the swap and fees to allow SociétéGénérale to hedge its potential risks arising from material declines of naturalgas market prices based on the Company’s overall hedge position with them. Allsuch fees are charged to interest expense.

 

TheHedge Facility is secured by a first lien on customer contracts and a secondlien on substantially all other assets of the Company. In addition, the Companyprovided a total of $25 million as cash collateral for potential negativemark-to-market changes in the value of the forward hedge position. Within thedefined volumetric limits of the Hedge Facility, the Company will not berequired to post additional collateral beyond the initial margin requirements.In April 2007, the Company replaced the $25 million of cash collateralwith a letter of credit. Under the Hedge Facility, the Company has theflexibility to either post cash collateral or issue a letter of credit asmargin for the Hedge Facility.

 

Inconnection with entering into the Hedge Facility on August 1, 2006, theCompany no longer purchases derivative instruments under the EMA.

 

Managementcontinually evaluates the credit risk associated with all counterparties.Credit risk associated with trade accounts receivable is limited as certain ofthe LDCs either guarantee customer billings or 

 

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amountsdue for delivered gas and electricity. In the market areas where the LDC doesnot guarantee the receivables, the Company maintains a provision for creditlosses based upon the credit risk of its customers, historical trends and otherinformation.

 

TheCompany operates in 36 market areas located in 14 states and the Provinces ofOntario and British Columbia, Canada. The Company’s diversified geographiccoverage mitigates its exposure to a single LDC, a regulatory jurisdiction,extreme local weather patterns or an economic downturn in any single geographicregion.

 

**Customer Acquisition Costs,Net**

** **

Customeracquisition costs represent the purchase price of customer contracts acquiredthrough bulk acquisitions and from direct response marketing throughindependent third parties. These costs are capitalized and generally amortizedover the estimated three-year average life of a customer, with a weightedaverage amortization period of approximately 1.6 years, as of June 30,2007. In addition, beginning July 1, 2005 direct response advertisingcosts, which consist primarily of hourly-based telemarketing costs associatedwith proven customer generation, are capitalized and amortized over theestimated average life of a customer in accordance with the provisions ofStatement of Position No. 93-7 “Reporting on Advertising Costs.” Directresponse advertising costs included in customer acquisition costs at June 30,2007 and 2006 were approximately $10.5 million and $4.1 million, respectively.All costs associated with servicing and maintaining customer accounts areexpensed as incurred. Amortization expense relating to capitalized customeracquisition costs for the years ended June 30, 2007, 2006 and 2005 was$19.5 million, $6.2 million and $5.0 million respectively. The amortizationexpense on customer acquisition costs is expected to approximate $19.1 millionin fiscal 2008, $16.8 million in fiscal 2009 and $3.1 million in fiscal 2010.

 

**Fixed Assets, Net**

** **

Fixedassets are stated at cost, less accumulated depreciation. Depreciation isrecorded on a straight-line basis over the estimated useful lives of the assetswhich range from three to five years.

 

**Impairment of Long-LivedAssets**

** **

Managementevaluates the recoverability of long-lived assets (including customeracquisition costs, which are evaluated monthly) by comparing the carrying valueof such assets to their projected future cash flows on an undiscounted basis.If there are indications that the carrying value of such assets may notbe recoverable, the Company recognizes an impairment loss for the differencebetween the carrying value of such assets and their projected future cash flowson a discounted basis, representing the asset’s fair value, and records acharge against current operations.

 

**Income Taxes**

** **

TheCompany accounts for income taxes under the liability method as required bySFAS No. 109, “Accounting for Income Taxes.” Under this method, deferredtax liabilities and assets are determined based upon the difference between thefinancial statement and tax bases of assets and liabilities using enacted taxrates in effect for the year in which the temporary differences are expected toreverse.

 

**DeferredRevenue**

 

Deferredrevenue relates primarily to the Company’s net payable position with individualcustomers who are on budget-billed plans, wherein the customers pay for theircommodity at a ratable amount per month 

 

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basedon estimated annual usage, while the Company records revenue on a consumedquantity basis. The cumulative difference between budget-billed customers’actual usage and the budget-billed amount actually invoiced, net of cashpayments made by the customers, is equal to the budget-billed variance. If thisnet budget-billed variance results in a payable due to the customer at thebalance sheet date, the amount is reflected as deferred revenue in theaccompanying balance sheets.

 

**Derivatives and HedgingActivities**

** **

TheCompany utilizes derivative financial instruments to reduce its exposure tofluctuations in the price of natural gas. Commodity derivatives used aseconomic hedges could include futures, forwards, swaps and options which can beeither exchange traded instruments or bilateral contracts with counterparties.In addition, certain contracts with customers are defined as derivatives.Settlements on the derivative contracts are realized monthly, generally basedupon the difference between the contract price and the closing price as quotedon the NYMEX or other published index. Market prices used to value derivativepositions reflect management’s best estimate considering various factorsincluding closing exchange and over-the-counter quotations, paritydifferentials, time value, and volatility factors underlying the commitments.The values are adjusted to reflect the potential impact of liquidating theCompany’s position in the ordinary course of business over a reasonable periodof time under present market conditions. The Company accounts for suchderivatives under the provisions of SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities,” as amended and interpreted (“SFAS No. 133”),which requires all derivative instruments to be carried on the balance sheet atfair value. The Company has not elected to designate any of the derivatives ashedges under SFAS No. 133, and accordingly, any changes in fair value mustbe adjusted through unrealized losses (gains) from risk management activitiesin the consolidated statements of operations. The Company has implemented riskmanagement controls and limits to monitor its risk position and ensure thathedging performance is in line with agreed-upon objectives.

 

InAugust 2006, the Company entered into interest rate swaps to hedge thefloating rate interest expense on the Floating Rate Senior Notes due 2011(“Senior Notes”). The swaps are fixed-for-floating and settle against the sixmonth LIBOR rate. None of the interest rate swaps has been designated as ahedge under SFAS No. 133; accordingly, changes in the market value of theinterest rate swaps have been and will continue to be charged to interestexpense.

 

**Stock-Based Compensation**

** **

TheCompany currently has three stock-based compensation plans in effect, underwhich warrants and options have been issued to employees, non-employees anddirectors. In December 2004, the FASB issued SFAS No. 123 (revised2004), “Share-Based Payment” (“SFAS No. 123R”), which requires therecognition of the cost of employee services received in exchange for an awardof equity instruments in the financial statements and the measurement based onthe grant-date fair value of the award. It also requires the cost to berecognized over the period during which an employee is required to provideservices in exchange for the award (i.e., the vesting period). SFAS No. 123Rreplaces SFAS No. 123, “Accounting for Stock Based Compensation” (“SFAS No. 123”)and supersedes Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” (“APB No. 25”) and related interpretations. TheCompany adopted SFAS No. 123R on July 1, 2006. As the Companyhistorically utilized the minimum value method for pro forma disclosures underthe original provisions of SFAS No. 123, it was required to adopt theprovisions of SFAS No. 123R using the prospective method. Under theprospective method, the Company will continue to account for non-vested awardsoutstanding at the date of adoption of SFAS No. 123R in the same manner asthey had been accounted for prior to adoption for financial statementrecognition purposes (see further discussion below). All awards granted,modified or settled after the adoption will be accounted for using themeasurement, recognition and attribution provisions of SFAS No. 123R. Theadoption of SFAS No. 123R did not have any financial impact on the 

 

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Company’sfinancial position, results of operations or cash flows for all awards grantedprior to June 30, 2006.

 

TheCompany has elected to follow APB No. 25 and related interpretations, inaccounting for all stock options and warrants (“awards”) granted to employees,rather than the alternative fair value method allowed under SFAS No. 123for all awards granted prior to June 30, 2006. APB No. 25 providesthat compensation expense relative to the Company’s employee stock and stockoption grants be measured based on the intrinsic value of the stock or stockoption at the date of grant.

 

TheCompany follows SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services,” for all awardsgranted to non-employees prior to June 30, 2006. The Company uses theBlack-Scholes-Merton option-pricing model for estimating the fair value ofnon-employee grants. The Black-Scholes-Merton option-pricing model wasdeveloped for use in estimating the fair value of traded options which have novesting restrictions and are fully transferable. In addition, option-pricingmodels require the input of highly subjective assumptions, including the expectedprice volatility. Because the Company’s stock options and warrants havecharacteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its stockoptions.

 

TheCompany has issued warrants to purchase the common stock of the Company tocertain employees which permit the employee to exercise such warrant for cashor by withholding from that number of shares that would otherwise be issuedupon exercise of the warrant that number of shares having a fair market valueequal to the warrant exercise to allow a cashless exercise of the warrant.

 

Asa result of such feature, a presumption exists that an employee will elect thecashless exercise and therefore such warrants are accounted for using variableplan accounting. Under variable plan accounting, compensation cost is measuredas the amount by which the estimated fair value of the shares of the Company’scommon stock covered by such warrants exceeds the exercise price of thewarrant. Prior to June 30, 2006, the Company estimated the fair value ofits common stock using an internally developed pricing model validated byexternal transactions in the Company’s common stock. At June 30, 2007 and2006, the Company obtained valuations of its common stock from an independentvaluation services firm. Compensation cost is accrued as a charge to expenseover the vesting period of such warrants using the accelerated expenseattribution method under Financial Accounting Standards Board (“FASB”)Interpretation No. 28 “Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans.” Changes, either increases or decreases,in the estimated fair value of the Company’s common stock between the date ofgrant and the exercise date result in a change in the measure of compensationfor the award which is reflected in compensation expense in the period in whichthe changes in estimated fair value occur. Accrued compensation for an awardthat is forfeited or cancelled is adjusted by decreasing compensation expensein the period of forfeiture or cancellation. During the years ended June 30,2007, 2006 and 2005, compensation expense relating to such warrants amounted to$2.3 million ($1.4 million, net of tax), $0.9 million ($0.6 million, net oftax) and $1.9 million ($1.1 million, net of tax), respectively.

 

**Recently Issued AccountingPronouncements**

** **

InJune 2006, the FASB issued FASB Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”(“FIN No. 48”). FIN No. 48 clarifies the accounting for uncertaintyin income taxes by prescribing a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be 

 

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takenin a tax return. The interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods anddisclosure. FIN No. 48 is effective for the Company on July 1, 2007.The Company is currently evaluating the impact of adopting FIN No. 48 onour financial condition, results of operations and cash flows.

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”), which provides guidance for using fairvalue to measure assets and liabilities. SFAS No. 157 also responds to investors’requests for expanded information about the extent to which a company measuresassets and liabilities at fair value, the information used to measure fairvalue, and the effect of fair value measurements on earnings. SFAS No. 157applies whenever other standards require (or permit) assets or liabilities tobe measured at fair value but does not expand the use of fair value in any newcircumstances.

 

UnderSFAS No. 157, fair value refers to the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants in the market in which the reporting entity transacts. SFASNo. 157 clarifies the principle that fair value should be based on theassumptions market participants would use when pricing the asset or liability.In support of this principle, SFAS No. 157 establishes a fair valuehierarchy that prioritizes the information used to develop those assumptions.The fair value hierarchy gives the highest priority to quoted prices in activemarkets and the lowest priority to unobservable data, for example, thereporting entity’s own data. Under the standard, fair value measurements wouldbe separately disclosed by level within the fair value hierarchy.

 

Theprovisions of SFAS 157 are effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years (i.e. the Company’s fiscal year ended June 30, 2009).Earlier application is encouraged, provided that the reporting entity has notyet issued financial statements for that fiscal year, including any financialstatements for an interim period within that fiscal year. The Company has notyet determined the impact of adopting SFAS No. 157 on its consolidatedfinancial statements.

 

**Reclassifications**

 

Certainprior year amounts have been reclassified to conform to the current year’spresentation.

 

**3. Acquisitions**

** **

OnNovember 1, 2005, the Company acquired certain natural gas customercontracts of Castle Power LLC (“Castle”). Castle marketed natural gas to smalland mid-market commercial customers in New York and New Jersey. Castle servedapproximately 2,200 customers in five markets. The acquisition was accountedfor as a purchase of intangible assets. The Company assumed the obligations toserve certain fixed-priced customers under contracts that extended to December 2006and that were at below-market prices as of the acquisition date, whichliability was estimated to be $3.6 million. Such amount was adjustedthrough cost of natural gas sold as the Company made deliveries under suchcontracts. As of June 30, 2006, the carrying value of the contractliability was approximately $0.4 million, and was fully adjusted throughcost of natural gas by December 2006. The liability assumed by the Companyrepresents the initial cost of the customer contracts acquired and wascapitalized as customer acquisition costs and was initially amortized over anestimated three-year life. During the year ended June 30, 2007, theCompany revised the estimated life to two years. In addition, a fee of $0.07per MMBtu will be paid to Castle over a four-year term from the date ofacquisition upon continued Castle account executive assistance, revenuegeneration and collection from the acquired customers (“ContingentConsideration”). The Contingent Consideration is payable on a quarterly basisin arrears and will be payable for volumes consumed and paid for on certaincustomer contracts acquired. The payment is determined at the end of eachquarter and capitalized as part of customer acquisition costs andamortized over the remaining 

 

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customerlife. As of June 30, 2007 and 2006, Contingent Consideration payable toCastle was approximately $141,000 and $130,000, respectively. No cash or otherworking capital assets were acquired as part of the acquisition. Theresults of operations associated with the customers acquired from Castle areincluded in the Company’s operating results from the date of acquisition.

 

OnMay 12, 2006, the Company entered into an Asset Purchase Agreement (the “APA”)with Shell Energy Services Company L.L.C. (“SESCo”) pursuant to which theCompany agreed to purchase substantially all of the assets of SESCo (the “Acquisition”).SESCo, a wholly owned subsidiary of Shell Oil Company, is a retail energymarketer that serves residential and small to mid-market commercial customersin Georgia and Ohio. The Acquisition added approximately 315,000 residentialcustomer equivalents (“RCEs,” each reflecting 100 MMBtus of annual natural gasconsumption) and Georgia to the list of states in which the Company operates.As of June 30, 2006, the Company had deposited $3 million in escrowrelating to the purchase and had capitalized approximately $0.3 million ofcosts directly related to the Acquisition. On August 1, 2006, the Companyconsummated the Acquisition for aggregate consideration of approximately$125.5 million with the proceeds of a bridge loan (see Note 4).During the three months ended December 31, 2006, the Company paid anadditional $0.5 million in connection with the Acquisition based on certainpost-closing adjustments as defined in the APA, resulting in a total purchaseprice of $126.0 million. The Acquisition was accounted for as a purchase businesscombination and the results of operations of SESCo are included in the Company’soperating results beginning on August 1, 2006. The Acquisition wasinitially financed by utilizing the proceeds from a $190 million bridgeloan which was repaid on August 4, 2006 primarily from the proceedsreceived by the issuance of $190 million face amount of floating ratesenior notes (see Note 4).

 

AtAugust 1, 2006, the preliminary purchase price was initially allocatedbased upon the estimated fair value of the net assets acquired at the date ofacquisition. The final allocations were based on independent valuations thatwere completed during the fourth quarter of fiscal year 2007. As a result ofchanges to the purchase price allocation, during the fourth quarter of fiscal2007, the Company recorded a benefit of $844,000 as a reduction of amortizationexpense that pertained to the first nine months of fiscal 2007. The followingtable presents the initial and final allocations of purchase price (inthousands):

 
| ** **                     | ** ** | **Initial  Allocation** | ** ** | **Final  Allocation** | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------|------------|
| Accounts  receivable           |       | $                       | 16,392     |                  | $          | 17,304 |   |
| Inventory                      |       | 33,501                  |       | 36,336                |       |
| Prepaid  peaking service       |       | —                  |       | 2,652                 |       |
| Fixed  assets                  |       | 15,000                  |       | 15,510                |       |
| Customer  acquisition costs    |       | 56,381                  |       | 38,500                |       |
| Customer  contract assets      |       | 6,306                   |       | 15,345                |       |
| Goodwill                       |       | —                  |       | 3,810                 |       |
| Customer  contract liabilities |       | (2,050                  | )          | (3,413                | )          |
|                           |       |                    |       |                  |       |
| Total                          |       | $                       | 125,530    |                  | $          | 126,044 |   |

 

Thecustomer acquisition costs are being amortized over an estimated three-yearaverage life of a customer.

 

Thegoodwill, which is reflected in our natural gas segment, represents the Company’scost of entering a new market, as well as workforce-related matters. TheCompany will be deducting for tax purposes the entire amount of goodwill over15 years.

 

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Thefollowing unaudited pro forma financial information for the year ended June 30,2006 assumes the Acquisition had occurred on July 1, 2005. Pro formafinancial information has not been provided for the year ended June 30,2007 as the results are not materially different from the operating resultsrecorded. The pro forma information is not necessarily indicative of theresults that would have been obtained had the Acquisition occurred on such datenor is it necessarily indicative of future results (in thousands):

 
| ** **                            | ** ** | **Year ended  June 30, 2006** | ** ** |
|---------------------------------------|------------|----------------------------------------------|------------|
| Sales  of natural gas and electricity |       | $                                            | 1,010,274  |   |
| Net  loss                             |       | $                                            | (54,430    | ) |

 

SESCo’soperating activities included Percent of Income Payment Plan (“PIPP”) accountsfor the nine months ended March 31, 2006. The PIPP account contractexpired on March 31, 2006 and was not renewed. Accordingly, we did notacquire any PIPP accounts in connection with the Acquisition. SESCo’s PIPPaccounts represented approximately $117.8 million of sales and $1.9 million ofnet income for the nine months ended March 31, 2006. In addition, we didnot acquire from SESCo any contracts which terminated or expired between March 31,2006 and August 1, 2006.

 

OnMay 17, 2007, the Company acquired substantially all of the assets ofVantage Power Services, L.P. (“Vantage”), and began supplying power toapproximately 12,000 former RCEs of Vantage in and around Houston, Dallas/Ft.Worth and Corpus Christi, Texas, for a purchase price of approximately$600,000, plus acquisition-related expenses of approximately $132,000,resulting in a total purchase price of $732,000. The Vantage acquisition wasaccounted for as a purchase business combination and the results of operationsof Vantage are included in the Company’s operating results beginning on May 17,2007. The preliminary purchase price was initially allocated based upon theestimated fair value of the net assets acquired at the date of acquisition. Thefinal allocation will be based on internal valuations and actual results thathave not yet been completed and will be subject to change when the valuationsare completed during fiscal year 2008. The following table presents thepreliminary allocation of the purchase price (in thousands):

 
| ** **                     | ** ** | **Preliminary  Allocation** | ** ** |
|--------------------------------|------------|-----------------------------|------------|
| Other  current assets          |       | $                           | 2          |   |
| Fixed  assets                  |       | 10                          |       |
| Customer  acquisition costs    |       | 1,599                       |       |
| Customer  contract liabilities |       | (879                        | )          |
|                           |       |                        |       |
| Total                          |       | $                           | 732        |   |

 

TheCompany also funded an escrow account with $900,000, which Vantage is eligibleto receive as additional consideration, subject to actual customer attritionand bad debt experience (the “Vantage Contingent Consideration”). The funds inescrow are included in the Company’s consolidated balance sheet under thecaption, “Restricted cash and short-term investments.” The Vantage ContingentConsideration will be evaluated at the end of each six-month period during the18 months following the closing. The Company will also pay to Vantage anestablished percentage of the realized net margin associated with the purchasedcontracts for the original contract term up to a maximum of two years after theclosing. These margin-sharing payments are not expected to be material.

 

InAugust 2006, the Company approved and announced to employees a plan tomove certain of its operations to Houston, Texas in connection with theAcquisition. The terms of the rationalization plan, which are specific to eachemployee affected, include various employee benefit cost components such asseverance, retention bonuses and reimbursement of relocation costs. Certain ofthe employee benefit costs 

 

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arecontingent on future events, such as continued employment during definedtransition periods. The Company estimates the maximum rationalization chargesfor the plan, all of which relate to employee severance and benefits, willamount to approximately $1.3 million. The Company recorded rationalizationcharges of $1.2 million and paid rationalization charges of$0.8 million during the year ended June 30, 2007. The Company expectsto record $0.1 million of rationalization charges during fiscal year 2008and to pay $0.5 million of such employee severance and benefits duringfiscal year 2008. All rationalization charges have been recorded to general andadministrative expenses in the consolidated statements of operations.

 

**4. Loans Payable andLong-Term Debt**

** **

**BridgeLoan**

 

OnMay 12, 2006, in conjunction with the execution of the APA, the Companyentered into a bridge loan commitment letter with two investment banks toprovide up to $200 million in bridge loans (the “Bridge Loan”) to financethe Acquisition. On August 1, 2006, the Company utilized $190 millionof the Bridge Loan to finance the Acquisition. Fees and interest associatedwith the Bridge Loan approximated $0.8 million. On August 4, 2006,the Company repaid the $190 million Bridge Loan with the proceeds from theissuance of $190 million aggregate principal amount of Floating RateSenior Notes due 2011 (the “Senior Notes”) and as a result the Companywrote-off the aforementioned costs as a charge to interest expense.

 

**SeniorNotes**

 

OnAugust 4, 2006, the Company issued $190 million aggregate principalamount of Senior Notes at 97.5% of par value. The Senior Notes mature on August 1,2011 and bear interest at a rate equal to LIBOR plus 7.5% per annum. For theyear ended June 30, 2007, the annual average weighted average interestrate was 12.965%. As of June 30, 2007, the interest rate on the SeniorNotes was 12.9006%. Interest is reset and payable semi-annually on February 1and August 1 of each year. On or before August 1, 2009, upon anequity offering, the Company may redeem up to 35% of the aggregateprincipal amount of the Senior Notes at a price equal to 100% of the principalamount, plus a premium equal to the rate per annum on the Senior Notesoutstanding on the date notice is given to redeem the Senior Notes plus accruedand unpaid interest to the redemption date. If a change of control, as definedin the indenture governing the Senior Notes, were to occur, the Company wouldbe obligated to make an offer to purchase the Senior Notes, in whole or inpart, at a price equal to 101% of the aggregate principal amount of the SeniorNotes, plus accrued and unpaid interest, if any, to the date of purchase. If achange of control were to occur, the Company may not have the financialresources to repay all of its obligations under the Senior Notes. The originalissue discount on the Senior Notes of $4,750,000 is being amortized to interestexpense ratably over the term of the Senior Notes. For the year ended June 30,2007, $1.1 million of original issue discount was amortized to interestexpense. This includes a write-off of approximately $600,000 relating to theearly extinguishment of $12.0 million aggregate principal amount of the SeniorNotes, as discussed in the following paragraph.

 

OnDecember 13, 2006, the Company purchased $12.0 million aggregate principalamount of Senior Notes outstanding, and paid accrued interest of approximately$600,000, from an existing bond holder at 92% of face value. The Companyobtained the $11.0million to re-purchase such Senior Notes from proceeds underits credit facility with Denham Commodity Partners Fund LP (“Denham”), formerlyknown as Sowood Commodity Partners Fund LP (see Note 5). The purchase ofthe $12.0million aggregate principal amount of Senior Notes resulted in theCompany recording a gain on early extinguishment of debt of approximately$400,000, which is net of the write-off of approximately $600,000, relating toa pro rata portion of the 2.5% original issue discount on the Senior Notes and 

 

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unamortizeddebt issuance costs. The $400,000 was recorded as interest income and reportednet of interest expense in the consolidated statement of operations for theyear ended June 30, 2007.

 

Holdingsis the issuer of the Senior Notes and has no significant independentoperations. Holdings’ only significant assets and liabilities are the indirectownership of the stock of MxEnergy Inc. and MxEnergy Electric Inc.,the Senior Notes and related interest expense and interest rate swaps (see “InterestRate Swaps” below for more information). Each of Holdings’ domesticsubsidiaries have jointly and severally, fully and unconditionally guaranteedthe Senior Notes on a senior unsecured basis. Holdings has only one foreignsubsidiary, which subsidiary is not material to the consolidated financialposition or operations of the Company. The indenture governing the Senior Notescontains restrictions on Holdings and its domestic subsidiaries on declaring orpaying any dividend or distribution on Holdings capital stock. On November 3,2006, the Company filed with the SEC a Registration Statement on Form S-4to register an exchange offer (the “Exchange Offer”) for $190 million aggregateprincipal amount of Senior Notes not registered under the Securities Act of1933, as amended (the “Securities Act”) with like principal amount of SeniorNotes that have been registered under the Securities Act. On April 30,2007, the Company’s Registration Statement on Form S-4 (as amended, the “RegistrationStatement”) was declared effective with the SEC and notice of the ExchangeOffer was communicated to all existing bond holders. On May 1, 2007, theCompany commenced an exchange offer for the original notes. On May 30,2007, the Company announced that it was indefinitely extending the expirationdate of the Exchange Offer as a result of the Company’s restatement of itsresults as of December 31, 2006 and for the three and six months then ended.The exchange offer was terminated on June 27, 2007. On August 1,2007, the Company commenced a new exchange offer for the original notes whichclosed on August 31, 2007. The Company exchanged $177,870,000 aggregateprincipal amount of original notes for an equal principal amount of notes.$130,000 aggregate principal amount of the original notes remains outstanding(excluding the $12.0 million owned by the Company). Pursuant to theregistration rights agreement relating to the original notes, the interest rateapplicable to the original notes increased by 0.25% per annum effective as of June 1,2007 because the Company did not complete the exchange offer by the 300th dayfollowing the issue date of the original notes. When the exchange offer wascompleted on August 31, 2007, the original notes ceased accruingadditional interest. As of June 30, 2007, the total additional interestaccrued was approximately $111,000.

 

OnJune 22, 2007, the Company launched a cash tender offer to purchase any orall of the outstanding original notes. In connection with the tender offer, theCompany solicited consents to effect certain proposed amendments to theindenture governing the notes. The Company revised the terms of the tenderoffer and consent solicitation on July 30, 2007 and extended theexpiration date to 5:00 p.m. on September 14, 2007. On August 15,2007, the Company terminated the tender offer and consent solicitation.

 

**InterestRate Swaps**

 

InAugust 2006, the Company entered into interest rate swaps to hedge thefloating rate interest expense on the Senior Notes. The swaps arefixed-for-floating and settle against the six-month LIBOR rate. The fixed ratesunder the swaps range from 5.68% to 5.72% per annum. The total notional amountof the interest rate swaps is $130 million with an initial weightedaverage term of approximately four years. None of the interest rate swaps hasbeen designated as a hedge under SFAS No. 133; accordingly, changes in themarket value of the interest rate swaps have been and will continue to becharged to interest expense, which approximated $0.9 million for the year endedJune 30, 2007. The carrying value of the interest rate swaps at June 30,2007 is approximately $(1.3) million and is included in unrealized losses fromrisk management activities on the consolidated balance sheet.

 

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**HedgeFacility**

 

OnAugust 1, 2006, concurrently with the closing of the Acquisition, theCompany entered into a committed exclusive hedge facility (the “Hedge Facility”)with Société Générale.

 

TheHedge Facility has an initial term of two years with subsequent one-yearrenewal terms. The Hedge Facility provides the Company with the ability toenter into NYMEX and basis swaps for a tenor of up to 39 months. Fees under theHedge Facility include an annual management fee, a volumetric fee based on thetenor of the swap and fees to allow Société Générale to hedge its potentialrisks arising from material declines of natural gas market prices based on theCompany’s overall hedge position with them.

 

TheHedge Facility is secured by a first lien on customer contracts and a secondlien on substantially all other assets of the Company. The Company posted aninitial balance of $25.0 million in cash collateral (obtained from the proceedsof the Senior Notes) for potential negative mark-to-market changes in the valueof the forward hedge position. In April 2007, the Company replaced the$25.0 million of cash collateral with a letter of credit. Under the Hedge Facility,the Company has the flexibility to post either cash collateral or issue aletter of credit as margin for the Hedge Facility. Within the definedvolumetric limits of the Hedge Facility, the Company will not be required topost additional collateral beyond the initial margin requirements.

 

**RevolvingCredit Facilities**

 

ThroughDecember 2005, the EMA with VPEM provided, among other things, loans tothe Company based on the level of its trade receivables and inventories. Theterms of the loans varied but were generally due in either 60-day or 300-dayincrements for receivables and inventory. Inventory loans accrued interest atprime for the duration of the loan. Accounts receivable and extended invoiceloans accrued interest at prime for the earlier of (i) 60 days or (ii) themargin withdrawal date; thereafter, the rate was prime plus 2% per annum.

 

Inaddition to the loans, the EMA provided for borrowings of up to $6,500,000(including third party guarantees) which were payable upon expiration of theEMA and bore interest at a rate of 3% per annum. These funds were used ascollateral for letters of credit or surety bonds issued to various utilitiesand regulatory agencies.

 

Therewere no borrowings under the EMA as of and for the year ended June 30,2007 and as of June 30, 2006. The loans and the borrowings under the EMAwere secured by a first lien on substantially all assets of the Company.

 

Intereston borrowings under the EMA during the years ended June 30, 2006 and 2005totaled $2.2 million and $2.9 million, respectively. There was no interestincurred under the EMA during the year ended June 30, 2007. Administrativefees and other volumetric based expenses were also incurred under the EMA. Theagreement with VPEM expired on June 30, 2007. Beginning July 1, 2007,the Company is able to purchase its physical gas supply from any counterparty.The Company currently has a portfolio of over 35 energy suppliers understandard NAESB contracts from whom we purchase our physical gas supply.

 

InDecember 2005, the Company’s principal operating subsidiaries entered intoa three-year committed credit agreement with a banking syndicate (the “OldCredit Agreement”). The Old Credit Agreement, which replaced the financingcomponent of the EMA with VPEM, provided for revolving working capital 

 

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borrowingor issuance of letters of credit up to $100 million. The availability ofletters of credit and advances under the Old Credit Agreement were limited by aborrowing base consisting primarily of the Company’s unrestricted cash,accounts receivables and natural gas inventories. Letters of credit issuedunder the Old Credit Agreement were charged fees of 1.50% per annum, whileloans bore interest at prime plus 0.375% per annum or at the Company’s option,LIBOR plus 1.625% per annum. Commitment fees were payable on the unused portionof the Old Credit Agreement at 0.375% per annum. As of June 30, 2006, noamounts were outstanding under the Old Credit Agreement.

 

Inconnection with the Acquisition, on August 1, 2006, the Company amendedand restated its Old Credit Agreement (the “New Credit Agreement”). The NewCredit Agreement provides up to $280 million (which may be increasedto $400 million under certain circumstances) and is secured by a secondpriority lien on customer contracts and a first priority lien on substantiallyall of the Company’s and its subsidiaries’ other existing and future assetsand. Borrowings under the New Credit Agreement generally bear interest at afluctuating rate based upon a base rate or a Eurodollar rate plus an applicablemargin. The applicable margin for base rate loans was 1.375% per annum and theapplicable margin for Eurodollar loans was 2.375% per annum through August 20,2007. Such interest rates will be re-established quarterly based on certainleverage ratios, at rates no higher than were applicable during the initialperiod. The current applicable margin for base rate loans is 0.75% per annumand the current applicable margin for Eurodollar loans is 1.75% per annum.Letters of credit issued under the New Credit Agreement will incur chargesranging from 1.375% to 2% per annum. All outstanding borrowings under the NewCredit Agreement are due on December 19, 2008.

 

Asof June 30, 2007, the Company had no amounts outstanding under the NewCredit Agreement. As of June 30, 2007, the Company had $101.4 millionin outstanding letters of credit issued under the New Credit Agreement whichserve as collateral for the performance risk associated with future delivery ofnatural gas. Total availability under the New Credit Agreement as of June 30,2007 was $110.0 million.

 

TheNew Credit Agreement contains customary covenants that restrict certainactivities including, among others, limitation on capital expenditures,disposal of property and equipment, additional indebtedness, issuance ofcapital stock and dividend payments. Financial covenants under the New CreditAgreement include, among others, minimum tangible net worth, minimum workingcapital and interest coverage, each as defined in the New Credit Agreement,which was amended on April 6, 2007 to reflect changes in the financialthresholds of certain covenants. The New Credit Agreement also containscustomary events of default. The Company was in compliance with the financialcovenants under the New Credit Agreement at June 30, 2007.

 

**CreditAgreement with Denham Commodity Partners Fund LP (“Denham”)**

 

Fora discussion of the Company’s credit agreement with Denham, reference is madeto “Note 5. Transactions with Related Parties — Credit Agreements withDenham Commodity Partners Fund LP (“Denham”).”

 

**5. Transactions with RelatedParties**

** **

**Credit Agreement with DenhamCommodity Partners Fund LP (“Denham”)**

** **

InJuly 2004, Lathi, LLC (“Lathi”), a significant stockholder of the Company,contributed its ownership interest and the financing agreements to Denham(formerly known as Sowood Commodity Partners Fund LP). This financing agreementconsists of a $12.0 million line of credit negotiated in November 2003.Draws under the line of credit bear interest 

 

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at9% per annum and are due May 14, 2009. Draws under the term loan facilitybore interest at 14% per annum and matured on March 25, 2006.

 

InJuly 2006, the Company fully utilized its $12.0 million Denham creditfacility to secure letters of credit with pipelines and LDCs prior to closingthe Acquisition. On August 1, 2006, the Company repaid the Denham creditfacility with proceeds from the Bridge Loan. On December 13, 2006, theCompany borrowed $11.0 million under the Denham credit facility to fund thepurchase of $12.0 million aggregate principal amount of its Senior Notes (seeNote 4).

 

Asof June 30, 2007 and 2006, the Company had $11.0 million and $0,respectively, of borrowings outstanding under the Denham credit facility.Interest on loans from Denham amounted to approximately $516,000, $0 and $0 forthe years ended June 30, 2007, 2006 and 2005, respectively.

 

Theremaining Denham financing agreement (as of June 30, 2007) containsoperating and financial covenants. These financial and operational covenantsrequire the Company to maintain minimum forward book values, minimum totalasset values, minimum qualified accounts and minimum consolidated earningsbefore interest, taxes, depreciation and amortization. The Company was incompliance with the covenants under the remaining Denham financing agreement atJune 30, 2007.

 

InJuly 2004, the Company amended the term of 1,469,736 outstanding warrantspreviously issued to Lathi such that the warrants all concurrently expire on March 29,2009. This modification was made in connection with the issuance of preferredstock in fiscal 2004 (see Note 11). The estimated change in the fair value ofthe warrants attributable to the modification was approximately $290,000 andwas treated as an additional cost of issuance of preferred stock in 2005.

 

**Transaction Bonuses**

** **

**In September 2006, certain members of the Company’smanagement team received cash bonuses in recognition of their work in theAcquisition. Jeffrey Mayer, President and Chief Executive Officer, Carole R.Artman-Hodge, Executive Vice President, and Chaitu Parikh, Vice President,Chief Financial Officer and Assistant Treasurer, received $250,000, $150,000and $200,000, respectively. Such amounts were recorded as general andadministrative expenses in the consolidated statements of operations for theyear ended June 30, 2007.**

** **

**Legal Services**

** **

DanielBergstein, a director and significant stockholder of the Company, is a senior partnerof Paul, Hastings, Janofsky & Walker LLP (“Paul Hastings”), a law firmwhich provides legal services to the Company. During the years ended June 30,2007, 2006 and 2005, the Company incurred expenses of approximately $1,234,000,$1,419,000 and $174,000, respectively, for legal services provided by PaulHastings. The Company expects that Paul Hastings will continue to provide legalservices in future periods.

 

**Financial Advisory Services**

 

**In fiscal 2005, the Company entered into a consultingagreement with Greenhill Capital Partners (“GCP”), a significant stockholder ofthe Company, to serve as a financial advisor. The agreement provided for apayment of a quarterly retainer of $75,000 and additional fees contingent uponthe successful completion of certain transactions specified in the agreement.The Company recorded general and administrative expenses of $0, $303,000 and$152,000 during the years ended June 30, 2007, 2006 and 2005,respectively, pertaining to this agreement. The retainer arrangement with GCPexpired on September 30, 2006. In May 2007, the Company entered intoa financial advisory services agreement**

 

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**with Greenhill & Co., LLC, an affiliate of GCP,under which the Company may incur charges based on the occurrence of atransaction as defined in the agreement, if any. The Company did not incur anyexpenses under this agreement during the year ended June 30, 2007.**

** **

**Other Transactions**

** **

Infiscal 2005, a member of the board of directors exercised options to acquire68,800 common shares of the Company with a non-interest bearing promissory notefor $680,000 secured by the stock. The promissory note was fully paid prior to June 30,2005.

 

Infiscal 2006, certain employees exercised warrants to acquire common stock ofthe Company. The warrants contained a provision that provided for a netissuance of common stock which resulted in the issuance of 54,987 shares ofcommon stock. In addition, common stock was withheld upon the exercise of thewarrants to satisfy withholding tax requirements. The Company estimated thefair market value of the stock at the time of exercise using an internallydeveloped valuation model.

 

**6. Fixed Assets, Net**

** **

Fixedassets, net, consist of the following (in thousands):

 
| ** **                                      | ** ** | **June 30** | ** ** | **Estimated** | ** ** |
|-------------------------------------------------|------------|------------------|------------|---------------|------------|
| ** **                                      | ** ** | **2007**         | ** ** | **2006**      | ** ** | **Useful Lives** | ** ** |
| Computer  equipment and development             | ** ** | **$**            | **12,665** |          | $          | 10,562 |   | 3–5 years |   |
| Computer  software                              | ** ** | **16,207**       |       | 1,246         |       | 3 years |   |
| Office  furniture and equipment                 | ** ** | **1,357**        |       | 1,019         |       | 3–5 years |   |
| ** **                                      |       | **30,229**       |       | 12,827        |       |   |   |
| Less  accumulated depreciation and amortization | ** ** | **(12,380**      | **)**      | (4,190        | )          |   |   |
| Net                                             | ** ** | **$**            | **17,849** |          | $          | 8,637 |   |   |   |

 

Depreciationand amortization expenserelating to all fixed assets for the years ended June 30, 2007, 2006 and2005 was approximately $8.2 million, $2.3 million and $1.2 million,respectively.

 

Accumulatedamortization relating to capitalized computer software costs as of June 30,2007 and 2006 was approximately $4.8 million and $79,000, respectively.Amortization expense relating to capitalized computer software costs for theyears ended June 30, 2007, 2006 and 2005 was approximately $4.7 million,$79,000 and $0, respectively.

 

**7. Accounts Payable andAccrued Liabilities**

** **

**Accounts payable and accrued liabilities consist of thefollowing (in thousands):**

** **
| ** **                                            | ** ** | **June 30** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|
| ** **                                            | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Interest  payable                                     | ** ** | **$**            | **13,118** |   | $ | 65 |   |
| Trade  accounts payable and accrued expenses          | ** ** | **10,047**       |       | 7,278 |   |
| Payroll  and related expenses                         | ** ** | **2,885**        |       | 1,880 |   |
| Sales  and other taxes                                | ** ** | **1,928**        |       | 1,035 |   |
| Customer  contracts acquired in business combinations | ** ** | **1,673**        |       | 670 |   |
| Other                                                 | ** ** | **3,306**        |       | 1,567 |   |
| Total  accounts payable and accrued liabilities       | ** ** | **$**            | **32,957** |   | $ | 12,495 |   |

 

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Interestpayable relates primarily to accrued interest on the Senior Notes and the Denhamcredit facility. Trade accounts payable and accrued expenses relate primarilyto transportation and distribution charges, imbalances and otherutility-related expenses.

 

Customercontracts acquired in business combinations relates to obligations to servefixed-price customers, acquired as part of acquisitions of businesses thathad contract terms which were at below market rates at the respective dates ofacquisition. Such amounts will be adjusted through cost of natural gas andelectricity sold as the Company makes deliveries under the contracts.

 

**8. Commodity Derivatives andHedging Activities**

** **

TheCompany’s risk management policy is to hedge 100% of the anticipated purchasesrequired to meet expected customer demand (up to 110% in the winter months) forall accounts served on a fixed-price contract. The Company utilizes NYMEX andbasis price swap agreements to hedge the risk of variability in the cost ofnatural gas. The risk management policy employed is intended to insulate theCompany from changes in the price of natural gas. The Company does not engagein speculative trading activities.

 

Fornatural gas, the Company had 18,703,000 MMBtu NYMEX and 14,641,000 MMBtu basisswaps open as of June 30, 2007 and 36,166,000 MMBtu NYMEX and 22,614,000MMBtu basis swaps open as of June 30, 2006, relating to hedgingactivities. For electricity, the Company had 69,137 MWhrs and 36,629 MWhrs ofswaps and fixed price contracts open as of June 30, 2007 and 2006,respectively, relating to hedging activities. Total unrealized losses fromcommodity risk management activities were $19.3 million and $0.4 million at June 30,2007 and 2006, respectively. Outstanding contracts as of June 30, 2007extend to October 2010.

 

Asof June 30, 2007 and 2006, the Company has forward physical contracts topurchase natural gas and electricity. For additional information, see Note 9.Commitments — Other.

 

**9. Commitments**

** **

**Operating Leases**

** **

TheCompany leases office space under non-cancelable operating leases, whichcontain escalation clauses and expire between July 2009 and October 2017subject to extension at the option of the Company. The Company takes intoaccount all escalation clauses when determining the amount of future minimumlease payments. All future minimum lease payments are recognized on astraight-line basis over the minimum lease term. Rental expense related to theabove leased spaces was $1.6 million, $529,000 and $391,000 for the years endedJune 30, 2007, 2006 and 2005, respectively. Future annual minimum leasepayments under these operating leases are as follows (in thousands):

 
| Fiscal  year: |   |   |   |
|---------------|--------|--------|--------|
| 2008          |   | $      | 887    |   |
| 2009          |   | 975    |   |
| 2010          |   | 760    |   |
| 2011          |   | 246    |   |
| 2012          |   | 209    |   |
| Thereafter    |   | 1,311  |   |
| Total         |   | $      | 4,388  |   |

 

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**Energy Trading & RiskManagement System (“ETRM”)**

** **

InJune 2005, the Company entered into a license agreement to install anenergy trading and risk management system (“ETRM”). At that time, the softwarelicense cost was approximately $790,000, with an additional $244,000 incurredin June 2007 to increase the number of user licenses. As of June 30,2007 and 2006, capitalized costs for the ETRM totaled approximately $2.2million and $2.0 million, respectively, (see Note 6). Annual maintenance feesapproximate an additional $240,000. The Company is utilizing the ETRM and willcontinue to perform enhancements to the system through the end of fiscal2008.

 

**Capacity Charges**

** **

TheCompany enters into agreements to transport and store natural gas. Since thedemand for natural gas in the winter is high, the Company agrees to pay forcertain capacity for the transportation systems utilized for up to atwelve-month period. These agreements are take-or-pay in that if the Companydoes not use the capacity, it still must pay for capacity committed. The amountof the capacity committed to at June 30, 2007 and 2006 was $4.9 millionand $1.8 million, respectively. These agreements will expire in fiscal 2008.

 

Chargesunder take-or-pay agreements committed to as of June 30, 2006, 2005 and2004, paid in fiscal years 2007, 2006 and 2005, totaled $1.8 million, $1.1million and $1.5 million, respectively.

 

**Other**

 

Asof June 30, 2007 and 2006 the Company has forward physical contracts topurchase a total of 9,747,000 MMBtu and 12,800,000 MMBtu of natural gas for themonths of July 2007 through December 2009 and July 2006 through May 2009,respectively. These contracts have a fixed basis component and a variablecomponent determined based on market prices at purchase date. The amount of thefixed basis and variable components were $2.9 million and$76.7 million at June 30, 2007, respectively and $8.5 million and$97.1 million at June 30, 2006, respectively. All such contracts areconsidered normal purchases under SFAS No. 133. As of June 30, 2007,the Company had forward physical contracts to purchase a total of 125,000 MWhrsfor the months of July 2007 through August 2009. These contracts areall on a fixed basis, totaling $9.6 million at June 30, 2007. All suchcontracts are considered normal purchases under SFAS No. 133. As of June 30,2006, there were no forward physical contracts to purchase electricity. As of June 30,2007, forward commitments to purchase natural gas and electricity were asfollows: fiscal year 2008 - $66.0 million; fiscal year 2009 - $20.4 million;and fiscal year 2010 - $2.8 million.

 

**10. Income Taxes**

** **

TheCompany files a consolidated U.S. Federal income tax return that includes allits domestic subsidiaries, as well as returns in various states. For operationsin Canada, a Canadian Federal tax return is filed, as well as an Ontarioprovincial return.

 

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Incometax (benefit) expense consists of the following (in thousands):

 
| ** **                          | ** ** | **Years ended June 30** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current:                            |       |                                   |       |   |   |   |   |
| Federal                             | ** ** | **$**                                  | **4,750**  | ** ** | $ | 5,595 |   | $ | 8,517 |   |
| State                               | ** ** | **1,204**                              | ** ** | 168 |   | 3,073 |   |
| ** **                          |       | **5,954**                              | ** ** | 5,763 |   | 11,590 |   |
| Deferred:                           |       |                                   | ** ** |   |   |   |   |
| Federal                             | ** ** | **(13,249**                            | **)**      | (25,683 | ) | 5,137 |   |
| State                               | ** ** | **(1,200**                             | **)**      | (7,081 | ) | 1,415 |   |
| ** **                          |       | **(14,449**                            | **)**      | (32,764 | ) | 6,552 |   |
| Total  income tax (benefit) expense | ** ** | **$**                                  | **(8,495** | **)** | $ | (27,001 | ) | $ | 18,142 |   |

 

In2005, the Company used the Alternative Minimum Tax credit that it had availableof $179,000.

 

Incometax expense in fiscal 2005 includes $563,000 of current income tax expense and$125,000 of deferred income tax expense resulting from a change in the stateapportionment factors used in fiscal 2005 in connection with the filing of theCompany’s fiscal 2004 income tax returns. In addition, the deferred taxbalances were adjusted due to a change in the effective tax rate. The federaltax rate in fiscal 2005 increased to 35% from 34% due to higher levels oftaxable income. The income tax expense differs from the amount computed byapplying the statutory federal income tax rate to income before income taxexpense, principally due to state income taxes, net of federal tax benefit.

 

Stateincome tax expense in fiscal 2006 was positively impacted by $282,000 due tofiscal 2005 income tax provision to return adjustments made during 2006.

 

Theprovision for income taxes varied from income taxes computed at the statutoryU.S. federal income tax rate as a result of the following:

 
| ** **                                                             | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Federal  statutory rate                                                | ** ** | **35.0**   | **%**      | 35.0     | %          | 35.0     | %          |
| State  statutory rate, net of federal benefit                          | ** ** | **5.4**    |       | 5.7      |       | 5.7      |       |
| Total                                                                  | ** ** | **40.4**   |       | 40.7     |       | 40.7     |       |
| Impact  of prior year adjustments on current and deferred income taxes | ** ** | **—** |       | 0.1      |       | 3.0      |       |
| Impact  of changing tax rates on prior year deferred balances          | ** ** | **(0.1**   | **)**      | —   |       | —   |       |
| Impact  of permanent differences                                       | ** ** | **(2.2**   | **)**      | (0.4     | )          | 0.3      |       |
| Effective  tax rate                                                    | ** ** | **38.1**   | **%**      | 40.4     | %          | 44.0     | %          |

 

Thestate statutory rate in fiscal 2007 decreased to 5.4%, as a result of theAcquisition, which adjusted the state apportionment factors, thus leading to alower tax rate. Permanent differences increased by $542,000 due to thenon-deductibility of incentive stock option compensation expense.

 

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Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amount of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. The Company expects to fullyrecognize its deferred tax assets recorded at June 30, 2007. Thesignificant components of the Company’s deferred tax assets and liabilities areas follows (in thousands):

 
| ** **                                       | ** ** | **June 30** | ** ** |
|--------------------------------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2007**         | ** ** | **2006** | ** ** |
| Deferred  tax assets:                            |       |             |       |   |   |
| Allowance  for doubtful accounts                 | ** ** | **$**            | **2,125**  |   | $ | 1,283 |   |
| Deprecation  and amortization                    | ** ** | **6,438**        |       | 1,400 |   |
| Unrealized  losses on risk management activities | ** ** | **8,327**        |       | 1,623 |   |
| Stock  compensation expense                      | ** ** | **1,867**        |       | 642 |   |
| Other  reserves                                  | ** ** | **133**          |       | 55 |   |
| Total  deferred tax assets                       | ** ** | **18,890**       |       | 5,003 |   |
| Deferred  tax liabilities:                       |       |             |       |   |   |
| Accrued  bonuses                                 | ** ** | **$**            | **—** |   | $ | 29 |   |
| Unrealized  gains on risk management activities  | ** ** | **—**       |       | 533 |   |
| Total  deferred tax liabilities                  | ** ** | **—**       |       | 562 |   |
| Net  deferred tax asset                          | ** ** | **$**            | **18,890** |   | $ | 4,441 |   |

 

**11. Redeemable ConvertiblePreferred Stock**

** **

TheCompany is authorized to issue 5,000,000 shares of Series A convertiblepreferred stock (“Preferred Stock”). On June 30, 2004, the Company enteredinto a Purchase Agreement with Charterhouse Group Inc. and Greenhill CapitalPartners LLC (collectively, the “Investors”) for Preferred Stock. Under theterms of the agreement, the Company issued 1,451,310 shares of Preferred Stockfor consideration of $29,730,000 (net of offering expenses of $1,270,000 ofwhich $887,000 was paid to the Investors). The shares were issued at a purchaseprice of $21.36 per share. On June 30, 2004, the Company receivedconsideration in the form of a promissory note from the Investors in the amountof $30,113,000. The promissory note was paid in July 2004. The Company hasreserved 1,451,310 common shares issuable upon conversion of the PreferredStock.

 

Holdersof the Preferred Stock are entitled to participate in any dividend paid on theCompany’s common stock on an “as converted” basis. In addition, dividends onthe Preferred Stock accrue at a rate of 12% per annum of the purchase price pershare if the increase in fair value of the Company’s common stock does notprovide the holders of the Preferred Stock an internal rate of return (“IRR”)of at least 12%. Accrued dividends, if any, are payable in additional shares ofPreferred Stock.

 

TheCompany did not accrue any dividends on the Preferred Stock for fiscal 2007,2006 and 2005. Had the holders of the Preferred Stock converted the shares tocommon stock at June 30, 2007, the conversion would have been done on aone-for-one basis as the estimated fair value of the common stock results in anaggregate return greater than the 12% per annum dividend rate. The liquidationpreference and conversion features of the Preferred Stock are defined below.

 

Holdersof the Preferred Stock are entitled to vote on all matters to be voted on bythe Company’s stockholders and shall vote on an as-converted basis as a single class withthe Company’s common stockholders.

 

86

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Inthe event of liquidation, each holder of Preferred Stock is entitled to receivean amount per share of Preferred Stock equal to the greater of:

 

1.               the Convertible PreferredLiquidation Preference defined as the sum of:

 

a.               the purchase price per share(as adjusted for any splits, stock dividends, combinations, recapitalization,or other similar event), and

b.              all dividends accrued ordeclared and unpaid as of such date on the Preferred Stock, or

 

2.               the amount per share ofPreferred Stock (or its common stock equivalent) such holder would havereceived if it had converted its share of Preferred Stock into shares of theCompany’s Common Stock immediately prior to a liquidation.

 

Asof June 30, 2007 and 2006, the holders of Preferred Stock do not have aliquidation preference as the estimated fair value of the common stock wouldprovide the holders with a return of greater than 12%.

 

Eachholder of Preferred Stock shall have the right at any time at the option of theholder (“Optional Conversion”) to convert the holder’s shares of PreferredStock into the number of fully paid and non-assessable shares of the Company’scommon stock equal to the product of:

 

1.               the number of shares ofPreferred Stock being so converted and

 

2.               the ratio of:

 

a.               purchase price per share to

b.              the Conversion Price(defined below) then in effect.

 

3.               Notwithstanding theforegoing, if the fair market value of the Company’s common stock as of theconversion date is at a level that would provide an IRR of less than 12% to themajority of the purchasers of the Preferred Stock on their respectiveinvestments then the ratio set forth in clause (2) above shall be theratio of:

 

a.               the Convertible PreferredLiquidation Preference for such share to

b.              the Conversion Price(defined below) then in effect.

 

The“Conversion Price” shall be set initially at an amount equal to $21.36 perPreferred Share and shall be subject to certain anti-dilution provisions.

 

Inthe event of:

 

1.               an underwritten publicoffering of shares of the Company at a total offering of not less than $75million and at a price per share (adjusted to reflect stock dividends, splitsand similar events) not less than 1.5 times the Conversion Price through thefirst anniversary of the original issue date or 2.0 times the Conversion Pricethereafter (a “Qualified Public Offering”) or

 

2.               the request of the holdersof a majority of the then outstanding shares of the Convertible Preferred Stockvoting as a separate class, all of the Preferred Stock will be automaticallyconverted into the Company’s common stock on the same basis as provided aboveunder an Optional Conversion.

 

Atany time on or after the fifth anniversary of the issuance of the PreferredStock, the Company may redeem all but not less than all of the outstandingshares of Preferred Stock in cash at a price per share 

 

87

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equalto the Convertible Preferred Liquidation Preference, if the fair market valueof the Company’s common stock as of the date notice of redemption is at a levelthat would provide an IRR of not less than 40% to the majority of thepurchasers of the Preferred Stock on their respective investments.

 

Theholders of the Preferred Stock will have the right to “put” the Preferred Stockto the Company after the fifth anniversary of the issuance of the PreferredStock, if the fair market value of the Company’s common stock is at a levelthat would not provide such holders an annualized IRR of at least 25%, at anamount per share equal to the Convertible Preferred Liquidation Preference.

 

TheCompany has reflected the redeemable convertible preferred stock outside of theequity section under the provisions of SEC Accounting Series Release268 (Reg S-X 5-02.28) which require that redeemable equity securities bepresented separately from stockholders’ equity if they are redeemable at theoption of the holder, or at a fixed date at a fixed price, or redemption isotherwise beyond the control of the issuer. This presentation is required evenif the likelihood of the redemption event occurring is considered remote. Asthe Preferred Stock is redeemable at the option of the holder if the IRR overthe five year period from the date of issuance is less than 25%, such amounthas been reported separately from stockholders’ equity at its fair market valueat the date of issuance ($29 million net of issuance costs). As the PreferredStock is only contingently redeemable, subsequent adjustment of its carryingvalue is not necessary until it is probable that the security will becomeredeemable in accordance with EITF Topic No. “D-98 Redeemable SecuritiesClassification and Measurement.” The Company determined it is not probable thatthe security will become redeemable as of June 30, 2007 and 2006 as thepreferred stockholders do not have a liquidation preference as the IRR in suchperiods is greater than 25%.

 

**12. Common Stock**

** **

**Shares Reserved forRedeemable Convertible Preferred Stock**

** **

Inconnection with the Preferred Stock issuance, the Company has reserved1,451,310 common shares issuable upon conversion of the Preferred Stock (seeNote 11).

 

**Options and Warrants**

** **

Asdescribed in Note 5, the Company has the following outstanding options andwarrants (collectively, “Awards”) issued in connection with existing creditfacilities and other transactions with related parties:

 

•                  1,183,808 immediately vested warrants held byDenham to purchase common stock of the Company with a weighted average exerciseprice of $10.13 per share in connection with the $12.0 million line of credit.

 

•                  75,000 immediately vested warrants held byDenham with an exercise price of $15.00 per share in connection with the $9.0million term loan facility.

 

•                  15,000 options with an exercise price of$21.50 per share, vesting ratably over a period of three years, with a term often years granted in 2005 to two non-employee directors in connection with theissuance of preferred stock.

 

Inaddition to the warrants issued to Denham in connection with the creditfacilities referred to above, Denham holds 285,928 warrants that werepreviously issued by the Company to Lathi.

 

TheCompany reserved 366,500 shares of Common Stock as a pool for distribution toemployees and non-employees pursuant to the Company’s 2001 Incentive StockOption (“ISO”) program. The 2001 ISO 

 

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programwas established in February 2001 and approved by the Company’sstockholders. The 2001 ISO program allows for awards of stock or stock optionsup to the allocated number of shares in the pool. As of June 30, 2007,53,600 shares were available under the 2001 ISO program for future award.

 

TheCompany reserved 400,000 shares of Common Stock as a pool for distribution toemployees and non-employees pursuant to the Company’s 2003 ISO program. The2003 ISO program was established in November 2003 and approved by theCompany’s stockholders. The 2003 ISO program allows for awards of stock orstock options up to the allocated number of shares in the pool. As of June 30,2007, 20,480 shares were available under the 2003 ISO program for future award.

 

InNovember 2005, the board of directors and stockholders approved theMxEnergy Holdings Inc. 2006 Equity Incentive Compensation Plan (the “2006 Plan”).The 2006 Plan allows the Company to grant options, restricted stock, phantomshares, dividend equivalent rights, performance awards or stock appreciationrights, to employees, members of the board of directors, officers, consultantsand other service providers. The purpose of the 2006 Plan is to attract andretain qualified employees, consultants and other service providers byproviding them with additional incentives and opportunities to participate inthe Company’s ownership, and to create interest in the success and increasedvalue of the Company. The 2006 Plan is administered by the compensationcommittee of the board of directors. The compensation committee has theauthority to determine and to establish guidelines and to delegate tomanagement the determination of the persons to whom awards are to be granted,the time at which awards will be granted, the number of shares to berepresented by each award, and the consideration to be received, if any. Thecompensation committee also has the power to interpret the 2006 Plan and tocreate or amend its rules. Option awards are generally granted with an exerciseprice equal to the market price of the Company’s stock at the date of grant,those option awards generally vest gradually based on three years of continuousservice and have ten year contractual terms. 750,000 shares of common stockhave been authorized to be issued pursuant to awards under the 2006 Plan. As ofJune 30, 2007, 260,200 shares were available under the 2006 Plan forfuture award. The adoption of the 2006 Plan has no impact on the 2001 and 2003ISO programs.

 

Thefair value of each option award granted subsequent to June 30, 2006, isestimated on the date of grant using a Black-Scholes-Merton option valuationmodel, which includes assumptions regarding the expected volatility, expectedterm and interest rate. The Company has determined that it is not practicableto estimate the expected volatility of its share price as it is a non-publiccompany with limited historical stock price data. Expected volatilities areestimated by the Company based on historical realized volatilities ofcomparable publicly traded company stock prices over a period of timecommensurate with the expected term of the option award. The Company utilized arange of volatilities of 14%-18% to calculate the fair value of option awardsgranted during the year ended June 30, 2007. The Company utilizes the “shortcutapproach” as described in Staff Accounting Bulletin No. 107, an interpretationof SFAS No. 123R, to determine the expected term of option awards. The “shortcutapproach” is calculated based on the mid-point between the vesting date and theend of the contractual term of the option award. Interest rates are based onthe risk free interest rate, determined as the implied yield on U.S. Treasuryzero-coupon issues with a remaining term equal to the expected term of theoption award. The Company utilized a range of interest rates of 4.5%-4.7% tocalculate the fair value of option awards granted during the year ended June 30,2007. The Company estimates no dividends when valuing option awards as theCompany has never issued dividends and currently does not expect to issuedividends in the future. The Company uses historical data to estimate optionaward forfeiture rates and such forfeiture rates are further determined basedon separately identified employee groups whom are expected to have similarbehavior patterns. Compensation expense for option awards subject to gradedvesting is recognized based on the accelerated attribution method as specifiedin FASB Interpretation No. 28, “Accounting for Stock Appreciation Rightsand Other Variable Stock Option or Award Plans.”

 

89

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Duringthe year ended June 30, 2007, the Company granted 508,000 of stock optionawards to employees under the 2006 Plan. These stock option awards vestgradually over a three-year period and have a weighted average contractual lifeof approximately ten years. The Company expects to record approximately$5.5 million of compensation expense as a result of these stock optionawards, of which $2.2 million ($1.5 million net of tax) was recorded in generaland administrative expenses in the consolidated statement of operations duringthe year ended June 30, 2007. The Company expects to record approximately$2.2 million, $0.9 million and $0.2 million in expenses, duringfiscal year 2008, fiscal year 2009 and fiscal year 2010, respectively, relatingto the stock option awards granted during the year ended June 30, 2007.

 

Pursuantto employment contracts entered into in fiscal 2006, the Company granted 1,500immediately vested warrants and 3,000 warrants which vest ratably over athree-year period to employees, which have a weighted average exercise priceper share of $32.50 and a weighted average fair value of $11.72 per share atthe date of grant.

 

Pursuantto employment contracts entered into in fiscal 2005, the Company granted 7,500immediately vested warrants and 22,500 warrants which vest ratably over athree-year period to employees, which have a weighted average exercise priceper share of $24.00 and a weighted average fair value of $1.06 per share at thedate of grant, of which 10,000 warrants have been forfeited.

 

Duringfiscal 2005, the Company granted 357,720 options to employees under the Company’s2003 ISO plan. The options vest ratably over a three-year period and have aweighted average exercise price per share of $24.09 and a weighted average fairvalue of $6.15 per share at the date of grant.

 

Underthe provisions of APB No. 25, the Company did not record any compensationexpense relating to the options or warrants (except primarily for warrants withthe cashless exercise provision as described in Note 2) granted to employees asthe exercise price was greater than or equal to the estimated fair market valueon the grant date.

 

Awardsexercised for common stock totaled 29,000, 132,967, and 96,533 in 2007, 2006and 2005, respectively, for aggregate proceeds of approximately $22,000,$562,000 and $798,000, respectively. The tax benefit derived by the Company onthe exercise of warrants amounted to approximately $200,000, $0 and $670,000 in2007, 2006 and 2005, respectively, and were recorded as a reduction of currenttax liability and an increase to additional paid-in capital.

 

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Thefollowing is a summary of all Awards as of June 30:

 
| ** **                                                         | ** ** | **2007**                   | ** **         | **2006**                                | ** ** | **2005**                   | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|--------------------|-----------------------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | **Number of  Awards** | ** **         | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Awards** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number of  Awards** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
|                                                               | ** ** | ** **                 | ** **         | ** **                              |       |                       |       |   |   |   |   |   |   |
| Outstanding  at beginning of year                                  | ** ** | **2,538,106**              | ** **         | **$**                                   | **10.87**  |                       | 2,696,706  |   | $ | 10.70 |   | 2,430,986 |   | $ | 8.61 |   |
| Granted                                                            | ** ** | **508,000**                | ** **         | **42.90**                               |       | 4,500                      |       | 32.50 |   | 402,720 |   | 24.38 |   |
| Exercised                                                          | ** ** | **29,000**                 | ** **         | **3.08**                                |       | 132,967                    |       | 4.23 |   | 96,533 |   | 8.26 |   |
| Forfeited                                                          | ** ** | **40,700**                 | ** **         | **28.73**                               |       | 30,133                     |       | 25.41 |   | 31,967 |   | 5.39 |   |
| Expired                                                            | ** ** | **45,000**                 | ** **         | **4.40**                                |       | —                     |       |   |   | 8,500 |   | 5.35 |   |
| Outstanding  at end of year                                        | ** ** | **2,931,406**              | ** **         | **$**                                   | **16.35**  |                       | 2,538,106  |   | $ | 10.87 |   | 2,696,706 |   | $ | 10.70 |   |
| Weighted  average fair value of grants during the year             | ** ** | ** **                 |               | **$**                                   | **12.31**  |                       |       |   | $ | 11.72 |   |   |   | $ | 5.76 |   |
|                                                               |       |                       |               |                                    |       |                       |       |   |   |   |   |   |   |
| Total  intrinsic value of awards outstanding at June 30, 2007 | ** ** | ** **                 | **$96.5  million** |                                    |       |                       |       |   |   |   |   |   |   |   |
|                                                                    |            |                            |                    |                                         |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **          | ** ** | ** **                              | ** **  | **2007**                                | ** **  | **2006**                                            | ** **     | **2005**                                | ** ** |
|---------------------|------------|-----------------------------------------|-------------|-----------------------------------------|-------------|-----------------------------------------------------|----------------|-----------------------------------------|------------|
| **Exercise  Price** | ** ** | **Number of  Awards  Outstanding** | ** **  | **Number of  Awards  Exercisable** | ** **  | **Weighted  Average  Contractual  Life  Remaining** | ** **     | **Number of  Awards  Outstanding** | ** ** | **Number of  Awards  Exercisable** | ** ** | **Number of  Awards  Outstanding** | ** ** | **Number of  Awards  Exercisable** | ** ** |
|                | ** ** | ** **                              | ** **  | ** **                              | ** **  | ** **                                          |           |                                    |       |   |   |   |   |   |   |
| $                   | 1.00       | ** **                              | **110,000** | ** **                              | **110,000** | ** **                                          | **4.7  Years** |                                    | 120,000    |   | 120,000 |   | 126,500 |   | 126,500 |   |
| 2.16                | ** ** | **132,450**                             | ** **  | **132,450**                             | ** **  | **0.2  Years**                                      |           | 132,450                                 |       | 132,450 |   | 132,450 |   | 132,450 |   |
| 3.72–5.35      | ** ** | **47,500**                              | ** **  | **47,500**                              | ** **  | **1.5  Years**                                      |           | 110,000                                 |       | 110,000 |   | 220,000 |   | 215,000 |   |
| 6.99–9.12      | ** ** | **1,215,863**                           | ** **  | **1,215,863**                           | ** **  | **1.7  Years**                                      |           | 1,229,663                               |       | 1,199,196 |   | 1,252,463 |   | 1,139,656 |   |
| 11.64–15.00    | ** ** | **562,573**                             | ** **  | **562,573**                             | ** **  | **1.4  Years**                                      |           | 562,573                                 |       | 559,573 |   | 562,573 |   | 556,573 |   |
| 21.50–25.00    | ** ** | **234,420**                             | ** **  | **162,947**                             | ** **  | **5.8  Years**                                      |           | 239,020                                 |       | 89,507 |   | 248,520 |   | — |   |
| 27.50–32.50    | ** ** | **136,300**                             | ** **  | **91,200**                              | ** **  | **7.9  Years**                                      |           | 144,400                                 |       | 48,967 |   | 154,200 |   | — |   |
| 42.57–48.74    | ** ** | **492,300**                             | ** **  | **5,000**                               | ** **  | **9.0  Years**                                      |           | —                                  |       | — |   | — |   | — |   |
| ** **          | ** ** | **2,931,406**                           | ** **  | **2,327,533**                           |        |                                                |           | 2,538,106                               |       | 2,259,693 |   | 2,696,706 |   | 2,170,179 |   |
|                     |            |                                         |             |                                         |             |                                                     |                |                                         |            |  |  |  |  |  |  |  |

 

Theweighted average remaining term for the awards outstanding and exercisable at June 30,2007 was approximately four and two years, respectively. The weighted averageexercise price of awards exercisable at June 30, 2007 was $10.39.

 

Asof June 30, 2007, the 2,931,406 of awards outstanding were comprised of489,800 stock option awards granted during fiscal year 2007 and accounted forunder the provisions of SFAS No. 123R, 83,500 warrants granted prior to June 30,2006 and accounted for using variable plan accounting (see Note 2) and2,358,106 stock option awards and warrants granted prior to June 30, 2006and accounted for under APB No. 25.

 

**13. Employee Benefits**

** **

TheCompany sponsors an employee savings plan under Section 401(k) of theInternal Revenue Code for all full-time employees with at least three months ofcontinuous service. Eligible employees may make pre-tax contributions upto 20% of their annual compensation not to exceed the annual 401(g) limitationfor any plan year. The Company makes a matching contribution of up to 10% ofeach participating employee’s compensation up to the maximum allowable underthe plan. Employees whose employment 

 

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dateis prior to July 1, 2007, are immediately 100% vested in allcontributions. Employer contributions for employees whose employment date is onor after July 1, 2007 will vest in increments of 25% per year. The Companymade contributions totaling approximately $1.0 million, $553,000 and $352,000during the years ended June 30, 2007, 2006 and 2005, respectively. Theincrease was due to increased staff levels.

 

**14. Segment Information**

** **

TheCompany classifies its business interests into two reportable segments: naturalgas and electricity. Previously, the Company had classified its business intothree reportable segments: residential and small commercial natural gas (massmarket), mid-market commercial natural gas and electricity. During the fourthquarter of fiscal 2007, management changed the method of allocating resourcesto the business and no longer views the mass market gas and the mid-marketcommercial gas as separate reportable segments. The reasons for the change areas follows:

 

•                  Management does not evaluate or manage themid-market commercial natural gas business in a manner distinct from the massmarket.

 

•                  Natural gas and electricity are each managedas overall portfolios.

 

•                  Supply of natural gas is handled consistentlyfor both mass markets and mid-markets.

 

•                  In assessing risk for the natural gasbusiness, no separation is made for mass market and mid-market risk exposures.

 

•                  The mid-market commercial natural gas is nota significant component of the overall gas business.

 

Asa result, the Company has reclassified the information from the prior year toconform to the current year’s presentation.

 

Informationas to the operations of the Company in each of its business segments is setforth below based on the nature of the products and services provided. TheCompany evaluates performance based on several factors, of which the primaryfinancial measure is gross profit adjusted to exclude the effect of anyunrealized gains or losses from risk management activities.

 

Salesfor the years ended June 30, 2007, 2006 and 2005 (in thousands):

 
| ** **   | ** ** | **2007**   | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|--------------|------------|------------|-------------|------------|------------|------------|------------|
| ** **   | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Natural  gas | ** ** | **$**      | **680,800** |       | $          | 345,700    |       | $ | 264,500 |   |
| Electricity  | ** ** | **23,100** |        | 16,900     |       | 12,700     |       |
| Total        | ** ** | **$**      | **703,900** |       | $          | 362,600    |       | $ | 277,200 |   |

 

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Costof Goods Sold for the years ended June 30, 2007, 2006 and 2005 (excludingeffect of unrealized gains or losses from risk management activities) (inthousands):

 
| ** **       | ** ** | **2007**   | ** **  | **2006** | ** ** | **2005** | ** ** |
|------------------|------------|------------|-------------|----------|------------|----------|------------|
|             |       |       |        |     |       |     |       |
| Natural  gas (a) | ** ** | **$**      | **565,800** |     | $          | 296,400  |       | $ | 206,900 |   |
| Electricity(a)   | ** ** | **19,200** |        | 13,200   |       | 11,200   |       |
| Total            | ** ** | **$**      | **585,000** |     | $          | 309,600  |       | $ | 218,100 |   |

 

Grossprofit, excluding the effect of unrealized gains or losses from risk managementactivities, for the years ended June 30, 2007, 2006 and 2005 (inthousands):

 
| ** **       | ** ** | **2007**  | ** **  | **2006** | ** ** | **2005** | ** ** |
|------------------|------------|-----------|-------------|----------|------------|----------|------------|
|             |       |      |        |     |       |     |       |
| Natural  gas (a) | ** ** | **$**     | **115,000** |     | $          | 49,300   |       | $ | 57,600 |   |
| Electricity  (a) | ** ** | **3,900** |        | 3,700    |       | 1,500    |       |
| Total            | ** ** | **$**     | **118,900** |     | $          | 53,000   |       | $ | 59,100 |   |

 

----

(a)          Cost of goods sold andgross profit include cost of natural gas sold and realized gains or losses fromrisk management activities during the period.

 

Totalsegment gross profit is reconciled to (loss) income before income tax (expense)benefit for the fiscal years ended June 30, 2007, 2006 and 2005 as follows(in thousands):

 
| ** **                                                 | ** ** | **2007**    | ** **  | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
|                                                       |       |        |        |     |       |     |       |
| Total  segment gross profit                                | ** ** | **$**       | **118,900** |     | $          | 53,000   |       | $ | 59,100 |   |
| Unrealized  (losses) gains from risk management activities | ** ** | **(17,100** | **)**       | (79,900  | )          | 16,000   |       |
| Operating  expenses                                        | ** ** | **(91,000** | **)**       | (36,700  | )          | (31,000  | )          |
| Interest  expense—net                                 | ** ** | **(33,100** | **)**       | (3,200   | )          | (2,900   | )          |
| (Loss)  income before income tax benefit (expense)         | ** ** | **$**       | **(22,300** | **)**    | $          | (66,800  | )          | $ | 41,200 |   |

 

Netassets for the segments, principally representing customer acquisition costs,are outlined as follows (in thousands). In addition to customer acquisitioncosts, the natural gas segment includes $3.8 million of goodwill, reflected inthe consolidated balance sheet in “Other assets, net.”

 
| ** **                  | ** ** | **Natural gas** | ** ** | **Electricity** | ** ** | **Total**  | ** ** |
|-----------------------------|------------|----------------------|------------|-----------------|------------|------------|------------|
|                        |       |                 |       |            |       |       |       |
| June 30,  2007         |       |                 |       |            |       |       |       |
| Customer  acquisition costs | ** ** | **$**                | **74,200** | ** **      | **$**      | **3,500**  | ** ** | **$** | **77,700** | ** ** |
| Accumulated  amortization   | ** ** | **37,600**           | ** ** | **1,100**       | ** ** | **38,700** | ** ** |
| Net  customer costs         | ** ** | **$**                | **36,600** | ** **      | **$**      | **2,400**  | ** ** | **$** | **39,000** | ** ** |
| June 30,  2006         |       |                 |       |            |       |       |       |
| Customer  acquisition costs |       | $                    | 28,900     |            | $          | 1,100      |       | $ | 30,000 |   |
| Accumulated  amortization   |       | 18,500               |       | 700             |       | 19,200     |       |
| Net  customer costs         |       | $                    | 10,400     |            | $          | 400        |       | $ | 10,800 |   |

 

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**15. Condensed ConsolidatingFinancial Information**

** **

OnAugust 1, 2006, the Company consummated the Acquisition for a totalpurchase price of $126.0 million (see Note 3). The Acquisition was initiallyfinanced by utilizing the proceeds from the Bridge Loan which was repaid on August 4,2006, principally with proceeds from the issuance of $190 million aggregateprincipal amount of Senior Notes (see Note 4). Each of the followingwholly owned domestic subsidiaries of Holdings (the “Guarantors”) jointly,severally and unconditionally guaranteed the Senior Notes on a senior unsecuredbasis:

 

•                  MxEnergy Capital Holdings Corp.

 

•                  MxEnergy Capital Corp.

 

•                  Online Choice Inc.

 

•                  MxEnergy Gas Capital Holdings Corp.

 

•                  MxEnergy Gas Capital Corp.

 

•                  MxEnergy Inc.

 

•                  MxEnergy Electric Capital Holdings Corp.

 

•                  MxEnergy Electric Capital Corp.

 

•                  MxEnergy Electric Inc.

 

•                  Total Gas & Electric, Inc.(effective in August 2006, Total Gas & Electric, Inc. wasmerged with and into MxEnergy Inc.)

 

•                  Total Gas & Electricity(PA) Inc., d/b/a/ MxEnergy Electric (PA) (effective in May 2007,Total Gas & Electricity (PA) Inc. was merged with and intoMxEnergy Electric Inc.)

 

•                  MxEnergy Services Inc.

 

•                  Infometer.com Inc.

 

Non-guarantorsubsidiaries (“Non-guarantors”) include MxEnergy (Canada) Ltd.

 

Thefollowing information presents consolidating balance sheets as of June 30,2007 and 2006, the related consolidating statements of operations for the yearsended June 30, 2007, 2006 and 2005, and the consolidated statements ofcash flows for the years ended June 30, 2007, 2006 and 2005 for thecombined Guarantors and each of the Non-guarantors, and elimination entriesnecessary to consolidate the entities comprising the condensed consolidatedfinancial statements.

 

94

----

 

**MxEnergyHoldings Inc.**

**ConsolidatingBalance Sheet**

**June 30,2007**

**(Dollarsin thousands)**

 
| ** **                                                                                          | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada) Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Assets                                                                                              |       |                             |       |                             |       |                        |       |             |       |             |       |
| Current  assets:                                                                                    |       |                             |       |                             |       |                        |       |             |       |             |       |
| Cash  and cash equivalents                                                                          |       | $                                | —     |                             | $          | 137                         |       | $                | 136,805    |             |       |   | $ | 136,942 |   |
| Due  from intercompany                                                                              |       | 43,303                           |       | —                           |       | —                      |       | $                | (43,303    | )                | —     |   |
| Restricted  cash and short-term investments                                                         |       | —                           |       | —                           |       | 1,050                       |       |             |       | 1,050            |       |
| Accounts  receivable, net of allowances                                                             |       | —                           |       | 121                              |       | 45,305                      |       |             |       | 45,427           |       |
| Inventories                                                                                         |       | —                           |       | —                           |       | 56,547                      |       |             |       | 56,547           |       |
| Current  portion of unrealized gains from risk management activities                                |       | —                           |       | —                           |       | 50                          |       |             |       | 50               |       |
| Income  taxes receivable                                                                            |       | 351                              |       | —                           |       | —                      |       |             |       | 351              |       |
| Deferred  income taxes                                                                              |       | 9,136                            |       | —                           |       | 9,136                       |       | (9,136           | )          | 9,136            |       |
| Other  current assets                                                                               |       | —                           |       | 152                              |       | 5,159                       |       |             |       | 5,311            |       |
| Total  current assets                                                                               |       | 52,790                           |       | 411                              |       | 254,052                     |       | (52,439          | )          | 254,814          |       |
| Long-term  investments                                                                              |       | 185,464                          |       | —                           |       | —                      |       | (185,464         | )          | —           |       |
| Customer  acquisition costs, net of accumulated amortization                                        |       | —                           |       | 73                               |       | 38,881                      |       |             |       | 38,954           |       |
| Fixed  assets, net                                                                                  |       | —                           |       | —                           |       | 17,849                      |       |             |       | 17,849           |       |
| Deferred  income taxes                                                                              |       | 9,754                            |       | —                           |       | 9,754                       |       | (9,754           | )          | 9,754            |       |
| Other  assets, net                                                                                  |       | 4,477                            |       | —                           |       | 6,902                       |       |             |       | 11,379           |       |
| Total  assets                                                                                       |       | $                                | 252,485    |                             | $          | 484                         |       | $                | 327,438    |             | $          | (247,657 | ) | $ | 332,750 |   |
| Liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)        |       |                             |       |                             |       |                        |       |             |       |             |       |
| Current  liabilities:                                                                               |       |                             |       |                             |       |                        |       |             |       |             |       |
| Accounts  payable and accrued liabilities                                                           |       | $                                | 9,846      |                             | $          | 163                         |       | $                | 22,948     |             |       |   | $ | 32,957 |   |
| Accrued  commodity purchases                                                                        |       | —                           |       | 105                              |       | 31,192                      |       |             |       | 31,297           |       |
| Due  to intercompany                                                                                |       | —                           |       | 1,581                            |       | 55,351                      |       | $                | (56,932    | )                | —     |   |
| Unrealized  losses from risk management activities                                                  |       | 544                              |       | —                           |       | 16,530                      |       |             |       | 17,074           |       |
| Deferred  revenue                                                                                   |       | —                           |       | —                           |       | 7,464                       |       |             |       | 7,464            |       |
| Total  current liabilities                                                                          |       | 10,390                           |       | 1,849                            |       | 133,485                     |       | (56,932          | )          | 88,792           |       |
| Unrealized  losses from risk management activities                                                  |       | 775                              |       | —                           |       | 2,811                       |       |             |       | 3,586            |       |
| Floating  Rate Senior Notes due 2011                                                                |       | 174,364                          |       | —                           |       | —                      |       | —           |       | 174,364          |       |
| Denham  credit facility                                                                             |       | 11,040                           |       | —                           |       | —                      |       |             |       | 11,040           |       |
| Total  liabilities                                                                                  |       | 196,569                          |       | 1,849                            |       | 136,296                     |       | (56,932          | )          | 277,782          |       |
|                                                                                                |       |                             |       |                             |       |                        |       |             |       |             |       |
| Redeemable  convertible preferred stock                                                             |       | 29,357                           |       | —                           |       | —                      |       |             |       | 29,357           |       |
|                                                                                                |       |                             |       |                             |       |                        |       |             |       |             |       |
| Commitments                                                                                         |       |                             |       |                             |       |                        |       |             |       |             |       |
| Stockholders’  Equity (Deficit)                                                                |       |                             |       |                             |       |                        |       |             |       |             |       |
| Common  stock                                                                                       |       | 34                               |       | 1                                |       | —                      |       | (1               | )          | 34               |       |
| Additional  paid-in-capital                                                                         |       | 21,367                           |       | —                           |       | —                      |       |             |       | 21,367           |       |
| Contributed  capital                                                                                |       | 819                              |       | —                           |       | 167,917                     |       | (168,736         | )          | —           |       |
| Unearned  stock compensation                                                                        |       | (22                              | )          | —                           |       | —                      |       |             |       | (22              | )          |
| Accumulated  other comprehensive loss                                                               |       | —                           |       | (129                             | )          | —                      |       |             |       | (129             | )          |
| Retained  earnings (deficit)                                                                        |       | 4,361                            |       | (1,237                           | )          | 23,225                      |       | (21,988          | )          | 4,361            |       |
| Total  stockholders’ equity (deficit)                                                          |       | 26,559                           |       | (1,365                           | )          | 191,142                     |       | (190,725         | )          | 25,611           |       |
| Total  liabilities, redeemable convertible preferred stock and stockholders’ equity  (deficit) |       | $                                | 252,485    |                             | $          | 484                         |       | $                | 327,438    |             | $          | (247,657 | ) | $ | 332,750 |   |
|                                                                                                     |            |                                  |            |                                  |            |                             |            |                  |            |                  |            |  |  |  |  |  |  |

 

95

----

 

**MxEnergyHoldings Inc.**

**ConsolidatingBalance Sheet**

**June 30,2006**

**(Dollarsin thousands)**

 
| ** **                                                                                          | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada)  Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Assets                                                                                              |       |                             |       |                         |       |                        |       |             |       |             |       |
| Current  assets:                                                                                    |       |                             |       |                         |       |                        |       |             |       |             |       |
| Cash  and cash equivalents                                                                          |       | $                                | —     |                         | $          | 146                         |       | $                | 5,947      |             |       |   | $ | 6,093 |   |
| Due  from intercompany                                                                              |       |                             |       |                         |       | 135,489                     |       | $                | (135,489   | )                | —     |   |
| Restricted  cash and short-term investments                                                         |       | —                           |       | —                       |       | 427                         |       |             |       | 427              |       |
| Accounts  receivable, net of allowances                                                             |       | —                           |       | 54                           |       | 31,521                      |       |             |       | 31,575           |       |
| Inventories                                                                                         |       | —                           |       | —                       |       | 18,499                      |       |             |       | 18,499           |       |
| Current  portion of unrealized gains from risk management activities                                |       | —                           |       | —                       |       | 1,664                       |       |             |       | 1,664            |       |
| Income  tax receivables                                                                             |       | 5,535                            |       | —                       |       | —                      |       |             |       | 5,535            |       |
| Deferred  taxes                                                                                     |       | 1,046                            |       | —                       |       | 1,046                       |       | (1,046           | )          | 1,046            |       |
| Other  current assets                                                                               |       | —                           |       | 72                           |       | 2,606                       |       |             |       | 2,678            |       |
| Total  current assets                                                                               |       | 6,581                            |       | 272                          |       | 197,199                     |       | (136,535         | )          | 67,517           |       |
| Long-term  investments                                                                              |       | 183,954                          |       |                         |       |                        |       | (183,954         | )          | —           |       |
| Customer  acquisition costs, net of accumulated amortization                                        |       | —                           |       | 89                           |       | 10,733                      |       |             |       | 10,822           |       |
| Fixed  assets, net                                                                                  |       | —                           |       | —                       |       | 8,637                       |       |             |       | 8,637            |       |
| Unrealized  gains from risk management activities                                                   |       | —                           |       | —                       |       | 1,272                       |       |             |       | 1,272            |       |
| Deferred  income taxes                                                                              |       | 3,395                            |       | —                       |       | 3,395                       |       | (3,395           | )          | 3,395            |       |
| Deposit  on SESCo asset purchase agreement and other costs                                          |       | 3,348                            |       | —                       |       | —                      |       |             |       | 3,348            |       |
| Other  assets, net                                                                                  |       | 2,850                            |       | —                       |       | 128                         |       |             |       | 2,978            |       |
| Total  assets                                                                                       |       | $                                | 200,128    |                         | $          | 361                         |       | $                | 221,364    |             | $          | (323,884 | ) | $ | 97,969 |   |
| Liabilities,  redeemable convertible preferred stock and stockholders’ equity (deficit)        |       |                             |       |                         |       |                        |       |             |       |             |       |
| Current  liabilities:                                                                               |       |                             |       |                         |       |                        |       |             |       |             |       |
| Accounts  payable and accrued liabilities                                                           |       | $                                | —     |                         | $          | 127                         |       | $                | 12,368     |             |       |   | $ | 12,495 |   |
| Accrued  commodity purchases                                                                        |       | —                           |       | —                       |       | 14,544                      |       |             |       | 14,544           |       |
| Due  to intercompany                                                                                |       | 134,387                          |       | 1,102                        |       | —                      |       | $                | (135,489   | )                | —     |   |
| Unrealized  losses from risk management activities                                                  |       | 132                              |       | —                       |       | 320                         |       |             |       | 452              |       |
| Deferred  revenue                                                                                   |       | —                           |       | —                       |       | 2,403                       |       |             |       | 2,403            |       |
| Total  current liabilities                                                                          |       | 134,519                          |       | 1,229                        |       | 29,635                      |       | (135,489         | )          | 29,894           |       |
| Unrealized  losses from risk management activities                                                  |       | —                           |       | —                       |       | 3,325                       |       |             |       | 3,325            |       |
| Total  liabilities                                                                                  |       | 134,519                          |       | 1,229                        |       | 32,960                      |       | (135,489         | )          | 33,219           |       |
|                                                                                                |       |                             |       |                         |       |                        |       |             |       |             |       |
| Redeemable  convertible preferred stock                                                             |       | 29,357                           |       | —                       |       | —                      |       | —           |       | 29,357           |       |
|                                                                                                |       |                             |       |                         |       |                        |       |             |       |             |       |
| Commitments                                                                                         |       |                             |       |                         |       |                        |       |             |       |             |       |
| Stockholders’  Equity (Deficit)                                                                |       |                             |       |                         |       |                        |       |             |       |             |       |
| Common  stock                                                                                       |       | 34                               |       | 1                            |       | —                      |       | (1               | )          | 34               |       |
| Additional  paid-in-capital                                                                         |       | 17,355                           |       | —                       |       | —                      |       |             |       | 17,355           |       |
| Contributed  capital                                                                                |       | 819                              |       | —                       |       | 167,098                     |       | (167,917         | )          | —           |       |
| Unearned  stock compensation                                                                        |       | (115                             | )          | —                       |       | —                      |       |             |       | (115             | )          |
| Accumulated  other comprehensive loss                                                               |       |                             |       | (40                          | )          | —                      |       |             |       | (40              | )          |
| Retained  earnings (deficit)                                                                        |       | 18,159                           |       | (829                         | )          | 21,306                      |       | (20,477          | )          | 18,159           |       |
| Total  stockholders’ equity (deficit)                                                          |       | 36,252                           |       | (868                         | )          | 188,404                     |       | (188,395         | )          | 35,393           |       |
| Total  liabilities, redeemable convertible preferred stock and stockholders’ equity  (deficit) |       | $                                | 200,128    |                         | $          | 361                         |       | $                | 221,364    |             | $          | (323,884 | ) | $ | 97,969 |   |
|                                                                                                     |            |                                  |            |                              |            |                             |            |                  |            |                  |            |  |  |  |  |  |  |

 

96

----

 

**MxEnergyHoldings Inc.**

**ConsolidatingStatement of Operations**

**ForThe Year Ended June 30, 2007**

**(Dollarsin thousands)**

 
| ** **                                                     | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada) Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Sales  of natural gas and electricity                          |       | $                                | —     |                             | $          | 1,292                       |       | $                | 702,634    |             |       |   | $ | 703,926 |   |
| Cost  of goods sold (excluding depreciation and amortization): |       |                             |       |                             |       |                        |       |             |       |             |       |
| Cost  of natural gas and electricity sold                      |       | —                           |       | 1,267                            |       | 550,761                     |       |             |       | 552,028          |       |
| Realized  losses from risk management activities               |       | —                           |       | —                           |       | 33,039                      |       |             |       | 33,039           |       |
| Unrealized  losses from risk management activities             |       | —                           |       | —                           |       | 17,079                      |       |             |       | 17,079           |       |
|                                                           |       | —                           |       | 1,267                            |       | 600,879                     |       |             |       | 602,146          |       |
| Gross  profit (loss)                                           |       | —                           |       | 25                               |       | 101,755                     |       |             |       | 101,780          |       |
| Operating  expenses:                                           |       |                             |       |                             |       |                        |       |             |       |             |       |
| General  and administrative expenses                           |       | —                           |       | 339                              |       | 53,440                      |       |             |       | 53,779           |       |
| Advertising  and marketing expenses                            |       | —                           |       | 4                                |       | 4,777                       |       |             |       | 4,781            |       |
| Reserves  and discounts                                        |       | —                           |       | —                           |       | 4,725                       |       |             |       | 4,725            |       |
| Depreciation  and amortization                                 |       | —                           |       | 91                               |       | 27,639                      |       |             |       | 27,730           |       |
| Equity  in operations of consolidated subsidiaries             |       | (1,510                           | )          | —                           |       | —                      |       | $                | 1,510      |             | —     |   |
| Total  operating expenses                                      |       | (1,510                           | )          | 434                              |       | 90,581                      |       | 1,510            |       | 91,015           |       |
| Operating  profit (loss)                                       |       | 1,510                            |       | (409                             | )          | 11,174                      |       | (1,510           | )          | 10,765           |       |
| Interest  expense, net                                         |       | 25,104                           |       | —                           |       | 7,954                       |       |             |       | 33,058           |       |
| Income  (loss) before income tax benefit                       |       | (23,594                          | )          | (409                             | )          | 3,220                       |       | (1,510           | )          | (22,293          | )          |
| Income  tax (expense) benefit                                  |       | 8,495                            |       | —                           |       | (1,301                      | )          | 1,301            |       | 8,495            |       |
| Net  income (loss)                                             |       | $                                | (15,099    | )                                | $          | (409                        | )          | $                | 1,919      |             | $          | (209 | ) | $ | (13,798 | ) |
|                                                                |            |                                  |            |                                  |            |                             |            |                  |            |                  |            |  |  |  |  |  |  |

 

97

----

 

**MxEnergyHoldings Inc.**

**ConsolidatingStatement of Operations**

**ForThe Year Ended June 30, 2006**

**(Dollarsin thousands)**

 
| ** **                                                    | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada) Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Sales  of natural gas and electricity                         |       | $                                | —     |                             | $          | 1,271                       |       | $                | 361,290    |             |       |   | $ | 362,561 |   |
| Cost  of goods sold (excluding depreciation and amortization) |       |                             |       |                             |       |                        |       |             |       |             |       |
| Cost  of natural gas and electricity sold                     |       | —                           |       | 1,697                            |       | 390,915                     |       |             |       | 392,612          |       |
| Realized  gains from risk management activities               |       | —                           |       | —                           |       | (82,983                     | )          |             |       | (82,983          | )          |
| Unrealized  losses from risk management activities            |       | —                           |       | —                           |       | 79,897                      |       |             |       | 79,897           |       |
|                                                          |       | —                           |       | 1,697                            |       | 387,829                     |       |             |       | 389,526          |       |
| Gross  (loss)                                                 |       | —                           |       | (426                             | )          | (26,539                     | )          |             |       | (26,965          | )          |
| Operating  expenses:                                          |       |                             |       |                             |       |                        |       |             |       |             |       |
| General  and administrative expenses                          |       | 911                              |       | 107                              |       | 21,605                      |       |             |       | 22,623           |       |
| Advertising  and marketing expenses                           |       | —                           |       | 1                                |       | 2,095                       |       |             |       | 2,096            |       |
| Reserves  and discounts                                       |       | —                           |       | —                           |       | 3,395                       |       |             |       | 3,395            |       |
| Depreciation  and amortization                                |       | —                           |       | 107                              |       | 8,397                       |       |             |       | 8,504            |       |
| Equity  in operations of consolidated subsidiaries            |       | 38,686                           |       |                             |       |                        |       | $                | (38,686    | )                | —     |   |
| Total  operating expenses                                     |       | 39,597                           |       | 215                              |       | 35,492                      |       | (38,686          | )          | 36,618           |       |
| Operating  (loss)                                             |       | (39,597                          | )          | (641                             | )          | (62,031                     | )          | 38,686           |       | (63,583          | )          |
| Interest  expense, net                                        |       | 641                              |       | —                           |       | 2,559                       |       | —           |       | 3,200            |       |
| Loss  before income tax benefit                               |       | (40,238                          | )          | (641                             | )          | (64,590                     | )          | 38,686           |       | (66,783          | )          |
| Income  tax benefit                                           |       | 27,001                           |       | 192                              |       | 26,353                      |       | (26,545          | )          | 27,001           |       |
| Net  loss                                                     |       | $                                | (13,237    | )                                | $          | (449                        | )          | $                | (38,237    | )                | $          | 12,141 |   | $ | (39,782 | ) |
|                                                               |            |                                  |            |                                  |            |                             |            |                  |            |                  |            |  |  |  |  |  |  |

 

98

----

 

**MxEnergyHoldings Inc.**

**ConsolidatingStatement of Operations**

**ForThe Year Ended June 30, 2005**

**(Dollarsin thousands)**

 
| ** **                                                    | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada) Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| Sales  of natural gas and electricity                         |       | $                                | —     |                             | $          | 1,121                       |       | $                | 276,075    |             |       |   | $ | 277,196 |   |
| Cost  of goods sold (excluding depreciation and amortization) |       |                             |       |                             |       |                        |       |             |       |             |       |
| Cost  of natural gas and electricity sold                     |       | —                           |       | 1,110                            |       | 254,614                     |       |             |       | 255,724          |       |
| Realized  gains from risk management activities               |       | —                           |       | —                           |       | (37,608                     | )          | —           |       | (37,608          | )          |
| Unrealized  gains from risk management activities             |       | —                           |       | —                           |       | (16,004                     | )          |             |       | (16,004          | )          |
|                                                          |       | —                           |       | 1,110                            |       | 201,002                     |       | —           |       | 202,112          |       |
| Gross  profit                                                 |       | —                           |       | 11                               |       | 75,073                      |       | —           |       | 75,084           |       |
| Operating  expenses:                                          |       |                             |       |                             |       |                        |       |             |       |             |       |
| General  and administrative expenses                          |       | 2,033                            |       | 20                               |       | 15,885                      |       |             |       | 17,938           |       |
| Advertising  and marketing expenses                           |       | —                           |       | —                           |       | 2,359                       |       | —           |       | 2,359            |       |
| Reserves  and discounts                                       |       | —                           |       | —                           |       | 4,533                       |       |             |       | 4,533            |       |
| Depreciation  and amortization                                |       | —                           |       | 94                               |       | 6,072                       |       |             |       | 6,166            |       |
| Equity  in operations of consolidated subsidiaries            |       | (24,213                          | )          | —                           |       | —                      |       | $                | 24,213     |             | —     |   |
| Total  operating expenses                                     |       | (22,180                          | )          | 114                              |       | 28,849                      |       | 24,213           |       | 30,996           |       |
| Operating  profit (loss)                                      |       | 22,180                           |       | (103                             | )          | 46,224                      |       | (24,213          | )          | 44,088           |       |
| Interest  expense, net                                        |       | —                           |       | —                           |       | 2,858                       |       | —           |       | 2,858            |       |
| Income  (loss) before income tax benefit                      |       | 22,180                           |       | (103                             | )          | 43,366                      |       | (24,213          | )          | 41,230           |       |
| Income  tax (expense) benefit                                 |       | (18,142                          | )          | 31                               |       | (19,081                     | )          | 19,050           |       | (18,142          | )          |
|                                                          |       | $                                | 4,038      |                             | $          | (72                         | )          | $                | 24,285     |             | $          | (5,163 | ) | $ | 23,088 |   |
|                                                               |            |                                  |            |                                  |            |                             |            |                  |            |                  |            |  |  |  |  |  |  |

 

99

----

 

**MxEnergyHoldings Inc.**

**ConsolidatingStatement of Cash Flows**

**ForThe Year Ended June 30, 2007**

**(Dollarsin thousands)**

 
| ** **                                                                                           | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada) Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| **Operating activities**                                                                             |       |                             |       |                             |       |                        |       |             |       |             |       |
| Net  (loss) gain                                                                                     |       | $                                | (15,099    | )                                | $          | (409                        | )          | $                | 1,919      |             | $          | (209 | ) | $ | (13,798 | ) |
| Adjustments  to reconcile net (loss) income to net cash provided by (used in) operating  activities: |       |                             |       |                             |       |                        |       |             |       |             |       |
| Unrealized  losses from risk management activities                                                   |       | —                           |       | —                           |       | 17,079                      |       |             |       | 17,079           |       |
| Stock  compensation expense                                                                          |       | —                           |       |                             |       | 4,539                       |       |             |       | 4,539            |       |
| Depreciation  and amortization                                                                       |       | —                           |       | 91                               |       | 27,639                      |       |             |       | 27,730           |       |
| Deferred  tax benefit                                                                                |       | (14,449                          | )          | —                           |       | (14,449                     | )          | 14,449           |       | (14,449          | )          |
| Unrealized  losses on interest rate swaps and amortization of deferred financing fees                |       | 1,187                            |       | —                           |       | 6,719                       |       |             |       | 7,906            |       |
| Non-cash  amortization of SESCo and Castle contracts                                                 |       | —                           |       | —                           |       | 11,891                      |       |             |       | 11,891           |       |
| Equity  in operations of consolidated subsidiaries                                                   |       | (1,510                           | )          | —                           |       | —                      |       | 1,510            |       | —           |       |
| Changes  in assets and liabilities, net of effects of acquisitions:                                  |       |                             |       |                             |       |                        |       |             |       |             |       |
| Net  inflow (outflow) in restricted cash and short term investments                                  |       | —                           |       | —                           |       | (623                        | )          |             |       | (623             | )          |
| Accounts  receivable                                                                                 |       | —                           |       | (147                             | )          | 3,600                       |       |             |       | 3,453            |       |
| Inventories                                                                                          |       | —                           |       | —                           |       | (1,712                      | )          |             |       | (1,712           | )          |
| Option  premiums                                                                                     |       | —                           |       | —                           |       | 1,835                       |       |             |       | 1,835            |       |
| Income  taxes receivable                                                                             |       | 5,184                            |       | —                           |       | —                      |       |             |       | 5,184            |       |
| Other  assets                                                                                        |       | 1,701                            |       | (69                              | )          | (2,625                      | )          |             |       | (993             | )          |
| Accounts  payable and accrued liabilities                                                            |       | (68,030                          | )          | 620                              |       | 73,538                      |       | 29,750           |       | 35,878           |       |
| Deferred  revenue                                                                                    |       | —                           |       | —                           |       | 5,061                       |       |             |       | 5,061            |       |
| Net  cash provided by (used in) operating activities                                                 |       | (91,016                          | )          | 86                               |       | 134,411                     |       | 45,500           |       | 88,981           |       |
| **Investing activities**                                                                             |       |                             |       |                             |       |                        |       |             |       |             |       |
| Long-term  investments                                                                               |       | 45,500                           |       | —                           |       | —                      |       | (45,500          | )          | —           |       |
| Purchase  of assets of SESCo                                                                         |       | (126,044                         | )          | —                           |       | —                      |       |             |       | (126,044         | )          |
| Deposit  on SESCo asset purchase agreement and other capitalized costs                               |       | 3,348                            |       | —                           |       | —                      |       |             |       | 3,348            |       |
| Purchase  of assets of Vantage                                                                       |       | (732                             | )          | —                           |       |                        |       |             |       | (732             | )          |
| Customer  acquisition costs                                                                          |       |                             |       | (95                              | )          | (7,515                      | )          |             |       | (7,610           | )          |
| Purchases  of fixed assets                                                                           |       |                             |       | —                           |       | (1,882                      | )          |             |       | (1,882           | )          |
| Net  cash (used in) provided by investing activities                                                 |       | (77,928                          | )          | (95                              | )          | (9,397                      | )          | (45,500          | )          | (132,920         | )          |
| **Financing activities**                                                                             |       |                             |       |                             |       |                        |       |             |       |             |       |
| Proceeds  from loans                                                                                 |       | —                           |       | —                           |       | 6,000                       |       |             |       | 6,000            |       |
| Repayments  of loans                                                                                 |       | —                           |       | —                           |       | (6,000                      | )          |             |       | (6,000           | )          |
| Debt  financing costs                                                                                |       | (4,149                           | )          | —                           |       | (5,196                      | )          |             |       | (9,345           | )          |
| Proceeds  from Denham credit facility                                                                |       | —                           |       | —                           |       | 23,040                      |       |             |       | 23,040           |       |
| Repayments  of Denham credit facility                                                                |       | —                           |       | —                           |       | (12,000                     | )          |             |       | (12,000          | )          |
| Proceeds  from bridge loan                                                                           |       | 190,000                          |       | —                           |       | —                      |       |             |       | 190,000          |       |
| Repayment  of bridge loan                                                                            |       | (190,000                         | )          | —                           |       | —                      |       |             |       | (190,000         | )          |
| Proceeds  from senior notes                                                                          |       | 185,250                          |       | —                           |       | —                      |       |             |       | 185,250          |       |
| Repurchase  of senior notes                                                                          |       | (11,723                          | )          | —                           |       | —                      |       |             |       | (11,723          | )          |
| Issuance  of common stock and exercise of warrants                                                   |       | 22                               |       | —                           |       | —                      |       |             |       | 22               |       |
| Purchase  of common stock for cancellation, net of tax benefit                                       |       | (456                             | )          | —                           |       | —                      |       |             |       | (456             | )          |
| Net  cash provided by (used in) financing activities                                                 |       | 168,944                          |       | —                           |       | 5,844                       |       | —           |       | 174,788          |       |
| Net  increase (decrease) in cash                                                                     |       | —                           |       | (9                               | )          | 130,858                     |       | —           |       | 130,849          |       |
| Cash  and cash equivalents at beginning of period                                                    |       | —                           |       | 146                              |       | 5,947                       |       |             |       | 6,093            |       |
|                                                                                                 |       |                             |       |                             |       |                        |       |             |       |             |       |
| Cash  and cash equivalents at end of period                                                          |       | $                                | —     |                             | $          | 137                         |       | $                | 136,805    |             | $          | — |   | $ | 136,942 |   |

 

100

----

 

**MxEnergyHoldings Inc.**

**ConsolidatingStatement of Cash Flows**

**ForThe Year Ended June 30, 2006**

**(Dollarsin thousands)**

 
| ** **                                                                            | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada) Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| **Operating activities**                                                              |       |                             |       |                             |       |                        |       |             |       |             |       |
| Net  (loss) income                                                                    |       | $                                | (13,237    | )                                | $          | (449                        | )          | $                | (38,238    | )                | $          | 12,142 |   | $ | (39,782 | ) |
| Adjustments  to reconcile net (loss) income to net cash used in operating activities: |       |                             |       |                             |       |                        |       |             |       |             |       |
| Unrealized  losses from risk management activities                                    |       | —                           |       | —                           |       | 79,897                      |       |             |       | 79,897           |       |
| Stock  compensation expense                                                           |       | 911                              |       |                             |       | —                      |       |             |       | 911              |       |
| Depreciation  and amortization                                                        |       | —                           |       | 107                              |       | 8,397                       |       |             |       | 8,504            |       |
| Deferred  tax benefit                                                                 |       | (32,764                          | )          | —                           |       | (32,764                     | )          | 32,764           |       | (32,764          | )          |
| Unrealized  losses on interest rate swaps and amortization of deferred financing fees |       | 641                              |       | —                           |       | 416                         |       |             |       | 1,057            |       |
| Non-cash  amortization of Castle contracts                                            |       | —                           |       | —                           |       | (3,276                      | )          |             |       | (3,276           | )          |
| Equity  in operations of consolidated subsidiaries                                    |       | 38,687                           |       | —                           |       | —                      |       | (38,687          | )          | —           |       |
| Changes  in assets and liabilities, net of effects of acquisition:                    |       |                             |       |                             |       |                        |       |             |       |             |       |
| Net  inflow in restricted cash and short term investments                             |       | —                           |       | —                           |       | 6,953                       |       |             |       | 6,953            |       |
| Accounts  receivable                                                                  |       | —                           |       | 88                               |       | (13,091                     | )          |             |       | (13,003          | )          |
| Inventories                                                                           |       | —                           |       | —                           |       | (2,685                      | )          |             |       | (2,685           | )          |
| Income  taxes receivable                                                              |       | (5,535                           | )          | —                           |       | —                      |       |             |       | (5,535           | )          |
| Option  premiums                                                                      |       | —                           |       | —                           |       | (1,834                      | )          |             |       | (1,834           | )          |
| Other  assets                                                                         |       | (505                             | )          | (72                              | )          | 3,222                       |       |             |       | 2,645            |       |
| Accounts  payable and accrued liabilities                                             |       | (27,675                          | )          | 176                              |       | (42,922                     | )          | 65,101           |       | (5,320           | )          |
| Deferred  revenue                                                                     |       | —                           |       | —                           |       | 865                         |       |             |       | 865              |       |
| Net  cash (used in) provided by operating activities                                  |       | (39,477                          | )          | (150                             | )          | (35,060                     | )          | 71,320           |       | (3,367           | )          |
| **Investing activities**                                                              |       |                             |       |                             |       |                        |       |             |       |             |       |
| Long-term  investments                                                                |       | 71,320                           |       | —                           |       | —                      |       | (71,320          | )          | —           |       |
| Purchase  of customer portfolio from Castle Power LLC                                 |       | (3,150                           | )          | —                           |       | —                      |       |             |       | (3,150           | )          |
| Deposit  on SESCo asset purchase agreement and other capitalized costs                |       | (3,348                           | )          | —                           |       | —                      |       |             |       | (3,348           | )          |
| Customer  acquisition costs                                                           |       | —                           |       | —                           |       | (6,149                      | )          |             |       | (6,149           | )          |
| Purchases  of fixed assets                                                            |       | —                           |       | —                           |       | (6,178                      | )          |             |       | (6,178           | )          |
| Net  cash provided by (used in) investing activities                                  |       | 64,822                           |       | —                           |       | (12,327                     | )          | (71,320          | )          | (18,825          | )          |
| **Financing activities**                                                              |       |                             |       |                             |       |                        |       |             |       |             |       |
| Proceeds  from loans                                                                  |       | 210,123                          |       | —                           |       | —                      |       |             |       | 210,123          |       |
| Repayments  of loans                                                                  |       | (226,502                         | )          | —                           |       | —                      |       |             |       | (226,502         | )          |
| Debt  financing costs                                                                 |       | (2,347                           | )          | —                           |       | —                      |       |             |       | (2,347           | )          |
| Repayments  of long-term borrowings                                                   |       | (5,000                           | )          | —                           |       | —                      |       |             |       | (5,000           | )          |
| Issuance  of common stock and exercise of warrants                                    |       | 532                              |       | —                           |       | —                      |       |             |       | 532              |       |
| Purchase  of common stock for cancellation                                            |       | (2,151                           | )          | —                           |       | —                      |       |             |       | (2,151           | )          |
| Net  cash used in financing activities                                                |       | (25,345                          | )          | —                           |       | —                      |       | —           |       | (25,345          | )          |
| Net  decrease in cash                                                                 |       | —                           |       | (150                             | )          | (47,387                     | )          | —           |       | (47,537          | )          |
| Cash  and cash equivalents at beginning of period                                     |       | —                           |       | 296                              |       | 53,334                      |       |             |       | 53,630           |       |
| Cash  and cash equivalentsat end of period                                            |       | $                                | —     |                             | $          | 146                         |       | $                | 5,947      |             | $          | — |   | $ | 6,093 |   |

 

101

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**MxEnergyHoldings Inc.**

**ConsolidatingStatement of Cash Flows**

**ForThe Year Ended June 30, 2005**

**(Dollarsin thousands)**

 
| ** **                                                                                           | ** ** | **MxEnergy  Holdings Inc.** | ** ** | **MxEnergy  (Canada) Ltd.** | ** ** | **Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|------------------|------------|
| **Operating  activities**                                                                            |       |                             |       |                             |       |                        |       |             |       |             |       |
| Net income  (loss)                                                                                   |       | $                                | 4,038      |                             | $          | (72                         | )          | $                | 24,285     |             | $          | (5,163 | ) | $ | 23,088 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                             |       |                             |       |                        |       |             |       |             |       |
| Unrealized gains  from risk management activities                                                    |       | —                           |       | —                           |       | (16,004                     | )          |             |       | (16,004          | )          |
| Stock  compensation expense                                                                          |       | 2,033                            |       | —                           |       | —                      |       |             |       | 2,033            |       |
| Depreciation and  amortization                                                                       |       | —                           |       | 94                               |       | 6,072                       |       |             |       | 6,166            |       |
| Deferred tax  expense                                                                                |       | 6,552                            |       | —                           |       | 6,552                       |       | (6,552           | )          | 6,552            |       |
| Amortization of  deferred financing fees                                                             |       | —                           |       | —                           |       | 349                         |       |             |       | 349              |       |
| Equity in  operations of consolidated subsidiaries                                                   |       | (24,213                          | )          | —                           |       | —                      |       | 24,213           |       | —           |       |
| Changes in  assets and liabilities, net of effects of acquisition:                                   |       |                             |       |                             |       |                        |       |             |       |             |       |
| Net inflow in  restricted cash and short term investments                                            |       | —                           |       | —                           |       | 2,195                       |       |             |       | 2,195            |       |
| Accounts  receivable                                                                                 |       | —                           |       | (60                              | )          | 3,331                       |       |             |       | 3,271            |       |
| Inventories                                                                                          |       | —                           |       | —                           |       | (72                         | )          |             |       | (72              | )          |
| Other assets                                                                                         |       | —                           |       | 7                                |       | 888                         |       |             |       | 895              |       |
| Accounts payable  and accrued liabilities                                                            |       | 242,650                          |       | 462                              |       | 1,729                       |       | (243,558         | )          | 1,283            |       |
| Deferred revenue                                                                                     |       | —                           |       | —                           |       | 1,538                       |       |             |       | 1,538            |       |
| Net cash  provided by (used in) operating activities                                                 |       | 231,060                          |       | 431                              |       | 30,863                      |       | (231,060         | )          | 31,294           |       |
| **Investing  activities**                                                                            |       |                             |       |                             |       |                        |       |             |       |             |       |
| Purchase of  Total Gas & Electric, Inc., net of cash acquired                                    |       | —                           |       | —                           |       | (2,003                      | )          |             |       | (2,003           | )          |
| Long-term  investments                                                                               |       | (231,060                         | )          | —                           |       | —                      |       | 231,060          |       |             |       |
| Customer  acquisition costs                                                                          |       | —                           |       | (135                             | )          | (3,708                      | )          |             |       | (3,843           | )          |
| Purchases of  fixed assets                                                                           |       | —                           |       | —                           |       | (2,450                      | )          |             |       | (2,450           | )          |
| Net cash (used  in) provided by investing activities                                                 |       | (231,060                         | )          | (135                             | )          | (8,161                      | )          | 231,060          |       | (8,296           | )          |
| **Financing  activities**                                                                            |       |                             |       |                             |       |                        |       |             |       |             |       |
| Proceeds from  loans                                                                                 |       | —                           |       | —                           |       | 193,748                     |       |             |       | 193,748          |       |
| Repayments of  loans                                                                                 |       | —                           |       | —                           |       | (190,390                    | )          |             |       | (190,390         | )          |
| Repayments of  long-term borrowings                                                                  |       | —                           |       | —                           |       | (1,000                      | )          |             |       | (1,000           | )          |
| Repayments of  Denham credit facility                                                                |       | —                           |       | —                           |       | (8,200                      | )          |             |       | (8,200           | )          |
| Issuance of  common stock and exercise of warrants                                                   |       | —                           |       | —                           |       | 798                         |       |             |       | 798              |       |
| Purchase of  common stock for cancellation                                                           |       | —                           |       | —                           |       | (667                        | )          |             |       | (667             | )          |
| Proceeds from  note receivable, net of $0.9 million in issuance costs                                |       | —                           |       | —                           |       | 30,107                      |       |             |       | 30,107           |       |
| Net cash provided  by financing activities                                                           |       | —                           |       | —                           |       | 24,396                      |       | —           |       | 24,396           |       |
| Net increase in  cash                                                                                |       | —                           |       | 296                              |       | 47,098                      |       | —           |       | 47,394           |       |
| Cash and cash  equivalents at beginning of period                                                    |       | —                           |       | —                           |       | 6,236                       |       |             |       | 6,236            |       |
| Cash and cash  equivalents at end of period                                                          |       | $                                | —     |                             | $          | 296                         |       | $                | 53,334     |             | $          | — |   | $ | 53,630 |   |

 

102

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**SCHEDULEII**

 

**MxEnergy Holdings Inc.**

**Valuationand Qualifying Accounts**

**For the years ended June 30, 2007, 2006 and 2005**

**(Dollars in thousands)**

 
| **Description**                             | ** ** | **Balance at  beginning  of period** | ** ** | **Charged to  costs and  expenses** | ** ** | **Deductions** | ** ** | **Balance at  end of period** | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|----------------------------------------------|------------|
| For the year  ended June 30, 2007:          |       |                                           |       |                                          |       |           |       |                                         |       |
| Allowance for  doubtful accounts receivable |       | $                                              | 3,285      |                                          | $          | 3,018          |       | $                                            | (1,044     | ) | $ | 5,259 |   |
| For the year  ended June 30, 2006:          |       |                                           |       |                                          |       |           |       |                                         |       |
| Allowance for  doubtful accounts receivable |       | $                                              | 1,899      |                                          | $          | 1,552          |       | $                                            | (166       | ) | $ | 3,285 |   |
| For the year  ended June 30, 2005:          |       |                                           |       |                                          |       |           |       |                                         |       |
| Allowance for  doubtful accounts receivable |       | $                                              | 1,401      |                                          | $          | 3,168          |       | $                                            | (2,670     | ) | $ | 1,899 |   |

 

103

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**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

In connection with the auditof our financial statements for the year ended June 30, 2006, we and ourindependent registered public accounting firm reported to the audit committeeof our board of directors that certain significant deficiencies in internalcontrols, when evaluated in the aggregate, resulted in a material weakness inthe design and operation of our internal controls as of June 30, 2006,which we and our independent registered public accounting firm believedcontinued to exist as of March 31, 2007. Specifically, the materialweakness in our controls and procedures led to a restatement of our condensedconsolidated financial statements for the three and six months endedDecember 31, 2006. In response to these identified control deficiencies,we have implemented certain disclosure control enhancements, policies andprocedures, including:

 

•                  Increasing our finance personnel since ourJune 30, 2006 audit by 60% including a core group of well-qualified andexperienced accounting personnel that joined us in connection with the SESCoacquisition. This has allowed us to formalize review processes and improvesegregation of duties;

 

•                  creating a co-sourced internal audit functionwith a professional services firm;

 

•                  implementing new systems designed tofacilitate reconciliation and reporting of transactions;

 

•                  initiating a process whereby the Controllerand/or senior accounting personnel sign-off on the review and approval of allsignificant accounting entries;

 

•                  implementing a risk management systemdesigned to help better track our risks and to facilitate reconciliation andreporting of transactions and risks and, in the interim, centralizing the riskmanagement reporting function to a risk manager and initiating monthly meetingsbetween supply and operations and the accounting team to ensure that alltransactions are appropriately recorded;

 

•                  documenting all significant financialprocesses, including inventory and gross margin, cash disbursements, cashreceipts, payroll, commodity procurement, and hedging and derivative valuation;

 

•                  continuing to employ a risk oversightcommittee, chaired by a member of the board of directors, which has adoptedpolicies and guidelines regarding the management of our supply portfolio andhedging instruments;

 

•                  implementing various controls throughout thebilling and customer sales price renewal process to timely identify and addresspricing errors;

 

•                  initiating the process to add additionalpersonnel to the office of the General Counsel; and

 

•                  implementing information technology policiesand procedures, including increased regulation of network access, changemanagement processes,  and addedsegregation of responsibilities.

 

As of June 30, 2007,management has concluded that the material weakness identified in prior periodsno longer exists as we believe we have designed and implemented an effectivecontrol environment. Whilewe believe that such material weakness no longer exists, we have not yet testedour newly implemented controls. The Company will begintesting controls during fiscal year 2008 using our co-sourced internal auditteam.

 

104

----

 

As of June 30, 2007, underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we conducted an evaluationof our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Based on this evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere effective as of June 30, 2007 in providing a reasonable level of assurancethat information we are required to disclose in reports that we file or submitunder the Exchange Act was recorded, processed, summarized and reported withinthe time periods specified in SEC rules and forms, including a reasonable levelof assurance that information required to be disclosed by us in such reportswas accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure.

 

**ITEM9B. OTHER INFORMATION**

 

None.

 

105

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## **PART III.**

## ** **

**ITEM10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

**Directors and ExecutiveOfficers**

 

Our board of directorsconsists of seven members. For a discussion on director independence, see “Item13. Certain Relationships and Related Transactions, and Director Independence —Independence of Directors.” All of our executive officers serve at thediscretion of our board of directors, subject to their employment agreementsdescribed under “Item 11. Executive Compensation.”

 

The following table setsforth the names and positions of the current directors and executive officers ofthe Company and their ages:

 
| **Name**                                   | ** ** | **Age** | ** ** | **Position**                                                     |
|--------------------------------------------|------------|---------|------------|------------------------------------------------------------------|
| Jeffrey  Mayer                             |       | 55      |       | President,  Chief Executive Officer and Director                 |
| Steven  Murray                             |       | 47      |       | Chief  Operating Officer and Director                            |
| Carole  R. (“Robi”) Artman-Hodge |       | 56      |       | Executive  Vice President and Director                           |
| Chaitu  Parikh                             |       | 38      |       | Vice  President and Chief Financial Officer                      |
| Robert  Blake                              |       | 51      |       | Vice  President, Electricity Operations & Regulatory Affairs |
| Charles  Cavin                             |       | 44      |       | Chief  Information Officer                                       |
| Gina  Goldberg                             |       | 49      |       | Vice  President, Marketing                                       |
| Robert  Werner                             |       | 51      |       | Vice  President, Supply                                          |
| Daniel  Bergstein                          |       | 64      |       | Director                                                         |
| William  Landuyt                           |       | 51      |       | Director                                                         |
| Stuart  Porter                             |       | 41      |       | Director                                                         |
| John  Stewart                              |       | 65      |       | Director                                                         |

 

Set forth below is a briefdescription of the business experience of the directors and executive officersof the Company.

 

**JeffreyMayer** has served as President and Chief Executive Officer of MxEnergy since1999. From 1992 to 1999, Mr. Mayer worked for Sempra Trading Corporation,formerly AIG Trading Corporation, a subsidiary of AIG, where as a ManagingDirector he managed natural gas derivatives marketing and worked on the launchof a retail energy joint venture. Mr. Mayer also served as Chairman of AIGClearing Corporation, the futures clearing arm of AIG Trading, as well asChairman of AIG Securities Corporation, the securities affiliate of AIGTrading. Prior to joining AIG, Mr. Mayer worked at Goldman,Sachs & Co. where he managed the Energy Futures Department from 1989to 1992, worked in the Futures Services Department from 1987 to 1989 and servedas Chief Counsel of its J. Aron Commodities Division from 1984 to 1987.Mr. Mayer developed the Energy Traders Institute, a seminar on riskmanagement sponsored by Infocast and heard by over 30 utilities and energyproducers in North America. In 1988 Mr. Mayer was appointed by the OptionsClearing Corporation to a Special Subcommittee of the Margin Committeeinvestigating risk management procedures in response to the October 1987stock market crash. Mr. Mayer received his J.D. from New York Universityin 1978 and his B.A. from Yale University in 1973. Mr. Mayer serves asChairman of the Board of Finance of Westport, CT, an elected office in which heserves as chairman of the town’s municipal pension plans, reviews budgets andapproves the tax rate.

 

**StevenMurray**has served as the Company’s Chief OperatingOfficer since August 2006. Prior to joining the Company, Mr. Murrayhad a 25 year career with the Royal Dutch Shell group of companies, wherehe most recently served as Chief Executive Officer of SESCo from late 2001 to August 2006and as the first President and Chief Executive Officer of Shell Trading US Co.from 1998 to late 2001. Mr. Murray previously served as Vice Chair of theNational Energy Marketers Association as well as a member of the board of theSoapers and Detergents Association.

 

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**Carole R. (“Robi”)Artman-Hodge** has served as Executive Vice President of MxEnergysince 1999 and served as Chief Operating Officer from 1999 to August 2006.Prior to co-founding MxEnergy, Ms. Artman-Hodge worked as senior managingdirector of the Project Finance unit of Bank of Ireland from 1997 to 1998,senior managing director of Risk Management and Origination for the NaturalResources unit of ING from 1989 to 1996, senior managing director of theCommodity Finance Treasury Marketing unit of Banque Paribas from 1981 to 1989,and Assistant Treasurer of the international banking unit of Harris Bank from1977 to 1981.

 

**ChaituParikh** has served as Vice President and Chief Financial Officer of MxEnergysince July 2004. Mr. Parikh previously served as the Vice Presidentof Finance of MxEnergy from December 2002 to July 2004. Prior tojoining MxEnergy, Mr. Parikh was Vice President and Controller of The NewPower Company from October 2001 to December 2002 and the ChiefFinancial Officer of Alliance Energy Services from December 1996 toJuly 2001. Previously, Mr. Parikh worked in public accounting withKPMG from 1991 to 1996. Mr. Parikh holds a CA designation from theCanadian Institute of Chartered Accountants.

 

**RobertBlake** has served as Vice President, ElectricityOperations & Regulatory Affairs of MxEnergy since June 2004 andserved as Vice President Customer Operations, from April 2001 to May 2004.Prior to joining MxEnergy, Mr. Blake worked for two other retail energymarketers, United Energy and Conectiv Energy. Mr. Blake was the Manager ofUnited Energy from January 2000 to March 2001 and Regional Sales Director forConectiv Energy from April 1998 to January 2000. From 1980 to March 1998, Mr.Blake worked for United Illuminating, an electric utility in Connecticut, wherehis last position held was Director of Commercial & Industrial EnergyServices. He has been involved with numerous national and regional electricityand energy committees and has held leadership positions with several regionalenergy groups, including chairing an NEPOOL task force. Mr. Blake has a B.S. inMechanical Engineering from Worcester Polytechnic Institute and a M.B.A. degreefrom the University of New Haven.

 

**CharlesCavin**has served as the Chief Information Officerof MxEnergy since November 2005. From January 2004 toOctober 2005, Mr. Cavin served as the Vice President of Finance of JPMorgan’s Asset Management division. From April 2002 to January 2004,Mr. Cavin was a Director of the Operational Excellence Practice ofHighQuest Partners LLC. From January 2000 to April 2002,Mr. Cavin served as the President of CoBlox, Inc., a company hefounded in 2000. Previously, Mr. Cavin spent 10 years in the financesector working for Goldman Sachs and IBM. Mr. Cavin received a B.S. in1986 from the United States Military Academy and a M.B.A. in 1990 from theCollege of William and Mary.

 

**GinaGoldberg** has served as Vice President, Marketing of MxEnergysince February 2004. Prior to joining MxEnergy as a consultant in November2003, Ms. Goldberg held various marketing positions at Showtime Networks Inc.from 1984 until 2003, including the position of Senior Vice President ofMarketing from 1998 until 2003. Ms. Goldberg additionally served as a member ofthe Viacom Inc. Marketing Board Council from 1998 until 2003. Previously, Ms.Goldberg worked in the Marketing Department at The Dallas Morning News from1981 until 1984.

 

**RobertWerner** has served as Vice President, Supply of MxEnergysince August 2006. Prior to joining MxEnergy, Mr. Werner had a 28 year careerwith Royal Dutch Shell in energy trading, supply chain management, and pipelineengineering and operations. From 2002 to 2006, Mr. Werner was VicePresident of Supply for Shell Energy Services, responsible for natural gassupply, commodity price exposure management and pricing. Prior tocompleting a two-year assignment in trading process and systems redesign in2002, Mr. Werner spent 14 years in a variety of roles trading crude oilin the United States, Africa, Europe and South America. Mr. Wernerhas a M.B.A. from the University of Houston and a B.S. in Mechanical andAerospace Engineering from Princeton University. Mr. Werner is a retiredprofessional engineer in the State of California.

 

**DanielBergstein** has served as a director of MxEnergy since 2000 andis the chairman of the compensation committee. Since 1988, Mr. Bergsteinhas been a senior partner in the New York office of the international law firmPaul, Hastings, Janofsky & Walker LLP, where he is the Chairman of thefirm’s global Telecommunications and Media practice. Mr. Bergstein is alsoa co-founder of Cequel III LLC; a director of

 

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Cequel Communications, LLC, the8th largest U.S. cable company; he is also an advisory board member of CatalystInvestors I and II, L.P., two private equity investment funds specializing intelecom and media investments; a board member of SR. Teleperformance, S.A., aParis stock exchange listed company; and a trustee and board member of TheFoundation Fighting Blindness.

 

**WilliamLanduyt** has served as a director of MxEnergy since 2004 and is the chairman ofthe audit committee. Mr. Landuyt is a senior partner at CharterhouseGroup, Inc., a position he has held since December 2003. FromOctober 1996 until July 2003, Mr. Landuyt served as the ChiefExecutive Officer and Chairman of the Board of Millennium Chemicals, Inc.Mr. Landuyt was previously employed by Hanson Industries where he servedas President and Chief Executive Officer from June 1995 untilOctober 1996. Mr. Landuyt held the position of Finance Director ofHanson Plc from 1992 until May 1995 and a Director of Hanson Plc from 1992until October 1996. Mr. Landuyt served as Vice President and ChiefFinancial Officer of Hanson Industries from 1988 to 1992. Mr. Landuytserves as a member of the board of directors and compensation committee of TopImage Systems, Ltd.

 

**StuartPorter** has served as a director of MxEnergy since 2000 and is chairman of therisk oversight committee. Since June 2007, Mr. Porter has been aprincipal of Denham Capital Management LP, and serves as Chief InvestmentOfficer for the Denham Commodity Partners Funds. From 2004 until 2007,Mr. Porter was a managing director at Sowood Capital Management LP, andduring that period managed the Sowood Commodity Partners Funds. From 1996 toJuly 2004, Mr. Porter was employed as a Vice President and PortfolioManager at Harvard Management Company, Inc. where he focused on relativevalue transactions in commodities and structured private transactions in thecommodity sector. Mr. Porter received a Bachelor of Arts degree inEconomics from the University of Michigan in 1987 and his Master of BusinessAdministration degree from the University of Chicago Graduate School ofBusiness in 1994.

 

**JohnStewart** has served as a director of MxEnergy since 2000. Mr. Stewart isan attorney in private practice since 1981. Mr. Stewart serves on theboards of directors of P&B Woodworking and Amity Art Foundation. Inaddition, Mr. Stewart serves as the chairman of the Library Commission ofWoodbridge, Connecticut.

 

**Committees**

 

Our board of directorsappoints committees to help carry out its duties. Our board of directors hasestablished three committees: the audit committee, the compensation committeeand the risk oversight committee.

 

*Audit Committee*. The auditcommittee consists of Mr. William Landuyt (Chair) and Messrs. Daniel Bergsteinand Stuart Porter. The board of directors has determined that Mr. WilliamLanduyt qualifies as an audit committee financial expert within the meaning ofthe SEC rules. The board of directors has determined that Mr. Landuyt is not anindependent director based on the definition of independence of the New York StockExchange. For more information, see “Item 13. Certain Relationships and RelatedTransactions, and Director Independence — Independence of Directors.” The auditcommittee makes recommendations to the board of directors regarding theselection of independent accountants, reviews the results and scope of auditand other services provided by our independent accountants, and reviews andevaluates our audit and control functions.

 

*Compensation Committee*. Thecompensation committee consists of Mr. Daniel Bergstein (Chair), Ms. Carole R.Artman-Hodge and Mr. William Landuyt. The compensation committee administersour employee stock and other benefit plans and makes decisions concerningsalaries and incentive compensation for our employees.

 

*Risk Oversight Committee*. The riskoversight committee consists of Mr. Stuart Porter (Chair), Ms. Carole R.Artman-Hodge and Messrs. Jeffrey Mayer, Steven Murray and Chaitu Parikh. Therisk oversight committee oversees the Company’s risk management policies.

 

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**Code of Ethics**

 

We have adopted a Code ofBusiness Conduct and Ethics, referred to herein as the Code of Ethics, whichapplies to our officers, directors and employees, which meets the definition ofa “code of ethics” required by Item 406 of Regulation S-K promulgated under theExchange Act. The purpose of the Code of Ethics is to promote a culture ofhonesty, integrity and respect for the law and the people who work at MxEnergy.A copy of the Code of Ethics is available on our website at www.mxholdings.com,under the Corporate Governance link. We intend to timely disclose anyamendments to or waivers of certain provisions of the Code of Ethics applicableto our directors, executive officers, including our principal executiveofficer, principal financial officer and principal accounting officer, andcontrollers on our website at www.mxholdings.com.

 

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**ITEM11. EXECUTIVE COMPENSATION**

 

**Compensation Committee Report**

 

The compensation committeehas reviewed and discussed with management the “Compensation Discussion andAnalysis,” or CD&A, section required by Item 402(b) of Regulation S-Kpromulgated under the Exchange Act, which follows. Based on the compensationcommittee’s review and discussion with management, the compensation committeerecommended to the board of directors that the CD&A be included in theCompany’s Annual Report.

 

THE COMPENSATION COMMITTEE:

 

Daniel Bergstein (Chair)

William Landuyt

Carole R. Artman-Hodge

 

*The information contained in theCompensation Committee Report shall not be deemed to be “soliciting material”or to be “filed” with the SEC, nor shall such information be incorporated byreference into any future filings under the Securities Act or the Exchange Act,except to the extent that we specifically incorporate it by reference in suchfiling.*

 

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**Compensation**Discussion and Analysis for Named Executive Officers

** **

**Overview of**CompensationProgram

** **

**The compensationcommittee is appointed by the board of directors to discharge the board’sresponsibilities relating to (1) compensation of the Company’s executives; (2)equity-based compensation plans, including, without limitation, stock optionplans, in which officers or employees may participate, and (3) arrangementswith executive officers relating to their employment relationships with theCompany, including, without limitation, employment agreements and restrictivecovenants. The compensation committee has overall responsibility for approvingand evaluating executive officer compensation plans, policies and programs ofthe Company, as well as all equity-based compensation plans and policies. Inaddition, the compensation committee shall oversee, review and approve all ofthe Company’s ERISA and other employee benefit plans.**

** **

**Overview of**CompensationPhilosophy and Objectives

** **

The compensation of our executive officers is basedin part on the terms of the employment agreements that we entered into witheach of our Chief Executive Officer, Chief Financial Officer, our three othermost highly compensated executive officers and two additional individuals forwhom disclosure would have been provided, but for the fact that the twoindividuals were not serving as executive officers as of June 30, 2007,which are collectively referred to herein as the named executive officers. Inaddition, our “pay-for-performance” philosophy on both an individual andcorporate level is among the fundamental tenants of our executive compensationprogram. We have adopted an approach to compensation comprised of a mix ofshort-term and long-term components that are designed to provide properincentives, and reward our senior management team for individual and corporateperformance.

 

Our intent regarding the compensation of ourexecutive officers is to provide salary levels and compensation incentivesthat:

 

•                  attract andretain talented and experienced executives;

 

•                  motivate ourexecutives to manage our business to meet our short-term and long-term businessobjectives;

 

•                  motivate theexecutives to increase stockholder value; and

 

•                  tie executivecompensation to the achievement of certain short-term and long-term individualand corporate objectives.

 

**Role of Our Compensation**Committee

** **

Our compensation committee is responsible foradministering our compensation practices. Our compensation committee consistsof two directors who are “outside directors” for purposes of Section 162(m) ofthe Internal Revenue Code, as amended, referred to herein as the Code, and oneemployee director, Carole R. Artman-Hodge. Our compensation committee iscomprised of Daniel Bergstein, Carole R. Artman-Hodge, and William Landuyt,with Mr. Bergstein serving as our compensation committee chairperson.

 

The compensation committee interprets, implements,administers, reviews and approves all aspects of remuneration of our

 

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named executive officers, including their participation inincentive-compensation plans and equity-based compensation plans. Thecompensation committee annually reviews and approves, for all named executiveofficers, (a) their annual base salary level, (b) their annual incentiveopportunity level, and (c) any special or supplemental benefits. The compensationcommittee also reviews and approves all employment agreements for namedexecutive officers.

 

The compensation committee considers recommendationsfrom Jeffrey Mayer, our President and Chief Executive Officer, in determiningexecutive compensation for all of the named executives, except for the ChiefExecutive Officer. In its sole discretion, the compensation committee mayaccept or deny, in whole or in part, the recommendations of Mr. Mayer. Forfiscal year 2007, however, the compensation committee reviewed and accepted therecommendations of Mr. Mayer with three minor adjustments, which reduced theindividual performance factor, referred to herein as the IPF, recommended forone executive officer and reduced the annual salary increases proposed for twoexecutive officers for fiscal year 2008. In addition, the compensationcommittee raised the IPF for the Chief Executive Officer and adjusted hisannual salary increase from 0% to 3% for fiscal year 2008. The board ofdirectors currently is not required to approve the compensation committeerecommendations. A compensation committee report is presented to the board ofdirectors, and board members are encouraged to ask questions and are given theopportunity to review specific details of the compensation committee’sactivities.

 

***Elements of Compensation***

 

The compensation of our named executive officersconsists primarily of five components:

 

•                                          base salary;

 

•                                          annual cashincentives;

 

•                                          equity-basedincentives;

 

•                                          other benefits;and

 

•                                          severance andtermination protection.

 

We use a mix of short-term compensation (basesalaries and annual cash incentives) and long-term compensation (equity-basedincentives) to provide a total compensation structure that is designed toachieve our pay-for-performance philosophy and our compensation objectives. Althoughthe compensation committee has not adopted any formal guidelines for allocatingtotal compensation between equity compensation and cash compensation, webelieve it is important for our executive officers to have some equityownership in the Company to provide them with long-term incentives to improvecorporate performance. We do not have any established formal criteria todetermine how decisions regarding one compensation element might affectdecisions regarding other compensation elements or fit into our overallcompensation objectives. We discuss each of the principal elements of ourexecutive compensation in detail below.

 

The compensation committee did not undertake aformalized benchmarking or competitive review of peer group compensation levelsof the named executive officers in fiscal year 2007, though formal benchmarkinghas been performed in the past. Our non-employee committee members are involvedwith a portfolio of small to mid-sized companies from which they can assess theappropriateness of executive compensation issues.

 

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**Annual Cash Compensation**

** **

***Base Salary***

** **

In general, our named executive officers’ basesalaries reflect (i) the initial base salaries that we negotiated with each ofthem at the time of their initial employment or promotion, and (ii) ourexecutives’ performance and increased experience and any changes in ourexecutives’ roles and responsibilities. The base salaries of our executiveofficers are reviewed and adjusted annually after fiscal year results have beenfinalized and after evaluations of the named executive officers’ have beenperformed. We believe that a competitive base salary is a necessary element ofany compensation program designed to attract and retain talented andexperienced executives. We also believe that attractive base salaries canmotivate and reward executives for their overall performance.

 

In fiscal year 2007, we increased the annual rate ofthe base salaries for our named executive officers, as follows:  

 
| ** **                                                      | ** ** | **Fiscal Year  2007** | ** ** | **Fiscal Year  2006** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Jeffrey  Mayer,***President and Chief  Executive Officer*     |       | $                     | 550,000    |                  | $          | 450,000 |   |
| ** **                                                      |       |                  |       |                  |       |   |   |
| **Chaitu Parikh,***Vice  President and Chief Financial Officer* |       | $                     | 390,000    |                  | $          | 350,000 |   |
| ** **                                                      |       |                  |       |                  |       |   |   |
| **Steven Murray,***Chief  Operating Officer*                    |       | $                     | 450,000    |                  |       | (a) |
| ** **                                                      |       |                  |       |                  |       |   |
| **Carole R. Artman-Hodge,***Executive  Vice President*          |       | $                     | 390,000    |                  | $          | 375,000 |   |
| ** **                                                      |       |                  |       |                  |       |   |   |
| **Charles Cavin,***Chief  Information Officer*                  |       | $                     | 200,000    |                  | $          | 150,000 | (b) |
| ** **                                                      |       |                  |       |                  |       |   |   |
| **Gina Goldberg,***Vice  President, Marketing*                  |       | $                     | 238,000    |                  | $          | 231,600 |   |
| ** **                                                      |       |                  |       |                  |       |   |   |
| **Robert Werner,***Vice  President, Supply*                     |       | $                     | 250,000    |                  |       | (a) |

 

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(a) Messrs. Murray and Werner joined the Companyeffective August 14, 2006, shortly after we acquired substantially all of theassets of SESCo (for additional information, see Note 3 to our consolidatedfinancial statements included elsewhere in this Annual Report). Prior tojoining the Company, Mr. Murray was the Chief Executive Officer of SESCo andMr. Werner was the Vice President of Supply of SESCo.

 

(b) Mr. Cavin joined the Company on October 31,2005.

 

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The committee considered the following factors indetermining the base salary increases for fiscal year 2007:  company performance, the executive’sindividual performance factor (as discussed below under “—Annual Cash IncentiveCompensation”), general increase in the cost of living, Mr. Mayer’srecommendations and the outside committee members knowledge of industrypractices. In addition, the compensation committee recognized that the Companybasically doubled in size during fiscal year 2007 as a result of the SESCoacquisition. As a result, the responsibilities of our executive officers, particularlyour Chief Executive Officer, have increased. The compensation committeereviewed the individual performance factors for all executives.

 

***Annual CashIncentive Compensation***

** **

Our named executive officers have the opportunity toreceive cash incentive awards tied to the Company’s overall performance andtheir individual performances. According to employment agreements that were inplace as of June 30, 2007, the target bonuses for each executive are asfollows: (1) Mr. Murray’s target bonus is 100% of base salary, plus thepossibility of an additional 20% of base salary; (2) Mr. Werner and Ms.Goldberg’s target bonus is between 50% to 100% of base salary; and (3) Mr.Cavin’s target bonus is up to 100% of base salary. The employment agreements ofMessrs. Mayer and Parikh and Ms. Artman-Hodge did not provide for specifictarget amounts.

 

The compensation committee establishes specificperformance goals for the payment of discretionary bonuses which are based onspecific goals and objectives as described below. The establishment of businessand individual goals for each executive officer reinforces two of ourcompensation goals – namely, to motivate our named executives toward evenhigher achievement and business results and to enable us to attract and retainhighly qualified individuals.

 

In fiscal year 2007, the business performancefactors, referred to herein as the BPF, considered for all named executiveswere as follows:

 

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•                  40% weightingon achievement of targeted year end residential customer equivalent objectives;

 

•                  30% weightingbased on achievement of key performance objectives specifically related tothe  improvement in the overall internalcontrol framework to address material weaknesses identified by our externalauditors in the prior year;

 

•                  30% weightingbased on achievement of Adjusted EBITDA (earnings before income taxes, interestexpense and depreciation and amortization) for the 2007 fiscal year.

 

Additionally, the compensation committee establishedperformance targets for the individual named executive officers and reviewedand approved individual performance criteria with respect to the performancetargets for the named executive officers.

 

**The IPF is calculated after a systematic review of eachemployee and manager’s performance. All employees complete a detailedself-evaluation form that has been reviewed by the compensation committee. Onthis form the employee and his or her manager assign and come to agreement on agrade from 1 to 5 for several specific categories and job skills within thosecategories. Categories include: (1) Leadership, Team Management andOrganizational Skills; (2) Primary Job Responsibilities; (3) Judgment andDecision-making; (4) Individual Attributes; (5) Peer Relationships; and (6)Industry, Departmental and Company Knowledge.**

** **

The product of the BPF and the IPF is thenmultiplied by the employee’s maximum bonus potential. This bonus potential is afactor, from 40-120%, of the employee’s base compensation and is set at thetime of employment subject to increase or decrease later. The BPF has thelargest impact on the cash incentive payout amount.

 

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Individual bonus amounts were as follows for theyear ended June 30, 2007:

 
| ** **                                                      | ** ** | **Target  Amount** | ** ** | **Payout** | ** ** |
|-----------------------------------------------------------------|------------|--------------------|------------|------------|------------|
| **Jeffrey Mayer,***President and Chief  Executive Officer*      |       | $                  | 550,000    |       | $          | 324,500 |   |
| ** **                                                      |       |               |       |       |       |   |   |
| **Chaitu Parikh,***Vice  President and Chief Financial Officer* |       | 390,000            |       | 253,100    |       |
| ** **                                                      |       |               |       |       |       |
| **Steven Murray,***Chief  Operating Officer*                    |       | 389,000            | (a)        | 229,800    |       |
| ** **                                                      |       |               |       |       |       |
| **Carole R. Artman-Hodge,***Executive  Vice President*          |       | 390,000            |       | 159,600    |       |
| ** **                                                      |       |               |       |       |       |
| **Charles Cavin,***Chief  Information Officer*                  |       | 80,000             |       | 43,000     |       |
| ** **                                                      |       |               |       |       |       |
| **Gina Goldberg,***Vice  President, Marketing*                  |       | 214,200            |       | 102,900    |       |
| ** **                                                      |       |               |       |       |       |
| **Robert Werner,***Vice  President, Supply*                     |       | 108,000            | (a)        | 44,700     |       |

 

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(a) The target amounts for Messrs. Murray and Wernerare pro rated, reflecting the fact that they joined the Company effectiveAugust 14, 2007, shortly after the SESCo acquisition.

 

Additionally, in September 2006, certainmembers of our management team received cash bonuses in recognition of theirwork in the SESCo acquisition. Jeffrey Mayer, our President and Chief ExecutiveOfficer; Carole R. Artman-Hodge, our Executive Vice President; Chaitu Parikh,our Vice President, Chief Financial Officer and Assistant Treasurer; CharlesCavin, our Chief Information Officer; and Gina Goldberg, our Vice President,Marketing, received $250,000, $150,000, $200,000, $25,000 and $25,000,respectively.

 

**Equity Incentive Compensation**

** **

We currently grant equity incentive awards in theform of stock options. Stock options are an important component in ourexecutive compensation program because the Company has benefited from dedicatedemployees who take ownership pride in its business. Some decisions regardingthe amount and

 

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timing of the stock option awards is made (1) at the time of theexecutive’s employment; (2) at the time of annual review, which is undertakenafter completion of the fiscal year; or (3) on rare occasions a special awardhas been made following a significant event such as an acquisition.

 

We typically make grants of equity incentive awardsto our executive officers on a periodic basis, approximately every twelvemonths. The date of grant and the fair market value of the awards areestablished on the date of the committee meeting. The fair market value of ourstock is determined by: (1) an external valuation from a third party; (2) aninternal valuation based on the valuation process used by the third partyvaluation; or (3) arm’s length transactions over the last quarter. Grantsawarded during fiscal year 2007 were based on an external valuation from athird party.

 

The board of directors has delegated responsibilityto the compensation committee to approve all policies and programs related tothe award of stock options. The compensation committee reviews and approves allstock equity-based compensation plans. Mr. Mayer makes recommendations to thecompensation committee regarding the award of stock options to all namedexecutive officers. The fiscal year 2007 grants were approved based on thecompensation committee members’ knowledge of market practice, performance ofthe Company and expectations of future performance of the Company. Thecompensation committee approved Mr. Mayer’s recommendations without changes.

 

The Company has adopted, by a vote of theshareholders, three separate incentive stock option plans (2001, 2003, and2006) pursuant to which stock options have been granted. Stock option awardsprovide our executive officers, employees and other individuals who haveprovided services to the Company with the right to purchase shares of ourcommon stock at a fixed exercise price typically for a period of up to tenyears, subject to continued employment with our company. The incentivecompensation plans do not allow the company to establish an exercise price thatis below fair market value of the common stock. We have granted stock optionsas incentive stock options in accordance with Section 422 of the Code, aswell as non-qualified stock options. In general, we provide our executives andall of our employees, with service-based stock options that have a three yearvesting schedule. The exercise price for options awarded to employees who owngreater than 10% of our common stock as of the date of grant is 110% of thefair market value of our common stock and the term of the option is reduced to5 years instead of 10 years.

 

For fiscal year 2007, we granted stock options toeach of the named executive officers pursuant to our 2006 Equity IncentiveCompensation Plan. The Company awarded stock options to Mr. Werner in November2006; however the first vesting period ended on August 1, 2007. Generally,stock options awarded to the named executive officers vest over a three-yearperiod with the first vesting period ending on the first anniversary of thedate of grant. We do not make decisions regarding equity awards based on thegains or losses from prior equity awards. Additionally, we do not have formalsecurity ownership requirements.

 

**Other Compensation**

** **

All of our executive officers are eligible forbenefits offered to employees generally, including life, health, disability anddental insurance and participation in our 401(k) plan. We intend to continue tomaintain our current benefits for our executive officers, as well as for all ofour full-time employees. The compensation committee in its discretion mayrevise, amend or add to the officer’s executive benefits and perquisites if itdeems it advisable. We do not believe it is necessary for the attraction orretention of management talent to provide the officers with a substantialamount of compensation in the form of perquisites. In addition to matching the401(k) contributions of all of the named executive officers, we madereimbursement payments to Messrs. Murray and Werner and Ms. Goldberg for legalfees in

 

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connection with preparation of their employment agreements andreimbursement payments to Mr. Murray in connection with club fees.

 

**Post-Employment Severance and Change in Control Benefits**

** **

***Mr. Mayer***

** **

We will provide severance payments to Mr. Mayer, ourPresident and Chief Executive Officer, should we terminate his employment forany reason other than for cause. Employment may be terminated at any timeduring the term of employment by us with or without cause upon six months’prior notice. Upon such termination, Mr. Mayer will: (1) be entitled to aseverance payment of (a) 36 months of his base salary and (b) any unvestedwarrants, options or other securities awarded to him pursuant to our equitycompensation plans and (2) vest in the pro-rata portion of any warrants oroptions that are scheduled to vest on the vesting date next succeeding theeffective date of his termination.

 

***Mr. Parikh***

 

In the event that weterminate Mr. Parikh’s employment without cause, there is a change in control,or the Company completes an initial public offering, Mr. Parikh will beentitled to a severance payment equal to six months of his then-current salarypayable on a monthly basis and all unvested warrants awarded to Mr. Parikh willvest.

 

***Mr. Murray***

 

In the event that weterminate Mr. Murray’s employment without a “business reason” (as definedbelow) or a constructive termination (as defined below) occurs, Mr. Murray willbe entitled to: (1) a lump sum payment equal to the greater of (a) base salaryfor a period of 12 months following the date of termination or (b) base salaryfor the remainder of the then-current agreement term; (2) a lump sum paymentequal to (a) 100% of the target bonus for the fiscal year in which thetermination occurs; (b) 100% of the target bonus for any full fiscal yearremaining during the agreement term; and (c) a pro rata portion of 100% of thetarget bonus for the final fiscal year that begins during the applicableagreement term; (3) Mr. Murray’s unvested stock options, restricted stock andother equity awards shall become fully vested, and all vested but outstandingstock options shall be cancelled in consideration of the Company’s payment toMr. Murray of an amount equal to (x) the fair market value for the sharesunderlying the options, (y) over the exercise price of such options, (z)multiplied by the number of shares subject to the options; and (4) continuationof other employee and executive benefits, such as health, life insurance anddisability, until the end of the agreement term and (5) any accrued, butunpaid, compensation.

 

If there is a change ofcontrol during the agreement term and the Company terminates Mr. Murray’semployment without business reasons prior to the end of the agreement term (orwithin a year following a change of control) prior to the end of the agreementterm (or within a year following a change of control) or a constructivetermination occurs, Mr. Murray will be entitled to receive the following: (1) alump sum payment equal to the greater of (a) base salary for a period of twoyears following the date of termination or (b) base salary for the remainder ofthe then-current agreement term and (2) a lump sum payment equal to the greaterof (a) 200% of the target bonus for the fiscal year in which the terminationoccurs; (b) 100% of the target bonus for any full fiscal year remaining doingthe agreement term times the number of years for the remainder of thethen-current agreement term; and (3) any accrued, but unpaid, compensation. Inaddition, Mr. Murray’s unvested stock options, restricted stock and otherequity awards shall become fully vested.

 

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In the event of terminationdue to disability, Mr. Murray will be entitled to all earned, but unpaidcompensation, payments and benefits in accordance with the disability policy ofthe Company, the “in the money” value of all vested options, a pro-rata portionof any target bonus Mr. Murray would have otherwise earned during the fiscalyear in which the disability occurs, and any accrued, but unpaid, compensation.

 

If Mr. Murray voluntarilyterminates his employment or the Company involuntarily terminates hisemployment for business reasons, all equity awards will expire according to theterms of the award agreement, Mr. Murray will receive any accrued, but unpaid,compensation, and Mr. Murray will receive a pro-rata portion of any targetbonus that he would have otherwise earned during the fiscal year in which histermination occurs.

 

If Mr. Murray’s employmentterminates due to death, Mr. Murray’s representative will receive payments andbenefits in accordance with the then-applicable plans, policies, orarrangements, all equity awards will expire according to the terms of the awardagreement (provided Mr. Murray will be entitled to the “in the money” value ofall vested options), Mr. Murray will receive any accrued, but unpaid,compensation, and Mr. Murray will be entitled to receive a pro rata portion ofany target bonus that he would have otherwise earned during the fiscal year inwhich his termination occurs.

 

***Ms. Artman-Hodge***

 

In the event that weterminate Ms. Artman-Hodge’s employment relationship without cause, Ms.Artman-Hodge will be entitled to a severance payment of 36 months of her basesalary in effect at the time of her termination plus any unvested warrants,options or other securities awarded to her pursuant to the Incentive StockOption Plan by us. Additionally, she will vest in the pro rata portion of anywarrants or options that are scheduled to vest on the vesting date nextsucceeding the effective date of her termination and forfeit the right toreceive all remaining unvested warrants or options. In the event that Ms.Artman-Hodge terminates her employment or we terminate her employment withcause, Ms. Artman-Hodge will forfeit her right to receive any unvested optionsor warrants.

 

***Ms. Goldberg***

 

In the event that Ms.Goldberg’s employment is terminated by the Company without business reasons orby Ms. Goldberg as a result of a constructive termination, Ms. Goldberg will beentitled to (i) a lump sum payment equal to the greater of her base salary forthe remainder of the employment term or (ii) her base salary for a period of 12months. For purposes of severance, Ms. Goldberg’s initial employment term is deemedto be two years. If the Company terminates Ms. Goldberg’s employment forbusiness reasons or Ms. Goldberg terminates her employment for any reason thatdoes not constitute a constructive termination, she will be entitled to anyaccrued and unpaid salary and she will forfeit her right to receive anyunvested options or warrants.

 

***Mr. Werner***

 

In the event that theCompany terminates Mr. Werner’s employment without a “business reason” (asdefined below) or Mr. Werner terminates his employment for any reason thatconstitutes a constructive termination (as defined below), Mr. Werner will beentitled to a lump sum payment equal to his base salary for the remainder ofthe employment term. For purposes of severance, Mr. Werner’s initial employmentterm will be considered three years. If the Company terminates Mr. Werner’semployment for business reasons or Mr. Werner terminates his employment for anyreason that does not constitute a constructive termination, he will be entitledto any accrued and unpaid salary.

 

119

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For purposes ofMr. Werner's employment agreement, “business reasons” mean: (i) grossnegligence, willful misconduct or other willful malfeasance in the performanceof his duties; (ii) conviction of, or plea of *nolocontendere* to, or written admission of the commission of a felony,or any other criminal offense involving moral turpitude; (iii) any act by Mr.Werner involving moral turpitude, fraud or misrepresentation with respect tohis duties for the Company or its affiliates; (iv) any act by Mr. Wernerconstituting a failure to follow the directions of the Chief Executive Officer,the Chief Operating Officer, or the board of directors, provided written noticeof such failure is provided to Mr. Werner and the failure continues for fivedays after receipt of such notice; and (v) subject to certain conditions, Mr.Werner’s material breach of the his employment agreement that has not beencured within 30 days after written notice of such breach by the board ofdirectors.

 

For purposes of the Mr.Werner’s employment agreement, “constructive termination” will be deemed tooccur if Mr. Werner gives the Company written notice of the existence of any ofthe following: (i) Mr. Werner is required to relocate his place of employment,other than a relocation that is within 50 miles of the Company’s Houstonoffices; (ii) there an intentional reduction in Mr. Werner’s base salary (otherthan a reduction that is consistent with a general reduction for the executivestaff as a group); (iii) there occurs any other material breach of hisemployment agreement by the Company provided Mr. Werner provides a writtendemand for substantial performance to the Company. Constructive terminationwill only be deemed to occur if the Company fails to cure the event within 30days following the date such notice is given.

 

***Mr. Cavin***

 

Mr. Cavin’s employmentagreement does not provide for severance payments in the event of terminationof employment.

 

**Accounting and TaxConsiderations**

** **

**EffectiveJuly 1, 2006, we adopted, on a prospective basis, the fair market valueprovisions of SFAS No. 123R.  Under SFASNo. 123R, the estimated fair value of options granted, net of forfeituresexpected to occur, is amortized as compensation expense over the vesting periodof the options based on the accelerated attribution method as specified in FASBInterpretation No. 28. For additional information, see Notes 2 and 12 toour audited consolidated financial statements included elsewhere in this AnnualReport.**

** **

We have granted stock options as incentive stockoptions in accordance with Section 422 of the Code subject to the volumelimitations contained in Code. Generally, the exercise of an incentive stockoption does not trigger any recognition of income or gain to the holder. If thestock is held until at least one year after the date of exercise (or two yearsfrom the date the option is granted, whichever is later), all of the gain onthe sale of the stock, when recognized for income tax purposes will be capitalgain, rather than ordinary income to the recipient. Consequently, we do notreceive a tax deduction. For stock options that do not qualify as incentivestock options, we are entitled to a tax deduction in the year in which thestock options are exercised equal to the spread between the exercise price andthe fair market value of the stock for which the stock option was exercised. Theholders of the non-qualified stock options are generally taxed on this sameamount in the year of exercise.

 

**Post Fiscal Year 2007 Actions**

** **

***Fiscal Year 2008 Salary Actions***

 

The compensation committee has approved an increasein base salary for some of the named executives. The new base salaries are asfollows:

 

120

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| ** **                                                      | ** ** | **Fiscal Year  2008** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------|------------|
| **Jeffrey  Mayer,***President and Chief  Executive Officer*     |       | $                     | 566,500    |   |
| ** **                                                      |       |                  |       |   |
| **Chaitu Parikh,***Vice  President and Chief Financial Officer* |       | $                     | 401,700    |   |
| ** **                                                      |       |                  |       |   |
| **Steven Murray,***Chief  Operating Officer*                    |       | $                     | 463,500    |   |
| ** **                                                      |       |                  |       |   |
| **Charles Cavin,***Chief  Information Officer*                  |       | $                     | 204,000    |   |
| ** **                                                      |       |                  |       |   |
| **Gina Goldberg,***Vice  President, Marketing*                  |       | $                     | 245,100    |   |

 

The compensation committee approved increases in the range of 2% to 3%in base salary for each of the above executives based on general increases inthe cost of living.

 

121

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**SummaryCompensation Table**

 

The following table sets forth certain informationwith respect to compensation for the year ended June 30, 2007 earned by or paidto our named executive officers:

 
| **(a)**                                                   | ** ** | **(b)**  | ** ** | **(c)**       | ** ** | **(d)**               | ** ** | **(f)**                        | ** ** | **(g)**                                                       | ** ** | **(i)**                                      | ** ** | **(j)**      | ** ** |
|-----------------------------------------------------------|------------|----------|------------|---------------|------------|-----------------------|------------|--------------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------|------------|--------------|------------|
| **Name and  Principal Position**                | ** ** | **Year** | ** ** | **Salary  $** | ** ** | **Bonus  $ (1)** | ** ** | **Option  Awards  $ (2)** | ** ** | **Non-equity  Incentive Plan  Compensation  $ (3)** | ** ** | **All Other  Compensation  $ (4)** | ** ** | **Total  $** | ** ** |
| Jeffrey Mayer*President and Chief Executive Officer*      |       | 2007     |       | $             | 547,745    |                  | $          | 250,000                        |       | $                                                             | 87,260     |                                         | $          | 324,500      |       | $ | 13,702 |   | $ | 1,223,207 |   |
|                                                      |       |     |       |          |       |                  |       |                           |       |                                                          |       |                                         |       |         |       |
| Chaitu Parikh*Vice President and Chief Financial Officer* |       | 2007     |       | 389,098       |       | 200,000               |       | 191,799                        |       | 253,100                                                       |       | 16,500                                       |       | 1,050,497    |       |
|                                                      |       |     |       |          |       |                  |       |                           |       |                                                          |       |                                         |       |         |       |
| Steven Murray*Chief Operating Officer*                    |       | 2007     |       | 389,423       |       | 150,000               |       | 737,688                        |       | 229,800                                                       |       | 43,128                                       |       | 1,550,039    |       |
|                                                      |       |     |       |          |       |                  |       |                           |       |                                                          |       |                                         |       |         |       |
| Carole R. Artman-Hodge*Executive Vice President*          |       | 2007     |       | 389,662       |       | 150,000               |       | 191,799                        |       | 159,600                                                       |       | 20,249                                       |       | 911,310      |       |
|                                                      |       |     |       |          |       |                  |       |                           |       |                                                          |       |                                         |       |         |       |
| Charles Cavin*Chief Information Officer*                  |       | 2007     |       | 198,873       |       | 25,000                |       | 103,276                        |       | 43,000                                                        |       | 13,192                                       |       | 383,341      |       |
|                                                      |       |     |       |          |       |                  |       |                           |       |                                                          |       |                                         |       |         |       |
| Gina Goldberg*Vice President, Marketing*                  |       | 2007     |       | 237,859       |       | 25,000                |       | 103,276                        |       | 102,900                                                       |       | 13,485                                       |       | 482,520      |       |
|                                                      |       |     |       |          |       |                  |       |                           |       |                                                          |       |                                         |       |         |       |
| Robert Werner*Vice President, Supply*                     |       | 2007     |       | 216,346       |       | —                |       | 317,388                        |       | 44,700                                                        |       | 19,250                                       |       | 597,684      |       |
|                                                           |            |          |            |               |            |                       |            |                                |            |                                                               |            |                                              |            |              |            |  |  |  |  |  |  |

 

----

(1)  For Messrs. Mayer, Parikh and Cavin, Ms.Artman-Hodge and Ms. Goldberg, represents cash bonuses in recognition of theirwork in the acquisition of SESCo. For Mr. Murray, represents a sign-on bonus,as per his employment agreement.

 

(2)  This column reflects the compensation cost ofstock options over the requisite service period as defined by SFAS No. 123R andreflects the dollar amount recognized for financial statement reportingpurposes for the fiscal year ended June 30, 2007. Assumptions used in thecalculation of these amounts are included in Note 12 to our auditedconsolidated financial statements included elsewhere in this Annual Report.

 

(3)  The amounts shown in this column areexclusively cash awards, which is discussed under “— Annual Cash IncentiveBonuses.”

 

(4)  This column reflects contributions to theCompany-sponsored employee savings plan under Section 401(k) of the Code (Mr.Mayer: $13,702; Mr. Parikh: $16,500; Mr. Murray: $21,596; Ms. Artman-Hodge:$20,249; Mr. Cavin: $13,192; Ms. Goldberg: $10,985; and Mr. Werner: $17,750),the amount of reimbursement for legal fees in connection with the preparationof their employment agreements (Mr. Murray: $13,340; Ms. Goldberg: $2,500; andMr. Werner: $1,500), and club fees (Mr. Murray: $8,192).

 

122

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**2007 Grants of Plan-Based Awards**

 

Thefollowing table sets forth certain information with respect to grants ofplan-based awards for the year ended June 30, 2007 to the named executiveofficers.

 
| ** **             | ** ** | ** **          | ** ** | **Estimated  Future Payouts  Under Non-Equity  Incentive Plan Awards(1)** | ** ** | **All Other  Options  Awards:  Number of  Securities** | ** ** | **Exercise or  Base Price  of Option** | ** ** | **Grant Date  Fair Value  of Option** | ** ** |
|------------------------|------------|---------------------|------------|-----------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Name**               | ** ** | **Grant Date** | ** ** | **Threshold  ($)**                                                                            | ** ** | **Target ($)**                                              | ** ** | **Maximum  ($)**                                      | ** ** | **Underlying  Options (#)**                     | ** ** | **Awards  ($/Sh)(2)** | ** ** | **Awards  (S)** | ** ** |
| Jeffrey Mayer          |       |                |       | $0                                                                                            |       | $550,000                                                         |       | $550,000                                              |       |                                                 |       |   |   |   |   |
| Jeffrey Mayer          |       | 11/16/2006          |       |                                                                                          |       |                                                             |       |                                                  |       | 39,000                                               |       | $46.83 |   | $228,462 |   |
| Chaitu Parikh          |       |                |       | 0                                                                                             |       | 390,000                                                          |       | 390,000                                               |       |                                                 |       |   |   |   |   |
| Chaitu Parikh          |       | 11/16/2006          |       |                                                                                          |       |                                                             |       |                                                  |       | 39,000                                               |       | 42.57 |   | 502,164 |   |
| Steven Murray          |       |                |       | 0                                                                                             |       | 389,000                                                          |       | 466,800                                               |       |                                                 |       |   |   |   |   |
| Steven Murray          |       | 11/16/2006          |       |                                                                                          |       |                                                             |       |                                                  |       | 150,000                                              |       | 42.57 |   | 1,931,400 |   |
| Carole R. Artman-Hodge |       |                |       | 0                                                                                             |       | 390,000                                                          |       | 390,000                                               |       |                                                 |       |   |   |   |   |
| Carole R. Artman-Hodge |       | 11/16/2006          |       |                                                                                          |       |                                                             |       |                                                  |       | 39,000                                               |       | 42.57 |   | 502,164 |   |
| Charles Cavin          |       |                |       | 0                                                                                             |       | 80,000                                                           |       | 200,000                                               |       |                                                 |       |   |   |   |   |
| Charles Cavin          |       | 11/16/2006          |       |                                                                                          |       |                                                             |       |                                                  |       | 21,000                                               |       | 42.57 |   | 270,396 |   |
| Gina Goldberg          |       |                |       | 0                                                                                             |       | 214,200                                                          |       | 238,000                                               |       |                                                 |       |   |   |   |   |
| Gina Goldberg          |       | 11/16/2006          |       |                                                                                          |       |                                                             |       |                                                  |       | 21,000                                               |       | 42.57 |   | 270,396 |   |
| Robert Werner          |       |                |       | 0                                                                                             |       | 108,000                                                          |       | 216,000                                               |       |                                                 |       |   |   |   |   |
| Robert Werner          |       | 11/16/2006          |       |                                                                                          |       |                                                             |       |                                                  |       | 50,000                                               |       | 42.57 |   | 643,800 |   |

 

----

(1)                                 Thesecolumns reflect the range of short-term incentive payouts for fiscal 2007performance under the Annual Cash Incentive Bonuses plan described under “— AnnualCash Incentive Compensation.” For fiscal year 2007 performance, the actualpayout, as well as the business objectives and percentage of target achieved,are discussed under “— Annual Cash Incentive Compensation.”  The target and maximum amounts for Messrs.Murray and Werner are pro rated, reflecting the fact that they joined theCompany effective August 14, 2007, shortly after the SESCo acquisition.

 

(2)                                 Theexercise price for all of the options is the fair market value on the option’sgrant date, except for Mr. Mayer’s options, where the exercise price is 110% ofthe fair market value. Under the Company’s 2006 Equity Incentive CompensationPlan, any optionee who owns greater than 10% of the Company’s issued andoutstanding common stock is granted options at 110% of the fair market value.The fair market value is defined under the terms of the Company’s 2006 EquityIncentive Compensation Plan as the closing price of our common stock, asdetermined by the Company using an internal valuation or as determined by anindependent third-party valuation firm, on the date of grant. Grants awardedduring fiscal year 2007 were based on an external valuation from a third party.

 

123

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**Outstanding Equity Awards at June 30, 2007**

 
| ** **             | ** ** | **Option Awards**                                                                      | ** ** |
|------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Exercisable  (#) (1)** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Unexercisable  (#)** | ** ** | **Option  Exercise  Price ($ )** | ** ** | **Option Expiration  Date (2)** | ** ** |
|                   |       |                                                                                        |       |   |   |   |   |   |   |   |
| Jeffrey Mayer          |       | 18,700                                                                                      |       | — |   | $ | 8.80 |   | 3/19/2008 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |   |
| Jeffrey Mayer          |       | 16,550                                                                                      |       | — |   | 8.80 |   | 1/21/2009 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Jeffrey Mayer          |       | 32,000                                                                                      |       | 16,000 |   | 23.65 |   | 10/19/2009 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Jeffrey Mayer          |       | 14,000                                                                                      |       | 7,000 |   | 30.25 |   | 6/26/2010 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Jeffrey Mayer          |       | —                                                                                      |       | 39,000 |   | 46.83 |   | 11/13/2011 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 5,000                                                                                       |       | — |   | 4.00 |   | 12/2/2007 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 5,000                                                                                       |       | — |   | 4.00 |   | 12/2/2007 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 5,000                                                                                       |       | — |   | 4.00 |   | 12/2/2007 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 5,000                                                                                       |       | — |   | 4.00 |   | 12/2/2007 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 7,500                                                                                       |       | — |   | 8.00 |   | 3/19/2013 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 17,700                                                                                      |       | — |   | 8.00 |   | 1/21/2014 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 24,000                                                                                      |       | 12,000 |   | 21.50 |   | 10/19/2014 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | 12,000                                                                                      |       | 6,000 |   | 27.50 |   | 6/26/2015 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Chaitu Parikh          |       | —                                                                                      |       | 39,000 |   | 42.57 |   | 11/13/2016 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Steven Murray          |       | —                                                                                      |       | 150,000 |   | 42.57 |   | 11/13/2016 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Carole R. Artman-Hodge |       | 18,700                                                                                      |       | — |   | 8.80 |   | 3/19/2008 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Carole R. Artman-Hodge |       | 16,550                                                                                      |       | — |   | 8.00 |   | 1/21/2014 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Carole R. Artman-Hodge |       | 32,000                                                                                      |       | 16,000 |   | 21.50 |   | 10/19/2014 |   |
|                   |       |                                                                                        |       |   |   |   |   |   |   |
| Carole R. Artman-Hodge |       | 14,000                                                                                      |       | 7,000 |   | 27.50 |   | 6/26/2015 |   |

 

124

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| Carole R. Artman-Hodge |   | — |   | 39,000 |   | 42.57  |   | 11/13/2016 |   |
|------------------------|--------|--------|--------|--------|--------|--------|--------|------------|--------|
|                   |   |   |   |   |   |   |   |       |   |
| Charles Cavin          |   | 1,500  |   | — |   | 32.50  |   | 11/30/2010 |   |
|                   |   |   |   |   |   |   |   |       |   |
| Charles Cavin          |   | 1,000  |   | — |   | 32.50  |   | 10/31/2011 |   |
|                   |   |   |   |   |   |   |   |       |   |
| Charles Cavin          |   | — |   | 1,000  |   | 32.50  |   | 10/30/2012 |   |
|                   |   |   |   |   |   |   |   |       |   |
| Charles Cavin          |   | — |   | 1,000  |   | 32.50  |   | 10/30/2013 |   |
|                   |   |   |   |   |   |   |   |       |   |
| Charles Cavin          |   | — |   | 21,000 |   | 42.57  |   | 11/13/2016 |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | 1,200  |   | — |   | 8.00   |   | 1/21/2014  |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | 2,500  |   | — |   | 8.00   |   | 4/30/2009  |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | 2,500  |   | — |   | 25.00  |   | 1/31/2010  |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | 2,500  |   | — |   | 33.67  |   | 1/31/2011  |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | 2,500  |   | — |   | 48.74  |   | 1/31/2012  |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | 8,000  |   | 4,000  |   | 21.50  |   | 10/19/2014 |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | 10,000 |   | 5,000  |   | 27.50  |   | 6/26/2015  |   |
|                   |   |   |   |   |   |   |   |       |   |
| Gina Goldberg          |   | — |   | 21,000 |   | 42.57  |   | 11/13/2016 |   |
|                   |   |   |   |   |   |   |   |       |   |
| Robert Werner          |   | — |   | 50,000 |   | 42.57  |   | 11/13/2016 |   |

 

125

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***OptionExercises and Stock Vested***

* *

*None ofthe named executive officers exercised any of their stock options during fiscalyear 2007.*

* *

**Agreements with Named ExecutiveOfficers**

 

**The employment agreements and offer letter discussed beloware based on the agreements between the named executive officers and theCompany during fiscal year 2007.**

** **

***Jeffrey Mayer Employment Agreement***

 

We entered into anemployment agreement with Mr. Mayer, dated April 1, 1999, referred to herein asthe Mayer Agreement. The employment agreement commenced on the date of theclosing of the Company’s equity capital transaction, in connection with theexecutive’s employment as our President. The initial term of the agreement wasfive years and is automatically extended for successive five-year terms, unlesswe or Mr. Mayer gives the other party at least six months’ advance notice tothe contrary.

 

The Mayer Agreement providesthat Mr. Mayer will receive a base salary of $12,000 per month or such greateramount as the Company may from time to time establish. The Mayer Agreement alsoprovides that Mr. Mayer is eligible for an annual year-end bonus and toparticipate in the Company’s Incentive Stock Option Plan. Under a provision ofthe agreement, Mr. Mayer also acknowledges and agrees that as a founder andowner of a substantial equity interest in the Company that he is subject to theShareholders Agreement, dated as of May 2, 1999, between the Company andcertain stockholders.

 

In the event that weterminate the executive’s employment without cause, Mr. Mayer will be entitledto a severance payment of 36 months of his base salary in effect at the time ofhis termination plus any unvested warrants, options or other securities awardedto him pursuant to the Incentive Stock Option Plan. Additionally, the agreementprovides that Mr. Mayer will vest in the pro-rata portion of any warrants oroptions that are scheduled to vest on the vesting date next succeeding theeffective date of his termination and forfeit the right to receive allremaining unvested warrants or options. In the event that Mr. Mayer terminateshis employment or we terminate his employment with cause, Mr. Mayer willforfeit his right to receive any unvested options or warrants.

 

Additionally, in the eventthat the executive’s employment terminates for any reason, we will repay to himany outstanding loan paid by him to the Company, terminate any outstandingguarantees or indemnifications by him of the Company, and indemnify and holdhim harmless from any liability for actions by or concerning the Company.

 

The Mayer Agreement alsocontains a non-compete provision, which applies during the term of theexecutive’s employment and for a period of one year thereafter, whether histermination of employment is with or without cause or whether the terminationis initiated by Mr. Mayer or the Company. Pursuant to the non-competeprovision, Mr. Mayer is prohibited from (1) working with, or providing servicesto, any person or entity which was a customer of the Company at the date ofcessation of his consulting or employment relationship, as the case may be orwithin the twelve-month period preceding such date, or which was contracted asa client prospect by any representative of the Company within 90 days prior tosuch date of cessation; or (2) soliciting or inducing any employee of theCompany to leave its employ or to hire or attempt to hire any such employee.

 

126

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For purposes of the MayerAgreement, cause means: (i) conviction of, or pleading guilty to, afelony-class crime; (ii) any action taken in bad faith by Mr. Mayer that has,or is likely to have, in the Company’s reasonable judgment, a material,detrimental effect on the reputation of the Company or its business; (iii) anact of fraud, dishonesty or gross misconduct by the executive; (iv) a materialbreach by Mr. Mayer of any provision of the Mayer Agreement that has not beencured within 30 days after written notice of such breach by the Company.

 

***Chaitu Parikh Employment Agreement***

 

We entered into anemployment agreement with Mr. Parikh, dated November 11, 2002, referred toherein as the Parikh Agreement, in connection with Mr. Parikh’s employment asour Vice President of Finance. The Parikh Agreement does not have a specificterm. The Company and Mr. Parikh may terminate the employment relationship atany time, with or without cause.

 

Under the agreement, Mr.Parikh will receive a base salary of $168,500 per year or such greater amountas the Company may from time to time establish. The agreement also providesthat Mr. Parikh may participate in the Company’s Incentive Stock Option Plan. TheCompany awarded Mr. Parikh warrants to purchase 20,000 shares of common stockwith a strike price of $4.00 pursuant to the Incentive Stock Option Plan, whichwill vest in equal installments on the first three annual anniversaries of thedate of grant.

 

Pursuant to the ParikhAgreement, Mr. Parikh’s right to receive warrants for up to 5,000 shares vestedthree months after his employment date. The additional warrants for 15,000shares vest in three installments on the first, second, and third anniversariesof his employment date.

 

In the event that weterminate Mr. Parikh’s employment without cause, there is a change in control,or the Company completes an initial public offering, Mr. Parikh will beentitled to a severance payment equal to six months of his then-current salarypayable on a monthly basis and all unvested warrants awarded to Mr. Parikh willvest. In the event Mr. Parikh voluntarily resigns for any reason or the Companyterminates Mr. Parikh’s employment for cause, Mr. Parikh shall forfeit theright to all shares that have not vested as of his termination date. Forpurposes of the Parikh Agreement, Mr. Parikh’s termination will not beconsidered for cause if he terminates his employment as a result of theoccurrence of any of the following: (1) any long term and material change inMr. Parikh’s authorities or responsibilities which represents a materialadverse change from his status, position, or responsibilities which were ineffect immediately prior to a change, or any removal of Mr. Parikh from, orfailure to reappoint or reelect him to, any of such positions, except if anysuch changes are because of disability, retirement, death or similar cause; (2)a reduction in or failure to pay any portion of his annual base salary; (3) therelocation of his office to a location that is more than 50 miles from thecurrent location; and (4) in the event of a change of control, the failure bythe Company to provide Mr. Parikh with compensation and benefits, which are noless favorable than those provided to Mr. Parikh prior to a change of control.

 

The Parikh Agreement alsospecifies that with respect to any warrants he receives, Mr. Parikh is subjectto the Third Amended and Restated Stockholders Agreement, dated as of May 1,1999, as amended and restated from time to time.

 

Additionally, the ParikhAgreement contains a non-compete provision and confidentiality provisions. Thenon-compete provision applies during the term of Mr. Parikh’s employment andfor a period of three months thereafter, whether his termination of employmentis with or without cause or whether the termination is initiated by Mr. Parikhor the Company. Pursuant to the non-compete provision, Mr. Parikh is prohibitedfrom (1) working with, or providing services to, any person or entity

 

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which was a customer of the Company at the date of cessation of hisconsulting or employment relationship, as the case may be or within thetwelve-month period preceding such date, or which was contracted as a client prospectby any representative of the Company within 90 days prior to such date ofcessation; or (2) soliciting or inducing any employee of the Company to leaveits employ or to hire or attempt to hire any such employee

 

For purposes of the ParikhAgreement, cause means: (i) conviction of, or pleading guilty to, afelony-class crime; (ii) any action taken in bad faith by Mr. Parikh that has,or is likely to have, in the Company’s reasonable judgment, a material,detrimental effect on the reputation of the Company or its business; (iii) anact of fraud, dishonesty or gross misconduct by Mr. Parikh; (iv) a materialbreach by Mr. Parikh of any provision of the Parikh Agreement that has not beencured within 30 days after written notice of such breach by the Company; and(v) failure to secure, in a timely fashion, approval of a requisite immigrationstatus.

 

***Steven Murray Employment Agreement***

 

We entered into anemployment agreement with Mr. Murray dated August 4, 2006, referred to hereinas the Murray Agreement, in connection with Mr. Murray’s employment as ourChief Operating Officer. The initial term of the agreement is three years andis automatically extended for one year at the end of the initial term, unlesswe or Mr. Murray gives the other party at least 180 days’ advance notice to thecontrary. Pursuant to the Murray Agreement, Mr. Murray’s office will be locatedin the Company’s Houston, Texas executive offices and he will report to theChief Executive Officer of the Company. In addition to his position as ChiefOperating Officer, the agreement provides that Mr. Murray will be a member ofthe board of directors of the Company.

 

The Murray Agreementprovides that Mr. Murray will receive an annual base salary of $450,000, whichmay be increased pursuant to the Company’s discretion. The Murray Agreementalso provides that Mr. Murray is eligible for an executive bonus, which may be100% of Mr. Murray’s base salary. The target bonus is based on the following:(1) 75% is based on the performance of the Company or Mr. Murray and (2) 25% isbased on the Company’s discretion. Additionally, the Company may award Mr.Murray up to 20% of his base salary in connection with his extraordinaryperformance with respect to a significant business event affecting the Company;provided that the maximum actual bonus will not exceed 120% of base salary. TheMurray Agreement also provides that the Company will grant to Mr. Murray anoption to purchase 150,000 shares of common stock which will vest in threeequal installments over three years commencing with the first anniversary ofthe initial term.

 

In the event Mr. Murray’semployment is terminated prior to an initial public offering of the commonstock of the Company, the Company shall have the right to purchase all of thecommon stock owned by Mr. Murray and Mr. Murray shall have the right to requirethe Company to purchase all of such stock, both based upon the fair marketvalue of the common stock.

 

In the event that weterminate Mr. Murray’s employment without a “business reason” (as definedbelow) or a constructive termination (as defined below) occurs, Mr. Murray willbe entitled to: (1) a lump sum payment equal to the greater of (a) base salaryfor a period of 12 months following the date of termination or (b) base salaryfor the remainder of the then-current agreement term; (2) a lump sum paymentequal to (a) 100% of the target bonus for the fiscal year in which thetermination occurs; (b) 100% of the target bonus for any full fiscal yearremaining during the initial term of the agreement; and (c) a pro rata portionof 100% of the target bonus for the final fiscal year that begins during theapplicable agreement term; (3) Mr. Murray’s unvested stock options, restrictedstock and other equity awards shall become fully vested, and all vested butoutstanding stock options shall be cancelled in consideration of the Company’spayment to Mr. Murray of an amount equal to (x) the fair market value for theshares

 

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underlying the option, (y) over the exercise price of such option, (z)multiplied by the number of shares subject to the option; and (4) continuationof other employee and executive benefits, such as health, life insurance anddisability, until the end of the term of the agreement and (4) any accrued, butunpaid, compensation.

 

If there is a change ofcontrol during the initial term of the agreement and the Company terminates Mr.Murray’s employment without business reasons prior to the end of the initialterm of the agreement (or within a year following a change of control) prior tothe end of the initial term of the agreement (or within a year following achange of control) or a constructive termination occurs, Mr. Murray will beentitled to receive the following: (1) a lump sum payment equal to the greaterof (a) base salary for a period of two years following the date of terminationor (b) base salary for the remainder of the then-current agreement term and (2)a lump sum payment equal to the greater of (a) 200% of the target bonus for thefiscal year in which the termination occurs; (b) 100% of the target bonus forany full fiscal year remaining during the initial term of the agreement timesthe number of years for the remainder of the then-current agreement term; (3)Mr. Murray’s unvested stock option, restricted stock and other equity awardsshall become fully vested and (4) any accrued, but unpaid, compensation.

 

In the event of terminationdue to disability, Mr. Murray will be entitled to all earned, but unpaidcompensation, payments and benefits in accordance with the disability policy ofthe Company, the “in the money” value of all vested options, a pro rata portionof any target bonus Mr. Murray would have otherwise earned during the fiscalyear in which the disability occurs, and any accrued, but unpaid, compensation.

 

If Mr. Murray voluntarilyterminates his employment or the Company involuntarily terminates hisemployment for business reasons, all equity awards will expire according to theterms of the award agreement, Mr. Murray will receive any accrued, but unpaid,compensation, and Mr. Murray will receive a pro rata portion of any targetbonus that he would have otherwise earned during the fiscal year in which histermination occurs.

 

If Mr. Murray’s employmentterminates due to death, Mr. Murray’s representative will receive payments andbenefits in accordance with the then applicable plans, policies, orarrangements, all equity awards will expire according to the terms of the awardagreement (provided Mr. Murray will be entitled to the “in the money” value ofall vested options), Mr. Murray will receive any accrued, but unpaid,compensation, and Mr. Murray will be entitled to receive a pro rata portion ofany target bonus that he would have otherwise earned during the fiscal year inwhich his termination occurs.

 

The Murray Agreementprovides that in the event that Mr. Murray becomes entitled to payments orbenefits that would constitute an “excess parachute payment” within the meaningof Section 280G of the Code, the payment and/or benefits will be reduced to theextent that such payments will not be subject to the excise tax or any interestor penalties imposed by Section 4999 of the Code, referred to herein as the280G Reduction. The 280G Reduction will only take place if Mr. Murray’s “netafter tax benefit” (as defined below) exceeds the net after tax benefit hewould realize if the 280G Reduction were not made. To the extent, the 280GReduction is unavailable because Mr. Murray’s net after tax benefit would begreater if the 280G Reduction were not made, the Company will pay Mr. Murray agross up payment to cover the excise tax, interest, and penalties imposed bySection 4999 of the Code and any income taxes and excise tax imposed upon thegross-up payment.

 

The Murray Agreement alsocontains a non-compete provision, which applies for the remainder of thethen-current agreement term. Pursuant to the non-compete provision, Mr. Murrayis prohibited from (1) owning, managing, controlling, participating in,consulting with or providing services for, or engaging in business competingwith the business of the Company or any of its subsidiaries for the remainderof the agreement term; (2) inducing or attempting to induce any employee of theCompany or

 

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such subsidiary (other than his own assistant) to leave the employ ofthe Company or hire or attempt to hire an employee of the Company or anysubsidiary at any time during the preceding 12 months (unless the employeecontacts Mr. Murray on an unsolicited basis); (3) directly or indirectlyinducing or attempting to induce any customer, supplier, licensee or otherbusiness relation of the Company or (4) disparaging the Company, its executiveofficers, or its directors.

 

For purposes of the MurrayAgreement, “business reasons” mean: (i) gross negligence, willful misconduct orother willful malfeasance in the performance of his duties; (ii) conviction of,or plea of *nolo contendere* to, or written admissionof the commission of a felony-class crime; (iii) any act by Mr. Murrayinvolving fraud or misrepresentation with respect to his duties for the Companyor its affiliates; (iv) any act by Mr. Murray constituting a failure to followthe directions of the board of directors, provided the board of directors givesMr. Murray written notice of such failure and the failure continues for 15 daysafter receipt of such notice; and (v) subject to certain conditions, Mr. Murray’smaterial breach of the Murray Agreement that has not been cured within 30 daysafter written notice of such breach by the Company.

 

For purposes of the MurrayAgreement, “constructive termination” occurs if Mr. Murray gives the Companywritten notice of the existence of any of the following: (i) a materialreduction in Mr. Murray’s authority, duties, and responsibilities; (ii) Mr.Murray is required to relocate his place of employment, other than a relocationthat is within 50 miles of the Company’s Houston offices; (iii) except undercertain circumstances, there is a material reduction in Mr. Murray’s basesalary; (iv) there is a material breach of the particular provision in theMurray Agreement, which provides that any successor to the Company shall agreeto perform the Company’s obligations under the Murray Agreement, unless thesuccessor of the Company offers Mr. Murray an employment contract, which is atleast as economically favorable to Mr. Murray as the Murray Agreement; and (v)there occurs any other material breach of the Murray Agreement by the Companyprovided Mr. Murray provides a written demand for substantial performance (inaddition to written notice) to the Company. Constructive termination will onlybe deemed to occur if Mr. Murray gives the Company written notice of theexistence of one of the events arising without his consent within 30 days ofthe initial existence of the event, the Company fails to cure the event within30 days following the date such notice is given, and Mr. Murray elects tovoluntarily terminate employment within the 90-day period immediately followingsuch event.

 

For purposes of the MurrayAgreement, “net after tax benefit” means the sum of (i) the total amountreceived or realized by Mr. Murray pursuant to the Murray Agreement that wouldconstitute a “parachute payment” within the  meaning of Section 280G of the Code and anycorresponding and applicable state law provision, plus (ii) all other paymentsor benefits that Mr. Murray receives or realizes or is then entitled to receiveor realize from the Company and any of its affiliates or that are otherwisewithin the scope of payments and/or benefits that would constitute a “parachutepayment” within the meaning of Section 280G of the Code and any correspondingand applicable state law provision, less (iii) the amount of federal, state,local and social security taxes payable with respect to the payments orbenefits described in (i) and (ii) above calculated at the maximum marginalindividual income tax rate for each year in which payments or benefits arerealized by Mr. Murray (based upon the rate in effect for that year as setforth in the Code at the time of the first receipt or realization of theforegoing), less (d) the amount of excise taxes imposed with respect to thepayments or benefits described in (i) and (ii) above by  Section 4999 of the Code and anycorresponding and applicable state law provision.

 

***Carole R. Artman-Hodge Employment Agreement***

 

We entered into anemployment agreement with Ms. Artman-Hodge dated April 1, 1999, referred toherein as the Artman-Hodge Agreement. The employment agreement commenced on thedate of the closing of the Company’s equity capital transaction in connectionwith Ms. Artman-Hodge’s employment

 

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as our Executive Vice President and Chief Financial Officer. Theinitial term of the agreement was five years and is automatically extended forsuccessive five-year terms, unless we or Ms. Artman-Hodge gives the other partyat least six months’ advance notice to the contrary.

 

The Artman-Hodge Agreementprovides that Ms. Artman-Hodge’s base salary may be increased from time to time.In fiscal year 2007, Mr. Artman-Hodge’s base salary was $389,662. TheArtman-Hodge Agreement also provides that Ms. Artman-Hodge is eligible for anannual year-end bonus and to participate in the Company’s Incentive StockOption Plan. Under a provision of the Artman-Hodge Agreement, Ms. Artman-Hodgealso acknowledges and agrees that as a founder and owner of a substantialequity interest in the Company that she is subject to the ShareholdersAgreement, dated as of May 1, 1999, between the Company and certainshareholders.

 

In the event that weterminate Ms. Artman-Hodge’s employment relationship without cause, Ms.Artman-Hodge will be entitled to a severance payment of 36 months of her basesalary in effect at the time of her termination plus any unvested warrants,options or other securities awarded to her pursuant to the Incentive StockOption Plan by us. Additionally, she will vest in the pro rata portion of anywarrants or options that are scheduled to vest on the vesting date nextsucceeding the effective date of her termination and forfeit the right toreceive all remaining unvested warrants or options. In the event that Ms.Artman-Hodge terminates her employment or we terminate her employment withcause, Ms. Artman-Hodge will forfeit her right to receive any unvested optionsor warrants.

 

The Artman-Hodge Agreementalso contains a non-compete provision, which applies during the term of Ms.Artman-Hodge’s employment and for a period of one year thereafter, whether hertermination of employment is with or without cause or whether the terminationis initiated by Ms. Artman-Hodge or the Company. Pursuant to the non-competeprovision, Ms. Artman-Hodge is prohibited from (1) working with, or providingservices to, any person or entity which was a customer of the Company at thedate of cessation of her consulting or employment relationship, as the case maybe or within the twelve-month period preceding such date, or which was contractedas a client prospect by any representative of the Company within 90 days priorto such date of cessation; or (2) soliciting or inducing any employee of theCompany to leave its employ or to hire or attempt to hire any such employee.

 

For purposes of theArtman-Hodge Agreement, cause means: (i) conviction of, or pleading guilty to,a felony-class crime; (ii) any action taken in bad faith by Ms. Artman-Hodgethat has, or is likely to have, in the Company’s reasonable judgment, amaterial, detrimental effect on the reputation of the Company or its business;(iii) an act of fraud, dishonesty or gross misconduct by Ms. Artman-Hodge; (iv)a material breach by Ms. Artman-Hodge of any provision of the Artman-HodgeAgreement that has not been cured within 30 days after written notice of suchbreach by the Company.

 

***Chuck Cavin Offer Letter***

 

The terms of Mr. Cavin’semployment are set forth in an offer letter to Mr. Cavin, dated October 19,2005, referred to herein as the Cavin Offer. The Cavin Offer provides that Mr.Cavin’s employment would begin on November 1, 2005 as our OperationalCompliance Officer. Pursuant to the Cavin Offer, Mr. Cavin’s employment may beterminated by the Company or by Mr. Cavin at any time, Mr. Cavin office islocated in Stamford, Connecticut, and he will report to the Chief OperatingOfficer of the Company. Mr. Cavin has since relocated to the Company’s officelocated in Houston, Texas.

 

The Cavin Offer providesthat Mr. Cavin’s annual base salary was $150,000 as of the date of the offerand he was eligible to receive a bonus of up to 50% during the first year ofhis employment, and would be eligible to receive a bonus of up to 100%thereafter.

 

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The offer letter providesthat the Company would grant to Mr. Cavin an Option to purchase 4,500 shares ofcommon stock, which would vest as follows: (1) 1,500 shares vest 30 days afterthe employment date; (2) 1,000 shares vest one year after the employment date;(3) another 1,000 shares vest two years after the employment date, and (4)another 1,000 shares vest three years after the employment date.

 

***Gina Goldberg Employment Agreement***

 

We entered into anemployment agreement with Ms. Goldberg dated June 13, 2007, referred to hereinas the Goldberg Agreement, in connection with Ms. Goldberg’s employment as ourVice President of Sales and Marketing. Under the Goldberg Agreement, theparties may terminate the Goldberg Agreement at any time provided either partygives the other at least 60 days’ advance notice of termination. Ms. Goldberg’soffice will be located in the Company’s Stamford, Connecticut offices and shewill report to the Chief Operating Officer or the Chief Executive Officer ofthe Company.

 

The Goldberg Agreementprovides that Ms. Goldberg will receive an annual base salary of $238,000. TheGoldberg Agreement also provides that Mr. Goldberg is eligible for a bonus,which is expected to range from 50 to 100% of Ms. Goldberg’s base salary.

 

Because the Company hadalready granted warrants and options to Ms. Goldberg prior to June 13, 2007,the Goldberg Agreement provides that the terms of the warrants and optionswould not be impacted by the Goldberg Agreement. If the Company terminates Ms.Goldberg’s employment for business reasons (as defined below) all unvestedstock options will be forfeited.

 

Additionally, if Ms.Goldberg’s employment is terminated for any reason, the Company shall have theright to purchase all of the common stock owned by Ms. Goldberg, provided thatif the amount payable to Ms. Goldberg exceeds $200,000, the Company may pay theexcess to Ms. Goldberg in quarterly installments with 5% interest over a periodof three years and the Company’s obligation to make such payment shall besuspended during any period that the payment would cause the Company to violatea loan or similar financial covenant.

 

In the event that theCompany terminates Ms. Goldberg’s employment without a “business reason” (asdefined below) or Ms. Goldberg terminates her employment for any reason thatconstitutes a constructive termination (as defined below), Ms. Goldberg will beentitled to (i) a lump sum payment equal to the greater of her base salary forthe remainder of the employment term or (ii) her base salary for a period of 12months. For purposes of severance, Ms. Goldberg’s employment term will bedeemed to be two years. If the Company terminates Ms. Goldberg’s employment forbusiness reasons or Ms. Goldberg terminates her employment for any reason thatdoes not constitute a constructive termination, she will be entitled to anyaccrued and unpaid salary.

 

For purposes of the GoldbergAgreement, “business reasons” mean: (i) gross negligence, willful misconduct orother willful malfeasance in the performance of his duties; (ii) conviction of,or plea of *nolo contendere* to, or written admissionof the commission of a felony, or any other criminal offense involving moralturpitude; (iii) any act by Ms. Goldberg involving moral turpitude, fraud ormisrepresentation with respect to his duties for the Company or its affiliates;(iv) any act by Ms. Goldberg constituting a failure to follow the directions ofthe Chief Executive Officer, the Chief Operating Officer, or the board ofdirectors, provided written notice of such failure is provided to Ms. Goldbergand the failure continues for five days after receipt of such notice; and (v)subject to certain conditions, Ms. Goldberg’s material breach of the GoldbergAgreement that has not been cured within 30 days after written notice of suchbreach by the board of directors.

 

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For purposes of the GoldbergAgreement, “constructive termination” occurs if Ms. Goldberg gives the Companywritten notice of the existence of any of the following: (i) Ms. Goldberg is requiredto relocate her place of employment, other than a relocation that is within 30miles of the Company’s Stamford offices; (ii) there an intentional and materialreduction in Ms. Goldberg’s base salary (other than a reduction that isconsistent with a general reduction for the executive staff as a group); (iii)there occurs any other material breach of the Goldberg Agreement by the Companyprovided Ms. Goldberg provides a written demand for substantial performance tothe Company. Constructive termination will only be deemed to occur if theCompany fails to cure the event within 31 days following the date such noticeis given.

 

The Goldberg Agreement alsocontains a non-compete provision, which applies during the term of the GoldbergAgreement and, provided Ms. Goldberg has received a severance payment for aperiod of one year after she has received such payment. Pursuant to thenon-compete provision, Ms. Goldberg is prohibited from (1) inducing orattempting to induce any employee of the Company or such subsidiary (other thanhis own assistant) to leave the employ of the Company, or in any way interferewith the relationship between the Company or any subsidiary and any employeethereof; (2) hiring or attempt to hire an employee of the Company or any subsidiaryat any time during the preceding 12 months (unless the employee contacts Ms.Goldberg on an unsolicited basis); (3) directly or indirectly inducing orattempting to induce any customer, supplier, licensee or other businessrelation of the Company or (4) disparaging the Company, its executive officers,or its directors.

 

***Robert Werner Employment Agreement***

 

We entered into anemployment agreement with Mr. Werner dated August 14, 2006, referred to hereinas the Werner Agreement, in connection with Mr. Werner’s employment as our VicePresident of Supply. Under the Werner Agreement, the parties may terminate theWerner Agreement at any time provided either party gives the other at least 60days’ advance notice of termination. Mr. Werner’s office will be located in theCompany’s Houston, Texas executive offices and he will report to the ChiefOperating Officer of the Company.

 

The Werner Agreementprovides that Mr. Werner will receive an annual base salary of $250,000, whichmay be increased pursuant to the Company’s discretion. The Werner Agreementalso provides that Mr. Werner is eligible for an executive bonus, which may isexpected to range from 50 to 100% of Mr. Werner’s base salary.

 

The agreement also providesthat the Company will grant to Mr. Werner an Option to purchase 50,000 sharesof common stock which will vest in three equal installments over three yearscommencing with the first anniversary of the date of grant. In the event Mr.Werner’s employment is terminated for any reason, any unvested stock optionwill terminate. If the Company terminates Mr. Werner’s employment for businessreasons (as defined below) all vested stock options will be forfeited. In theevent, Mr. Werner’s employment is terminated for any reason that does notconstitute a business reason, stock options will expire in accordance with theterms of the award agreement.

 

Additionally, if Mr. Werner’semployment is terminated for any reason, the Company shall have the right topurchase all of the common stock owned by Mr. Werner, provided that if theamount payable to Mr. Werner exceeds $200,000, the Company may pay the excessto Mr. Werner in quarterly installments with 5% interest over a period of threeyears and the Company’s obligation to make such payment shall be suspended duringany period that the payment would cause the Company to violate a loan orsimilar financial covenant.

 

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In the event that theCompany terminates Mr. Werner’s employment without a “business reason” (asdefined below) or Mr. Werner terminates his employment for any reason thatconstitutes a constructive termination (as defined below), Mr. Werner will beentitled to a lump sum payment equal to his base salary for the remainder ofthe employment term. For purposes of severance, Mr. Werner’s employment termwill be deemed to be three years. If the Company terminates Mr. Werner’semployment for business reasons or Mr. Werner terminates his employment for anyreason that does not constitute a constructive termination, he will be entitledto any accrued and unpaid salary.

 

For purposes of the WernerAgreement, “business reasons” mean: (i) gross negligence, willful misconduct orother willful malfeasance in the performance of his duties; (ii) conviction of,or plea of *nolo contendere* to, or written admissionof the commission of a felony, or any other criminal offense involving moralturpitude; (iii) any act by Mr. Werner involving moral turpitude, fraud ormisrepresentation with respect to his duties for the Company or its affiliates;(iv) any act by Mr. Werner constituting a failure to follow the directions ofthe Chief Executive Officer, the Chief Operating Officer, or the board ofdirectors, provided written notice of such failure is provided to Mr. Werner andthe failure continues for five days after receipt of such notice; and (v)subject to certain conditions, Mr. Werner’s material breach of the WernerAgreement that has not been cured within 30 days after written notice of suchbreach by the board of directors.

 

For purposes of the WernerAgreement, “constructive termination” occurs if Mr. Werner gives the Companywritten notice of the existence of any of the following: (i) Mr. Werner isrequired to relocate his place of employment, other than a relocation that iswithin 50 miles of the Company’s Houston offices; (ii) there an intentionalreduction in Mr. Werner’s base salary (other than a reduction that isconsistent with a general reduction for the executive staff as a group); (iii)there occurs any other material breach of the Werner Agreement by the Companyprovided Mr. Werner provides a written demand for substantial performance tothe Company. Constructive termination will only be deemed to occur if theCompany fails to cure the event within 30 days following the date such noticeis given.

 

The Werner Agreement alsocontains a non-compete provision, which applies for three years commencing uponthe effective date of the agreement. Pursuant to the non-compete provision, Mr.Werner is prohibited from (1) owning, managing, controlling, participating in,consulting with or providing services for, or engaging in business competingwith the business of the Company or any of its subsidiaries for the remainderof the agreement term; (2) inducing or attempting to induce any employee of theCompany or such subsidiary (other than his own assistant) to leave the employof the Company, or in any way interfere with the relationship between theCompany or any subsidiary and any employee thereof; (3) hiring or attempt to hirean employee of the Company or any subsidiary at any time during the preceding12 months (unless the employee contacts Mr. Werner on an unsolicited basis);(4) directly or indirectly inducing or attempting to induce any customer,supplier, licensee or other business relation of the Company or (5) disparagingthe Company, its executive officers, or its directors.

 

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**Post-Employment Payments**

 

The following table setsforth an estimate of the dollar amounts potentially payable to the namedexecutive officers upon a termination vesting or exercise of equity-basedawards during the last fiscal year.

 
| **Name and  Termination  Event**                     | ** ** | **Cash Severance  Payment** | ** ** | **Continuation of  Employer – Paid  Health and Life  Insurance** | ** ** | **Acceleration  of Stock  Options** | ** ** | **Continuation  of  Perquisites** | ** ** | **Total  Termination  Benefits** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ***Jeffrey Mayer***                                       |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| Involuntary without cause or good reason                  |       | $                                | 1,650,000  |                                                                                           | $          | —                                   |       | $                                 | 638,337    |                             | $          | — |   | $ | 2,288,337 |   |
| Involuntary with cause or good reason                     |       | $                                | 1,650,000  |                                                                                           | $          | —                                   |       | $                                 | 638,337    |                             | $          | — |   | $ | 2,288,337 |   |
|                                                      |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| ***Chaitu Parikh***                                       |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| Involuntary without cause or good reason                  |       | $                                | 195,000    |                                                                                           | $          | —                                   |       | $                                 | —     |                             | $          | — |   | $ | 195,000 |   |
| Involuntary or good reason after change in control  (CIC) |       | $                                | 195,000    |                                                                                           | $          | —                                   |       | $                                 | —     |                             | $          | — |   | $ | 195,000 |   |
|                                                      |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| ***Steven Murray***                                       |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| Involuntary without cause or good reason                  |       | $                                | 2,336,301  |                                                                                           | $          | 25,633                                   |       | $                                 | 1,005,000  |                             | $          | 16,384 |   | $ | 3,383,318 |   |
| Disability                                                |       | $                                | 229,800    |                                                                                           | $          | —                                   |       | $                                 | —     |                             | $          | — |   | $ | 229,800 |   |
| Death                                                     |       | $                                | 229,800    |                                                                                           | $          | —                                   |       | $                                 | —     |                             | $          | — |   | $ | 229,800 |   |
| Involuntary with cause or good reason                     |       | $                                | 229,800    |                                                                                           | $          | —                                   |       | $                                 | —     |                             | $          | — |   | $ | 229,800 |   |
| Involuntary or good reason after change in control  (CIC) |       | $                                | 1,843,151  |                                                                                           | $          | 25,633                                   |       | $                                 | 1,005,000  |                             | $          | 16,384 |   | $ | 2,890,168 |   |
|                                                      |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| ***Carole R. Artman-Hodge***                              |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| Involuntary without cause or good reason                  |       | $                                | 1,170,000  |                                                                                           | $          | —                                   |       | $                                 | 858,010    |                             | $          | — |   | $ | 2,028,010 |   |
| Involuntary with cause or good reason                     |       | $                                | 1,170,000  |                                                                                           | $          | —                                   |       | $                                 | 858,100    |                             | $          | — |   | $ | 2,028,010 |   |
|                                                      |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| ***Gina Goldberg***                                       |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| Involuntary without cause or good reason                  |       | $                                | 601,722    |                                                                                           | $          | —                                   |       | $                                 | —     |                             | $          | — |   | $ | 601,722 |   |
|                                                      |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| ***Robert Werner***                                       |       |                             |       |                                                                                           |       |                                     |       |                              |       |                             |       |
| Involuntary without cause or good reason                  |       | $                                | 568,673    |                                                                                           | $          | —                                   |       | $                                 | —     |                             | $          | — |   | $ | 568,673 |   |
|                                                           |            |                                  |            |                                                                                                |            |                                          |            |                                   |            |                                  |            |  |  |  |  |  |  |

 

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**Equity Compensation Plans**

 

***2006 Equity Incentive Compensation Plan***

 

Our board of directorsadopted our 2006 Equity Incentive Compensation Plan, referred to herein as the2006 Plan, in November 2005, as approved by our stockholders, in order to provideincentives and awards to employees, directors, consultants and advisors of oursand our affiliates, referred to herein as eligible persons. The 2006 Planpermits awards of options, restricted shares, restricted share units,unrestricted share awards, phantom shares, dividend equivalent rights, shareappreciation rights, deferred share units, and performance shares.

 

*Shares Subject to the 2006Plan.*The 2006 Planprovides that no more than 750,000 shares of common stock may be issuedpursuant to awards under the 2006 Plan. Shares of common stock that are subjectto any award that expires, or are forfeited, cancelled or become unexercisablewill again be available for subsequent awards, except as prohibited by law.

 

*Administration.*Either the board of directors or a committeeappointed by the board of directors will administer the 2006 Plan. Thecompensation committee of the board of directors is currently acting as thecommittee for purposes of the 2006 Plan.

 

Subject to the terms of the2006 Plan, the committee has express authority to determine the eligiblepersons who will receive awards, the number of shares of common stock, units,dividend equivalent rights, or SARs, to be covered by each award, and the termsand conditions of awards. The committee has broad discretion to prescribe,amend and rescind rules relating to the 2006 Plan and its administration, tointerpret and construe the 2006 Plan and the terms of all award agreements, andto take all actions necessary or advisable to administer the 2006 Plan. Withinthe limits of the 2006 Plan, the committee may accelerate the vesting of anyaward, allow the exercise of unvested awards and may modify, replace cancel orrenew them.

 

*Eligibility.*The committee may grant options that areintended to qualify as incentive stock options, or ISOs, only to employees, andmay grant all other awards to eligible persons.

 

*Options.*Options granted under the 2006 Plan provideparticipants with the right to purchase shares of common stock at a certainprice (exercise price) for a specified period of time. The committee may grantoptions that are intended to qualify as ISOs or options that are not intendedto so qualify, or non-ISOs. The 2006 Plan provides that ISO treatment may notbe available for options that become first exercisable in any calendar year tothe extent the value of the underlying shares that are subject to the optionexceed $100,000 (based upon the fair market value of the shares of common stockon the option grant date).

 

*Share Appreciation Rights.*A share appreciationright generally permits a participant who receives it to receive, uponexercise, cash and/or shares of common stock equal in value to an amountdetermined by multiplying (x) the excess of the fair market value, on the dateof exercise, of the shares of common stock with respect to which the SAR isbeing exercised, over the exercise price of the SAR for such shares by (y) thenumber of shares with respect to which the SARs are being exercised. Thecommittee may grant SARs in tandem with options or independently of them. SARsthat are independent of options may limit the value on its exercise to apercentage, not exceeding 100% of the excess value.

 

*Exercise price of Optionsand SARs.*Theexercise price of ISOs, non-ISOs, and SARs may not be less than 100% of thefair market value on the grant date of the shares of common stock subject tothe

 

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award (110% of fair market value for ISOs granted to employees who, atthe time of grant, own more than 10% of our outstanding shares of commonstock).

 

*Exercise of Options andSARs.*To the extentexercisable in accordance with the agreement granting them, an option or SARmay be exercised in whole or in part, and from time to time during its term,subject to the earlier termination relating to a holder’s termination ofemployment or service. With respect to options, the committee has thediscretion to accept payment of the exercise price in any of the followingforms (or combination of them):  cash orcheck in U.S. dollars, certain common stock and cashless exercise under aprogram the committee approves. The term over which the participants mayexercise options and SARs may not exceed ten years from the date of grant (fiveyears in the case of ISOs granted to employees who, at the time of grant, ownmore than 10% of our outstanding shares of common stock).

 

Subject to the terms of theagreement evidencing an option grant, the option may be exercised during the90-day period after the optionee’s termination of employment without cause (butin no case later than the termination date of the option), during the six-monthperiod after the optionee retires, or during the one year period after theoptionee’s termination of service due to death or permanent disability. Theagreements evidencing the grant of an option may, in the discretion of thecommittee, set forth additional or different terms and conditions applicable tosuch option upon a termination or change in status of the employment or serviceof the option holder. All SARs are to be settled solely in cash as soon aspracticable after exercise.

 

*Restricted Shares,Restricted Share Units, Unrestricted Shares and Deferred Share Units.*Under the 2006 Plan, the committee may grantrestricted shares that are forfeitable until certain vesting requirements aremet, may grant restricted share units which represent the right to receiveshares of common stock after certain vesting requirements are met, and maygrant unrestricted shares as to which the participant’s interest is immediatelyvested. For restricted share awards, the 2006 Plan provides the committee withdiscretion to determine the terms and conditions under which a participant’sinterests in such awards become vested. The 2006 Plan provides for deferred shareunits in order to permit certain directors, consultants, agents, or selectmembers of management to defer their receipt of compensation payable in cash orshares of common stock (including shares that would otherwise be issued uponthe vesting of restricted shares and restricted share units).

 

Whenever shares of commonstock are delivered pursuant to these awards, the participant will be entitledto receive an amount equal to any cash dividends and a number of shares equalto any stock dividends, which were declared and paid to the holders of sharesbetween the grant date and the date such shares are released from the vestingrestrictions in the case of restricted shares or issued in the case ofrestricted share units.

 

*Performance Awards.*The 2006 Plan authorizes the committee togrant performance-based awards in the form of performance units that thecommittee may or may not designate as “performance compensation awards” thatare intended to be exempt from section 162(m) of the Code limitations. In eithercase, performance compensation awards vest and become payable upon theachievement, within a specified period of time, of performance objectivesapplicable to the individual or us. Performance compensation awards are payablein shares of common stock, cash or some combination of the two.

 

*Dividend Equivalent Rights.*The committee may inits discretion grant dividend equivalent rights to any eligible person, andshall evidence each grant in an award agreement. A dividend equivalent rightshall generally represent the right of the participant to receive, at the timeof settlement, an amount equal to the regular cash dividends that we have paidon the number of shares designated in the award agreement during the periodbetween the date the award is granted and the settlement date applicable to

 

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the shares. Interest shall not accrue on such amounts, unless an awardagreement provides otherwise. The committee may impose any employment-relatedterms and conditions on the grant of a dividend equivalent right as it deemsappropriate in its discretion.

 

*Phantom Shares.*  The committee may in its discretion grant phantom shares toany eligible person, and shall evidence each grant in an award agreement thatsets forth the number of shares to which the award relates. Except as set forthin the applicable award agreement or the committee otherwise determines, upontermination of a participant’s continuous service, the participant shallforfeit his or her unvested phantom shares. A participant’s rights associatedwith an award of phantom shares shall at all times constitute an unsecuredpromise of the Company to pay benefits in cash as they come due. The right ofthe participant or the participant’s duly-authorized transferee to receivebenefits hereunder shall be solely an unsecured claim against the generalassets of the Company. No provision of the 2006 Plan shall be interpreted toconfer upon any participant any voting, dividend or derivative or other similarrights with respect to any share that is subject to a phantom share award.

 

***2003 Stock Option Plan***

 

Our board of directorsadopted our 2003 Stock Option Plan, referred to herein as the 2003 Plan, onNovember 30, 2003, as approved by our stockholders, in order to provideincentives and awards to eligible persons. The 2003 Plan permits awards ofnon-qualified stock options and ISOs within the meaning of Section 422(b) ofthe Code.

 

*Shares Subject to the 2003Plan.*The 2003 Planprovides that no more than 400,000 shares of common stock may be issuedpursuant to awards under the 2003 Plan. Shares of common stock for which anoption was not exercised may again be the subject of one or more optionsgranted pursuant to the 2003 Plan.

 

*Administration.*Either the board of directors or a committeewhich shall be comprised of at least two non-employee directors of the boardwill administer the 2003 Plan. The board of directors and any committeeexercising discretion under the 2003 Plan from time to time are referred to inthis section as the committee.

 

Subject to the terms of the2003 Plan, the committee has express authority to determine eligible personswho will receive awards, the number of shares of common stock to be covered byeach award, and the terms and conditions of awards. The committee hasdiscretion to interpret and construe the 2003 Plan and the terms of all awardagreements. The board of directors may amend the 2003 Plan from time to time insuch manner as it may deem advisable.

 

*Eligibility.*The committee may grant options that areintended to qualify as ISOs only to employees, and may grant all other awardsto eligible persons.

 

*Options.*Options granted under the 2003 Plan provideparticipants with the right to purchase shares of common stock at apredetermined exercise price. The committee may grant options that are intendedto qualify as ISOs or non-ISOs. The 2003 Plan also provides that ISO treatmentmay not be available for options that become first exercisable in any calendaryear to the extent the value of the underlying shares that are the subject ofthe options exceed $100,000.

 

*Exercise price of Options.*The exercise price ofISOs and non-ISOs may not be less than 100% of the fair market value on thegrant date of the shares of common stock subject to the award (110% of fairmarket value for ISOs granted to employees who, at the time of grant, own morethan 10% of our outstanding shares of common stock).

 

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*Exercise of Options.*Options granted under the 2003 Plan shall notbe exercisable after the first to occur of (i) the expiration term specified inthe award agreement, (ii) the expiration of three months from the date theoptionee’s employment of service with the Company or its Affiliates (other thanservice as a non-employee director) terminates for any reason other than deathor disability, or (iii) the expiration of one year from the date suchemployment of service with the Company or its Affiliates, including service asa non-employee director, terminates due to the optionee’s disability or death.

 

***2001 Stock Option Plan***

 

Our board of directorsadopted our 2001 Stock Option Plan, referred to herein as the 2001 Plan, onFebruary 9, 2001, as approved by our stockholders, in order to provideincentives and awards to eligible persons. The 2001 Plan permits awards ofnon-qualified stock options and ISOs within the meaning of Section 422(b) ofthe Code.

 

*Shares Subject to the 2001Plan.*The 2001 Planprovides that no more than 366,500 shares of common stock may be issuedpursuant to awards under the 2001 Plan. Shares of common stock for which anoption was not exercised may again be the subject of one or more optionsgranted pursuant to the 2001 Plan.

 

*Administration.*Either the board of directors or a committeewhich shall be comprised of at least two non-employee directors of the boardwill administer the 2001 Plan. The board of directors and any committeeexercising discretion under the 2001 Plan from time to time are referred to inthis section as the committee.

 

Subject to the terms of the2001 Plan, the committee has express authority to determine eligible personswho will receive awards, the number of shares of common stock to be covered byeach award, and the terms and conditions of awards. The committee hasdiscretion to interpret and construe the 2001 Plan and the terms of all awardagreements. The board of directors may amend the Plan from time to time in suchmanner as it may deem advisable.

 

*Eligibility.*The committee may grant options that are intendedto qualify as ISOs only to employees, and may grant all other awards toeligible persons.

 

*Options.*Options granted under the 2001 Plan provideparticipants with the right to purchase shares of common stock at apredetermined exercise price. The committee may grant options that are intendedto qualify as ISOs or non-ISOs. The 2001 Plan also provides that ISO treatmentmay not be available for options that become first exercisable in any calendaryear to the extent the value of the underlying shares that are the subject ofthe option exceed $100,000.

 

*Exercise price of Options.*The exercise price ofISOs and non-ISOs may not be less than 100% of the fair market value on thegrant date of the shares of common stock subject to the award (110% of fairmarket value for ISOs granted to employees who, at the time of grant, own morethan 10% of our outstanding shares of common stock).

 

*Exercise of Options.*Options granted under the 2001 Plan shall notbe exerciseable after the first to occur of (i) the expiration term specifiedin the award agreement, (ii) the expiration of three months from the date theoptionee’s employment of service with the Company or its affiliates (other thanservice as a non-employee director) terminates for any reason other than deathor disability, or (iii) the expiration of one year from the date suchemployment of service with the Company or its affiliates, including service asa non-employee director, terminates due to the optionee’s disability or death.

 

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**Compensation Committee Interlocksand Insider Participation**

 

The following directorsserved on the compensation committee during fiscal 2007: Messrs. DanielBergstein (Chair) and William Landuyt and Ms. Carole R. Artman-Hodge. Ms.Artman-Hodge also serves as the Company’s Executive Vice President. Messrs.Bergstein and Landuyt were not, during fiscal 2007 or previously, officers oremployees of MxEnergy Holdings Inc. The board of directors has determined thatMessrs. Bergstein and Ms. Artman-Hodge were not independent directors based onthe definition of independence of the New York Stock Exchange. For moreinformation, see “Item 13. Certain Relationships and Related Transactions,and Director Independence — Independence of Directors.” During the fiscal yearended June 30, 2007, we had no compensation committee “interlocks” — meaningthat no executive officer of the Company served as a director or member of thecompensation committee of another entity of which an executive officer servedas a director or a member of the compensation committee of the Company.

 

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**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The following table setsforth, as of August 31, 2007, information with respect to shares of commonstock beneficially owned by (i) each of the Named Executive Officersincluded in the Summary Compensation Table in the Compensation Discussion andAnalysis (ii) each director, (iii) all executive officers anddirectors as a group and (iv) each person who we know to be the beneficialowner of more than five percent of our outstanding shares of common stock.

 

The percentages of commonstock and Series A preferred stock beneficially owned are reported on thebasis of regulations of the SEC governing the determination of beneficialownership of securities. Under the rules of the SEC, a person is deemed to be a“beneficial owner” of a security if that person has or shares “voting power,”which includes that power to vote or to direct the voting of such security, or “investmentpower,” which includes the power to dispose of or to direct the disposition ofsuch security. A person is also deemed to be a beneficial owner of anysecurities of which that person has a right to acquire beneficial ownershipwithin 60 days. All persons listed have sole voting and investment powerwith respect to their shares (subject to community property laws whereapplicable) unless otherwise indicated.

 
| ** **                                                                                                 | ** ** | **Common Stock(1)** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                                                                 | ** ** | **Number**               | ** ** | **Percentage  of Class** | ** ** |
| **Executive  Officers and Directors**                                                                      |       |                     |       |   |   |
| Jeffrey Mayer(2)                                                                                           |       | 699,509                  |       | 20.0 | % |
| Steven Murray(3)                                                                                           |       | —                   |       | — |   |
| Carole R.  (“Robi”) Artman-Hodge(4)                                                              |       | 408,092                  |       | 11.6 | % |
| Chaitu Parikh(5)                                                                                           |       | 91,200                   |       | 2.6 | % |
| Charles Cavin(6)                                                                                           |       | 2,500                    |       | 0.1 | % |
| Gina Goldberg(7)                                                                                           |       | 29,200                   |       | 0.8 | % |
| Robert Werner(8)                                                                                           |       | —                   |       | — |   |
| Daniel  Bergstein(9)                                                                                       |       | 340,613                  |       | 9.9 | % |
| John Stewart(10)                                                                                           |       | 64,641                   |       | 1.9 | % |
| William  Landuyt(11)                                                                                       |       | 1,274,931                |       | 27.5 | % |
| Stuart  Porter(12)                                                                                         |       | 2,841,724                |       | 57.2 | % |
| All directors  and executive officers as a group (12 persons)(13)                                     |       | 5,828,436                |       | 89.2 | % |
| **5%  Stockholders**                                                                                       |       |                     |       |   |   |
| Denham Commodity  Partners Fund LP(12)                                                                     |       |                     |       |   |   |
| 200 Clarendon  Street, 25th Floor Boston, MA 02116                                                         |       | 2,841,724                |       | 57.2 | % |
| Charter Mx  LLC(11)                                                                                        |       |                     |       |   |   |
| 1105 Market  Street, Suite 1300 Wilmington, DE 19899                                                       |       | 1,274,931                |       | 27.5 | % |
| Greenhill  Capital Partners, L.P. and its affiliated funds(14)                                             |       |                     |       |   |   |
| 300 Park Avenue,  23rd Floor New York, NY 10022                                                            |       | 245,179                  |       | 6.7 | % |
| Pequot  Enterprises LLC(15)                                                                                |       |                     |       |   |   |
| 26 Pequot Trail,  Westport, CT 06880                                                                       |       | 594,000                  |       | 17.4 | % |
| JED  Communications Associates, Inc.(16)                                                                   |       |                     |       |   |   |
| c/o Paul, Hastings,  Janofsky & Walker LLP, 75 E. 55th Street, New York,  NY 10022 |       | 320,313                  |       | 9.4 | % |
| Carole R. Artman  Hodge 2005 7 Yr. GRAT(17)                                                                |       |                     |       |   |   |
| c/o  Carole R. Artman Hodge 61 Rye Road, Rye, NY 10580                                      |       | 298,310                  |       | 8.7 | % |

 

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| (1) | The percentage of beneficial  ownership is based on 3,421,937 shares of our common stock outstanding as of  August 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes (i) 81,250 shares  of our common stock issuable upon the exercise of stock options that are  either currently exercisable or become exercisable during the next  60 days and (ii) 594,000 shares of common stock held by Pequot  Enterprises LLC, a limited liability company owned 23% by Mr. Mayer and  for which Mr. Mayer, as manager, has both voting and disposition power.  Does not include 62,000 shares of our common stock issuable upon the  exercise of options that are currently not exercisable and will not become  exercisable within the next 60 days. |
| (3) | Does not include 150,000 shares  of our common stock issuable upon the exercise of options that are currently  not exercisable and will not become exercisable within the next 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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| (4)  | Includes (i) 81,250 shares  of our common stock issuable upon the exercise of stock options that are  either currently exercisable or become exercisable during the next  60 days and (ii) 298,310 shares of our common stock owned by the  Carole R. Artman-Hodge 2005 7 Yr. GRAT for which Ms. Artman-Hodge has  both voting and disposition power. Does not include 62,000 shares of our  common stock issuable upon the exercise of options that are currently not  exercisable and will not become exercisable within the next 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (5)  | Includes (i) 61,200 shares  of our common stock issuable upon the exercise of stock options that are  either currently exercisable or become exercisable during the next 60 days  and (ii) 20,000 shares of our common stock issuable upon the exercise of  warrants that are either currently exercisable or become exercisable during  the next 60 days. Does not include 57,000 shares of our common  stock issuable upon the exercise of options that are currently not  exercisable and will not become exercisable within the next 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (6)  | Includes 2,500 shares of our  common stock issuable upon the exercise of warrants that are either currently  exercisable or become exercisable during the next 60 days. Does not  include (i) 21,000 shares of our common stock issuable upon the exercise  of options that are currently not exercisable and will not become exercisable  within the next 60 days and (ii) 2,000 shares of our common stock issuable  upon the exercise of warrants that are currently not exercisable and will not  become exercisable during the next 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (7)  | Includes (i) 19,200 shares  of our common stock issuable upon the exercise of stock options that are  either currently exercisable or become exercisable during the next  60 days and (ii) 10,000 shares of our common stock issuable upon  the exercise of warrants that are either currently exercisable or become  exercisable during the next 60 days. Does not include 30,000 shares of  our common stock issuable upon the exercise of options that are currently not  exercisable and will not become exercisable within the next 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (8)  | Does not include 50,000 shares  of our common stock issuable upon the exercise of options that are currently  not exercisable and will not become exercisable within the next 60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (9)  | Includes (i) 17,800 shares  of our common stock issuable upon the exercise of stock options that are  either currently exercisable or become exercisable during the next  60 days and (ii) 320,313 shares of our common stock owned by JED  Communications Associates, Inc., a corporation 100% owned by  Mr. Bergstein and members of his immediate family. Does not include  4,000 shares of our common stock issuable upon the exercise of options that  are currently not exercisable and will not become exercisable within the next  60 days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (10) | Includes (i) 11,800 shares  of our common stock issuable upon the exercise of stock options that are  either currently exercisable or become exercisable during the next 60 days,  (ii) 42,341 shares of our common stock held by the Stewart Family Trust,  of which Mr. Stewart is the beneficiary, and for which Mr. Stewart  may be deemed to have beneficial ownership, (iii) 2,500 shares of our  common stock held in an IRA for Mr. Stewart for which he has both voting  and disposition power, (iv) 3,000 shares of our common stock held by  Mr. Stewart’s spouse, for which Mr. Stewart may be deemed to have  indirect beneficial ownership, and (v) 2,500 shares of our common stock  held in an IRA account belonging to Mr. Stewart’s spouse, for which  Mr. Stewart may be deemed to have indirect beneficial ownership.  Mr. Stewart disclaims beneficial ownership of the shares held by his  spouse and by his spouse’s IRA account except to the extent of his pecuniary  interest therein. Does not include 1,000 shares of our common stock issuable  upon the exercise of options that are currently not exercisable and will not  become exercisable within the next 60 days.                                                                                                                                                                                                     |
| (11) | Includes 1,217,228 shares of  our common stock issuable upon the conversion of 1,217,228 shares of our  Series A preferred stock. Charter Mx LLC is wholly owned by Charterhouse  Equity Partners IV, L.P. The general partner of Charterhouse Equity Partners  IV, L.P. is CHUSA Equity Investors IV, L.P., whose general partner is  Charterhouse Equity IV, LLC, a wholly owned subsidiary of Charterhouse  Group, Inc. As a result of the foregoing, all of the shares held by  Charter Mx LLC would be deemed to be beneficially owned by Charterhouse  Group, Inc. William Landuyt is an executive officer of Charterhouse  Group, Inc. Mr. Landuyt disclaims beneficial ownership of the  shares held by Charter Mx LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (12) | This entity was formerly known  as Sowood Commodity Partners Fund LP. Includes 1,544,736 shares of our common  stock issuable upon the exercise of warrants that are either currently  exercisable or become exercisable during the next 60 days. The shares of  our common stock and the warrants are held by Denham Commodity Partners Fund  LP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (13) | Represents beneficial ownership  as a group for all directors and executive officers as listed under “Item 10.  Directors, Executive Officers and Corporate Governance — Directors and  Executive Officers.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| (14) | Includes (i) 6,848 shares  of our common stock held by Greenhill Capital Partners, L.P., (ii) 978  shares of our common stock held by Greenhill Capital Partners (Cayman), L.P.,  (iii) 1,081 shares of our common stock held by Greenhill Capital  Partners (Executives), L.P., (iv) 2,190 shares of our common stock held  by Greenhill Capital, L.P., (v) 144,440 shares of our common stock  issuable upon the conversion of 144,440 shares of our Series A preferred  stock held by Greenhill Capital Partners, L.P., (vi) 20,639 shares of  our common stock issuable upon the conversion of 20,639 shares of our  Series A preferred stock held by Greenhill Capital Partners (Cayman),  L.P., (vii) 22,797 shares of our common stock issuable upon the  conversion of 22,797 shares of our Series A preferred stock held by  Greenhill Capital Partners (Executives), L.P. and (viii) 46,206 shares  of our common stock issuable upon the conversion of 46,206 shares of our  Series A preferred stock held by Greenhill Capital, L.P. GCP Managing  Partner, L.P., the managing general partner of Greenhill Capital Partners,  L.P., Greenhill Capital Partners (Cayman), L.P., Greenhill Capital Partners  (Executives), L.P. and Greenhill Capital, L.P. (the “Funds”), as well as  Greenhill Capital Partners, LLC, which controls the managing general partner,  and Greenhill & Co., Inc., |

 

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|   | the sole member of Greenhill  Capital Partners, LLC, may be deemed to beneficially own the shares held by  the Funds. We have been advised by the Funds that all decisions regarding  investments by the Funds are made by an investment committee whose  composition may change. No individual has authority to make any such  decisions without the approval of the investment committee. The current  members of the investment committee are Robert H. Niehaus, Scott L. Bok,  Robert F. Greenhill, Simon A. Borrows, Kevin Bousquette and V. Frank Pottow,  each of whom disclaims beneficial ownership in the shares held by the Funds  except to the extent of his pecuniary interest therein. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (15)   | Pequot Enterprises LLC is a  limited liability company owned 23% by Jeffrey Mayer and for which  Mr. Mayer, as manager, has both voting and disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (16)   | JED Communications Associates,  Inc. is a corporation owned 100% by Daniel Bergstein and members of his  immediate family and for which Mr. Bergstein has both voting and  disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (17)   | The Carole R. Artman-Hodge 2005  7 Yr. GRAT is a grantor retained annuity trust of which Carole R. “Robi”  Artman-Hodge is the beneficiary and the trustee and for which Ms.  Artman-Hodge has both voting and disposition power.                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

**Equity Compensation Plan Information**

** **

The table below providesinformation, as of June 30, 2007, concerning securities authorized for issuanceunder MxEnergy’s equity compensation plans.

 
| **Plan Category**                                      | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights (1)** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants, and rights(1)** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans(2)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by our stockholders     |       | 2,931, 406                                                                                                                                           |       | $                                                                                                                    | 16.35      |                                                                                                                                       | 334,280    |   |
| Equity  compensation plans not approved by our stockholders |       | —                                                                                                                                               |       | —                                                                                                               |       | —                                                                                                                                     |       |
| Total                                                       |       | 2,931,406                                                                                                                                            |       | $                                                                                                                    | 16.35      |                                                                                                                                       | 334,280    |   |

 

----

| (1) | Includes 1,110,720 options to purchase shares of our  common stock under the 2001 and 2003 Stock Option Plans and the 2006 Equity  Incentive Compensation Plan and 1,760,686 warrants to purchase shares of our  common stock. All warrants were granted on a discretionary basis under no  formal equity compensation plan.                                                                                                                                                                         |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Includes 53,600 shares under the 2001 Stock Option  Plan, 20,480 shares under the 2003 Stock Option Plan and 260,200 shares under  the 2006 Equity Incentive Compensation Plan. Available shares shown above for  the 2001 and 2003 Stock Option Plans and the 2006 Equity Incentive  Compensation Plan include shares that have become available due to  forfeitures or have been reacquired by the Company for any reasons without  delivery of the stock, as allowed under the terms of the plan. |

 

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**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, ANDDIRECTOR INDEPENDENCE**

 

Our Code of Business Conductand Ethics, which is posted on our website at www.mxholdings.com, prohibitsdirectors and executive officers from engaging in transactions on behalf of theCompany with a family member, or with a company with which they are or theirfamily member is a significant owner or associated or employed in a significantrole. Our audit committee must review and approve in advance all relatedparty transactions or business or professional relationships. All instancesinvolving potential related party transactions or business or professionalrelationships must be reported to the Company’s General Counsel who willassess the materiality of the transaction or relationship and elevate thematter to the audit committee as appropriate. Any dealings with a related partymust be conducted in such a way as to avoid preferential treatment and assurethat the terms obtained by the Company are no less favorable than could beobtained from unrelated parties on an arm’s-length basis.

 

**Independence of Directors**

 

The Company is a closelyheld corporation and does not have a class of equity securities listed on anational securities exchange. The Company has adopted the definition ofindependence of the New York Stock Exchange. However, because our securitiesare not listed on a national securities exchange, none of our directors arerequired to qualify as an independent director.

 

The board of directors hasdetermined that under such standard, William Landuyt and John Stewart are independentdirectors. None of Jeffrey A. Mayer, Steven Murray or Carol R. Artman-Hodge isindependent because they are currently employed by the Company. Stuart Porteris not an independent director as a result of his affiliation with Denham, asignificant stockholder of the Company. Daniel Bergstein is not an independentdirector because (i) he is a partner in the New York office of Paul,Hastings, Janofsky & Walker LLP, a law firm that performs substantiallegal services to the Company on a regular basis and (ii) he received$250,000 and 12,000 options in June 2004 as a finder’s fee in connection withour sale of Series A preferred stock.

 

**Stockholders’ Agreement**

 

We have entered into astockholders’ agreement with holders of our common and preferred stock. Thestockholders’ agreement contains, among other things, the agreement among ourstockholders to restrict their ability to transfer our stock as well as rightsof first refusal, tag-along rights and drag-along rights. Pursuant to thestockholders’ agreement, certain of our stockholders have, subject to certainexceptions, preemptive rights on future offerings of equity securities by us.In addition, if we issue or sell shares of our common stock below a certainprice, we must offer to sell such common stock to certain of our existingstockholders at a similarly low price.

 

Pursuant to the stockholders’agreement, the consent of Jeffrey Mayer and the holders of 10% of more of ourcommon stock on a fully diluted basis are required for various transactionsincluding our liquidation, dissolution, merger, sale of all or substantiallyall of our assets as well as the issuance of our securities in connection withcertain acquisitions and joint ventures. The consent of our board of directors(including the consent of the director appointed by the holders of ouroutstanding series A preferred stock) is required for certain actionsincluding our incurrence of debt in excess of $2.0 million.

 

**Registration RightsAgreement**

 

We entered into aregistration rights agreement with certain of our stockholders, dated as ofJune 25, 2004. Pursuant to the terms of the registration rights agreement,Denham and certain affiliates of Charterhouse and GCP will have the right fromtime to time, subject to certain conditions, to cause us to register shares ofour common stock held by them under the Securities Act. In addition, if at anytime we register shares of our common stock, certain holders of our commonstock, including Denham, certain affiliates of Charterhouse and GCP,

 

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Jeffrey Mayer, Carole R. Artman-Hodge and Daniel Burke, will beentitled to include their registrable securities in the registration statementrelating to that offering. Jeffrey Mayer and Carole R. Artman-Hodge areexecutive officers and directors of MxEnergy. Denham, Charterhouse and GCP aresignificant stockholders of MxEnergy. Under the registration rights agreement,except in limited circumstances, we are obligated to pay all expenses inconnection with such registration.

 

**Denham Credit Facility**

 

We entered into a loan agreementfor a $12.0 million subordinated line of credit with Denham, a significantstockholder of the Company, which expires on May 14, 2009. As of June 30,2007, $11.0 million of borrowings are outstanding under the Denham creditfacility. For a description of the material terms of the Denham creditfacility, see “Item 7. Management’s Discussion and Analysis of FinancialCondition and Results of Operations – Liquidity and Capital Resources – DenhamCredit Facility.” We believe that the terms of the Denham credit facility arecomparable to those we would have received in an arm’s length transaction.

 

**Transaction Bonuses**

 

In September 2006,certain members of our management team received cash bonuses in recognition oftheir work in the SESCo acquisition. Jeffrey Mayer, our President and ChiefExecutive Officer, Carole R. Artman-Hodge, our Executive Vice President, andChaitu Parikh, our Vice President, Chief Financial Officer and AssistantTreasurer, received $250,000, $150,000 and $200,000, respectively.

 

**Legal Services**

 

Daniel Bergstein, a directorand significant stockholder of the Company, is a senior partner of Paul,Hastings, Janofsky & Walker LLP, or Paul Hastings, a law firm whichprovides legal services to us. During the fiscal years ended June 30, 2007,2006 and 2005, we incurred $1,234,000, $1,419,000 and $174,000, respectively,of legal services provided by Paul Hastings. We expect that Paul Hastings willcontinue to provide legal services to us in 2008. We believe that these legalservices were provided on terms comparable to those we would have received inan arm’s length transaction provided to Paul Hastings’ other clients.

 

**Finder’s Fees and OptionGrants**

 

On June 30, 2004,Daniel Bergstein received $250,000 and 12,000 options to purchase shares of ourcommon stock and John Stewart received 3,000 options to purchase shares of ourcommon stock. Such payment and option grants were made as finder’s fees inconnection with MxEnergy’s issuance of Series A preferred stock on thatdate. The options have an exercise price of $21.50 per share, vest ratably overthree years and have a term of ten years. The estimated aggregate fair value ofthe options was $78,000. The finder’s fees paid to Daniel Bergstein and JohnStewart were more favorable than those we would have paid in an arm’s lengthtransaction. Messrs. Bergstein and Stewart are both directors and stockholdersof the Company.

 

**Financial AdvisoryServices**

 

GCP, a significantstockholder of the Company, serves as a financial advisor to the Company undera retainer arrangement, executed January 20, 2005, under which we pay$75,000 per quarter. We recorded $0, $303,000 and $152,000 during the yearsended June 30, 2007, 2006 and 2005, respectively, for financial advisoryservices provided by GCP under this arrangement. We believe that thesefinancial advisory services were provided on terms comparable to those we wouldhave received in an arm’s length transaction. The retainer arrangement with GCPexpired on September 30, 2006.

 

On May 1, 2007, weentered into a financial advisory services agreement with Greenhill &Co., LLC, or Greenhill, an affiliate of GCP. As compensation for such services,we have agreed to pay Greenhill a transaction fee of 0.75% of the aggregateconsideration (less any cash on our balance sheet at the time of sale) wereceive from a sale of the Company. If we enter into definitive documentationfor such a sale and such agreement is later

 

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terminated, we will pay to Greenhill an amount equal to one-third ofany break up fee we receive in connection with such termination less anyout-of-pocket expenses incurred by us in connection with such transaction,provided that such amount payable to Greenhill will not exceed$1.5 million per transaction. In addition, we may pay to Greenhill, at thesole discretion of our board of directors, an incentive fee equal to 0.20% ofthe aggregate consideration (less any cash on our balance sheet at the time ofsale) we receive from a sale of the Company. We agreed to reimburse Greenhillfor its reasonable out-of-pocket expenses. Unless otherwise extended by theparties in writing, the agreement terminates upon the earlier of (i) theconsummation of a sale of the Company and (ii) 12 months from thedate of the agreement. We did not incur any expenses under this agreementduring the year ended June 30, 2007.

 

**Promissory Note**

** **

On May 12, 2005, DanielBergstein, a director and significant stockholder of the Company, exercisedwarrants to acquire 47,800 of our common stock with a non-interest bearingpromissory note for $600,846 which was secured by such stock. On the same date,JED Communications Associates, Inc., of which Daniel Bergstein is an ownerand the President, exercised warrants to acquire 21,000 shares of our commonstock with a non-interest bearing promissory note for $79,380 which was securedby such stock. Both promissory notes were paid in full on June 25, 2005.The terms of the promissory notes were more favorable than those we would havegranted in an arm’s length transaction.

 

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**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The total fees and expensesfor professional services provided by our independent registered publicaccounting firm, Ernst & Young LLP, for the years ended June 30, 2007 and2006 are presented in the table below (in thousands):

 
| ** **          | ** ** | **Year ended June 30,** | ** ** |
|---------------------|------------|----------------------------------------|------------|
| ** **          | ** ** | **2007**                               | ** ** | **2006** | ** ** |
|                |       |                                   |       |   |   |
| Audit Fees          |       | $                                      | 2,196      |   | $ | 1,588 |   |
| Audit-Related  Fees |       | —                                 |       | — |   |
| Tax Fees            |       | 29                                     |       | 76 |   |
| All Other Fes       |       | —                                 |       | — |   |
| Total               |       | $                                      | 2,225      |   | $ | 1,664 |   |

 

Audit Fees consist of feesbilled for the audit of our consolidated financial statement, reviews of ourAnnual Report on Form 10-K and Quarterly Reports on Form 10-Q and reviews ofvarious SEC and other regulatory filings.

 

Audit-Related Fees consistof fees for assurance and related services that are reasonably related to theperformance of the audit or review of our financial statements.

 

Tax Fees consist of fees fortax compliance, tax advice and tax planning.

 

The audit committeeconsidered the compatibility of non-audit services provided by the auditorswith maintaining the auditors’ independence, and determined that the auditors’independence relative to financial audits was not jeopardized by the non-auditservices. The auditors did not employ leased personnel in connection with theirwork.

 

**Pre-ApprovalPolicy**

 

The services performed bythe independent registered public accounting firm in fiscal 2007 werepre-approved by the audit committee, in accordance with the audit committee’sindependent auditor pre-approval policy. This policy describes the permittedaudit, audit-related and tax services (collectively, referred to as thedisclosure categories) that the independent registered public accounting firmmay perform up to a pre-determined dollar limit per project. The policyrequires a description of the material services (referred to as the standardservices list) expected to be performed by the independent registered publicaccounting firm in each of the disclosure categories presented to the auditcommittee for approval.

 

Any requests for audit,audit-related and tax services not contemplated on the standard services listor exceeding the pre-determined dollar limit per project must be submitted tothe audit committee for specific pre-approval and cannot commence until suchapproval has been granted. Normally, pre-approval is provided on an informal,as-needed basis. The audit committee may delegate pre-approval authority to amember of the audit committee, who shall initially be the chairman of the auditcommittee. The decisions of any audit committee member to whom pre-approvalauthority is delegated must be presented to the full audit committee at itsnext scheduled meeting.

 

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**PART IV**

 

**ITEM15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

The following documents are filed as part ofthis Annual Report:

 

(i) Financial Statements.See Index to Financial Statements under “Item 8. Financial Statements andSupplementary Data.”

 

(ii) Financial StatementSchedules. See Index to Financial Statements under “Item 8. FinancialStatements and Supplementary Data.” All other schedules are omitted as therequired information is inapplicable or the information is presented in theconsolidated financial statements or related notes under “Item 8. FinancialStatements and Supplementary Data.”

 

(iii) Exhibits. The exhibitsfiled as part of this Annual Report are listed in the exhibit index immediatelypreceding such exhibits, which index is incorporated herein by reference.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                      | MXENERGY  HOLDINGS INC. |
|---------------------------|------------------------------|
|                      |                         |
| Date: September 28,  2007 |                         |   |
|                      | By:                          | /s/ JEFFREY A.  MAYER |   |
|                      |                         | Jeffrey A. Mayer |   |
|                      |                         | *President  and Chief Executive Officer* |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 
| **Signatures**              | ** ** | **Title**                                                                                         | ** ** | **Date**            |
|-----------------------------|------------|---------------------------------------------------------------------------------------------------|------------|---------------------|
|                        |       |                                                                                              |       |                |
| /s/ JEFFREY A.  MAYER       |       | Director, President and  Chief Executive                                                          |       | September 28,  2007 |
| Jeffrey A. Mayer            |       | Officer (Principal  Executive Officer)                                                            |       |
|                        |       |                                                                                              |       |                |
| /s/ CHAITU  PARIKH          |       | Vice President of  Finance, Chief Financial                                                       |       | September 28,  2007 |
| Chaitu Parikh               |       | Officer and Assistant  Treasurer  (Principal Financial Officer and  Principal Accounting Officer) |       |
|                        |       |                                                                                              |       |                |
| /S/ STEVEN  MURRAY          |       | Director                                                                                          |       | September 28,  2007 |
| Steven Murray               |       |                                                                                              |       |
|                        |       |                                                                                              |       |                |
| /s/ CAROLE R.  ARTMAN-HODGE |       | Director                                                                                          |       | September 28,  2007 |
| Carole R.  Artman-Hodge     |       |                                                                                              |       |
|                        |       |                                                                                              |       |                |
| /S/ DANIEL  BERGSTEIN       |       | Director                                                                                          |       | September 28,  2007 |
| Daniel Bergstein            |       |                                                                                              |       |
|                        |       |                                                                                              |       |                |
| /S/ JOHN STEWART            |       | Director                                                                                          |       | September 28,  2007 |
| John Stewart                |       |                                                                                              |       |
|                        |       |                                                                                              |       |                |
| /S/ STUART  PORTER          |       | Director                                                                                          |       | September 28,  2007 |
| Stuart Porter               |       |                                                                                              |       |
|                        |       |                                                                                              |       |                |
| /S/ WILLIAM  LANDUYT        |       | Director                                                                                          |       | September 28,  2007 |
| William Landuyt             |       |                                                                                              |       |

 

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**Index toExhibits**

 
| Exhibit  Number | ** ** | **Title**                                                                                                                                                                                                                                                                                                                                                                   |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |       | Asset Purchase  Agreement, dated as of May 12, 2006, by and between MxEnergy Inc. and Shell  Energy Services Company L.L.C.(1)                                                                                                                                                                                                                                              |
| 2.2             |       | First Amendment to  Asset Purchase Agreement and Acknowledgement, dated as of July 28, 2006, by  and between MxEnergy Inc. and Shell Energy Services Company L.L.C.(1)                                                                                                                                                                                                 |
| 3.1             |       | Amended and Restated  Certificate of Incorporation of MxEnergy Holdings Inc.(1)                                                                                                                                                                                                                                                                                             |
| 3.2             |       | Amended and Restated Bylaws  of MxEnergy Holdings Inc.(1)                                                                                                                                                                                                                                                                                                                   |
| 4.1             |       | Indenture dated as of  August 4, 2006 by and among MxEnergy Holdings Inc., Law Debenture Trust  Company of New York, as trustee, and Deutsche Bank Trust Company Americas, as  registrar and paying agent, related to MxEnergy’s Floating Rate Senior Notes  due 2011(1)                                                                                               |
| 4.2             |       | Form of Senior Floating  Rate Note due 2011 (included in Exhibit 4.1)(1)                                                                                                                                                                                                                                                                                                    |
| 4.3             |       | Registration Rights  Agreement, dated as of August 4, 2006, by and among MxEnergy Holdings Inc.,  the guarantors named therein and Deutsche Bank Securities Inc. and Morgan  Stanley & Co. Incorporated, as initial purchasers(1)                                                                                                                                       |
| 4.4             |       | Supplemental Indenture  dated as of August 1, 2007 by and among MxEnergy Holdings Inc., Law Debenture  Trust Company of New York, as trustee, and Deutsche Bank Trust Company  Americas, as registrar and paying agent, related to MxEnergy’s Floating Rate  Senior Notes due 2011(2)                                                                                  |
| 10.1            |       | First Amended and  Restated Credit Agreement, dated as of August 1, 2006, by and among MxEnergy  Inc. and MxEnergy Electric Inc., as borrowers, MxEnergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, lenders party thereto and  Société Générale, as administrative agent, syndication agent, lead arranger  and sole bookrunner(1) |
| 10.2            |       | First Amendment to  First Amended and Restated Credit Agreement, dated as of April 6, 2007,  by and among MxEnergy Inc. and MxEnergy Electric Inc., as borrowers, MxEnergy  Holdings Inc. and certain subsidiaries thereof, as guarantors, and lenders  party thereto(1)                                                                                               |
| 10.3            |       | First Amended and  Restated Pledge Agreement, dated as of August 1, 2006, by and among MxEnergy  Inc. and MxEnergy Electric Inc., as borrowers, MxEnergy Holdings Inc. and  certain subsidiaries thereof, as guarantors, and Société Générale(1)                                                                                                        |
| 10.4            |       | First Amended and  Restated Security Agreement, dated as of August 1, 2006, by and among  MxEnergy Inc. and MxEnergy Electric Inc., as borrowers, MxEnergy Holdings  Inc. and certain subsidiaries thereof, as guarantors, and Société Générale(1)                                                                                                      |
| 10.5            |       | Amended and Restated  Loan Agreement, dated as of November 14, 2003, by and between Sowood  Commodity Partners Fund LP (as successor to Lathi LLC) and MxEnergy Inc.(1)                                                                                                                                                                                                     |
| 10.6            |       | Amended and Restated  Security Agreement, dated as of November 14, 2003, by and between Sowood  Commodity Partners Fund LP (as successor to Lathi LLC) and MxEnergy Inc.(1)                                                                                                                                                                                                 |
| 10.7            |       | Amendment No. 1 to  Amended and Restated Loan Agreement, dated as of March 22, 2004, by and  between Sowood Commodity Partners Fund LP (as successor to Lathi LLC) and  MxEnergy Inc.(1)                                                                                                                                                                                    |
| 10.8            |       | Amendment No. 2 to  Amended and Restated Loan Agreement and Amendment No. 1 to Amended and  Restated Security Agreement, dated as of December 19, 2005, by and between  Sowood Commodity Partners Fund LP (as successor to Lathi LLC) and MxEnergy  Inc.(1)                                                                                                                 |
| 10.9            |       | Amendment No. 3 to  Amended and Restated Loan Agreement and Amendment No. 2 to Amended and  Restated Security Agreement, dated as of August 1, 2006, by and between  Sowood Commodity Partners Fund LP (as successor to Lathi LLC) and MxEnergy  Inc.(1)                                                                                                                    |
| 10.10           |       | Subordination and  Intercreditor Agreement, dated as of December 19, 2005, by and among  Société Générale and certain counterparties, Sowood Commodity Partners Fund  LP, MxEnergy Holdings Inc., MxEnergy Inc., MxEnergy Electric Inc. and certain  of their respective subsidiaries and Virginia Power Energy Marketing, Inc.(1)                 |
| 10.11           |       | Amendment No. 1 to  Subordination and Intercreditor Agreement, dated as of August 1, 2006,  by and among Société Générale and certain counterparties, Sowood Commodity  Partners Fund LP, MxEnergy Holdings Inc., MxEnergy Inc. and certain of their  respective subsidiaries(1)                                                              |
| 10.12           |       | Amended and Restated  Energy Marketing Agreement, dated as of December 15, 2005, by and between  Virginia Power and Energy Marketing, Inc. and MxEnergy Inc.(1)                                                                                                                                                                                                             |
| 10.13           |       | Letter Agreement, dated  as of February 28, 2006, relating to Amended and Restated Energy  Marketing Agreement(1)                                                                                                                                                                                                                                                      |
| 10.14           |       | Letter Agreement, dated  as of July 11, 2006, relating to Amended and Restated Energy Marketing  Agreement(1)                                                                                                                                                                                                                                                          |
| 10.15           |       | Master Transaction  Agreement, dated as of August 1, 2006, by and among MxEnergy Inc., MxEnergy  Holdings Inc. and certain subsidiaries thereof, as guarantors, and Société  Générale(1)                                                                                                                                                                |

 

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| 10.16 |   | First Amendment to  Master Transaction Agreement, dated as of April 6, 2007, by and among  MxEnergy Inc., MxEnergy Holdings Inc. and certain subsidiaries thereof, as  guarantors, and Société Générale(1)                                                                                                                                                               |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17 |   | Third Amended and  Restated Stockholders’ Agreement, dated as of June 25, 2004, by and among  MxEnergy Inc., Charter Mx LLC, Sowood Commodity Partners Fund LP (as  successor to Lathi LLC), Jeffrey A. Mayer, Carole R. Artman-Hodge, Daniel P.  Burke and certain other investors party thereto(1)                                                                                         |
| 10.18 |   | Registration Rights  Agreement dated as of June 25, 2004 by and among MxEnergy Inc., Sowood  Commodity Partners Fund LP (as successor to Lathi LLC), Charter Mx LLC,  Greenhill Capital Partners, L.P., Greenhill Capital Partners (Cayman), L.P.,  Greenhill Capital Partners (Executives), L.P., Greenhill Capital, L.P.,  Jeffrey A. Mayer, Carole R. Artman-Hodge and Daniel P. Burke, Sr.(1) |
| 10.19 |   | Transition Services  Agreement, dated as of August 1, 2006, by and between MxEnergy Inc. and Shell  Energy Services Company L.L.C.(1)                                                                                                                                                                                                                                                             |
| 10.20 |   | Employment Agreement,  dated as of April 1, 1999, by and between MxEnergy Inc. and Jeffrey  Mayer(1)                                                                                                                                                                                                                                                                                         |
| 10.21 |   | Employment Agreement,  dated as of August 4, 2006, by and between MxEnergy Inc. and Steven Murray(1)                                                                                                                                                                                                                                                                                              |
| 10.22 |   | Employment Agreement,  dated as of April 1, 1999, by and between MxEnergy Inc. and Carole R.  (“Robi”) Artman-  Hodge(1)                                                                                                                                                                                                                                                           |
| 10.23 |   | Employment Agreement,  dated as of November 11, 2002, by and between MxEnergy Inc. and Chaitu  Parikh(1)                                                                                                                                                                                                                                                                                     |
| 10.24 |   | Employment Agreement,  dated as of October 19, 2005, by and between MxEnergy Inc. and Charles Cavin(1)                                                                                                                                                                                                                                                                                            |
| 10.25 |   | Employment Agreement,  dated as of May 1, 2000, by and between MxEnergy Inc. and Emmett  Capanna(1)                                                                                                                                                                                                                                                                                          |
| 10.26 |   | Employment Agreement,  dated as of December 24, 2004, by and between MxEnergy Inc. and Thomas  Hartmann(1)                                                                                                                                                                                                                                                                                   |
| 10.27 |   | Employment Agreement,  dated as of June 13, 2007, by and between MxEnergy Inc. and Gina  Goldberg*                                                                                                                                                                                                                                                                                           |
| 10.28 |   | Employment Agreement,  dated as of August 14, 2006, by and between MxEnergy Inc. and Robert  Werner*                                                                                                                                                                                                                                                                                         |
| 10.29 |   | 2001 Stock Option Plan,  as amended(1)                                                                                                                                                                                                                                                                                                                                                            |
| 10.30 |   | 2003 Stock Option Plan,  as amended(1)                                                                                                                                                                                                                                                                                                                                                            |
| 10.31 |   | 2006 Equity Incentive  Compensation Plan(1)                                                                                                                                                                                                                                                                                                                                                       |
| 10.32 |   | Form of Award Agreement  under 2001 Stock Option Plan(1)                                                                                                                                                                                                                                                                                                                                          |
| 10.33 |   | Form of Award Agreement  under 2003 Stock Option Plan(1)                                                                                                                                                                                                                                                                                                                                          |
| 10.34 |   | Form of Stock Option  Award Agreement under 2006 Equity Incentive Compensation Plan(1)                                                                                                                                                                                                                                                                                                            |
| 10.35 |   | Financial Advisory  Agreement, dated as of January 20, 2005, by and between MxEnergy Inc. and  Greenhill & Co., LLC(1)                                                                                                                                                                                                                                                                        |
| 10.36 |   | Financial Advisory  Agreement, dated as of May 1, 2007, by and between MxEnergy Holdings Inc. and  Greenhill & Co., LLC(1)                                                                                                                                                                                                                                                                    |
| 10.37 |   | Promissory Note, dated  May 12, 2005, by Daniel Bergstein in favor of MxEnergy Inc.(1)                                                                                                                                                                                                                                                                                                            |
| 10.38 |   | Promissory Note, dated  May 12, 2005, by JED Communications Associates, Inc. in favor of MxEnergy  Inc.(1)                                                                                                                                                                                                                                                                                        |
| 21    |   | List of Subsidiaries of  MxEnergy Holdings Inc.(1)                                                                                                                                                                                                                                                                                                                                                |
| 31.1  |   | Certification by the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.*                                                                                                                                                                                                                                                                                        |
| 31.2  |   | Certification by the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.*                                                                                                                                                                                                                                                                                        |
| 32    |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.*†                                                                                                                                                                                                                                                                  |

 

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| *      | Filed herewith.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| † | Pursuant to Securities and Exchange Commission  Release No. 33-8238, this certification will be treated as  “accompanying” this Quarterly Report on Form 10-Q and not “filed” as  part of such report for purposes of Section 18 of the Securities  Exchange Act of 1934, or otherwise subject to the liability of  Section 18 of the Securities Exchange Act of 1934 and this certification  will not be deemed to be incorporated by reference into any filing under the  Securities Act of 1933 or the Securities Exchange Act of 1934, except to the  extent that the registrant specifically incorporates it by reference. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (1)    | Incorporated by reference to Registration Statement  on Form S-4 (File No. 333-138425) declared effective on April 30, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)    | Incorporated by reference to our Current Report on  Form 8-K filed on August 7, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

 

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