UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.  20549
 
 FORM
10-K
  x
                Annual Report
      Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For the fiscal year
      ended December 31, 2008 oro
                Transition Report
      Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934For the transition
      period from __________________ to
      __________________
  Commission
file number:  333-136528
 
 World
Energy Solutions, Inc.
 (Exact
name of registrant as specified in its charter)
  Delaware
                04-3474959(State or other
      jurisdiction of incorporation or organization)
                (I.R.S. Employer
      Identification Number)
  446
Main Street
 Worcester,
Massachusetts  01608
 (Address
of principal executive offices)
 
 (508)
459-8100
 (Registrant’s telephone
number, including area code)
 
 Securities
registered under Section 12(b) of the Act:
 None
 
 Securities
registered under Section 12(g) of the Act:
 None
 
 Indicate
by checkmark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.   Yes o  No x
  Indicate
by checkmark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   Yes o  No x
  Indicate
by checkmark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.    Yes x    No
o
 
 Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.   x
 
 Indicate
by checkmark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions
of “large accelerated filer”, “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):    Large
accelerated filer o  Accelerated
filer x  Non-accelerated
filer o 
Smaller reporting company  o
 
 Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).    Yes o 
  No x
 
 The
aggregate market value of the common stock held by non-affiliates of the
registrant based on the last sale price of such stock as reported by the Toronto
Stock Exchange on June 30, 2008 (the last business day of the Registrant’s most
recently completed second fiscal quarter) was approximately
$78,816,980.
  As of
February 20, 2009, the registrant had 85,207,937 shares of Common
Stock outstanding.
  DOCUMENTS
INCORPORATED BY REFERENCE
 
 Portions of the registrant’s definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 21,
2009, are incorporated by reference into Part III of this Report.
  
 
 World
Energy Solutions, Inc.
 Form
10-K
 For
the Year Ended December 31, 2008
 
 Table
of Contents
   PART
      IItem
      1.
                  Business
                  1Item
      1A.
                  Risk
      Factors
                  11Item
      1B.
                  Unresolved
      Staff Comments
                  19Item
      2.
                  Properties
                  19Item
      3.
                  Legal
      Proceedings
                  19Item
      4.
                  Submission
      of Matters to a Vote of Security Holders
                  19PART
      IIItem
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  20Item
      6.
                  Selected
      Consolidated Financial Data
                  21Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  22Item
      7A.
                  Quantitative
      and Qualitative Disclosure about Market Risk
                  35Item
      8.
                  Financial
      Statements and Supplementary Data
                  35Item
      9.
                  Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                  35Item
      9A.
                  Controls
      and Procedures
                  35Item
      9B.
                  Other
      Information
                  37PART
      IIIItem
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  37Item
      11.
                  Executive
      Compensation
                  37Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  37Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  37Item
      14.
                  Principal
      Accountant Fees and Services
                  37PART
      IVItem
      15.
                  Exhibits
      and Financial Statement Schedules
                  38Signatures
                  
                  39Exhibit
      Index
   FORWARD-LOOKING
STATEMENTS
 
 This
Report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, or the Securities Act, and Section 21E
of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which
statements involve risks and uncertainties. These statements relate to our
future plans, objectives, expectations and intentions. These statements may be
identified by the use of words such as “may”, “could”, “would”, “should”,
“will”, “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”
and similar expressions. Our actual results and timing of certain events could
differ materially from those discussed in these statements. Factors that could
contribute to these differences include but are not limited to, those discussed
under “Risk Factors”, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, and elsewhere in this Report. The
cautionary statements made in this Report should be read as being applicable to
all forward-looking statements wherever they appear in this Report.
 
 PART
I
 
 Item
1.  Business
 
 Overview
 
 World
Energy is an energy and environmental commodities brokerage company that has
developed online exchanges - the World Energy Exchange and the World Green
Exchange. On the World Energy Exchange, retail energy consumers (commercial,
industrial, and government, or CIG) and wholesale energy participants
(utilities, electricity retailers and intermediaries (buyers)) in the United
States are able to negotiate for the purchase or sale of electricity and other
energy resources from competing energy suppliers which have agreed to
participate on our auction platform in a given auction. The World Energy
Exchange is supplemented with information about market rules, pricing trends,
energy consumer usage and load profiles. Our procurement staff uses this auction
platform to conduct auctions, analyze results, guide energy consumers through
contracting, and track their contracts, sites, accounts and usage history.
Although our primary source of revenue is from brokering electricity and natural
gas, we adapted our World Energy Exchange auction platform to accommodate the
brokering of green power in 2003 (i.e., electricity generated by renewable
resources), wholesale electricity in 2004 and certain other energy-related
products in 2005.  In 2007, we created the World Green Exchange based
on the World Energy Exchange technology and business process.  On the
World Green Exchange, buyers and sellers negotiate for the purchase or sale of
environmental commodities such as Renewable Energy Certificates (RECs), Verified
Emissions Reductions (VERs), Certified Emissions Reductions (CERs) and Regional
Greenhouse Gas Initiative (RGGI) allowances.
 
 On June
1, 2007, we acquired substantially all of the assets of EG Partners, LLC,
formerly EnergyGateway LLC (“EnergyGateway”), for $4,951,758 in cash and
5,375,000 of our common shares plus the assumption of certain
liabilities.  EnergyGateway provided on-line energy procurement and
value-added energy services to customers in many major industries in the U.S.
and Canada, from large multi-site Fortune 500 industrials to middle-market
manufacturing and small commercial operations. With the acquisition we expanded
our product offering to include EnergyGateway’s “post and bid” process and
expanded our reach into the natural gas and commercial and industrial
marketplaces. In the post and bid online environment, end users post their
energy needs and energy suppliers respond to those postings.
 
 In
addition to the retail energy industry, we have continued to develop and build
solutions to address the wholesale and environmental commodities markets. We
support the wholesale product line by utilizing our reverse auction platform
technology and process.  We support the environmental commodity
product line by utilizing the post and bid platform solution and process.
Wholesale has evolved into a significant revenue contributor for us with
approximately 10% of our consolidated revenue in 2007 and 2008 being derived
from this product line. We have continued to pursue the environmental
commodities product line and have conducted several auctions in 2008
representing every major environmental commodity including U.S. VERs, Canadian
and U.S. RECs and CERs for a European lister. In August 2008, we were awarded a
two-year contract with RGGI. RGGI, a consortium of 10 Northeast and Mid-Atlantic
states, is the first mandatory market-based effort in the United States to
reduce greenhouse gas emissions. RGGI selected our World Green Exchange to sell
allowances for the emitting of carbon dioxide emissions from the power sector.
In accordance with this contract the Company will conduct quarterly auctions for
RGGI over the two-year period with an option to extend for an additional two
year period. We successfully completed the first two auctions for RGGI during
the third and fourth quarters of 2008.
 
 The
Retail Energy Industry
 
 Retail
Electricity Deregulation
 
 The
electricity industry in the United States is governed by both federal and state
laws and regulations, with the federal government having jurisdiction over the
sale and transmission of electricity at the wholesale level in interstate
commerce, and the states having jurisdiction over the sale and distribution of
electricity at the retail level.
 
 The
federal government regulates the electricity wholesale and transmission business
through the Federal Energy Regulatory Commission, or FERC, which draws its
jurisdiction from the Federal
Power Act, and from other legislation such as the Public Utility Regulatory Policies
Actof 1978, the Energy
Policy Actof 1992, or EPA 1992, and the Energy Policy Actof 2005.
FERC has comprehensive and plenary jurisdiction over the rates and terms for
sales of power at wholesale, and over the organization, governance and financing
of the companies engaged in such sales. States regulate the sale of electricity
at the retail level within their respective jurisdictions, in accordance with
individual state laws which can vary widely in material respects. Restructuring
of the retail electricity industry in the United States began in the mid-1990s,
when certain state legislatures restructured their electricity markets to create
competitive markets that enable energy consumers to purchase electricity from
competitive energy suppliers.
 
 Prior to
the restructuring of the retail electricity industry, the electricity market
structure in the United States consisted of vertically integrated utilities
which had a near monopoly over the generation, transmission and distribution of
electricity to retail energy consumers. In states that have embraced electricity
restructuring, the generation component (i.e., the source of the
 1
 electricity)
has become more competitive while the energy delivery functions of transmission
and distribution remain as monopoly services provided by the incumbent local
utility and subject to comprehensive rate regulation. In other words, in these
states, certain retail energy consumers (specifically, those served by
investor-owned utilities and not by municipal power companies or rural power
cooperatives) can choose their electricity supplier but must still rely upon
their local utility to deliver that electricity to their home or place of
business.
 
 The
structure and, ultimately, the success level of industry restructuring has been
determined on a state by state basis. There have been three general models for
electricity industry restructuring: (i) delayed competition,
(ii) phased-in competition, and (iii) full competition. The delayed
competition model consists of the state passing legislation authorizing
competitive retail electricity markets (i.e., customer choice of electric energy
supplier), however, no action is taken by the state regulatory authority charged
with utility industry oversight within such state to change the incumbent
utility rates for electric energy to encourage competition. The phased-in
competition model consists of the state passing legislation authorizing
competitive retail electricity markets together with a gradual change of the
incumbent local utility’s retail electric rates to encourage the competitive
supply of electricity over time. The full competition model consists of the
state passing legislation authorizing competitive retail electricity markets
together with an immediate change to the incumbent local utilities’ retail
electric rates that results in the whole commercial, industrial and government,
or CIG, electricity market in such state being competitive
immediately.
 
 Energy
consumers who choose to switch electricity suppliers can either do it themselves
by contacting competitive energy suppliers directly, or indirectly, by engaging
aggregators, brokers or consultants, collectively referred to as ABCs, to assist
them with their electricity procurement.
 
 Competitive Energy
Suppliers:  These entities take title to power and resell it
directly to energy consumers. These are typically well-funded entities, which
both service energy consumers and also work with ABCs, to contract with energy
consumers. Presently, we estimate there are over 40 competitive suppliers,
several of which operate on a national level and are registered in nearly all of
the 16 states and the District of Columbia that permit CIG energy consumers
to choose their electricity supplier and have deregulated pricing to create
competitive markets.  Of the 16 deregulated states, 11 have viable
competitive markets.
 
 Aggregators, Brokers and
Consultants:  ABCs facilitate transactions by having
competitive energy suppliers compete against each other in an effort to get
their energy customers the lowest price. This group generally uses manual
request for proposal, or RFP, processes that are labor intensive, relying on
phone, fax and email solicitations. We believe that the online RFP process is
superior to the traditional paper-based RFP process as it involves a larger
number of energy suppliers, can accommodate a larger number of bids within a
shorter time span, and allows for a larger amount of contract variations
including various year terms, territories and energy usage
patterns.
 
 Online
Brokers:  Online brokers are a subset of the ABCs. These
entities use online platforms to run electronic RFP processes in an effort to
secure the lowest prices for their energy customers by having competitors bid
against one another. We believe that we are among the pioneering companies
brokering electricity online and we are not aware of any competitor that has
brokered more electricity online than we have.
 
 Retail
Natural Gas
 
 The
natural gas industry in the United States is governed by both federal and state
laws and regulations, with the federal government having jurisdiction over the
transmission of natural gas in interstate commerce, and the states having
jurisdiction over the sale and distribution at the retail level.
 
 The
federal government regulates the natural gas transmission business through FERC
which draws its jurisdiction from the Natural Gas Act, and from
other legislation such as the Energy Policy Act of 2005. FERC has
comprehensive and plenary jurisdiction over the rates and terms for transmission
of gas in interstate commerce, and over the organization, governance and
financing of the companies engaged in such transmission. States regulate the
distribution and sale of gas at the retail level within their respective
jurisdictions, in accordance with individual state laws which can vary widely in
material respects.
 
 The
natural gas market in the United States is deregulated in most states and offers
retail energy consumers access to their choice of natural gas commodity
supplier.
 
 Following
a period of heavy regulation, the gas industry was deregulated in three phases
as a result of legislation enacted in 1978 followed by multiple orders of FERC.
The expected result of this deregulation was to stimulate competition in the
natural gas industry down the pipeline to the distribution level.
 
 At the
retail level, reforms and restructuring have taken place on a state by state
basis, with varying nuances to the restructuring in different states. For
example, state commissions have allowed local distribution companies to offer
unbundled transportation service to large customers; occasionally to provide
flexible pricing in competitive markets; and to engage in other competitive
activities.
 
 Today, we
estimate that utilities in over 40 states permit retail natural gas
consumers to choose their natural gas commodity suppliers. In most instances,
the incumbent local distribution utility still delivers the commodity to the
consumers’ premises, even
 2
 if a
different supplier is selected to provide the commodity. The level of
competitive choice available to retail CIG energy consumers has increased, with
a wide range of products and a significant number of suppliers participating in
both retail and wholesale transactions.
 
 Wholesale
Energy
 
 The
wholesale electricity market is the competitive market that connects generators
(sellers) with utilities, electricity retailers and intermediaries (buyers) who
purchase electricity to re-sell on the retail market. Total wholesale purchases
of electric power in 2008 was 5.5 billion MWh.  Natural gas is an
important input fuel for generators, and purchases of natural gas in 2008
totaled 6 trillion cubic feet.
 
 The U.S.
wholesale electricity market emerged in the late 1970s when independent power
producers, or IPPs, and other non-utilities entered the electricity generation
market, although the market was restricted until the early 1990s when
competitive constraints were removed. These new generation entities began to
compete directly with traditional utilities and offered customers more than one
choice to obtain electricity. Today, participants in the wholesale market
include IPPs, traditional utilities, and intermediary power marketers. In
addition, banks, traders, and brokers participate in the wholesale
market.
 
 IPPs and
traditional utilities comprise the generation portion of the wholesale market.
Many employ internal sales forces to assist in the sale and distribution of
their power, enabling them to participate as both buyers and sellers within the
wholesale market. However, a growing number of IPPs and utilities have found it
easier and more cost effective to sell their generation through power marketing
services, which has contributed to the power marketers’ increased role within
the market. Power marketers utilize several different platforms to purchase
power from generators for distribution, which include paper RFPs, phone
brokerage, electronic exchanges and auctions.
 
 Our
customers in the wholesale market can be either buyers or sellers and can
include utilities and municipal utilities that buy power to fill in gaps in
their portfolios or natural gas to consume in their generation facilities, and
retail marketers who buy natural gas and power to resell to retail
customers.  If the customer is a buyer, we will run a reverse
(descending price) auction to secure a low price.  If the customer is
a seller, we will run a forward (ascending price) auction to secure a higher
price.
 
 Environmental
Commodities
 
 Concerns
about global warming have spawned a number of initiatives to reduce greenhouse
gas emissions. The most widely adopted of these initiatives is the Kyoto
Protocol pursuant to which many countries in Europe, Asia and elsewhere have
created carbon cap and trade systems. In carbon cap and trade programs, carbon
dioxide emission caps are established and producers of these emissions can buy
or sell credits in order to meet their required allocations. While the United
States has not ratified the Kyoto Protocol at a federal level, there are a
number of initiatives in the U.S. at the regional, state and local level
aimed at limiting greenhouse gas emissions, including RGGI - a collaboration of
10 Northeastern and Mid-Atlantic states, and renewable portfolio standards,
initiatives adopted by over 25 states and the District of Columbia regarding the
minimum requirements mandated to utilities to derive power from renewable
sources.
 
 In August
2008, we were awarded a two-year contract with RGGI, which is the first
mandatory, market based effort in the United States to reduce greenhouse gas
emissions. RGGI selected our World Green Exchange to sell allowances for the
emitting of carbon dioxide emissions from the power sector. In accordance with
this contract the Company will conduct quarterly auctions for RGGI over the
two-year period with an option to extend for an additional two year period. We
successfully completed the first two auctions for RGGI during the third and
fourth quarters of 2008.
 
 Additionally,
carbon emissions reduction initiatives and mandates are spurring investments in
renewable energy, carbon efficiency and recovery processes to create credits
that can be traded to countries or companies seeking to get beneath mandated
carbon emission limits. Thus far, these credits are being traded privately or
via exchanges (such as the European Climate Exchange, Evomarkets, and the
Chicago Climate Exchange) that have been formed to take advantage of these
opportunities, although we believe that a structured auction event may be a more
efficient mechanism for transacting these credits.
 
 Our
customers in the exchange of environmental commodities can be either buyers or
sellers and include U.S. CIG customers seeking to buy renewable energy to
voluntarily “green” their energy portfolio, utilities seeking to meet mandated
renewable portfolio standards, independent power producers looking to sell
renewable energy, project developers interested in selling carbon offsets,
entities that must meet compliance requirements and need to purchase carbon
offsets, and environmental commodity brokers. If the customer is a
buyer, we will run a reverse (descending price) auction to secure a lower
price.  If the customer is a seller, we will run a forward (ascending
price) auction to secure a higher price.
 
 Company
Strategy and Operations
 
 Overview
 
 We are an
energy and environmental commodities brokerage company that has developed online
auction platforms, the World
 3
 Energy
Exchange and the World Green Exchange.  On the World Energy Exchange
energy consumers in the U.S. are able to negotiate for the purchase or sale of
electricity and other energy resources from competing energy suppliers which
have agreed to participate on our auction platform in a given auction. On the
World Green Exchange, buyers and sellers negotiate for the purchase or sale of
environmental commodities such as Renewable Energy Certificates, Verified
Emissions Reductions and Certified Emissions Reductions.
 
 We bring
suppliers and consumers together in our virtual marketplaces, often with the
assistance of our channel partners, who identify and work with customers to
consummate transactions.  Our exchanges are comprised of a series of
software modules that automate our comprehensive procurement process
including:
 
 •
                energy
      and environmental commodities sourcing management — a database of
      suppliers and contacts;
 
 •
                lead
      management — a module to track prospective customers through the
      sales process;
 
 •
                  deal
      and task management — a module to list, assign and track steps to
      complete a procurement
successfully;
 
 •
                market
      intelligence — databases of information related to market rules and
      pricing trends for markets;
 
 •
                request
      for proposal, or RFP, development — a module to create RFPs with a
      variety of terms and parameters;
 
 •
                conducting
      auctions — underlying software to manage the bidding and timing of an
      auction and display the results;
 
 •
                portfolio
      management — a database of contracts, sites, accounts and
      usage;
 
 •
                commission
      reporting — a system to display forecasted and actual commissions due
      to channel partners; and
 
 •
                receivables
      management — a system to upload data received from suppliers and
      track payment receipt.
 
 Our
technology-based solution is attractive to channel partners as it provides them
with a business automation platform to enhance their growth, profitability and
customer satisfaction. Channel partners are important to our business because
these entities offer our auction platforms to enhance their service offerings to
their customers. By accessing our market intelligence and automated auction
platform, channel partners significantly contribute to our transaction volume,
and in return we pay them a fixed percentage of the revenue we receive from
winning bidders (i.e., energy suppliers and other buyers). This third party
commission structure is negotiated in advance within the channel partner
agreement based on a number of factors, including expected volume, effort
required in the auction process and competitive factors.
 
 As a
requirement to bid in an auction (which is described in greater detail below),
bidders must agree to an on-line agreement to pay our fee if they execute a
contract as a result of the auction. Following an auction event, our employees
continue to work with the energy consumer and other listers or collectively, the
customer, and bidder through the contract negotiation process and, accordingly,
we are aware of whether a contract between the customer and bidder is
consummated. If a contract is entered into between a customer and bidder using
our auction platforms, we are compensated based upon a fixed fee, or commission,
that is built into the price of the commodity. This approach is attractive to
both the customer and bidder as there is no fee charged to either party if the
brokering process does not result in a contract. Our fees are based on the total
amount of the commodity transacted between the customer and bidder multiplied by
our contractual commission rate. We have master agreements with our bidders,
whereby bidders are allowed to bid on customer requirements in exchange for
agreeing to pay the fee that we have negotiated with the customer.  In
order to participate in any specific auction bidders are required to acknowledge
and agree to our fee on our online platform prior to participating in any
specific auction.
 
 Retail Electricity
Transactions
 
 For
retail electricity transactions, monthly revenue is based on actual usage data
obtained from the energy supplier for a given month or, to the extent actual
usage data is not available, based on the estimated amount of electricity
delivered to the energy consumer for that month. While the number of contracts
closed via the World Energy Exchange in any given period can fluctuate widely
due to a number of factors, this revenue recognition method provides for a
relatively predictable revenue stream, as revenue is based on energy consumers’
actual historical energy usage profile. However, monthly revenue can still vary
from our expectations because usage is affected by a number of variables which
cannot always be accurately predicted, such as the weather and general business
conditions affecting our energy consumers.
 
 Contracts
between energy consumers and energy suppliers are signed for a variety of term
lengths, with a one-year contract term being typical for commercial and
industrial energy consumers, and government contracts typically having two to
three year, and occasionally five-year terms. The chart below displays our
annualized backlog from year-end 2004 through 2008. Annualized
backlog represents the revenue that we would derive within the twelve months
following the date on which the backlog is calculated from contracts between
energy consumers and energy suppliers that are in force on such date, assuming
such energy consumers use energy at their historical usage levels. For any
particular contract, annualized backlog is calculated by
 4
 multiplying
the energy consumer’s historical usage by our fixed contractual commission rate.
This metric is not intended as an estimate of overall future revenues, since it
does not purport to include revenues that may be earned during the relevant
12-month backlog period from new contracts or renewals of contracts that expire
during such period. In addition, annualized backlog does not represent
guaranteed future revenues, and to the extent actual usage under a particular
contract varies from historical usage, our revenues under such contract will
differ from the amount included in annualized backlog.
 
 In
addition to retail electricity contracts, we have ongoing contractual
arrangements with retail natural gas customers under which we deliver certain
energy management auction administration services for which we receive a monthly
fee. Annualized backlog as at December 31, 2008 includes monthly management
fees related to natural gas contracts of $1.1 million that have expected revenue
associated with them from January 1, 2009 through December 31, 2009.
These contracts may expire during the period and therefore the annualized
backlog does not include any revenue from expected contract renewals. Also
included in our annualized backlog is revenue expected to be derived in the
following 12 months from administering quarterly auctions for RGGI.
 
 Annualized
Backlog
 (in
millions)
  
 Because
the calculation of backlog is a calculation of a contracted commission rate
multiplied by a historical energy usage figure and our management contracts are
cancelable by our natural gas customers, our annualized backlog may not
necessarily be indicative of future results. Annualized backlog should not be
viewed in isolation or as a substitute for our historical revenues presented in
the financial statements included in this Form 10-K. Events that may cause
future revenues from contracts in force to differ materially from our annualized
backlog include the events that may affect energy usage, such as overall
business activity levels, changes in energy consumers’ businesses, weather
patterns and other factors described under “Risk Factors”.
 
 Retail Natural Gas
Transactions
 
 There are
two primary fee components to our retail natural gas services - transaction fees
and management fees.  Transaction fees are billed to and paid by the
energy supplier awarded business on the platform.  Transaction fees
for natural gas and electricity awards are established prior to award and are
the same for each supplier.  For the majority of our natural gas
transactions, we bill the supplier upon the conclusion of the transaction based
on the estimated energy volume transacted for the entire award term multiplied
by the transaction fee.  Management fees are paid by our energy
consumers and are generally billed on a monthly basis for services rendered
based on terms and conditions included in contractual arrangements. While
substantially all of our retail natural gas transactions are accounted for in
accordance with this policy, a certain percentage is accounted for as the
natural gas is consumed by the customer and recognized as revenue in accordance
with the retail electricity transaction revenue recognition methodology
described above.
 
 Wholesale and Green
Transactions
 
 For
wholesale energy and environmental commodity transactions, substantially all
transaction fees are invoiced upon the conclusion of the auction based on a
fixed fee.  These revenues are not tied to future energy usage and are
recognized upon the
 5
 completion
of the online auction.  For reverse auctions where our customers bid
for a consumer’s business, the fees are paid by the bidder. For forward auctions
where a lister is selling energy or credits, the fees are typically paid by the
lister. In addition, revenue may not be recognized on certain green transactions
until the credits being auctioned have been verified and/or delivered. While
substantially all wholesale and green transactions are accounted for in this
fashion, a small percentage of our wholesale revenue is accounted for as
electricity or gas is delivered, similar to the retail electricity transaction
methodology described above.
 
 The
Brokerage Process
 
 Our
brokerage process is supported by a variety of software modules designed with
the goal to find the best possible price while providing step-by-step process
management and detailed documentation prior to, during and following the
auction. Our process includes data collection and analysis, establishing the
benchmark price, conducting multiple auction events to enable testing of various
term and price combinations and assisting in contract completion. We create an
audit trail of all the steps taken in a given transaction. Specific web pages
track all information provided to energy suppliers including energy supplier
calls, supplier invitations, usage profiles and desired contract
parameters.
 
 At the
commencement of the process, non-government energy consumers will enter into a
procurement services agreement with us pursuant to which we are appointed as the
brokerage service provider to solicit and obtain bids for the supply of energy
or environmental commodities and to assist in the procurement of these
commodities. Government energy consumers will send out a solicitation at the
commencement of the brokerage process which sets out the contract terms. Only
bidders that are qualified under the solicitation may participate in the
auction. Bidders who wish to bid on the provision of energy or environmental
commodities to such customers must partake in our brokerage process and cannot
contract with customers outside of our brokerage process.
 
 For
retail energy, the procurement services agreement authorizes us to retrieve the
energy consumer’s energy usage history from the utility serving its accounts. We
utilize the usage history to identify and analyze the energy consumer’s energy
needs and to run a rate and tariff model which calculates the utility rate for
that energy consumer’s facilities. This price is used as a benchmark price to
beat for the auction event. For other customers or commodities, the benchmark
price may be negotiated or calculated in another manner.
 
 Prior to
conducting the auction, the auction parameters, including target price, supplier
preferences, contract terms, payment terms and product mix, as applicable, are
discussed with the customer and agreed upon. Approximately two to five days
prior to the auction, we will post RFPs with these auction parameters on our
World Energy Exchange or World Green Exchange and alert the potential bidders.
Additionally, bidders are provided with information about the customer,
historical energy usage information relating to the energy consumer’s facilities
(if retail customers), and the desired contract parameters, several days in
advance of the auction as part of the RFP. This advanced notice gives the
bidders the opportunity to analyze the value of a potential deal and the
creditworthiness of the customer. We believe that, using this information along
with the auction parameters described in the RFP, the bidders develop a bidding
strategy for the auction.
 
 The
auction is run on the World Energy Exchange or the World Green Exchange,
depending on the commodity auctioned. The auction creates a competitive bidding
environment that is designed to cause bidders to deliver better prices in
response to other competitive bids. Specifically, bidders enter an auction by
submitting an opening bid at or better than the suggested opening bid posted on
the RFP. After they enter the auction and assess the bidding activity, bidders
may begin testing the competition by submitting a bid better than the
then-leading bid. They do this presumably to test their pricing and to gauge the
relative level of competition for the deal. There is typically a modest level of
bidding and counter-bidding activity among bidders until the final 30 seconds of
the auction when bidding activity tends to increase. In the final seconds, all
bidders see the then-leading bid and must make a judgment as to how aggressively
to submit their last bid in order to win the deal. At this point in the auction,
bidders make their final bid without knowledge of what any other bidders are
bidding. We call this a final “blind” bid. Because a bidder does not know what
the other bidders will bid in their blind bid, this process has often resulted
in the leading bidder outbidding itself at the moment before the auction closes
in an effort to maintain its lead position and win the auction
event.
 
 Typically,
a number of auctions tailored to the customer’s specific needs will be held. Our
exchanges provide rapid results and can accommodate a multitude of permutations
for offers, including various year terms, quantities, load factors and green
power requirements. For commercial and industrial customers or project owners,
we typically run two to six auction events per procurement and for large
government aggregations that generally are more complex, we typically run 20 to
40 auction events. Each auction event usually lasts less than 15 minutes.
Included as part of any auction transaction are date and time stamping of bids,
comparison of each bid with benchmark prices, as well as automated stop times,
which ensure the integrity of auction events. The exchanges are also
periodically synchronized to the atomic clock which is intended to ensure that
auction start and stop times are precise.
 
 Following
an auction, the auction results are analyzed and if the auction has been
successful, we assist the customer with the contracting process with the winning
bidder which is typically finalized within one hour of the closing of the last
auction event. In the case of a commercial energy consumer, we facilitate any
remaining discussion between the leading energy supplier and the energy consumer
relating to the energy supplier’s contract terms that were not addressed in
establishing the auction parameters. In the case of government energy consumers,
the energy suppliers have seen and, in general, have agreed to the form of
supply contract being required by the government energy consumer. Accordingly,
the time period between the end of the auction and the execution of a contract
is usually shorter than in the case of non-government energy consumers. Not all
auctions result in awarded contracts.
 6
 For
retail energy transactions, the incumbent local utility serving a given location
is typically obligated to deliver the commodity to the customer’s premises from
the location where the supplier delivers electricity energy into that local
utility’s delivery system. However, the energy supplier is responsible for
enrolling the energy consumer’s account with the applicable local utility and
the energy supplier remains liable for any costs resulting from the physical
loss of energy during transmission and delivery to the customer’s premises. We
never buy, sell or take title to the energy products or environmental
commodities on our auction platform.
 
 We
typically interface directly with the customer through the brokerage process.
However, if a channel partner is involved, the channel partner will often
perform one or more of the following functions: working with a customer to sign
a procurement services agreement, interacting with the customer relating to
World Energy analyses, supporting the decision-making, and interfacing with the
customer during the contracting process. However, even if a channel partner is
involved, we are still primarily responsible for tasks such as interacting with
utilities to obtain an energy consumer’s usage history, performing analyses,
creating RFPs, interfacing with bidders, and scheduling, conducting and
monitoring auctions and collecting the commission earned from the
bidder.
 
 Growth
Strategy
 
 Our
overall objective is to achieve a preeminent position as the exchange of choice
for executing transactions in energy and environmental commodities. We seek to
achieve our objective by expanding our community of channel partners, customers
and bidders on our exchange, strengthening and expanding long-term relationships
with government agencies, broadening our product offerings, making strategic
acquisitions, and growing our sales force. Key elements of our strategy are as
follows:
 
 Continuing to Develop Channel
Partner Relationships.  A significant majority of the customers
using our auction platforms have been introduced to us through our channel
partners. Our primary growth strategy is to focus on developing and increasing
our number of channel partner relationships in an effort to expand the base of
customers using our auction platforms. As illustrated by the diagram below, we
have consistently increased the number of channel partners since 2004 from 10
to 59, and have recently made investments to focus on recruitment and
training in an effort to accelerate the addition of channel partners. We will
also consider future opportunities to work with channel partners who have
succeeded in establishing a significant customer base. The following table sets
out the growth in our channel partner relationships over the last
five fiscal years and data is presented as at December 31,
2008.
   Number
of Channel Partners
  
 Strengthening and Expanding
Long-term Relationships with Government Agencies.  We
intend to build on the relationships we have established with federal, state and
local government agencies. We expect that our expertise in brokering cost-saving
energy contracts for government agencies will continue to be in demand as
contract terms expire and governments look to contract for low energy prices in
a competitive market.  We also have seen government agencies leading
the way in seeking energy supply from renewable sources and in purchasing
Renewable Energy Certificates. We intend to leverage our government presence
into the environmental commodities markets and to secure business relationships
with other state and local governments.
 
 Expand our Share in the
Natural Gas Market.  While our core competence has
traditionally been in electricity brokerage for retail energy consumers, we
significantly expanded our current natural gas market share with our acquisition
of EnergyGateway. This acquisition gives us additional staff, natural gas
expertise and a post-and-respond software solution to add to our auction
capability.  We expect this combination to strengthen our natural gas
offering and present cross-selling opportunities.
 7
 Leverage Early Wins in the Wholesale
Market.  An important rationale for our initial public offering
was to enter the wholesale market where we had initial success in 2005 and 2006.
In 2007, we built a six-person team specifically focused on the opportunities
within the wholesale market. Our initial successes have been validated as we
have now thirty-nine wholesale customers of which twenty-three were revenue
producing in 2008.  We will continue our push into this market segment
in order to expand our presence and market share.
 
 Brokering Environmental
Commodities.  We have expanded our operations by entering into
the environmental commodities market by creating the World Green Exchange in
2007. We have successfully transacted VERs, RECs, and CERs representing
substantially all of the currently available environmental commodity types. In
August 2008 we were awarded a two-year contract with RGGI to run quarterly
auctions to sell regulated allowances as established by RGGI, the only regulated
cap-and-trade carbon dioxide allowance program in the United States. We
successfully completed the first two auctions under this program during the
third and fourth quarters of 2008. As countries attempt to reduce their
environmental emissions in order to achieve compliance under the Kyoto Protocol
and U.S.-based initiatives, we believe that the creation and trading of
environmental commodities will accelerate. We also believe that the
characteristics of this market and these commodities, namely lack of liquidity,
lack of transparency and product complexity and differentiation, make our
auction process an excellent approach to transacting these commodities. We are
pursuing several sub-markets both domestically and internationally, including
serving utilities seeking to meet their renewable portfolio standards, working
with project owners to maximize the value of their carbon offsets, and
facilitating trades between brokers in the secondary market.
 
 Making Strategic
Acquisitions.  From time to time, we also pursue strategic
acquisitions to help us expand geographically, add expertise and product depth,
provide accretive revenue and profit streams or a combination of two or more of
the above.
 
 Growing our Direct Sales
Force.  In certain retail markets and in the emerging wholesale
energy and environmental commodities markets, we believe a direct sales presence
will be a benefit to us.  A key growth strategy for us has been to
open regional offices (in addition to our Worcester headquarters and Washington,
DC sales offices), and staff them with direct sales people.  Our sales
force numbers eighteen today, compared to two at the time of our initial public
offering. These professionals are allocated to each of our primary markets:
retail, wholesale and environmental commodities.
 
 Bidders,
Customers and Channel Partners
 
 Bidders.  Our
success is heavily dependent on our bidder relationships, the credibility of our
bidders and the integrity of the auction process. Bidders include over
200 competitive electricity and natural gas suppliers and over 100
wholesale electricity suppliers registered on the World Energy Exchange,
representing a majority of all suppliers in the deregulated electricity and
natural gas markets. To date, there are over 65 registered bidders on the World
Green Exchange. Of the registered energy suppliers, approximately 75 had active
contracts with energy consumers that were brokered through our World Energy
Exchange as of December 31, 2008. One of these energy suppliers accounted
for 22% in the aggregate of our revenue for the year ended December 31,
2008, and two of these energy suppliers each accounted for over 10% individually
and 32% in the aggregate of our revenue for the year ended December 31,
2007.  In order to participate in an auction event, bidders must
register with us by either entering into a standard-form agreement pursuant to
which the bidder is granted a license to access our auction platform and bid at
auction events or by qualifying to participate in an auction pursuant to a
government solicitation. Our standard form agreement is typically for an
indefinite term, may be terminated by either party upon 30 days prior
written notice, is non-exclusive, non-transferable and cannot be sublicensed.
Under our standard-form agreement or the government solicitation, the bidder
agrees to pay us a commission, which varies from contract to contract and which
is based on a set rate per energy unit consumed by the customer.
 
 Customers.  Customers
using our auction platform to procure energy and environmental commodities
include government agencies, commercial and industrial energy consumers,
utilities, municipal utilities, environmental commodity project owners,
financial institutions and brokers. Government energy consumers have complex
energy needs in terms of both scope and scale, which we believe can best be met
with a technology-based solution such as the World Energy Exchange.
Additionally, the automated nature of our World Energy Exchange auction platform
is designed to support protest free auctions. We have brokered energy for the
General Services Administration (GSA) and over 25 federal agencies, Montgomery
County, Maryland, the State of Maryland, the Commonwealth of Massachusetts, the
Commonwealth of Pennsylvania, the State of Delaware, the State of New Jersey and
the State of Connecticut and the 10 Northeast and Mid-Atlantic states
participating in RGGI including New York and the New England
states.
  Our
contracts for the online energy procurements with these governmental entities
are typically for multiple years ranging from two to five
years.  During this contractual period, the governmental entity may
run various auctions for different locations or agencies that fall under their
purview.  As a result, revenue from these customers could extend
beyond the actual contractual term.  We have contracts with 7 of the
11 currently deregulated states that are competitive.  As additional
states open their electricity markets to competition and suppliers enter those
markets creating a competitive landscape, we plan to actively market our
services to them. These contracts do not require that the government energy
consumer use our services and, as is typical in government procurements, contain
termination for convenience clauses.   If a contract was
terminated for convenience, it would typically not have any bearing on energy
delivered through the termination date.
 8
 Two of
the energy consumers using our auction platform each accounted for over 10%
individually and approximately 23% in the aggregate of our revenue for the year
ended December 31, 2008, and two of these energy consumers accounted for
over 10% individually and approximately 30% in the aggregate of our revenue for
the year ended December 31, 2007.
 
 Contract
      Party
                Percent
      of Revenue
                  for
      the Year Ended
                  December 31,
      2008State
      of Maryland
                13%General
      Services Administration
                10%
  Direct Sales.  We
also maintain a direct sales arm of our business. Retail targets of direct sales
efforts are typically large companies with facilities in many geographic
locations including hotel chains, wholesale clubs, property management firms,
big box retailers, supermarkets, department stores, drug stores, convenience
stores, restaurant chains, financial services firms and manufacturers across
various industries.  We also are pursuing utilities, municipal
utilities, and retail energy providers in the wholesale market, and project
owners, customers seeking to meet compliance obligations, and brokers in the
environmental commodities markets.
 
 Channel
Partners.  We also target customers through our channel partner
model. These are firms with existing client relationships with certain customers
that would benefit from the addition of an online procurement solution. Channel
partners consist of a diverse array of companies including energy service
companies, demand side consultants and manufacturers, ABCs and strategic
sourcing companies, but in the most general terms they are resellers or
distributors. As of December 31, 2008, we have entered into agreements with
59 channel partners that are currently engaged in efforts to source
potential transactions to our exchanges, although not all have sourced a
transaction for which an auction has been completed. Upon identifying
opportunities with new channel partners, we enter into a channel partner
agreement that grants the channel partner a non-exclusive right to sell our
procurement process typically for a term of one year, which term renews
automatically unless terminated upon 30 days written notice. The channel
partner receives a commission based generally on the amount of involvement of
the channel partner in the procurement process.
 
 Competition
 
 Customers
have a broad array of options when purchasing energy or environmental
commodities. Retail energy consumers can either purchase energy directly from
the utility at the utility’s rate or purchase energy in the deregulated market
through one of the following types of entities: competitive energy suppliers,
ABCs and online brokers. We compete with competitive energy suppliers, ABCs and
other online brokers for energy consumers that are seeking an alternative to
purchasing directly from the utility. Wholesale customers typically buy from
generators, traders, traditional brokers who use phone-based methods, or bid-ask
exchanges.  Environmental commodity customers typically buy or sell
directly through bilateral transactions, brokers, traders or bid-ask exchanges
such as the Chicago Climate Exchange.
 
 Technology
 
 The
auction platform, which powers the World Energy and World Green Exchanges, is
comprised of a scalable transaction processing architecture and web-based user
interface. The auction platform is primarily based on internally developed
proprietary software, but also includes third party components for user
interface elements and reporting. The auction platform supports the selling and
buying processes including bid placements, bidder registration and management,
channel partner management, deal process management, contract management, site
management, collection and commission management, and reporting. The auction
platform maintains current and historical data online for all of these
components.
 
 Our
technology systems are monitored and upgraded as necessary to accommodate
increasing levels of traffic and transaction volume on the website. However,
future upgrades or additional technology licensing may be required to ensure
optimal performance of our auction platform services. See “Risk Factors” at Item
1A. To provide maximum uptime and system availability, our auction platform is
hosted in a multi-tiered, secure, and reliable fault tolerant environment which
includes backup power supply to computer equipment, climate control, as well as
physical security to the building and data center. In the event of a major
system component failure, such as a system motherboard, spare servers are
available.
 
 We strive
to offer a high level of data security in order to build the confidence in our
services among customers and to protect the participants’ private information.
Our security infrastructure has been designed to protect data from unauthorized
access, both physically and over the Internet. The most sensitive data and
hardware of the exchanges reside at the data centers.
 
 Seasonality
 
 Our
revenue is subject to seasonality and fluctuations during the year primarily as
a result of weather conditions and its impact on the demand for energy. Our
revenue is generated from the commissions we receive under any given energy
contract, which is tied to the energy consumer’s consumption of energy.
Therefore, revenue from natural gas consumption tends to be strongest
 9
 during
the winter months due to the increase in heating usage, and revenue from
electricity consumption tends to be strongest during the summer months due to
the increase in air conditioning usage. Our revenue is also subject to
fluctuations within any given season, depending on the severity of weather
conditions — during a particularly cold winter or an unseasonably warm
summer, energy consumption will rise.
 
 Intellectual
Property
 
 We enter
into confidentiality and non-disclosure agreements with third parties with whom
we conduct business in order to limit access to and disclosure of our
proprietary information.
 
 We
operate our platform under the trade names “World Energy Exchange” and “World
Green Exchange”. We own the following registered trademarks in the United
States: World Energy Solutions, World Green Exchange, and World Energy Exchange.
We also own the following domain names: worldenergy.com, wesplatform.com,
wexch.com, worldenergyexchange.com, echoicenet.com, e-choicenet.com,
worldenergysolutions.com, worldenergysolutions.net, worldenergy.biz,
worldgreenexchange.com, worldgreenexchange.biz, worldgreenexchange.info,
worldgreenexchange.us and worldpowerexchange.com. To protect our intellectual
property, we rely on a combination of copyright and trade secret laws and the
domain name dispute resolution system.
 
 Certain
of our trade names may not be eligible for protection if, for example, they are
generic or in use by another party. We may be unable to prevent competitors from
using trade names or corporate names that are confusingly similar or identical
to ours. A company organized under the laws of the State of Florida and whose
shares are publicly traded under the symbol “WEGY” also operates under the name
“World Energy Solutions, Inc.” According to its filings with the Securities and
Exchange Commission (SEC), this other company changed its name to “World Energy
Solutions” in November 2005, and is in the business of energy conservation
technologies and environmental sustainability.  This appears to be a
different business than ours.  On January 26, 2009, we entered into a
settlement agreement with WEGY pursuant to which WEGY has agreed to change
its legal name, cease use of the phrase “World Energy Solutions”, and transfer
the domain name “worldenergysolutionsinc.com” to us.
 
 We do not
have any patents and if we are unable to protect our copyrights, trade secrets
or domain names, our business could be adversely affected. Others may claim in
the future that we have infringed their intellectual property
rights.
 
 Personnel
 
 As of
December 31, 2008, we had fifty-five employees consisting of four members
of senior management, eighteen sales and marketing employees, two information
technology employees, twenty-five trading desk employees and six administrative
employees. In addition, we rely on a number of consultants and other advisors.
The extent and timing of any increase in staffing will depend on the
availability of qualified personnel and other developments in our business. None
of the employees are represented by a labor union, and we believe that we have
good relationships with our employees.
 
 Company
Information
 
 We
commenced operations through an entity named Oceanside Energy, Inc., or
Oceanside, which was incorporated under the laws of the State of Delaware on
September 3, 1996. We incorporated World Energy Solutions, Inc. under the
laws of the State of Delaware under the name “World Energy Exchange, Inc.” on
June 22, 1999, and on October 31, 1999, Oceanside became a
wholly-owned subsidiary of World Energy Solutions, Inc. through a share exchange
whereby Oceanside stockholders were given shares of common stock of World Energy
in exchange for their Oceanside shares. Oceanside was subsequently dissolved on
May 18, 2006. On December 21, 2006, we incorporated a 100% owned
subsidiary, World Energy Securities Corp., under the laws of the Commonwealth of
Massachusetts.
 
 On
December 5, 2006 we concluded our initial public offering for the sale of
23,000,000 shares of common stock resulting in net proceeds to the Company of
approximately $17.5 million (net of offering costs of approximately $3.6
million).  In connection with the closing of this offering all of the
outstanding shares of convertible preferred stock and non-voting common stock
converted into 19,416,310 shares of voting common stock.
 
 Our
registered and principal office is located at 446 Main Street, Worcester,
Massachusetts, 01608, United States of America, and our telephone number is
(508) 459-8100. Our website is located at www.worldenergy.com.
 10
 Item 1A. Risk
Factors
 
 You should carefully consider the
risks and uncertainties
described below before deciding to invest in shares of our common stock.
If any of the following
risks or uncertainties actually occurs, our business, prospects, financial condition and operating
results would likely suffer, possibly materially. In that event, the market price of
our common stock could decline and you could lose all or part of your
investment.
 
 Risks
Related to Our Business
 
 We have limited
operating experience and a history of operating losses, and we may be
subject to
risks inherent in early stage companies, which may make it difficult for
you to
evaluate our business and prospects.
 
 We have a
limited operating history upon which you can evaluate our business and
prospects. We began assisting in energy transactions in 2001 and introduced our
current auction model in April of that same year. Further, we have a history of
losses and, at December 31, 2008, we had an accumulated deficit of
approximately $19.6 million. We cannot provide any assurance that we will
be profitable in any given period or at all. You must consider our business,
financial history and prospects in light of the risks and difficulties we face
as an early stage company with a limited operating history. In particular, our
management may have less experience in implementing our business plan and
strategy compared to our competitors, including our strategy to increase our
market share and build our brand name. In addition, we may face challenges in
planning and forecasting accurately as a result of our limited historical data
and inexperience in implementing and evaluating our business strategies. Our
inability to successfully address these risks, difficulties and challenges as a
result of our inexperience and limited operating history may have a negative
impact on our ability to implement our strategic initiatives, which may have a
material adverse effect on our business, prospects, financial condition and
results of operations.
 
 Our costs will
increase significantly as we expand our business and in the event that
our revenue
does not increase proportionately, we will generate significant operating losses
in the future.
 
 We have
significantly increased our operating expenses as we expanded our brokerage
capabilities to offer additional energy-related products, increased our sales
and marketing efforts and developed our administrative organization. We also are
incurring increased costs as a result of being a publicly held company with
shares listed on the Toronto Stock Exchange (TSX). As we continue to expand our
business rapidly, we may incur significant operating losses. For the twelve
months ended December 31, 2008, we incurred a net loss of approximately
$6.8 million, which was a direct result of these increased costs. In addition,
our budgeted expense levels are based, in significant part, on our expectations
as to future revenue and are largely fixed in the short term. As a result, we
may be unable to adjust spending in a timely manner to compensate for any
unexpected shortfall in revenue which could compound those losses in any given
fiscal period.
 
 A
prolonged recession, instability in the financial markets, and inefficient
financial sector liquidity, could negatively impact our business.
 
 The
consequences of a prolonged recession could include a lower level of economic
activity and uncertainty regarding energy prices and the capital and commodity
markets. A lower level of economic activity could result in a decline in energy
consumption, which could adversely affect our revenues and future growth. 
Economic downturns such as the one that is currently occurring or periods of
high energy supply costs typically lead to reductions in energy consumption and
increased conservation measures. These conditions could adversely impact the
level of energy sales and result in less demand for energy delivery.  A
recession or a prolonged lag of a subsequent recovery could have an adverse
effect on the Company’s results of operations, cash flows or financial
position.  Instability in the financial markets as a result of recession or
otherwise, as well as insufficient financial sector liquidity, also could affect
the cost of capital and energy suppliers and our ability to raise
capital.
 
 Our business is
heavily influenced by how much regulated utility prices for energy are above or
below competitive market prices for energy and, accordingly, any changes
in
regulated prices or cyclicality or volatility in competitive market
prices heavily impacts
our business.
 
 When
energy prices increase in competitive markets above the price levels of the
regulated utilities, energy consumers are less likely to lock-in to higher fixed
price contracts in the competitive markets and so they are less likely to use
our auction platform. Accordingly, reductions in regulated energy prices can
negatively impact our business. Any such reductions in regulated energy prices
over a large geographic area or over a long period of time would have a material
adverse effect on our business, prospects, financial condition and results of
operations. Similarly, cyclicality or volatility in competitive market prices
that have the effect of driving those prices above the regulated utility prices
will make our auction platform less useful to energy consumers and will
negatively impact our business.
 
 The online
brokerage of energy and environmental commodities is a relatively new and emerging
market and it is uncertain whether our auction model will gain widespread
acceptance.
 
 The
emergence of competition in the energy and environmental commodities markets are
relatively recent developments, and
 11
 industry
participants have not yet achieved consensus on how to most efficiently take
advantage of the competitive environment. We believe that as the online energy
brokerage industry matures, it is likely to become dominated by a relatively
small number of competitors that can offer access to the largest number of
competitive suppliers and consumers. Brokerage exchanges with the highest levels
of transaction volume will likely be able to offer energy suppliers lower
transaction costs and offer consumers better prices, which we believe will
increasingly create competitive barriers for smaller online brokerage exchanges.
For us to capitalize on our position as an early entrant into this line of
business, we will need to generate widespread support for our auction platform
and continue to rapidly expand the scale of our operations. Other online auction
or non-auction strategies may prove to be more attractive to the industry than
our auction model. If an alternative brokerage exchange model becomes widely
accepted in the electricity industry and/or the other energy-related industries
we participate in, our business will fail.
 
 We depend on a
small number of key energy consumers for a significant portion of our
revenue,
many of which are government entities that have no obligation to use our
auction
platform or continue their relationship with us, and the partial or
complete loss of business
of one or more of these consumers could negatively affect our business.
 
 We have
an energy consumer base comprised primarily of large businesses and government
organizations.  Two of these energy consumers accounted for over 10%
individually and 23% in the aggregate of our revenue for the year ended
December 31, 2008, and two of these energy consumers accounted for over 10%
individually and 30% in the aggregate of our revenue for the year ended
December 31, 2007. Our government contracts are typically for multiple
years but are subject to government funding contingencies and cancellation for
convenience clauses. Although our non-government contracts create a short-term
exclusive relationship with the energy consumer, typically this exclusivity
relates only to the specific auction event and expires during the term of the
energy contract. Accordingly, we do not have ongoing commitments from these
energy consumers to purchase any of their incremental energy requirements
utilizing our auction platform, and they are not prohibited from using competing
brokerage services. The loss of any of these key energy consumers will
negatively impact our revenue, particularly in the absence of our ability to
attract additional energy consumers to use our service.
 
 We do not have
contracts for fixed volumes with the energy suppliers who use our auction platform
and we depend on a small number of key energy suppliers, and the partial or
complete loss of one or more of these energy suppliers as a participant
on our auction
platform could undermine our ability to execute effective
auctions.
 
 We do not
have contracts for fixed volumes with any of the energy suppliers who use our
auction platform. One energy supplier accounted for 22% in the aggregate of our
revenue for the year ended December 31, 2008, and two energy suppliers each
accounted for over 10% individually and 32% in the aggregate of our revenue for
the year ended December 31, 2007. The loss of any of these or other
significant suppliers will negatively impact our operations, particularly in the
absence of our ability to locate additional national suppliers. We do not have
agreements with any of these suppliers preventing them from directly competing
with us or utilizing competing services.
 
 We depend on our
channel partners to establish and develop certain of our relationships
with energy consumers and the loss of certain channel partners could
result in
the loss of certain key energy consumers.
 
 We rely
on our channel partners to establish certain of our relationships with energy
consumers. Our ability to maintain our relationships with our channel partners
will impact our operations and revenue. We depend on the financial viability of
our channel partners and their success in procuring energy consumers on our
behalf. One of our channel partners was involved with identifying and qualifying
energy consumers which entered into contracts that accounted for 32% and 38% of
our revenue for the years ended December 31, 2008 and December 31, 2007,
respectively. Channel partners may be involved in various aspects of a deal
including but not limited to lead identification, the selling process, project
management, data gathering, contract negotiation, deal closing and post-auction
account management. To the extent that a channel partner ceases to do business
with us, or goes bankrupt, dissolves, or otherwise ceases to carry on business,
we may lose access to that channel partner’s existing client base, in which case
the volume of energy traded through the World Energy Exchange will be adversely
affected and our revenue will decline.
 
 If we are unable
to rapidly implement some or all of our major strategic initiatives,
our ability
to improve our competitive position may be negatively
impacted.
 
 Our
strategy is to improve our competitive position by implementing certain key
strategic initiatives in advance of competitors, including the
following:
 
 •
                continue
      to develop channel partner
relationships;
 
 •
                strengthen
      and expand long-term relationships with government
    agencies;
 
 •
                target
      other energy-related markets;
 
 •
                target
      utilities in order to broker energy-related products for
    them;
 
 12
 •
                further
      develop a green credits auction
platform;
 
 •
                make
      strategic acquisitions; and
 
 •
                grow
      our direct sales force.
  We cannot
assure you that we will be successful in implementing any of these key strategic
initiatives, or that our time to market will be sooner than that of competitors.
Some of these initiatives relate to new services or products for which there are
no established markets, or in which we lack experience and expertise. In
addition, the execution of our growth strategies will require significant
increases in working capital expenses and increases in capital expenditures and
management resources and may subject us to additional regulatory
oversight.
 
 If we are
unable to rapidly implement some or all of our key strategic initiatives in an
effective and timely manner, our ability to improve our competitive position may
be negatively impacted, which would have a material and adverse effect on our
business and prospects.
 
 We currently
derive a substantial amount of our revenue from the brokerage of electricity, and
as a result our business is highly susceptible to factors affecting the electricity
market over which we have no control.
 
 We
derived approximately 64% of revenue during 2008 and 75% during 2007 from the
brokerage of electricity. Although we expect that our reliance on the brokerage
of electricity will diminish as we implement our strategy to expand brokerage
into other markets, we believe that our revenue will continue to be highly
dependent on the level of activity in the electricity market for the near
future. Transaction volume in the electricity market is subject to a number of
variables, such as consumption levels, pricing trends, availability of supply
and other variables. We have no control over these variables, which are affected
by geopolitical events such as war, threat of war, terrorism, civil unrest,
political instability, environmental or climatic factors and general economic
conditions. We are particularly vulnerable during periods when energy consumers
perceive that electricity prices are at elevated levels since transaction volume
is typically lower when prices are high relative to regulated utility prices.
Accordingly, if electricity transaction volume declines sharply, our results
will suffer.
 
 Our success
depends on the widespread adoption of purchasing electricity from competitive
sources.
 
 Our
success will depend, in large part, on the willingness of CIG energy consumers
to embrace competitive sources of supply, and on the ability of our energy
suppliers to consistently source electricity at competitive rates. In most
regions of North America, energy consumers have either no or relatively little
experience purchasing electricity in a competitive environment. Although
electricity consumers in deregulated regions have been switching from incumbent
utilities to competitive sources, there can be no assurance that the trend will
continue. In a majority of states and municipalities, including some areas which
are technically “deregulated”, electricity is still provided by the incumbent
local utility at subsidized rates or at rates that are too low to stimulate
meaningful competition by other providers. In addition, extreme price volatility
could delay or impede the widespread adoption of competitive markets. To the
extent that competitive markets do not continue to develop rapidly our prospects
for growth will be constrained. Also, there can be no assurance that trends in
government deregulation of energy will continue or will not be reversed.
Increased regulation of energy would significantly damage our
business.
 
 Even if our
auction brokerage model achieves widespread acceptance as the preferred
means to
transact electricity and other energy-related products, we may be unsuccessful in
competing against current and future competitors.
 
 We expect
that competition for online brokerage of electricity and other energy-related
products will intensify in the near future in response to expanding restructured
energy markets that permit consumer choice of energy sources and as
technological advances create incentives to develop more efficient and less
costly energy procurement in regional and global markets. The barriers to entry
into the online brokerage marketplace are relatively low, and we expect to face
increased competition from traditional off-line energy brokers, other
established participants in the energy industry, online services companies that
can launch online auction services that are similar to ours and demand response
providers.
 
 Many of
our competitors and potential competitors have longer operating histories,
better brand recognition and significantly greater financial resources than we
do. The management of some of these competitors may have more experience in
implementing their business plan and strategy and they may have pre-existing
commercial or other relationships with large energy consumers and/or suppliers
which would give them a competitive advantage. We expect that as competition in
the online marketplace increases, brokerage commissions for the energy industry
will decline, which could have a negative impact on the level of brokerage fees
we can charge per transaction and may reduce the relative attractiveness of our
exchange services. We expect that our costs relating to marketing and human
resources may increase as our competitors undertake marketing campaigns to
enhance their brand names and to increase the volume of business conducted
through their exchanges. We also expect many of our competitors to expend
financial and other resources to improve their network and system infrastructure
to compete more aggressively. Our inability to adequately address these and
other competitive pressures would have a material adverse effect on our
business, prospects, financial condition and results of operations.
 13
 We depend on the
services of our senior executives and other key personnel, the loss of whom could
negatively affect our business.
 
 Our
future performance will depend substantially on the continued services of our
senior management and other key personnel, including our senior vice president
of sales and marketing, vice presidents of business development, chief
information officer, senior vice president of operations and our market
directors. If any one or more of such persons leave their positions and we are
unable to find suitable replacement personnel in a timely and cost efficient
manner, our business may be disrupted and we may not be able to achieve our
business objectives, including our ability to manage our growth and successfully
implement our strategic initiatives. We do not have long-term employment
agreements with any of our senior management or other key personnel and we do
not have a non-competition agreement with our current chief executive
officer.
 
 We must
also continue to seek ways to retain and motivate all of our employees through
various means, including through enhanced compensation packages. In addition, we
will need to hire more employees as we continue to implement our key strategy of
building on our market position and expanding our business. Competition for
qualified personnel in the areas in which we compete remains intense and the
pool of qualified candidates is limited. Our failure to attract, hire and retain
qualified staff on a cost efficient basis would have a material adverse effect
on our business, prospects, financial condition, results of operations and
ability to successfully implement our growth strategies.
 
 We depend on
third-party service and technology providers and any loss or break-down
in those
relationships could damage our operations significantly if we are unable
to find alternative
providers.
 
 We depend
on a number of third-party providers for web hosting, elements of our online
auction system, data management and other systems, as well as communications and
networking equipment, computer hardware and software and related support and
maintenance. There can be no assurance that any of these providers will be able
to continue to provide these services without interruption and in an efficient,
cost-effective manner or that they will be able to adequately meet our needs as
our transaction volume increases. An interruption in or the cessation of such
third-party services and our inability to make alternative arrangements in a
timely manner, or at all, could have a material adverse effect on our business,
financial condition and operating results. There is also no assurance that any
agreements that we have in place with such third-party providers will be
renewed, or if renewed, renewed on favorable terms.
 
 Our business
depends heavily on information technology systems the interruption or
unavailability of
which could materially damage our operations.
 
 The
satisfactory performance, reliability and availability of our exchange,
processing systems and network infrastructure are critical to our reputation and
our ability to attract and retain energy consumers and energy suppliers to the
World Energy Exchange. Our efforts to mitigate systems risks may not be adequate
and the risk of a system failure or interruption cannot be eliminated. Although
we have never experienced an unscheduled interruption of service, any such
interruption in our services may result in an immediate, and possibly
substantial, loss of revenue and damage to our reputation.
 
 Our
business also depends upon the use of the internet as a transactions medium.
Therefore, we must remain current with Internet use and technology developments.
Our current technological architecture may not effectively or efficiently
support our changing business requirements.
 
 Any
substantial increase in service activities or transaction volume on the World
Energy Exchange and the World Green Exchange may require us to expand and
upgrade our technology, transaction processing systems and network
infrastructure. There can be no assurance that we will be able to successfully
do so, and any failure could have a material adverse effect on our business,
results of operations and financial condition.
 
 Breaches of
online security could damage or disrupt our reputation and our ability to
do
business.
 
 To
succeed, online communications must provide a secure transmission of
confidential information over public networks. Security measures that are
implemented may not always prevent security breaches that could harm our
business. Although to our knowledge we have never experienced a breach of online
security, compromise of our security could harm our reputation, cause users to
lose confidence in our security systems and to not source their energy using our
auction platform and also subject us to lawsuits, sanctions, fines and other
penalties. In addition, a party who is able to circumvent our security measures
could misappropriate proprietary information, cause interruptions in our
operations, damage our computers or those of our users, or otherwise damage our
reputation and business. Our insurance policies may not be adequate to reimburse
us for losses caused by security breaches.
 
 We may
need to expend significant resources to protect against security breaches or to
address problems caused by breaches. These issues are likely to become more
difficult and costly as our business expands.
 
 To the extent
that we expand our operations into foreign markets, additional costs
and risks
associated with doing business internationally will apply.
 14
 We
currently outsource certain data and programming activities in Eastern Europe.
It is possible that we will have international operations in the near future.
These operations may include the brokering of green credits in countries
signatory to the Kyoto Protocol and the brokering of energy in other geographic
markets where we believe the demand for our services may be strong. To the
extent we enter geographic markets outside of the United States, our
international operations will be subject to a number of risks and potential
costs, including:
 
 •
                different
      regulatory requirements governing the energy
  marketplace;
 
 •
                difficulty
      in establishing, staffing and managing international
      operations;
 
 •
                regulatory
      regimes governing the Internet and auctioneering that may limit or prevent
      our operations in some
jurisdictions;
 
 •
                different
      and more stringent data privacy
laws;
 
 •
                differing
      intellectual property laws;
 
 •
                differing
      contract laws that prevent the enforceability of agreements between energy
      suppliers and energy consumers;
 
 •
                the
      imposition of special taxes, including local taxation of our fees or of
      transactions through our exchange;
 
 •
                strong
      local competitors;
 
 •
                currency
      fluctuations; and
 
 •
                political
      and economic instability.
 
 Our
failure to manage the risks associated with international operations could limit
the future growth of our business and adversely affect our operating results. We
may be required to make a substantial financial investment and expend
significant management efforts in connection with any international
expansion.
 
 The application
of taxes including sales taxes and other taxes could negatively affect our
business.
 
 The
application of indirect taxes (such as sales and use tax, value added tax, goods
and services tax, business tax, and gross receipt tax) to e-commerce businesses
and our users is a complex and evolving issue. Many of the fundamental statutes
and regulations that impose these taxes were established before the growth of
the Internet and e-commerce. In many cases, it is not clear how existing
statutes apply to the Internet or e-commerce. In addition, some jurisdictions
have implemented or may implement laws specifically addressing the Internet or
some aspect of e-commerce. The application of existing or future laws could have
adverse effects on our business.
 
 Several
proposals have been made at the United States state and local level that would
impose additional taxes on the sale of goods and services through the Internet.
These proposals, if adopted, could substantially impair the growth of
e-commerce, and could diminish our opportunity to derive financial benefit from
our activities. The United States federal government’s moratorium on states and
other local authorities imposing access or discriminatory taxes on the Internet,
which was scheduled to expire on November 1, 2007, has been extended by seven
years. This moratorium, however, does not prohibit federal, state, or local
authorities from collecting taxes on our income or generally from collecting
taxes that are due under existing tax rules.
 
 In
conjunction with the Streamlined Sales Tax Project — an ongoing, multi-year
effort by certain state and local governments to require collection and
remittance of distant sales tax by out-of-state sellers — bills have been
introduced in the U.S. Congress to overturn the Supreme Court’s Quilldecision, which limits
the ability of state governments to require sellers outside of their own state
to collect and remit sales taxes on goods purchased by in-state residents. An
overturning of the Quilldecision would harm our users and our business.
 
 The
passage of new legislation and the imposition of additional tax requirements
could increase the costs to energy suppliers and energy consumers using our
auction platform and, accordingly, could harm our business. There have been, and
will continue to be, ongoing costs associated with complying with the various
indirect tax requirements in the numerous states, localities or countries in
which we currently conduct or will conduct business.
 
 U.S. federal
or state legislative or regulatory reform of the current systems governing
commodities or energy may affect our ability to conduct our business
profitably.
 
 We are
currently not regulated as an energy provider, broker or commodities dealer.
Changes to the laws or regulations governing activities related to commodities
trading or energy procurement, supply, distribution or sale, or transacting in
energy-related products or securities could adversely affect the profitability
of our brokerage operations or even our ability to conduct auctions. In
addition, our future lines of business under consideration, including
transacting in green credits, could subject us to
 15
 additional
regulation. Changes to the current regulatory framework could result in
additional costs and expenses or prohibit certain of our current business
activities or future business plans. We cannot predict the form any such
legislation or rule making may take, the probability of passage, and the
ultimate effect on us.
 
 We
may expand our business through acquisition of other businesses and technologies
which will present special risks.
 
 We may
expand our business in certain areas through the acquisition of businesses,
technologies, products and services from other businesses. Acquisitions involve
a number of special problems, including:
  •
                  the
      need to incur additional indebtedness, issue stock or use cash in order to
      complete the acquisition;
  •
                difficulty
      integrating acquired technologies, operations and personnel with the
      existing business;
  •
                diversion
      of management attention in connection with both negotiating the
      acquisitions and integrating the
assets;
  •
                strain
      on managerial and operational resources as management tries to oversee
      larger operations;
  •
                the
      funding requirements for acquired companies may be
      significant;
  •
                exposure
      to unforeseen liabilities of acquired
companies;
  •
                increased
      risk of costly and time-consuming litigation, including stockholder
      lawsuits; and
  •
                  potential
      issuance of securities in connection with an acquisition with rights that
      are superior to the rights of our common stockholders, or which may have a
      dilutive effect on our common
stockholders.
  We may
not be able to successfully address these problems. Our future operating results
will depend to a significant degree on our ability to successfully integrate
acquisitions and manage operations while also controlling expenses and cash
burn.
 
 Risks
Relating to Intellectual Property
 
 We may be unable
to adequately protect our intellectual property, which could harm us
and affect
our ability to compete effectively.
 
 We have
developed proprietary software, logos, brands, service names and web sites,
including our proprietary auction platform. Although we have taken certain
limited steps to protect our proprietary intellectual property (including
consulting with outside patent and trademark counsel regarding protection of our
intellectual property and implementing a program to protect our trade secrets),
we have not applied for any patents with respect to our auction platform. We
have registered the following trademarks in the United States: World Energy
Solutions, World Green Exchange, and World Energy Exchange, and we filed
applications for these trademarks internationally. The steps we have taken to
protect our intellectual property may be inadequate to deter misappropriation of
our proprietary information or deter independent development of similar
technologies by others. We may not be able to prevent the unauthorized
disclosure or use of our technical knowledge or trade secrets by consultants,
vendors, former employees and current employees, despite the existence of
confidentiality agreements and other contractual restrictions. If our
intellectual property rights are not adequately protected, we may not be able to
continue to commercialize our services. We may be unable to detect the
unauthorized use of, or take adequate steps to enforce, our intellectual
property rights. In addition, certain of our trade names may not be eligible for
protection if, for example, they are generic or in use by another party.
Accordingly, we may be unable to prevent competitors from using trade names that
are confusingly similar or identical to ours.
 
 Our auction
platform, services, technologies or usage of trade names could infringe
the
intellectual property rights of others, which may lead to litigation that
could itself be costly,
could result in the payment of substantial damages or royalties, and/or prevent us
from using technology that is essential to our business.
 
 Although
no third party has threatened or alleged that our auction platform, services,
technologies or usage of trade names infringe their patents or other
intellectual property rights, we cannot assure you that we do not infringe the
patents or other intellectual property rights of third parties.
 
 Infringement
and other intellectual property claims and proceedings brought against us,
whether successful or not, could result in substantial costs and harm to our
reputation. Defending our intellectual property rights could result in the
expenditure of significant financial and managerial resources, which could
adversely affect our business, financial condition, and operating results. If
our business is successful, the possibility may increase that others will assert
infringement claims against us.
 
 We use
intellectual property licensed from third parties in our operations. There is a
risk that such licenses may be terminated, which could significantly disrupt our
business. In such an event, we may be required to spend significant time and
money to develop a non-infringing system or process or license intellectual
property that does not infringe upon the rights of that other party or to obtain
a license for the intellectual property from the owner. We may not be successful
in that development or any such license may not be available on commercially
acceptable terms, if at all. In addition, any litigation could be lengthy and
costly and could adversely affect us even if we are successful in such
litigation.
 16
 Our
corporate name and certain of our trade names may not be eligible for protection
if, for example, they are generic or in use by another party. We may be unable
to prevent competitors from using trade names or corporate names that are
confusingly similar or identical to ours. A company organized under the laws of
the State of Florida and whose shares are publicly traded under the symbol
“WEGY” also operates under the name “World Energy Solutions, Inc.” According to
its filings with the SEC, this other company changed its name to “World Energy
Solutions” in November 2005, and is in the business of energy conservation
technologies and environmental sustainability. This appears to be a different
business than ours. On January 26, 2009, we entered into a settlement agreement
with WEGY pursuant to which WEGY has agreed to change its legal name, cease
use of the phrase “World Energy Solutions”, and transfer the domain name
“worldenergysolutionsinc.com” to us.
 
 Risks
Relating to Ownership of Our Common Stock
 
 Because there is
a limited trading history for our common stock and our stock price may be volatile,
you may not be able to resell your shares at or above your purchase
price.
 
 We cannot
predict the extent to which investors’ interests will provide an active trading
market for our common stock or whether the market price of our common stock will
be volatile. The market for early stage Internet and technology stocks has been
extremely volatile. The following factors, many of which are outside of our
control, could cause the market price of our common stock to decrease
significantly from recent prices:
 
 •
                loss
      of any of the major energy consumers or suppliers using our auction
      platform;
 
 •
                departure
      of key personnel;
 
 •
                variations
      in our quarterly operating results;
 
 •
                announcements
      by our competitors of significant contracts, new transaction capabilities,
      enhancements, lower fees, acquisitions, distribution partnerships, joint
      ventures or capital commitments;
 
 •
                changes
      in governmental regulations and standards affecting the energy industry
      and our products, including implementation of additional regulations
      relating to consumer data privacy;
 
 •
                decreases
      in financial estimates by equity research
  analysts;
 
 •
                sales
      of common stock or other securities by us in the
  future;
 
 •
                decreases
      in market valuations of Internet or technology
      companies; and
 
 •
                fluctuations
      in stock market prices and volumes.
 
 In the
past, securities class action litigation often has been initiated against a
company following a period of volatility in the market price of the company’s
securities. If class action litigation is initiated against us, we will incur
substantial costs and our management’s attention will be diverted from our
operations. All of these factors could cause the market price of our stock to
decline, and you may lose some or all of your investment. Also due to the size
of the market capitalization of our shares, and the fact that we are only
publicly listed on the TSX, the market for our common stock may be volatile and
may not afford a high level of liquidity.
 
 Future sales of
our common stock by persons who were stockholders prior to our initial public
offering or who required restricted securities that became available for public
resale could cause our stock price to
decline.
 
 A
substantial portion of our stockholders prior to our initial public offering
were subject to lock-up agreements with the underwriters that restricted their
ability to transfer their stock for at least 365 days after the date of the
offering. On November 30, 2007, these lock-up provisions expired and an
additional 43,368,733 shares of our common stock became eligible for sale
in the public market. In addition, in January 2007 we filed a registration
statement with the SEC covering all of the shares subject to options
outstanding, but not exercised, and all of the shares available for future
issuance under our stock incentive plans. In November 2007, we filed a
registration statement with the SEC covering all of the shares issued to the
former owner of the EnergyGateway shares.  The perception in the
public market that our stockholders might sell shares of common stock could also
depress the market price of our common stock.  A decline in the price
of shares of our common stock might impede our ability to raise capital through
the issuance of additional shares of our common stock or other equity
securities, and may cause you to lose part or all of your investment in our
shares of common stock.
 
 Massachusetts
Capital Resource Company holds certain piggy-back and demand registration rights
with respect to 600,000 shares. Certain underwriters for our initial public
offering have piggy-back registration rights with respect to shares
 17
 issuable
upon exercise of the warrants issued in connection with our initial public
offering. In the event that the holders of registration rights were to exercise
such rights, upon registration of the shares of our common stock in connection
with any such exercises, sales of a substantial number of shares of our common
stock in the applicable public market could occur. Such sales, or the perception
in such market that the holders of a large number of shares intend to sell
shares, could reduce the market price of our common stock.
  Our directors and
executive officers have substantial control over us and could
limit your ability to influence the outcome of key transactions,
including changes of control.
 
 As of
February 20, 2009, our executive officers and directors and entities affiliated
with them, beneficially own, in the aggregate, approximately 27% of our
outstanding common stock. In particular, Richard Domaleski, our chief executive
officer, beneficially owns approximately 22% of our outstanding common stock.
Our executive officers, directors and affiliated entities, if acting together,
would be able to control or influence significantly all matters requiring
approval by our stockholders, including the election of directors and the
approval of mergers or other significant corporate transactions. These
stockholders may have interests that differ from yours, and they may vote in a
way with which you disagree and that may be adverse to your interests. The
concentration of ownership of our common stock may have the effect of delaying,
preventing or deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of a sale of our company, and may affect the market price of our common
stock.
 
 Our corporate
documents and Delaware law make a takeover of our company more difficult, we
have a classified board of directors and certain provisions of our certificate of
incorporation and by-laws require a super-majority vote to amend, all
of which
may prevent certain changes in control and limit the market price of our
common
stock.
 
 Our
charter and by-laws contain provisions that might enable our management to
resist a takeover of our company. Our certificate of incorporation and by-laws
establish a classified board of directors such that our directors serve
staggered three-year terms and do not all stand for re-election every year. In
addition, any action required or permitted to be taken by our stockholders at an
annual meeting or special meeting of stockholders may only be taken if it is
properly brought before the meeting and may not be taken by written action in
lieu of a meeting, and special meetings of the stockholders may only be called
by the chairman of the Board, the Chief Executive Officer or our Board. Further,
our certificate of incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of 75% of our shares of capital
stock entitled to vote, and any vacancy on our Board, including a vacancy
resulting from an enlargement of our Board, may only be filled by vote of a
majority of our directors then in office. In addition, our by-laws establish an
advance notice procedure for stockholder proposals to be brought before an
annual meeting of stockholders, including proposed nominations of persons for
election to the Board. These provisions of our certificate of incorporation and
by-laws, including those setting forth the classified board, require a
super-majority vote of stockholders to amend. These provisions might discourage,
delay or prevent a change in the control of our company or a change in our
management. These provisions could also discourage proxy contests and make it
more difficult for you and other stockholders to elect directors and take other
corporate actions. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of our common
stock.
 
 We may choose not
to continue to file periodic reports with the SEC if we are not required to do
so, which would limit the information available about us in the
United States, and because we are not listed on a United States exchange, we do
not have the same disclosure and corporate governance obligations as
a company
that is so listed.
 
 Under
United States securities laws, we are required to file informational reports
about us with the SEC, including periodic reports on Forms 10-K and 10-Q
and current reports on Form 8-K. However, unless we list our shares on a
market located in the United States, our obligation to file those reports will
be suspended as to any year in the event that our shares are held by fewer than
300 stockholders of record as of the beginning of that year. In such an event,
we may choose not to file those reports and the information you would thereafter
receive about us would be limited. We may choose not to file those reports for
cost or other reasons. In addition, in the event we are not required to be a
reporting issuer under the Exchange Act we will no longer be subject to certain
rules intended to protect U.S. investors, such as the Sarbanes-Oxley Act.
Our determination not to file those reports could have the result of limiting
the market for our shares, and thereby have a negative effect on our stock
price. Should we not have an obligation to file periodic reports in accordance
with United States securities laws, we expect to file periodic reports in
compliance with National Instrument 51-102 of the Canadian securities regulators
so long as shares of our common stock are listed on the TSX.
 
 Our
shares are registered on the TSX and not on any U.S. exchange. Because we
are not currently listed on any U.S. exchange, we do not have the same
disclosure and corporate governance obligations as companies that are listed on
a U.S. exchange. However, we are subject to corporate governance and
disclosure requirements of companies listed on the TSX and as a result of being
a reporting issuer in each of the provinces of Canada.
 18
 Item
1B.  Unresolved Staff Comments
 
 None.
   Item
2.  Properties
 
 We do not
own any real property. We lease the business premises in the following locations
for the stated principal uses:
 
 Location
                Approximate
                  Floor
      Space
                  (Square
      Feet)
                
                Principal
      Use446
      Main Street, Worcester, Massachusetts (1)
                7,458
                
                Executive
      office and general administration1215
      19th Street
      NW, Washington, District of Columbia (2)
                400
                
                Branch
      office1035
      Pearl Street, Boulder, CO (3)
                178
                
                Branch
      office10001
      Woodloch Forest Drive, The Woodlands, TX (4)
                2,027
                
                Branch
      office770
      East Market Street, West Chester, PA (5)
                575
                
                Branch
      office4495
      Bradenton Avenue, Dublin OH (6)
                4,500
                
                Branch
      office
 
 Note:
 
 (1)
                Pursuant
      to two lease agreements with Sovereign Bank expiring December 31, 2009, at
      a monthly rate escalating to $11,931 in 2009, plus operating expenses and
      taxes.(2)
                Pursuant
      to a five-year lease agreement with Roosevelt Land, LP expiring July 16,
      2011, at a monthly rate of $5,000, plus operating expenses and
      taxes.(3)
                Pursuant
      to a one-year lease agreement with Kabili, LLC expiring August 31, 2009,
      at a monthly rate of $1,150, plus certain operating
    expenses.(4)
                Pursuant
      to a five-year lease agreement with NNN Waterway Plaza, expiring March 31,
      2012, at a monthly rate escalating to $5,574, plus operating expenses and
      taxes.(5)
                Pursuant
      to a two-year lease agreement with High Associates LTD expiring December
      31, 2009, at a monthly rate escalating to $970, plus certain operating
      expenses.(6)
                Pursuant
      to a 62-month lease agreement with Rickert Property Management, expiring
      July 31, 2012, a monthly rate escalating to $3,750, plus operating
      expenses and taxes.
 
  Item 3.  Legal
Proceedings
 
 From time
to time we may be a party to various legal proceedings arising in the ordinary
course of our business. Our management is not aware of any litigation
outstanding, threatened or pending as of the date hereof by or against us or our
properties which we believe would be material to our financial condition or
results of operations.
 
  Item
4.  Submission of Matters to a Vote of Security
Holders
 
 Not
applicable.
  19
 PART
II
 
 Item 5.  Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 
 Our
common stock (Symbol “XWE”) began trading on the TSX on November 16,
2006.  Prior to this date, there was no established public trading
market for our common stock.  Our common stock does not currently
trade on a U.S. national market.
 
 The
following table sets forth the high and low closing prices per share reported on
TSX for the periods shown (in U.S. $’s):
 
 High
                
                Low2008:First
      quarter
                $0.96
                
                $0.70Second
      quarter
                $1.42
                
                $0.88Third
      quarter
                $1.14
                
                $0.37Fourth
      quarter
                $0.44
                
                $0.142007:First
      quarter
                $1.00
                
                $0.82Second
      quarter
                $1.53
                
                $0.82Third
      quarter
                $1.77
                
                $1.08Fourth
      quarter
                $1.31
                
                $0.55
 
 On
February 20, 2009, the last reported sale price of our common stock on TSX was
CAD$0.37 per share and there were 136 holders of record of our common
stock.
 
 We have
never declared or paid any cash dividends on our common stock.  We
currently intend to retain our future earnings, if any, to finance the expansion
of our business and do not expect to pay any dividends in the foreseeable
future.
 
 Information
regarding our equity compensation plans required by this item is incorporated by
reference to the information appearing under the caption “Equity Compensation
Plan Information” in our definitive Proxy Statement for the 2009 Annual Meeting
of Stockholders.
  Use of Proceeds from Registered
Securities
  We
registered shares of our common stock in connection with our initial public
offering concurrently in Canada under the terms of a Supplemented Prep
Prospectus dated November 9, 2006 and in the United States under the Securities
Act. Our Registration Statement on Form S-1 (No. 333-136528) in connection with
our initial public offering was declared effective by the SEC on November 9,
2006. As of December 31, 2008, we
have used approximately $16 million of the net proceeds of the initial public
offering to redeem our long-term debt, to acquire the assets of Energy Gateway,
for working capital and to fund operations.  The remaining net
proceeds of the initial public offering are invested in short-term, highly
liquid money market accounts with an original maturity of 90 days or
less.There has been no material change in the planned use of
proceeds from our initial public offering as described in our final prospectus
filed with the SEC pursuant to Rule 424(b).
  Recent Sales of Unregistered
Securities
  None.
  Repurchase of Equity
Securities
  None.
 
 20
 Item 6. Selected
Consolidated Financial Data
 
 The
following table summarizes our consolidated financial data for the periods
presented. You should read the following financial information together with the
information under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our consolidated financial statements and the
notes to those consolidated financial statements appearing elsewhere in this
annual report. The selected consolidated statements of operations data for the
fiscal years ended December 31, 2008, 2007 and 2006, and the selected
consolidated balance sheet data as of December 31, 2008 and 2007 are
derived from the audited consolidated financial statements, which are included
elsewhere in this document. The selected consolidated statements of operations
data for the years ended December 31, 2005 and 2004, and the consolidated
balance sheet data at December 31, 2006, 2005 and 2004 are derived from our
audited consolidated financial statements not included in this
document.  The financial data reflects the Company’s acquisition of
EnergyGateway as of June 1, 2007.  Historical results are not
necessarily indicative of the results to be expected in future
periods.
 
  For the Years Ended
      December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Consolidated
      Statement of Operations Data:Revenue
                
                $
                12,444,692
                
                
                $
                9,188,265
                
                
                $
                5,763,098
                
                
                $
                4,673,987
                
                
                $
                3,191,660Cost
      of revenue
                
                
                4,552,215
                
                
                
                2,874,678
                
                
                
                1,166,426
                
                
                
                648,410
                
                
                
                563,972Gross
      profit
                
                
                7,892,477
                
                
                
                6,313,587
                
                
                
                4,596,672
                
                
                
                4,025,577
                
                
                
                2,627,688Operating
      expenses:Sales and
      marketing
                
                
                10,057,361
                
                
                
                8,598,256
                
                
                
                3,227,263
                
                
                
                2,649,786
                
                
                
                1,814,799General and
      administrative
                
                
                4,669,807
                
                
                
                5,858,810
                
                
                
                1,862,450
                
                
                
                995,703
                
                
                
                710,462Total
      operating expenses
                
                
                14,727,168
                
                
                
                14,457,066
                
                
                
                5,089,713
                
                
                
                3,645,489
                
                
                
                2,525,261Operating
      income (loss)
                
                
                (6,834,691
                )
                
                
                (8,143,479
                )
                
                
                (493,041
                )
                
                
                380,088
                
                
                
                102,427Other
      income (expense), net(1)
                
                
                39,531
                
                
                
                563,294
                
                
                
                (312,280
                )
                
                
                (86,838
                )
                
                
                960,524Income
      (loss) before income taxes
                
                
                (6,795,160
                )
                
                
                (7,580,185
                )
                
                
                (805,321
                )
                
                
                293,250
                
                
                
                1,062,951Income
      tax (expense) benefit
                
                
                —
                
                
                
                (1,061,720
                )
                
                
                304,228
                
                
                
                754,000
                
                
                
                —Net
      income
      (loss)
                
                
                (6,795,160
                )
                
                
                (8,641,905
                )
                
                
                (501,093
                )
                
                
                1,047,250
                
                
                
                1,062,951Accretion
      of preferred stock issuance costs
                
                
                —
                
                
                
                —
                
                
                
                (6,299
                )
                
                
                (7,199
                )
                
                
                (7,199
                )Net
      income (loss) available to common stockholders
                
                $
                (6,795,160
                )
                
                $
                (8,641,905
                )
                
                $
                (507,392
                )
                
                $
                1,040,051
                
                
                $
                1,055,752Net
      income (loss) available to common stockholders per share:Basic
      Voting
                
                $
                (0.08
                )
                
                $
                (0.11
                )
                
                $
                (0.01
                )
                
                $
                0.02
                
                
                $
                0.02Basic
      Non-Voting
                
                $
                —
                
                
                $
                —
                
                
                $
                —
                
                
                $
                0.02
                
                
                $
                0.02Diluted
      Voting and Non-Voting
                
                $
                (0.08
                )
                
                $
                (0.11
                )
                
                $
                (0.01
                )
                
                $
                0.02
                
                
                $
                0.02Weighted
      average shares outstanding — Basic:Voting
      Common Stock
                
                
                83,103,145
                
                
                
                79,793,590
                
                
                
                45,576,477
                
                
                
                33,049,472
                
                
                
                32,058,759Non-Voting
      Common Stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                6,778,327
                
                
                
                2,880,592Total
      Common Stock-Basic
                
                
                83,103,145
                
                
                
                79,793,590
                
                
                
                45,576,477
                
                
                
                39,827,799
                
                
                
                34,939,351Weighted
      Average Shares Outstanding — Diluted:
                
                
                83,103,145
                
                
                
                79,793,590
                
                
                
                45,576,477
                
                
                
                54,506,566
                
                
                
                52,096,206
 ____________
 (1)
                Other
      income (expense) for the year ended December 31, 2004 includes a gain
      of $1,062,775 from extinguishment of
debt.
    As of December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                
                $
                1,731,411
                
                
                $
                7,001,884
                
                
                $
                17,483,886
                
                
                $
                1,584,066
                
                
                $
                49,389Working
      capital
                
                
                742,478
                
                
                
                5,323,622
                
                
                
                16,639,898
                
                
                
                1,372,542
                
                
                
                (882,162
                )Total
      assets
                
                
                14,776,640
                
                
                
                20,800,565
                
                
                
                20,791,381
                
                
                
                3,787,842
                
                
                
                941,688Long-term
      liabilities
                
                
                3,737
                
                
                
                46,222
                
                
                
                87,844
                
                
                
                1,879,745
                
                
                
                150,368Series A
      redeemable convertible preferred stock
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,501,698
                
                
                
                1,494,499Accumulated
      deficit
                
                
                (19,648,432
                )
                
                
                (12,853,272
                )
                
                
                (4,211,367
                )
                
                
                (3,710,274
                )
                
                
                (4,747,524
                )Total
      stockholders’ equity (deficit)
                
                $
                11,009,131
                
                
                $
                16,859,799
                
                
                $
                17,945,002
                
                
                $
                (938,883
                )
                
                $
                (2,241,134
                )
 
  21
 Item
7.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
 You should read the following
discussion and analysis of our financial condition and results of operations together with
our consolidated financial statements and related notes appearing elsewhere in this
Annual Report on Form 10-K. Some of the information contained in this discussion and analysis
includes forward-looking statements that involve risks and uncertainties.
You should review the “Risk
Factors” section of this Annual Report for a discussion of important factors that could cause
actual results to differ materially from the results described in or implied by
the forward-looking statements contained in the following discussion and
analysis.
 
 Overview
 
 World
Energy is an energy and environmental commodities brokerage company that has
developed online auction platforms, the World Energy Exchange and the World
Green Exchange. On the World Energy Exchange, CIG or retail energy consumers and
wholesale energy participants (utilities, electricity retailers, and
intermediaries) in the United States are able to negotiate for the purchase or
sale of electricity and other energy resources from competing energy suppliers
which have agreed to participate on our auction platform. The World Energy
Exchange is supplemented with information about market rules, pricing trends,
energy consumer usage and load profiles. Our procurement staff uses this auction
platform to conduct auctions, analyze results, guide energy consumers through
contracting, and track their contracts, sites, accounts and usage history.
Although our primary source of revenue is from brokering electricity and natural
gas, we adapted our World Energy Exchange auction platform to accommodate the
brokering of green power in 2003 (i.e. electricity generated by renewable
resources), wholesale electricity in 2004 and certain other energy-related
products in 2005.  In 2007, we created the World Green Exchange based
on the World Energy Exchange technology and business process.  On the
World Green Exchange, buyers and sellers negotiate for the purchase or sale of
environmental commodities such as Renewable Energy Certificates, Verified
Emissions Reductions, Certified Emissions Reductions and Regional Greenhouse Gas
Initiative allowances.
 
 On June
1, 2007, we acquired substantially all of the assets of EG Partners, LLC,
formerly known as EnergyGateway LLC (EnergyGateway) for $4,951,758 in cash and
5,375,000 of our common shares plus the assumption of certain
liabilities.  The EnergyGateway operations are included in our
financial statements from June 1, 2007. EnergyGateway provided online energy
procurement and value-added energy services to customers in many major
industries in the U.S. and Canada, from large multi-site Fortune 500 industrials
to middle-market manufacturing and small commercial operations.
 
 Since our
initial public offering (IPO) in November 2006, we have aggressively grown the
Company from 20 employees to 55 employees as of December 31, 2008. This planned
investment has allowed us to pursue our strategic initiatives as outlined in our
IPO growing our revenue by over 200%. Our cost structure has increased
correspondingly. The majority of our infrastructure investment was made during
the first 9-months of 2007 and our fixed operating cost structure has remained
stable since the fourth quarter of 2007 and declined in the latter half of 2008.
We believe that our fixed operating cost structure will remain at, or decrease
from, current levels in the short-term. However, a portion of our operating
costs, including channel partner and internal commission structures, are
variable in nature and will increase as revenue levels increase. While we do
expect there will be changes within our workforce in the future, we believe that
we have the necessary resources to pursue our strategic
initiatives.
 
 Beginning
in the latter half of the first quarter and continuing into the early part of
the third quarter, there was a sharp rise in electricity and natural gas
prices.  We believe that these increases caused some of our customers
in our wholesale and retail product lines to delay their energy procurement
decisions.  Based on our prior experience with rapid increases in
commodity prices, we believe that customers who have delayed their procurement
decisions will come back to transact on our platform either when they are
required to renew their contract due to expiration, prices decrease to a level
at which they are comfortable, or if they believe that the then-present
environment represents a new market level. During the latter part of July 2008
we began to observe a contraction in electricity and natural gas prices. We
believe this contraction contributed to an increase in procurement activity in
both the retail and wholesale product lines in the third and fourth quarters of
2008 as compared to levels in the second quarter.
 
 U.S. and
global economic conditions worsened significantly in the last quarter of 2008.
The stress caused to international credit markets, initially driven in large
part by the devaluation of risky U.S. subprime debt, led to a dramatic
tightening in liquidity. The U.S. government has responded with several
initiatives to alleviate the strain on the financial markets. While these
programs have had some positive effects on financial systems, credit remains
tight and economic conditions in the U.S. and globally have continued to
deteriorate. As a result of the decline in economic output, energy demand in
many regions is lower, which could lead to reduced sales and lower margins.
While we did experience a slight decline in energy usage during the fourth
quarter, energy demand was still within our long-term historical trends and did
not have a material impact on our operations.
 22
 Operations
 
 Revenue
 
 Retail Electricity
Transactions
 
 We
receive a monthly commission on energy sales contracted through our online
auction platform from each energy supplier based on the energy usage generated
and transacted between the energy supplier and energy consumer. Our commissions
are not based on the retail price for electricity; rather, commissions are based
on the energy usage generated and transacted between the energy supplier and
energy consumer multiplied by our contractual commission rate. Our contractual
commission rate is negotiated with the energy consumer on a
procurement-by-procurement basis based on energy consumer specific
circumstances, including size of auction, internal effort required to organize
and run the respective auction and competitive factors, among others. Once the
contractual commission is agreed to with the energy consumer, all energy
suppliers participating in the auction agree to that rate. That commission rate
remains fixed for the duration of the contractual term regardless of energy
usage. Energy consumers provide us with a letter of authority to request their
usage history from the local utility. We then use this data to compile a usage
profile for that energy consumer that will become the basis for the auction.
This data may also be used to estimate revenue on a going forward basis, as
noted below.
 
 Historically,
our revenue and operating results have varied from quarter-to-quarter and are
expected to continue to fluctuate in the future. These fluctuations are
primarily due to energy usage, particularly electricity, having higher demand in
our second and third quarters and lower demand during our fourth and first
quarters. In addition, the activity levels on the World Energy Exchange can
fluctuate due to a number of factors, including geopolitical events, the ability
to obtain financing in credit markets, weather conditions and market prices. To
the extent these factors affect the purchasing decisions of energy consumers our
future results of operations may be affected.
 
 Contracts
between energy suppliers and energy consumers are signed for a variety of term
lengths, with a one year contract term being typical for commercial and
industrial energy consumers, and government contracts typically having two to
three year terms. As a result of recent commodity price fluctuations, we have
seen our commercial and industrial customers contracting for multiple year
terms. Our revenue has grown over the last three years through new participants
utilizing our World Energy Exchange as well as energy consumers increasing the
size or frequency of their transactions on our exchange platform.
 
 We
generally do not directly invoice our electricity energy suppliers and,
therefore, we report a substantial portion of our receivables as “unbilled.”
Unbilled accounts receivable represents management’s best estimate of energy
provided by the energy suppliers to the energy consumers for a specific
completed time period at contracted commission rates and is made up of two
components. The first component represents energy usage for which we have
received actual data from the supplier and/or the utility, but for which payment
has not been received at the balance sheet date. The majority of our contractual
relationships with energy suppliers require them to supply actual usage data to
us on a monthly basis and remit payment to us based on that usage. The second
component represents energy usage for which we have not received actual data,
but for which we have estimated usage.
 
 Retail Natural Gas
Transactions
 
 There are
two primary fee components to our retail natural gas services - transaction fees
and management fees.  Transaction fees are billed to and paid by the
energy supplier awarded business on the platform.  Transaction fees
for natural gas and electricity awards are established prior to award and are
the same for each supplier.  For the majority of our natural gas
transactions, we bill the supplier upon the conclusion of the transaction based
on the estimated energy volume transacted for the entire award term multiplied
by the transaction fee.  Management fees are paid by our energy
consumers and are generally billed on a monthly basis for services rendered
based on terms and conditions included in contractual arrangements. While
substantially all of our retail natural gas transactions are accounted for in
accordance with this policy, a certain percentage is accounted for as the
natural gas is consumed by the customer and recognized as revenue in accordance
with the retail electricity transaction revenue recognition methodology
described above.
 
 Wholesale and Environmental
Commodity Transactions
 
 For
wholesale energy and environmental commodity transactions, substantially all
transaction fees are invoiced upon the conclusion of the auction based on a
fixed fee.  These revenues are not tied to future energy usage and are
recognized upon the completion of the online auction.  For reverse
auctions where our customers bid for a consumer’s business, the fees are paid by
the bidder. For forward auctions where a lister is selling energy or credits,
the fees are typically paid by the lister. In addition, revenue may not be
recognized on certain green transactions until the credits being auctioned have
been verified and/or delivered. While substantially all wholesale and green
transactions are accounted for in this fashion, a small percentage of our
wholesale revenue is accounted for as electricity or gas is delivered similar to
the retail electricity transaction methodology described above.
 23
 Cost
of revenue
 
 Cost of
revenue consists primarily of:
 
 •
                salaries,
      employee benefits and stock-based compensation associated with our auction
      management services, which are directly related to the development and
      production of the online auction and maintenance of market-related data on
      our auction platform and monthly management fees (our supply desk
      function);
 
 •
                amortization
      of capitalized costs associated with our auction platform and acquired
      developed technology; and
 
 •
                rent,
      depreciation and other related overhead and facility-related
      costs.
 
 
 Sales
and marketing
 
 Sales and
marketing expenses consist primarily of:
 
 •
                salaries,
      employee benefits and stock-based compensation related to sales and
      marketing personnel;
 
 •
                third
      party commission expenses to our channel
  partners;
 
 •
                travel
      and related expenses;
 
 •
                amortization
      related to customer relationships and
contracts;
 
 •
                rent,
      depreciation and other related overhead and facility-related costs;
      and
 
 •
                general
      marketing costs such as trade shows, marketing materials and outsourced
      services.
 
 General
      and administrative
 
 General
and administrative expenses consist primarily of:
 
 •
                salaries,
      employee benefits and stock-based compensation related to general and
      administrative personnel;
 
 •
                accounting,
      legal, recruiting and other professional
  fees; and
 
 •
                rent,
      depreciation and other related overhead and facility-related
      costs.
 
 Interest
income (expense), net
 
 Interest
income (expense), net consists primarily of:
 
 •
                interest
      income in 2008 and 2007 related to the invested portion of the proceeds
      from our initial public offering;
 
 •
                interest
      expense in 2008, 2007 and 2006 related to capital leases;
    and
 
 •
                interest
      expense in 2006 on our $2.0 million subordinated note payable to
      Massachusetts Capital Resource Company, or MCRC, including the accretion
      of warrants, that was redeemed on December 4,
  2006.
 
 Income
tax expense
 
 We did
not record an income tax benefit for the year ended December 31, 2008 as we
provided a full valuation allowance against our deferred tax assets due to
uncertainty regarding the realization of those deferred tax assets, primarily
net operating loss carryforwards, in the future.  Income tax expense
of approximately $1.1 million for the year ended December 31, 2007 resulted from
the application of a full valuation allowance provided against deferred tax
assets generated in prior years.
 24
 Results
of Operations
 
 The
following table sets forth certain items as a percent of revenue for the periods
presented:
 For
      the Years Ended
                  December 31,2008
                
                
                2007
                
                
                2006Revenue
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %Cost
      of revenue
                
                
                37
                
                
                
                31
                
                
                
                20Gross
      profit
                
                
                63
                
                
                
                69
                
                
                
                80Operating
      expenses:Sales
      and marketing
                
                
                81
                
                
                
                94
                
                
                
                56General
      and administrative
                
                
                38
                
                
                
                64
                
                
                
                33Operating
      loss
                
                
                (56
                )
                
                
                (89
                )
                
                
                (9
                )Interest
      income (expense)
                
                
                —
                
                
                
                7
                
                
                
                (5
                )Income
      tax benefit (expense)
                
                
                —
                
                
                
                (12
                )
                
                
                5Net
      loss
                
                
                (56
                )%
                
                
                (94
                )%
                
                
                (9
                )%
 
 
 Comparison
of the Years Ended December 31, 2008 and 2007
 
 Revenue
 
 For
      the Years EndedDecember 31,2008
                
                
                2007
                
                
                IncreaseRevenue
                
                $
                12,444,692
                
                
                $
                9,188,265
                
                
                $
                3,256,427
                
                
                
                35
                %
 
 Revenue
increased 35% primarily due to increased auction activity in all of our product
lines, new customer wins and the inclusion of the EnergyGateway operation for a
full twelve months during the year ended December 31, 2008 as compared to seven
months during the year ended December 31, 2007.  The revenue increase
reflects increased activity in our retail business including the large state
government procurements run during 2007, record bookings generated by our retail
sales force and an increase to 59 channel partners as of December 31, 2008 from
42 as of December 31, 2007. Of those channel partners, 35 had contributed to our
revenue by brokering transactions over the exchange during 2008 as compared to
25 during 2007. In addition, our wholesale customer base grew to 39 in 2008 from
12 in 2007 and 2008 reflected our success in the environmental commodities
product line including the successful completion of the first two quarterly
auctions for RGGI.
 
 Cost
of revenue
 
 For the Years Ended
      December 31,2008
                
                
                2007$
                
                
                % of Revenue
                
                
                $
                
                
                % of Revenue
                
                
                IncreaseCost
      of revenue
                
                $
                4,552,215
                
                
                
                37
                %
                
                $
                2,874,678
                
                
                
                31
                %
                
                $
                1,677,537
                
                
                
                58
                %
 
 The 58%
increase in cost of revenue related to the year ended December 31, 2008 as
compared to the same period in 2007 was substantially due to an increase in
salary and benefit costs primarily from the inclusion of the former
EnergyGateway employees for a full twelve months during the year ended December
31, 2008 as compared to seven months during the year ended December 31, 2007
and, to a lesser extent, increased travel costs and amortization related to
developed technology and intangible assets acquired. Cost of revenue as a
percent of revenue increased 6% due to the cost increases noted above partially
offset by the 35% increase in revenue.
 
 Operating
expenses
 
 For the Years Ended
      December 31,2008
                
                
                2007$
                
                
                % of Revenue
                
                
                $
                
                
                % of Revenue
                
                
                Increase / (Decrease)Sales and
      marketing
                
                $
                10,057,361
                
                
                
                81
                %
                
                $
                8,598,256
                
                
                
                94
                %
                
                $
                1,459,105
                
                
                
                17
                %General and
      administrative
                
                
                4,669,807
                
                
                
                38
                
                
                
                5,858,810
                
                
                
                64
                
                
                
                (1,189,003
                )
                
                
                (20
                )Total
      operating expenses
                
                $
                14,727,168
                
                
                
                119
                %
                
                $
                14,457,066
                
                
                
                158
                %
                
                $
                270,102
                
                
                
                2
                %
 
 The 17%
increase in sales and marketing expense for the year ended December 31, 2008 as
compared to the same period in 2007 primarily reflects general salary increases
and the inclusion of the former EnergyGateway employees for a full twelve months
during the year ended December 31, 2008 as compared to seven months during the
year ended December 31, 2007.  In addition, the increased costs
include amortization related to customer relationships and contracts, partially
offset by decreases in consulting and marketing expenses. Sales and marketing
expense as a percentage of revenue decreased 13% due to the 35% increase in
revenue, partially offset by the cost increases noted above.
 
 The 20%
decrease in general and administrative expenses related to the year ended
December 31, 2008 as compared to the same period in 2007 was primarily due to
decreases in compliance related costs, and, to a lesser extent, recruiting
costs.  General and administrative expenses as a percent of revenue
decreased 26% substantially due to the 35% increase in revenue and the cost
decreases noted above.
 25
 Interest
income (expense), net
 
 Interest
income, net was approximately $40,000 and $563,000 for the years ended December
31, 2008 and 2007, respectively.  The decrease in interest income was
primarily due to a lower average cash balance in 2008 as compared to 2007, as we
utilized the proceeds from our initial public offering to pursue our strategic
initiatives.
 
 Income
tax provision
 
 We did
not record an income tax benefit for the year ended December 31, 2008 as we
provided a full valuation allowance against our deferred tax assets due to
uncertainty regarding the realization of those deferred tax assets, primarily
net operating loss carryforwards, in the future.  Income tax expense
of approximately $1.1 million for the year ended December 31, 2007 resulted from
the application of a full valuation allowance provided against deferred tax
assets generated in prior years.
 
 Net
loss
 
 We
reported a net loss for the year ended December 31, 2008 of approximately $6.8
million as compared to a net loss of approximately $8.6 million for the year
ended December 31, 2007. The decrease in net loss is primarily due to an
increase in revenue and decrease in income tax expense, partially offset by a
decrease in interest income and, to a lesser extent, increased operating
expenses.
 
 Comparison
of the Years Ended December 31, 2007 and 2006
 
 Revenue
 
 For
      the Years EndedDecember 31,2007
                
                
                2006
                
                
                IncreaseRevenue
                
                $
                9,188,265
                
                
                $
                5,763,098
                
                
                $
                3,425,167
                
                
                
                59
                %
 
 Revenue
increased 59% primarily due to increased auction activity in multiple product
lines, new customer wins and the acquisition of the assets of EnergyGateway
during the year ended December 31, 2007 as compared to the same period in
2006.  The revenue increase reflects the growth of our wholesale
customer base to 12 in 2007 from 2 in 2006 as well as an increase to 42 channel
partners as of December 31, 2007 from 29 as of December 31, 2006. Of those
channel partners, 25 had contributed to our revenue by brokering transactions
over the exchange during 2007 as compared to 18 during 2006.
 
 Cost
of revenue
 
 For the Years Ended
      December 31,2007
                
                
                2006$
                
                
                % of Revenue
                
                
                $
                
                
                % of Revenue
                
                
                IncreaseCost
      of revenue
                
                $
                2,874,678
                
                
                
                31
                %
                
                $
                1,166,426
                
                
                
                20
                %
                
                $
                1,708,252
                
                
                
                146
                %
 
 The 146%
increase in cost of revenue related to the year ended December 31, 2007 as
compared to the same period in 2006 was substantially due to the addition of ten
former EnergyGateway employees, an increase in salary and benefit costs
associated with nine new supply desk employees and, to a lesser extent,
amortization related to developed technology acquired. Cost of revenue as a
percent of revenue increased 11% due to the cost increases noted above partially
offset by the 59% increase in revenue.
 
 Operating
expenses
 
 For the Years Ended
      December 31,2007
                
                
                2006$
                
                
                % of Revenue
                
                
                $
                
                
                % of Revenue
                
                
                IncreaseSales and
      marketing
                
                $
                8,598,256
                
                
                
                94
                %
                
                $
                3,227,263
                
                
                
                56
                %
                
                $
                5,370,993
                
                
                
                166
                %General and
      administrative
                
                
                5,858,810
                
                
                
                64
                
                
                
                1,862,450
                
                
                
                33
                
                
                
                3,996,360
                
                
                
                215Total
      operating expenses
                
                $
                14,457,066
                
                
                
                158
                %
                
                $
                5,089,713
                
                
                
                89
                %
                
                $
                9,367,353
                
                
                
                184
                %
 
 The 166%
increase in sales and marketing expense for the year ended December 31, 2007 as
compared to the same period in 2006 primarily reflects the addition of eleven
new sales and marketing employees, general salary increases and the addition of
the
 26
 former
EnergyGateway employees.  In addition, the increased costs include
amortization related to customer relationships and contracts as well as
increases in travel, consulting and marketing expenses. Sales and marketing
expense as a percentage of revenue increased 38% due to increased costs
discussed above partially offset by the 59% increase in revenue.
 
 The 215%
increase in general and administrative expenses related to the year ended
December 31, 2007 as compared to the same period in 2006 was primarily due to an
increase in legal, audit and other compliance costs, the addition of four
corporate employees, the addition of the former EnergyGateway employees and
assets and increases in benefits, recruiting, and occupancy related costs. The
increase in legal and audit costs were primarily related to increased compliance
and infrastructure activities in support of our growth initiatives, including
compliance with the Sarbanes-Oxley Act and ongoing public company costs and the
acquisition of the assets of EnergyGateway. General and administrative expenses
as a percent of revenue increased 31% substantially due to the cost
increases noted above, partially offset by the 59% increase in
revenue.
 
 Interest
income (expense), net
 
 Interest
income, net was approximately $563,000 for the year ended December 31,
2007.  Interest expense, net was approximately $312,000 for the year
ended December 31, 2006.  Interest income in 2007 was primarily due to
interest earned on the invested portion of the proceeds from our initial public
offering.  Interest expense in 2006 was primarily due to interest paid
on our $2.0 million subordinated note with the MCRC.  This note was
retired in December 2006.
 
 Income
tax provision
 
 We
recorded an income tax provision of approximately $1.1 million for the year
ended December 31, 2007, reflecting the application of a full valuation
allowance provided against deferred tax assets generated in prior years due to
uncertainty regarding the realization of those deferred tax assets, primarily
net operating loss carryforwards, in the future. We recorded an income tax
benefit of approximately $304,000 for the year ended December 31, 2006,
reflecting an effective federal and state tax rate of 38% as we determined that
it was more likely than not that a portion of our deferred tax assets would be
benefited against expected future income.
 
 Net
loss
 
 We
reported a net loss for the year ended December 31, 2007 of approximately $8.6
million as compared to a net loss of approximately $501,000 for the year ended
December 31, 2006. The increase in net loss is primarily due to the higher
operating expenses discussed above and, to a lesser extent, the income tax
provision partially offset by increases in revenue and interest
income.
 
 Liquidity
and Capital Resources
 
 In
November 2005, we received $2.0 million in exchange for a subordinated note
payable to MCRC, which bore interest at the rate of 10% per annum, and
required quarterly interest payments beginning on December 31, 2005. On
December 4, 2006, we exercised our option to redeem the MCRC note without
premium as a result of the completion of our initial public offering. In
connection with the MCRC note redemption, MCRC exercised warrants to purchase
600,000 shares of our common stock.  The remaining warrants to
purchase 2,400,000 shares of common stock did not vest and subsequently expired
due to the successful completion of our initial public offering on November 16,
2006.  The net redemption amount was $1,795,000, including interest
earned through the date of redemption.  For the year ended
December 31, 2006 interest expense related to the subordinated debt was
$437,000.
 
 On
November 16, 2006, we completed our initial public offering of 27,441,064 shares
of common stock at a price of CDN$1.05 (approximately U.S. $0.93) per
share.  The offering was comprised of 20,000,000 shares sold by us for
gross proceeds to us of CDN$21,000,000 and 7,441,064 shares sold by certain
selling stockholders for gross proceeds to such stockholders of approximately
CDN$7,800,000.
 
 On
December 5, 2006, we issued an additional 3,000,000 shares of common stock in
accordance with an over-allotment option granted to the underwriters of the
initial public offering at a price of CDN$1.05 (approximately U.S.$0.92) per
share for gross proceeds to the Company of CDN$3,150,000.  Net
proceeds to us from the initial public offering and over-allotment option were
approximately $17.5 million, net of offering costs of approximately $3.6
million.  In addition, we granted the underwriters of the initial
public offering, warrants to purchase up to 1,150,000 shares of common stock at
the public offering price. The warrants are exercisable from the 1-year
anniversary of the warrant issuance (November 16, 2007 and December 5, 2007 for
the over allotment) and expire 18 months from that date (May 15, 2009 and June
4, 2009 for the over allotment).  The warrants allow for net share
settlement and certain of the holders of these warrants have piggy-back
registration rights.   We valued the warrants at $274,129 and
recorded it as a component of additional paid-in capital. These warrants have
not been exercised to date.
 
 At
December 31, 2008, we had no commitments for material capital expenditures. We
have identified and executed against a number of strategic initiatives that we
believe are key components of our future growth, including: expanding our
community of channel partners, energy consumers and energy suppliers on our
exchanges; strengthening and extending our long-term
 27
 relationships
with government agencies; entering into other energy-related markets including
wholesale transactions with utilities and the emerging environmental credit
markets; making strategic acquisitions and growing our sales
force.  As of December 31, 2008, our workforce numbered 55 reflecting
a decrease of eight from the 63 we employed at December 31, 2007.  At
December 31, 2008, we had 18 professionals in our sales and marketing and
account management groups, 25 in our supply desk group and 12 in our general and
administrative group.  While we will hire additional professionals as
the need and/or opportunity arises, we believe that in the short-term our
operating costs will remain at current levels.
 
 Comparison
of December 31, 2008 to December 31, 2007
 
 December
      31,
                  2008
                
                
                December 31,
                  2007
                
                
                Increase/(Decrease)Cash
      and cash equivalents
                
                $
                1,731,411
                
                
                $
                7,001,884
                
                
                $
                (5,270,473
                )
                
                
                (75
                )%Trade
      accounts receivable
                
                
                2,343,593
                
                
                
                1,878,233
                
                
                
                465,360
                
                
                
                25Days
      sales outstanding
                
                
                62
                
                
                
                56
                
                
                
                6
                
                
                
                11Working
      capital
                
                
                742,478
                
                
                
                5,323,622
                
                
                
                (4,581,144
                )
                
                
                (86
                )Stockholders’
      equity
                
                
                11,009,131
                
                
                
                16,859,799
                
                
                
                (5,850,668
                )
                
                
                (35
                )
 
 Cash and
cash equivalents decreased 75%, primarily due to the pre-tax loss for the year
ended December 31, 2008, an increase in trade accounts receivable, decreases in
accounts payable and accrued expenses and costs incurred in software development
all partially offset by an increase in deferred revenue. Trade accounts
receivable increased 25% primarily due to an increase in revenue and in days
sales outstanding within our accounts receivable balance. Days sales outstanding
(representing account receivable outstanding at December 31, 2008 divided by the
average sales per day during the most recent quarter, adjusted for deferred
revenue of approximately $116,000) increased 11% due to a higher concentration
of retail energy sales as compared to wholesale energy sales during the three
months ended December 31, 2008 versus the same period in the prior year.
Wholesale revenue was 20% of fourth quarter revenue in 2007 versus only 10% in
2008. Revenue from our energy suppliers representing greater than 10% of our
revenue decreased to 22% from one energy supplier during the year ended December
31, 2008 from 32% from two energy suppliers for the same period in 2007. This
decrease was directly related to the addition of the EnergyGateway customers and
an increase in wholesale transactions.
 
 Working
capital (consisting of current assets less current liabilities) decreased 86%,
primarily due to the decrease in cash and cash equivalents resulting from the
funding of the pre-tax loss for the year ended December 31, 2008 and a $0.5
million increase in deferred revenue both partially offset by a $0.5 million
increase in accounts receivable and a $0.6 million decrease in accounts payable
and accrued expenses. Stockholders’ equity decreased 35% due to the net loss for
the year, partially offset by share-based compensation and the exercise of stock
options and warrants.
 
 Cash used
in operating activities for the years ended December 31, 2008 and 2007 was
approximately $4.7 million and $4.6 million, respectively, due primarily to the
pre-tax losses in each respective period. Cash used in investing and financing
activities for the year ended December 31, 2008 was approximately $547,000
primarily due to costs incurred in software development. Cash used in investing
and financing activities for the year ended December 31, 2007 was approximately
$5.9 million primarily due to the acquisition of EnergyGateway in June
2007.
 
 To date
we have not experienced any significant liquidity effects from the current
economic crisis. Energy suppliers are active participants in the financial
markets and have been able to obtain financing when required. Our energy
supplier base has been contracting as an industry wide consolidation has been
under way over the last several years. We have had several energy consumers file
for bankruptcy and liquidate operations as a result of the current economic
environment but the effect on our operations has not been significant to
date.  We do expect to see some weakness in our commercial and
industrial business as companies cut back production and/or close plants.
However, we do not expect this to have a material impact on our operations in
2009.
 
 We have
incurred $19.6 million of cumulative operating losses to date. For the year
ended December 31, 2008, we incurred net losses of $6.8 million and generated
negative cash flow of $5.3 million. We have historically funded our operations
with cash flow from operations and the issuance of various debt and equity
instruments. We have approximately $1.7 million of cash and cash equivalents and
no bank debt as of December 31, 2008.  We expect to continue to fund
our operations from existing cash resources, operating cash flow and, when
required, the issuance of various debt and equity instruments. That
notwithstanding, we believe that our current financial resources are adequate to
fund our ongoing operations and pursue our strategic initiatives. Management
anticipates the Company will reach cash flow positive and improve its liquidity
through continued growth. We have consistently decreased our quarterly operating
loss and cash usage during 2008. In the fourth quarter, our operating loss was
$1.0 million and cash usage was $25,000. While cash usage benefitted from
certain working capital reductions in the fourth quarter, we have reduced our
operating cash flow substantially through growth and certain cost reductions
implemented during 2008. To the extent our revenue growth does not meet our
anticipated targets, we will adjust our cost structure as deemed appropriate.
However no assurance can be given that management’s actions will result in
profitable operations or cash flow.
 
 On
September 8, 2008, we entered into a Loan and Security Agreement (the
“Agreement”) with Silicon Valley Bank (SVB). Under the Agreement, SVB has
committed to make advances to us in an aggregate amount of up to $3,000,000,
subject to availability against certain eligible account receivables, eligible
retail backlog and maintenance of financial covenants. The credit
 28
 facility
bears interest at a floating rate per annum based on SVB’s prime rate plus
three-quarters of one percentage point (0.75%) on advances made against eligible
accounts receivable and prime plus one-and-one-half of one percentage point
(1.5%) on advances made against eligible retail backlog. These interest
rates are subject to change based on our maintenance of an adjusted quick ratio
of one-to-one. All unpaid principal and accrued interest is due on
September 7, 2009 (the Maturity Date). Until the Maturity Date, we are only
required to pay interest, with each such payment due in arrears on the last
calendar day of each month.
 
 There
were no outstanding borrowings from the credit facility and we were in
compliance with our bank covenants as of December 31, 2008.
 
 Comparison
of December 31, 2007 to December 31, 2006
 
 December 31,
                  2007
                
                
                December 31,
                  2006
                
                
                Increase/(Decrease)Cash
      and cash equivalents
                
                $
                7,001,884
                
                
                $
                17,483,886
                
                
                $
                (10,482,002
                )
                
                
                (60
                )%Trade
      accounts receivable
                
                
                1,878,233
                
                
                
                1,702,798
                
                
                
                175,435
                
                
                
                10Days
      sales outstanding
                
                
                56
                
                
                
                95
                
                
                
                (39
                )
                
                
                (41
                )Working
      capital
                
                
                5,323,622
                
                
                
                16,639,898
                
                
                
                (11,316,276
                )
                
                
                (68
                )Stockholders’
      equity
                
                
                16,859,799
                
                
                
                17,945,002
                
                
                
                (1,085,203
                )
                
                
                ( 6
                )
 
 Cash and
cash equivalents decreased 60%, primarily due to the acquisition of the
EnergyGateway assets and the pre-tax loss for the year. Trade accounts
receivable increased 10% due to the acquisition of the EnergyGateway assets and
the 59% increase in revenue, both offset by an improvement in days sales
outstanding.  Days sales outstanding decreased by 39 days primarily
due to the addition of EnergyGateway receivables, which are due net 15, the
increase in wholesale transactions, which are typically due net 30, and improved
collection rates. Revenue from our energy suppliers representing greater than
10% of our revenue decreased from 51% from four energy suppliers to 32% from two
energy suppliers for the year ended December 31, 2007 and 2006, respectively.
This decrease was directly related to the addition of the EnergyGateway
customers.
 
 Working
capital (consisting of current assets less current liabilities) decreased
approximately 68%, primarily due to the decrease in cash and cash equivalents
resulting from the acquisition of the EnergyGateway assets and funding of the
pre-tax loss for the year.  Stockholders’ equity decreased 6% due to
the net loss for the period substantially offset by the fair value of the stock
issued as part of the acquisition of EnergyGateway assets.
 
 Cash used
in operating activities for the year ended December 31, 2007 was approximately
$4.6 million due primarily to the pre-tax loss for the period. Cash used in
investing and financing activities for the year ended December 31, 2007 was
approximately $5.8 million, primarily due to the purchase of the EnergyGateway
assets and, to a lesser extent, costs incurred in software development and
purchases of property and equipment.
 
 Cash
provided by operating activities for the year ended December 31, 2006 was
approximately $259,000, due primarily to increases in accounts payable and
accrued expenses substantially offset by an increase in accounts receivable, the
net loss for the year and deferred taxes for the period. Cash used in investing
activities for the year ended December 31, 2006 was approximately $138,000,
primarily due to the purchases of property and equipment and costs incurred in
software development. Cash provided by financing activities for year ended
December 31, 2006 was approximately $15.8 million, primarily due to the net
proceeds from our initial public offering and the issuance of warrants partially
offset by the retirement of long-term debt.
 
 Contractual
Obligations and Other Commercial Commitments
 
 The table
below summarizes our gross contractual obligations and other commercial
commitments as of December 31, 2008. As of December 31, 2008, we did
not have any purchase obligations other than our capital and operating
leases.
 
 Payments Due by PeriodContractual
      Obligations
                
                2009
                
                
                2010 and 2011
                
                
                2012 and 2013
                
                
                2014
      and
                  Thereafter
                
                
                TotalCapital
      leases
                
                $
                44,745
                
                
                $
                3,990
                
                
                $
                —
                
                
                $
                —
                
                
                $
                48,735Operating
      leases
                
                
                316,582
                
                
                
                306,340
                
                
                
                42,972
                
                
                
                —
                
                
                
                665,894Total
      contractual obligations
                
                $
                361,327
                
                
                $
                310,330
                
                
                $
                42,972
                
                
                $
                —
                
                
                $
                714,629
 
 Critical
Accounting Policies
 
 The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America (generally accepted
accounting principles, or GAAP) requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting
period.
 
 The most
judgmental estimates affecting our consolidated financial statements are those
relating to revenue recognition and the estimate of actual energy purchased from
the energy supplier and end user, or energy consumer, of such energy; software
 29
 development
costs; the fair value of our equity securities prior to our initial public
offering when there was no ready market for the purchase and sale of these
shares; the valuation of intangible assets and goodwill; impairment of
long-lived assets; and estimates of future taxable income as it relates to the
realization of our net deferred tax assets. We regularly evaluate our estimates
and assumptions based upon historical experience and various other factors that
we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. To the extent
actual results differ from those estimates; our future results of operations may
be affected. We believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation of our
consolidated financial statements. Refer to Note 2 of our consolidated
financial statements filed herewith for a description of our accounting
policies.
 
 Revenue
Recognition
 
 Retail Electricity
Transactions
 
 We
receive a monthly commission on energy sales contracted through our online
auction platform from each energy supplier based on the energy usage generated
and transacted between the energy supplier and energy consumer. Our commissions
are not based on the retail price for electricity; rather, commissions are based
on the energy usage generated and transacted between the energy supplier and
energy consumer multiplied by our contractual commission rate. Revenue from
commissions is recognized as earned on a monthly basis over the life of each
contract as energy is consumed, provided there is persuasive evidence of an
arrangement, the sales price is fixed or determinable, collection of the related
receivable is reasonably assured, and customer acceptance criteria, if any, has
been successfully demonstrated.
 
 We record
brokerage commissions based on actual usage data obtained from the energy
supplier for that accounting period, or to the extent actual usage data is not
available, based on the estimated amount of electricity and gas delivered to the
energy consumers for that accounting period. We develop our estimates on a
quarterly basis based on the following criteria:
 
 •
                Payments
      received prior to the issuance of the financial
  statements;
 •
                Usage
      updates from energy
suppliers;
 •
                Usage
      data from utilities;
 •
                Comparable
      historical usage data; and
 •
                Historical
      variances to previous estimates.
 
 To the
extent usage data cannot be obtained, we estimate revenue as
follows:
 
 •
                Historical
      usage data obtained from the energy consumer in conjunction with the
      execution of the auction;
 •
                Geographic/utility
      usage patterns based on actual data
received;
 •
                Analysis
      of prior year usage
patterns; and
 •
                Specific
      review of individual energy supplier/location
  accounts.
 
 In
addition, we analyze this estimated data based on overall industry trends
including prevailing weather and usage data. Once the actual data is received,
we adjust the estimated accounts receivable and revenue to the actual total
amount in the period during which the payment is received. Based on management’s
current capacity to obtain actual energy usage, we currently estimate four to
six weeks of revenue at the end of our accounting period. Differences between
estimated and actual revenue have been within management’s expectations and have
not been material to date.
 
 We
generally do not directly invoice our electricity energy suppliers and,
therefore, we report a substantial portion of our receivables as “unbilled.”
Unbilled accounts receivable represents management’s best estimate of energy
provided by the energy suppliers to the energy consumers for a specific
completed time period at contracted commission rates and is made up of two
components. The first component represents energy usage for which we have
received actual data from the supplier and/or the utility but for which payment
has not been received at the balance sheet date. The majority of our contractual
relationships with energy suppliers require them to supply actual usage data to
us on a monthly basis and remit payment to us based on that usage. The second
component represents energy usage for which we have not received actual data,
but for which we have estimated usage.  Commissions paid in advance by
certain energy suppliers are recorded as deferred revenue and amortized to
commission revenue on a monthly basis on the energy exchanged that
month.
 
 Retail Natural Gas
Transactions
 
 There are
two primary fee components to our retail natural gas services, transaction fees
and management fees.  Transaction fees are billed to and paid by the
energy supplier awarded business on the platform.  Transaction fees
for natural gas awards are established prior to award and are the same for each
supplier. For the majority of our natural gas transactions, we bill the supplier
upon the conclusion of the transaction based on the estimated energy volume
transacted for the entire award term multiplied by the transaction
fee.  Management fees are paid by our energy consumers and are
generally billed on a monthly basis for services rendered based on terms and
conditions included in contractual arrangements. While substantially all of our
retail natural gas transactions are accounted in accordance with this policy, a
certain percentage are accounted for as the natural gas is consumed by the
customer and recognized as revenue in accordance with the retail electricity
transaction revenue recognition methodology described above.
 30
 Wholesale and Green
Transactions
 
 Substantially
all transaction fees are invoiced upon the conclusion of the auction based on a
fixed fee.  These revenues are not tied to future energy usage and are
recognized upon the completion of the online auction.  For reverse
auctions where our customers bid for a consumer’s business, the fees are paid by
the bidder. For forward auctions where a lister is selling energy or credits,
the fees are typically paid by the lister. In addition, revenue may not be
recognized on certain green transactions until the credits being auctioned have
been verified and/or delivered. While substantially all wholesale and green
transactions are accounted for in this fashion, a small percentage of our
wholesale revenue is accounted for as the wholesale electricity or gas is
delivered similar to the retail electricity transaction revenue recognition
methodology described above.
 
 Channel Partner
Commissions
 
 We pay
commissions to our channel partners at contractual rates based on monthly energy
transactions between energy suppliers and energy consumers. The commission is
accrued monthly and charged to sales and marketing expense as revenue is
recognized. We pay commissions to our salespeople at contractual commission
rates based upon cash collections from our customers.
 
 Revenue
Estimation
 
 Our
estimates in relation to revenue recognition affect revenue and sales and
marketing expense as reflected on our statements of operations, and trade
accounts receivable and accrued commissions accounts as reflected on our balance
sheets. For any quarterly reporting period, we may not have actual usage data
for certain energy suppliers and will need to estimate revenue. We record
revenue based on the energy consumers’ historical usage profile. At the end of
each reporting period, we adjust historical revenue to reflect actual usage for
the period. For the year ended December 31, 2008, we estimated usage for
approximately 10% of our revenue resulting in a negative 0.2%, orapproximately $23,000,
adjustment to reduce revenue. This decrease in revenue, which is based on
adjusted year to date revenue, resulted in an approximate $6,000 decrease in
sales and marketing expense related to third party commission expense associated
with those revenues. Corresponding adjustments were made to trade accounts
receivable and accrued commissions, respectively. A 1% difference between this
estimate and actual usage would have an approximate $10,000 effect on our
revenue for the year ended December 31, 2008.
 
 Software
Development
 
 Certain
acquired software and significant enhancements to our software are recorded in
accordance with Statement of Position (SOP) 98-1, “Accounting for Costs of Computer Software Developed or
Obtained for Internal Use”.Accordingly, internally developed software
costs of approximately $403,000, $469,000 and $66,000 related to implementation,
coding and configuration have been capitalized in 2008, 2007 and 2006,
respectively. We amortize internally developed and purchased software over the
estimated useful life of the software (generally three years).  During
2008, 2007, and 2006, approximately $239,000, $111,000, and $73,000 were
amortized to cost of revenues, respectively.  Accumulated amortization
was approximately $512,000 and $273,000 at December 31, 2008 and 2007,
respectively.
 
 Our
estimates for capitalization of software development costs affect cost of
revenue and capitalized software as reflected on our consolidated statements of
operations and on our consolidated balance sheets. During the year ended
December 31, 2008, capitalized software costs were 2.7% of our total assets and
amortization expense was approximately 5.3% of cost of revenue. To the extent
the carrying amount of the capitalized software costs may not be fully
recoverable or that the useful lives of those assets are no longer appropriate,
we may need to record an impairment (non-cash) charge and write-off a portion or
all of the capitalized software balance on the balance sheet.
 
 Goodwill
 
 We use
assumptions in establishing the carrying value and fair value of our
goodwill.  Goodwill represents the excess of the purchase price over
the fair value of identifiable net assets of acquired businesses.  We
account for goodwill that results from acquired businesses in accordance with
Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible
Assets” (SFAS No. 142).  Under SFAS No. 142, goodwill and
intangible assets having indefinite lives are not amortized but instead are
assigned to reporting units and tested for impairment annually or more
frequently if changes in circumstances or the occurrence of events indicate
possible impairment.
 
 Pursuant
to SFAS No. 142, we perform an annual impairment review during the fourth fiscal
quarter of each year, or earlier, if indicators of potential impairment exist.
The impairment test for goodwill is a two-step process.  Step one
consists of a comparison of the fair value of a reporting unit with its carrying
amount, including the goodwill allocated to each reporting unit.  If
the carrying amount is in excess of the fair value, step two requires the
comparison of the implied fair value of the reporting unit with the carrying
amount of the reporting unit’s goodwill over the implied fair value of the
reporting unit’s goodwill will be recorded as an impairment loss.  The
Company performed its annual impairment analysis in December 2008 and determined
that no impairment of our goodwill or intangible assets existed.
 31
 Intangible
Assets
 
 We use
assumptions in establishing the carrying value, fair value and estimated lives
of our intangible assets.  The criteria used for these assumptions
include management’s estimate of the assets continuing ability to generate
positive income from operations and positive cash flow in future periods
compared to the carrying value of the asset, as well as the strategic
significance of any identifiable intangible asset in our business
objectives.  If assets are considered impaired, the impairment
recognized is the amount by which the carrying value of the assets exceeds the
fair value of the assets.  Useful lives and related amortization
expense are based on our estimate of the period that the assets will generate
revenues or otherwise be used by us.  Factors that would influence the
likelihood of a material change in our reported results include significant
changes in the asset’s ability to generate positive cash flow, a significant
decline in the economic and competitive environment on which the asset depends
and significant changes in our strategic business objectives.
 
 Intangible
assets consist of customer relationships and contracts, purchased technology and
other intangibles, and are stated at cost less accumulated amortization.
Intangible assets with a definite life are amortized using the straight-line
method over their estimated useful lives, which range from one to ten
years.
 
 Impairment
of Long-Lived and Intangible Assets
 
 In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, we periodically review long-lived assets
and intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable or that
the useful lives of those assets are no longer appropriate. Recoverability of
these assets is determined by comparing the forecasted undiscounted net cash
flows of the operation to which the assets relate to the carrying
amount.  During 2008, no impairment of our long-lived assets was
recorded as no change in circumstances indicated that the carrying value of the
assets was not recoverable.
 
 Income
Taxes
 
 We
account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).Deferred tax assets and liabilities are determined at the end of each
period based on the future tax consequences that can be attributed to net
operating loss carryforwards, as well as differences between the financial
statement carrying amounts of the existing assets and liabilities and their
respective tax basis. Deferred income tax expense or credits are based on
changes in the asset or liability from period to period. Valuation allowances
are provided if, based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. The
realization of deferred tax assets is dependent upon the generation of future
taxable income. In determining the valuation allowance, we consider past
performance, expected future taxable income, and qualitative factors which we
consider to be appropriate in estimating future taxable income.  Our
forecast of expected future taxable income is for future periods that can be
reasonably estimated. Results that differ materially from current expectations
may cause management to change its judgment on future taxable income and adjust
our existing tax valuation allowance.
 
 Our
estimates in relation to income taxes affect income tax benefit and deferred tax
assets as reflected on our statements of operations and balance sheets,
respectively. The deferred tax assets are reduced by a valuation allowance if it
is more likely than not that the tax benefits will not be realized in the near
term.  As of December 31, 2008, we had deferred tax assets of
approximately $7.3 million against which a full valuation allowance has been
established. To the extent we determine that it is more likely than not that we
will recover all of our deferred tax assets, it could result in an approximate
$7.3 million non-cash tax benefit.
 
 Share-Based
Compensation
 
 In
accordance with SFAS No. 123(R) “Share-Based Payment”, the
Company recognizes the compensation cost of share-based awards on a
straight-line basis over the requisite service period of the
award.  In 2008 and 2007, share-based awards consisted of grants of
restricted stock and stock options.  The restrictions on the
restricted stock lapse over the vesting period.  The vesting period of
restricted stock is determined by the Board of Directors, and is generally four
years for employees.
 32
 
 The
per-share weighted-average fair value of stock options granted during the years
ended December 31, 2008 and 2007 was $0.12 and $0.58, respectively, on the date
of grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions and estimated forfeiture rates of 15% and 13% in
2008 and 2007, respectively:
 
 Year
      ended
                  December
      31,
                
                Expected
                  Dividend
      Yield
                
                Risk
                  Interest
      Rate
                
                Expected
                  Option
      Life
                
                Expected
                  Volatility2008
                
                —
                
                1.67%
                
                4.75
      years
                
                87%2007
                
                —
                
                4.66%
                
                4.61
      years
                
                54%2006
                
                —
                
                4.66%
                
                4.75
      years
                
                48%
 
 The
Company has two stock incentive plans: the 2003 Stock Incentive Plan (2003
Plan), and the 2006 Stock Incentive Plan (2006 Plan).  As of December
31, 2008, 3,582,300 shares of common stock representing option grants still
outstanding were reserved under the 2003 Plan.  No further grants are
allowed under the 2003 Plan.  As of December 31, 2008, 8,738,161
shares of common stock were reserved under the 2006 Plan representing 2,682,250
outstanding stock options, 2,042,000 shares of restricted stock granted and
4,013,911 shares available for grant.
 
 A summary
of stock option activity under both plans for the year ended December 31, 2008,
is follows:
 
 Shares
                
                
                Weighted
      Average
                  Exercise PriceOutstanding
      at December 31, 2007
                
                
                6,703,029
                
                
                $
                0.65Granted
                
                
                1,206,000
                
                
                $
                0.20Canceled
                
                
                (1,063,750
                )
                
                $
                1.29Exercised
                
                
                (580,729
                )
                
                $
                0.03Outstanding
      at December 31, 2008
                
                
                6,264,550
                
                
                $
                0.51
 
 A summary
of options outstanding and options exercisable as of December 31, 2008 is
as follows:
 
 Options
      Outstanding
                
                
                Options
      ExercisableWeighted
                
                
                
                
                
                
                WeightedAverage
                
                
                
                
                
                
                AverageRange
      of
                
                
                
                
                Remaining
                
                Aggregate
                
                
                Number
                
                Remaining
                
                AggregateExercise
                
                
                
                
                Contractual
                
                Intrinsic
                
                
                Of
      Shares
                
                Contractual
                
                IntrinsicPrices
                
                
                Options
                
                Life
                
                Value
                
                
                Exercisable
                
                Life
                
                Value$0.02
      - $0.19
                
                
                
                2,080,300
                
                1.84
      Years
                
                $
                627,496
                
                
                
                2,080,300
                
                1.84
      Years
                
                $
                627,496$0.20
      - $1.12
                
                
                
                2,708,000
                
                5.35
      Years
                
                
                189,112
                
                
                
                1,041,125
                
                3.94
      Years
                
                
                33,789$1.13
      - $1.34
                
                
                
                1,476,250
                
                5.35
      Years
                
                
                —
                
                
                
                577,500
                
                5.33
      Years
                
                
                —6,264,550
                
                4.18
      Years
                
                $
                816,608
                
                
                
                3,698,925
                
                2.98
      Years
                
                $
                661,285
 
 The
aggregate intrinsic value in the table above represents the total intrinsic
value of our outstanding options and exercisable options as of December 31,
2008. The aggregate intrinsic value of options exercised during the year ended
December 31, 2008 was approximately $416,000.  At December 31,
2008, the weighted average exercise price of options outstanding and exercisable
was $0.51 and $0.38, respectively.  The weighted average fair value of
option grants for the years ended December 31, 2008 and 2007 was $0.12 and
$0.58, respectively.
 
 Restricted
Stock
 
 A summary
of restricted stock activity for the year ended December 31, 2008 is as
follows:
 
 Shares
                
                
                Weighted
      Average
                  Grant
      PriceOutstanding
      at December 31, 2007
                
                
                1,448,500
                
                
                $
                1.10Granted
                
                
                793,000
                
                
                $
                0.87Cancelled
                
                
                (599,500
                )
                
                $
                1.02Vested
                
                
                (456,069
                )
                
                $
                1.12Unvested
      at December 31, 2008
                
                
                1,185,931
                
                
                $
                0.98
 
 There
were 11,464,392 shares reserved for issuance under these plans at
December 31, 2008.
 33
 Recent
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 157, “Fair Value Measurements,”
(SFAS No. 157), which establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The FASB partially deferred
the effective date of SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis to fiscal years beginning after November 15, 2008. The
effective date for financial assets and liabilities that are recognized on a
recurring basis was January 1, 2008. We determined that our adoption of
SFAS 157 on January 1, 2008 for financial assets and liabilities did not
have a material impact on our consolidated financial statements.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,” (SFAS 159), which provides companies
with an option to report selected financial assets and liabilities at fair
value. SFAS 159 establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities and highlights the effect
of a company’s choice to use fair value on its earnings. It also requires a
company to display the fair value of those assets and liabilities for which it
has chosen to use fair value on the face of the balance sheet. SFAS 159 was
effective for us beginning January 1, 2008 and did not have an impact on
our consolidated financial statements as we did not choose to use the fair value
option.
 
 In
December 2007, the FASB, issued SFAS No. 141 (revised 2007), “Business Combinations”(SFAS
No. 141(R)).  SFAS No. 141(R) requires an acquiring entity in a
business combination to recognize all (and only) the assets acquired and
liabilities assumed in the transaction; establishes the acquisition-date fair
value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination.  SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008.  The Company expects
to adopt SFAS No. 141(R) on January 1, 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (SFAS No. 160).  SFAS No.
160 clarifies that a noncontrolling or minority interest in a subsidiary is
considered an ownership interest and, accordingly, requires all entities to
report such interests in subsidiaries as equity in the consolidated financial
statements.  SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008.  The Company expects to adopt SFAS No. 160 on
January 1, 2009.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133” (SFAS No. 161).  The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows.  Entities are required to provide enhanced disclosures about:
(a) how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations; and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows.  This standard is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged.  The Company is currently
evaluating the impact, if any, SFAS No. 161 will have on its consolidated
financial position, results of operations or cash flows.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (SFAS No. 162).  SFAS No. 162 identifies
the sources of accounting principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
GAAP in the United States (the GAAP hierarchy).  This Statement is
effective 60 days following the Security and Exchange Commission’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411,
“The Meaning of Present Fairly
in Conformity with Generally Accepted Accounting
Principles”.  The Company currently adheres to the GAAP
hierarchy as presented in SFAS No. 162, and therefore does not expect its
adoption will have a material impact on its consolidated results of operations
and financial condition.
 
 Seasonality
 
 Our
revenue is subject to seasonality and fluctuations during the year primarily as
a result of weather conditions and its impact on the demand for energy. Our
revenue is generated from the commissions we receive under any given energy
contract, which is tied to the energy consumer’s consumption of energy.
Therefore, revenue from natural gas consumption tends to be strongest during the
winter months due to the increase in heating usage, and revenue from electricity
consumption tends to be strongest during the summer months due to the increase
in air conditioning usage. Our revenue is also subject to fluctuations within
any given season, depending on the severity of weather conditions — during
a particularly cold winter or an unseasonably warm summer, energy consumption
will rise.
 
 Cyclicality
 
 We
believe that our business will continue to be cyclical in nature and is tied, in
part, to market energy prices which impact transaction volume. When energy
prices increase in competitive markets above the price levels of the regulated
utilities, energy
 34
 consumers
are less likely to lock-in to higher fixed price contracts in the competitive
markets and so they are less likely to use our auction platform. Conversely,
when energy prices decrease in competitive markets below the price levels of the
regulated utilities, energy consumers are more likely to lock-in to lower fixed
price contracts in the competitive markets and so they are more likely to use
our auction platform. Although our short term revenue is impacted by usage
trends, these cyclical effects will also have longer term implications on our
business because we derive future revenue from current auctions.
 
  Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk
 
 Market
Risk
 
 Market
risk is the potential loss arising from adverse changes in market rates and
prices, such as foreign currency rates, interest rates, and other relevant
market rates or price changes.  In the ordinary course of business,
the Company is exposed to market risk resulting from changes in foreign currency
exchange rates, and the Company regularly evaluates its exposure to such
changes.  The Company’s overall risk management strategy seeks to
balance the magnitude of the exposure and the costs and availability of
appropriate financial instruments.
 
 Impact
of Inflation and Changing Prices
 
 Historically,
our business has not been materially impacted by inflation. We provide our
service at the inception of the service contract between the energy supplier and
energy consumer. Our fee is set as a fixed dollar amount per unit of measure and
fluctuates with changes in energy demand over the contract period.
 
 Foreign
Currency Fluctuation
 
 Our
commission revenue is primarily denominated in U.S. dollars. Therefore, we
are not directly affected by foreign exchange fluctuations on our current
orders. However, fluctuations in foreign exchange rates do have an effect on
energy consumers’ access to U.S. dollars and on pricing competition. We
have entered into non-U.S. dollar contracts but they have not had a
material impact on our operations. We do not believe that foreign exchange
fluctuations will materially affect our results of operations.
 
  Item 8.Financial Statements and
Supplementary Data
 
 The
consolidated financial statements listed in Item 15(a) are incorporated herein
by reference and are filed as a part of this report and follow the signature
pages to this Annual Report on Form 10-K on page 40.
   Item 9.Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
 
 None.
 
  Item 9A.Controls and
Procedures
 
 Evaluation of Disclosure
Controls and Procedures
 
 As required by Rule 13a-15 under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company
carried out an evaluation under the supervision and with the participation of
the Company’s management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company’s disclosure controls and
procedures as of December 31, 2008. In designing and
evaluating the Company’s disclosure controls and procedures, the Company and its
management recognize that there are inherent limitations to the effectiveness of
any system of disclosure controls and procedures, including the possibility of
human error and the circumvention or overriding of the controls and
procedures.  Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their desired
control objectives. Additionally, in evaluating and implementing possible
controls and procedures, the Company’s management was required to apply its
reasonable judgment. Based upon the required evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that as of December 31, 2008,
the Company’s disclosure controls and procedures were effective at the
reasonable assurance level to ensure that information required to be disclosed
by the Company in the reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms.
 
 Internal Control Over
Financial Reporting
  a)
                Management’s
      Report on Internal Control Over Financial
  Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company, as such term is defined in
Rule 13a-15(f) under the Exchange Act.  Because of its inherent
limitations, internal control
 35
 over
financial reporting may not prevent or detect
misstatements.  Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.  Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2008.  In making this assessment, the Company’s management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control-Integrated
Framework.
  Based on
this assessment, our management believes that, as of December 31, 2008, our
internal control over financial reporting is effective based on those
criteria.
  Our
independent registered public accounting firm has issued an attestation report
on our internal control over financial reporting. This report appears
below.
  b)
                Attestation
      Report of the Independent Registered Public Accounting Firm
   REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders
 World
Energy Solutions, Inc.
 Worcester,
Massachusetts
 
  We have
audited World Energy Solutions, Inc.’s (“the Company”) internal control over
financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in Part II, Item 9A of this Form 10-K. Our responsibility is to
express an opinion on the Company’s internal control over financial reporting
based on our audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
  A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America. A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In our
opinion, World Energy Solutions, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.
  We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of World Energy
Solutions, Inc. as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity (deficit) and cash flows for each
of the three years in the period ended December 31, 2008, and our report dated
March 2, 2009, expressed an unqualified opinion on those consolidated financial
statements.
  
  /S/    UHY
LLP
  Boston,
Massachusetts
 March 2,
2009
 36
 c)
                Changes
      in Internal Control Over Financial Reporting
  There was
no change in the Company’s internal control over financial reporting occurred
during the year ended December 31, 2008 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  Item 9B.Other
Information
 
 Not
applicable.
 
 PART
III
 
 Item  10.  Directors,
Executive Officers and Corporate Governance
 
 The
information required to be disclosed by this item 10 is hereby incorporated by
reference to the Company’s definitive proxy statement to be filed by the Company
within 120 days of the close of its fiscal year.
 
 We have
adopted a code of business conduct and ethics applicable to all of our directors
and employees.  The code of  business conduct and ethics is
available on the corporate governance section of “Investor Relations” of our
website www.worldenergy.com.
 
 Any
waiver of the code of business conduct and ethics for directors or executive
officers, or any amendment to the code that applies to directors or executive
officers, may only be made by the board of directors.  We intend to
satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an
amendment to, or waiver from, a provision of this code of ethics by posting such
information on our website, at the address and location specified
above.  To date, no such waivers have been requested or
granted.
 
  Item
11.  Executive Compensation
 
 The
information required to be disclosed by this item 11 is hereby incorporated by
reference to the Company’s definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
   Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  The
information required to be disclosed by this item 12 is hereby incorporated by
reference to the Company’s definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
   Item 13.  Certain
Relationships and Related Transactions, and Director
Independence
 
 The
information required to be disclosed by this item 13 is hereby incorporated by
reference to the Company’s definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
   Item 14.  Principal
Accountant Fees and Services
 
 The
information required to be disclosed by this item 14 is hereby incorporated by
reference to the Company’s definitive proxy statement to be filed by the Company
within 120 days after the close of its fiscal year.
  37
 PART
IV
   Item 15.  Exhibits
and Financial Statement Schedules
 
 (a)(1)
Financial Statements
 
 For a
list of the financial information included herein, see “Index to Consolidated
Financial Statements” on page 40 of this Annual Report on Form
10-K.
 
 (a)(2)
Financial Statements Schedules
 
 All
schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes
thereto.
 
 (a)(3)
Exhibits
 
 The list
of exhibits filed as a part of this Annual Report on Form 10-K is set forth on
the Exhibit Index immediately preceding the exhibits hereto and is incorporated
herein by reference.
 
 
  38
 SIGNATURES
 
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
   WORLD
      ENERGY SOLUTIONS, INC.By:
                  /s/ Richard
      Domaleski
                  March
      3, 2009Richard
      DomaleskiChief
      Executive Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  
 Signature
                
                Title
                
                Date/s/ Richard
      Domaleski
                
                Chief Executive
      Officer and Director
                
                March 3,
      2009Richard
      Domaleski/s/ James
      Parslow
                
                Chief Financial
      Officer
                
                March 3,
      2009James
      Parslow/s/ Edward
      Libbey
                
                Chairman of the
      Board and Director
                
                March 3,
      2009Edward
      Libbey/s/ Patrick
      Bischoff
                
                Director
                
                March 3,
      2009Patrick
      Bischoff/s/ John
      Wellard
                
                Director
                
                March 3,
      2009John
      Wellard/s/ Thad
      Wolfe
                
                Director
                
                March 3,
      2009Thad
      Wolfe
   SUPPLEMENTAL
INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE
EXCHANGE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE EXCHANGE ACT
  No annual
report to security holders covering the Company’s prior fiscal year or proxy
materials have been furnished to security holders which have not been furnished
to the Securities and Exchange Commission.  The Company will furnish
to the Securities and Exchange Commission any annual report to security holders
covering the Company’s prior fiscal year and any proxy materials to be furnished
to security holders subsequent to the filing of this annual report.
 39
 WORLD
ENERGY SOLUTIONS, INC.
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 PageREPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
              41CONSOLIDATED
      FINANCIAL STATEMENTS:Consolidated
      Balance Sheets for World Energy Solutions, Inc. at December 31, 2008
      and December 31, 2007
              42Consolidated
      Statements of Operations for World Energy Solutions, Inc. for the years
      ended December 31, 2008, 2007 and 2006
              43Consolidated
      Statements of Stockholders’ Equity (Deficit) for World Energy Solutions,
      Inc. for the years ended December 31, 2008, 2007 and
    2006
              44Consolidated
      Statements of Cash Flows for World Energy Solutions, Inc. for the years
      ended December 31, 2008, 2007 and 2006
              45Notes
      to Consolidated Financial Statements
              46
         
 40
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
 To the
Board of Directors and Stockholders
 World
Energy Solutions, Inc.
 Worcester,
Massachusetts
 
 We have
audited the accompanying consolidated balance sheets of World Energy Solutions,
Inc. (the “Company”) as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2008.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of World Energy
Solutions, Inc. as of December 31, 2008 and 2007, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.
 
 We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of World Energy Solutions,
Inc.’s internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 2, 2009 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
 
 /S/    UHY
LLP
 
 
 Boston,
Massachusetts
 March 2,
2009
    
 41
 WORLD
ENERGY SOLUTIONS, INC.
 
 Consolidated
Balance Sheets
  
 December 31,2008
              
              
              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              1,731,411
              
              
              $
              7,001,884Trade
      accounts receivable, net
              
              
              2,343,593
              
              
              
              1,878,233Prepaid
      expenses and other current assets
              
              
              431,246
              
              
              
              338,049Total
      current assets
              
              
              4,506,250
              
              
              
              9,218,166Property
      and equipment, net
              
              
              487,211
              
              
              
              595,950Capitalized
      software, net
              
              
              627,275
              
              
              
              463,888Intangibles,
      net
              
              
              5,949,609
              
              
              
              7,316,916Goodwill
              
              
              3,178,701
              
              
              
              3,178,701Other
      assets
              
              
              27,594
              
              
              
              26,944Total
      assets
              
              $
              14,776,640
              
              
              $
              20,800,565LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              593,553
              
              
              $
              980,488Accrued
      commissions
              
              
              777,784
              
              
              
              712,919Accrued
      compensation
              
              
              1,118,168
              
              
              
              1,516,418Accrued
      expenses
              
              
              355,511
              
              
              
              279,162Deferred
      revenue and customer advances
              
              
              876,271
              
              
              
              363,933Capital
      lease obligations
              
              
              42,485
              
              
              
              41,624Total
      current liabilities
              
              
              3,763,772
              
              
              
              3,894,544Capital
      lease obligations, net of current portion
              
              
              3,737
              
              
              
              46,222Total
      liabilities
              
              
              3,767,509
              
              
              
              3,940,766Commitments
      and contingencies (Note 9)Stockholders’
      equity:Preferred stock,
      $0.0001 par value; 5,000,000 shares authorized, no shares issued
      or
      outstanding
              
              
              —
              
              
              
              —Common
      stock, $0.0001 par value; 150,000,000 shares authorized;
      84,107,271shares
      issued and 83,976,845 shares outstanding at December 31, 2008, and82,399,241
      shares issued and outstanding at December 31, 2007
              
              
              8,398
              
              
              
              8,240Additional
      paid-in capital
              
              
              30,748,038
              
              
              
              29,704,831Accumulated
      deficit
              
              
              (19,648,432
              )
              
              
              (12,853,272
              )Treasury
      stock, at cost; 130,426 shares at December 31, 2008 and no shares atDecember 31,
      2007
              
              
              (98,873
              )
              
              
              —Total
      stockholders’ equity
              
              
              11,009,131
              
              
              
              16,859,799Total
      liabilities and stockholders’ equity
              
              $
              14,776,640
              
              
              $
              20,800,565
  
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 
 42
 WORLD
ENERGY SOLUTIONS, INC.
 
 Consolidated
Statements of Operations
   
 Years Ended
    December 31,2008
              
              
              2007
              
              
              2006Revenue:Brokerage
      commissions and transaction fees
              
              $
              11,156,215
              
              
              $
              8,401,791
              
              
              $
              5,762,098Management
      fees
              
              
              1,288,477
              
              
              
              786,474
              
              
              
              1,000Total
      revenue
              
              
              12,444,692
              
              
              
              9,188,265
              
              
              
              5,763,098Cost
      of revenue
              
              
              4,552,215
              
              
              
              2,874,678
              
              
              
              1,166,426Gross
      profit
              
              
              7,892,477
              
              
              
              6,313,587
              
              
              
              4,596,672Operating
      expenses:Sales
      and marketing
              
              
              10,057,361
              
              
              
              8,598,256
              
              
              
              3,227,263General
      and administrative
              
              
              4,669,807
              
              
              
              5,858,810
              
              
              
              1,862,450Total
      operating expenses
              
              
              14,727,168
              
              
              
              14,457,066
              
              
              
              5,089,713Operating
      loss
              
              
              (6,834,691
              )
              
              
              (8,143,479
              )
              
              
              (493,041
              )Interest
      income (expense):Interest
      income
              
              
              45,132
              
              
              
              573,395
              
              
              
              139,617Interest
      expense
              
              
              (5,601
              )
              
              
              (10,101
              )
              
              
              (451,897
              )Total
      interest income (expense), net
              
              
              39,531
              
              
              
              563,294
              
              
              
              (312,280
              )Loss
      before income taxes
              
              
              (6,795,160
              )
              
              
              (7,580,185
              )
              
              
              (805,321
              )Income
      tax (expense) benefit
              
              
              —
              
              
              
              (1,061,720
              )
              
              
              304,228Net
      loss
              
              
              (6,795,160
              )
              
              
              (8,641,905
              )
              
              
              (501,093
              )Accretion
      of preferred stock issuance costs
              
              
              —
              
              
              
              —
              
              
              
              (6,299
              )Net
      loss available to common stockholders
              
              $
              (6,795,160
              )
              
              $
              (8,641,905
              )
              
              $
              (507,392
              )Net
      loss per common share — basic anddiluted
              
              $
              (0.08
              )
              
              $
              (0.11
              )
              
              $
              (0.01
              )Weighted
      average shares outstanding —  basicand
      diluted
              
              
              83,103,145
              
              
              
              79,793,590
              
              
              
              45,576,477
  
 The
accompanying notes are an integral part of these consolidated financial
statements.
   43
 WORLD
ENERGY SOLUTIONS, INC.
 
 Consolidated
Statements of Stockholders’ Equity (Deficit)
 Years
Ended December 31, 2008, 2007, and 2006
 
 Non-VotingCommon
      Stock
              
              
              VotingCommon
      Stock
              
              
              Treasury
      Stock
              
              
              Additional
              
              
              
              
              
              TotalStockholders’Number
      ofShares
              
              
              $0.0001
                Par
      Value
              
              
              Number
      ofShares
              
              
              $0.0001Par
      Value
              
              
              Number
      ofShares
              
              
              Stated
      atCost
              
              
              Paid-inCapital
              
              
              AccumulatedDeficit
              
              
              Equity
                (Deficit)Balance,
      December 31, 2005
              
              
              6,792,135
              
              
              $
              679
              
              
              
              33,724,819
              
              
              $
              3,372
              
              
              
              675,346
              
              
              $
              (151,953
              )
              
              $
              2,919,293
              
              
              $
              (3,710,274
              )
              
              $
              (938,883
              )Exercise
      of stock options
              
              
              2,190,671
              
              
              
              219
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              56,698
              
              
              
              —
              
              
              
              56,917Common
      stock warrants exercised
              
              
              —
              
              
              
              —
              
              
              
              1,070,958
              
              
              
              107
              
              
              
              —
              
              
              
              —
              
              
              
              253,098
              
              
              
              —
              
              
              
              253,205Issuance
      of common stock in connection with initial public offering, net of $3.6
      million of offering costs
              
              
              —
              
              
              
              —
              
              
              
              23,000,000
              
              
              
              2,300
              
              
              
              —
              
              
              
              —
              
              
              
              17,264,968
              
              
              
              —
              
              
              
              17,267,268Issuance
      of warrants in connection with initial public offering
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              274,129
              
              
              
              —
              
              
              
              274,129Conversion
      of Non-Voting Common Stock to Voting Common Stock in connection with
      initial public offering
              
              
              (8,982,806
              )
              
              
              (898
              )
              
              
              8,982,806
              
              
              
              898
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Conversion
      of Series A Redeemable Convertible Preferred Stock in connection with
      initial public offering
              
              
              —
              
              
              
              —
              
              
              
              10,433,504
              
              
              
              1,044
              
              
              
              —
              
              
              
              —
              
              
              
              1,506,953
              
              
              
              —
              
              
              
              1,507,997Accretion
      of stock issuance costs
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (6,299
              )
              
              
              —
              
              
              
              (6,299
              )Share-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              44,261
              
              
              
              —
              
              
              
              44,261Purchase
      of treasury stock
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              25,000
              
              
              
              (12,500
              )
              
              
              —
              
              
              
              —
              
              
              
              (12,500
              )Retirement
      of treasury stock
              
              
              —
              
              
              
              —
              
              
              
              (700,346
              )
              
              
              (70
              )
              
              
              (700,346
              )
              
              
              164,453
              
              
              
              (164,383
              )
              
              
              —
              
              
              
              —Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (501,093
              )
              
              
              (501,093
              )Balance,
      December 31, 2006
              
              
              —
              
              
              
              —
              
              
              
              76,511,741
              
              
              
              7,651
              
              
              
              —
              
              
              
              —
              
              
              
              22,148,718
              
              
              
              (4,211,367
              )
              
              
              17,945,002Share-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              982,190
              
              
              
              —
              
              
              
              982,190Issuance
      of common stock in connection with acquisition of
      EnergyGateway
              
              
              —
              
              
              
              —
              
              
              
              5,375,000
              
              
              
              538
              
              
              
              —
              
              
              
              —
              
              
              
              6,522,694
              
              
              
              —
              
              
              
              6,523,232Issuance
      of common stock in connection with restricted stock grant
              
              
              —
              
              
              
              —
              
              
              
              400,000
              
              
              
              40
              
              
              
              —
              
              
              
              —
              
              
              
              (40
              )
              
              
              —
              
              
              
              —Reversal
      of issuance costs related to initial public offering of common
      stock
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              48,468
              
              
              
              —
              
              
              
              48,468Exercise
      of stock options
              
              
              —
              
              
              
              —
              
              
              
              112,500
              
              
              
              11
              
              
              
              —
              
              
              
              —
              
              
              
              2,801
              
              
              
              —
              
              
              
              2,812Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (8,641,905
              )
              
              
              (8,641,905
              )Balance,
      December 31, 2007
              
              
              —
              
              
              
              —
              
              
              
              82,399,241
              
              
              
              8,240
              
              
              
              —
              
              
              
              —
              
              
              
              29,704,831
              
              
              
              (12,853,272
              )
              
              
              16,859,799Share-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,006,560
              
              
              
              —
              
              
              
              1,006,560Issuance
      of common stock in connection with restricted stock grants
              
              
              —
              
              
              
              —
              
              
              
              325,643
              
              
              
              33
              
              
              
              130,426
              
              
              
              (98,873
              )
              
              
              (33
              )
              
              
              —
              
              
              
              (98,873
              )Exercise
      of stock warrants
              
              
              —
              
              
              
              —
              
              
              
              671,232
              
              
              
              67
              
              
              
              —
              
              
              
              —
              
              
              
              20,070
              
              
              
              —
              
              
              
              20,137Exercise
      of stock options
              
              
              —
              
              
              
              —
              
              
              
              580,729
              
              
              
              58
              
              
              
              —
              
              
              
              —
              
              
              
              16,610
              
              
              
              —
              
              
              
              16,668Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (6,795,160
              )
              
              
              (6,795,160
              )Balance,
      December 31, 2008
              
              
              —
              
              
              $
              —
              
              
              
              83,976,845
              
              
              $
              8,398
              
              
              
              130,426
              
              
              $
              (98,873
              )
              
              $
              30,748,038
              
              
              $
              (19,648,432
              )
              
              $
              11,009,131
 
   The
accompanying notes are an integral part of these consolidated financial
statements.
 
 44
 WORLD
ENERGY SOLUTIONS, INC.
 
 Consolidated
Statements of Cash Flows
    Years Ended
      December 31,2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      loss
              
              $
              (6,795,160
              )
              
              $
              (8,641,905
              )
              
              $
              (501,093
              )Adjustments
      to reconcile net loss to net cash provided by(used
      in) operating activities:Depreciation
      and amortization
              
              
              1,756,068
              
              
              
              1,028,497
              
              
              
              135,446Deferred
      taxes
              
              
              —
              
              
              
              1,061,720
              
              
              
              (307,720
              )Share-based
      compensation
              
              
              1,006,560
              
              
              
              982,190
              
              
              
              44,261Accretion
      of warrants
              
              
              —
              
              
              
              —
              
              
              
              252,000Changes
      in operating assets and liabilities , net of the effects of
      acquisition:Trade
      accounts receivable
              
              
              (465,360
              )
              
              
              17,590
              
              
              
              (673,991
              )Prepaid
      expenses and other assets
              
              
              (93,847
              )
              
              
              (133,377
              )
              
              
              (106,798
              )Accounts
      payable
              
              
              (386,935
              )
              
              
              80,491
              
              
              
              690,908Accrued
      commissions
              
              
              64,865
              
              
              
              (308,514
              )
              
              
              156,540Accrued
      compensation
              
              
              (398,250
              )
              
              
              1,212,088
              
              
              
              193,330Accrued
      expenses
              
              
              76,349
              
              
              
              33,762
              
              
              
              210,578Deferred
      revenue and customer advances
              
              
              512,338
              
              
              
              68,525
              
              
              
              165,668Net
      cash provided by (used in) operating activities
              
              
              (4,723,372
              )
              
              
              (4,598,933
              )
              
              
              259,129Cash
      flows from investing activities:Costs
      incurred in software development
              
              
              (402,705
              )
              
              
              (469,171
              )
              
              
              (65,652
              )Net
      cash paid in acquisition of EnergyGateway, net of cashacquired
              
              
              —
              
              
              
              (4,904,358
              )
              
              
              —Purchases
      of property and equipment
              
              
              (40,704
              )
              
              
              (456,095
              )
              
              
              (72,061
              )Net
      cash used in investing activities
              
              
              (443,409
              )
              
              
              (5,829,624
              )
              
              
              (137,713
              )Cash
      flows from financing activities:Proceeds
      from exercise of stock options
              
              
              16,668
              
              
              
              2,812
              
              
              
              56,917Proceeds
      from exercise of stock warrants
              
              
              20,137
              
              
              
              —
              
              
              
              253,205Proceeds
      from initial public offering of common stock, net ofoffering
      costs of $3.6 million
              
              
              —
              
              
              
              —
              
              
              
              17,541,397Retirement
      of long-term debt
              
              
              —
              
              
              
              —
              
              
              
              (2,000,000
              )Principal
      payments on capital lease obligations
              
              
              (41,624
              )
              
              
              (56,257
              )
              
              
              (50,092
              )Principal
      payments on guaranteed return
              
              
              —
              
              
              
              —
              
              
              
              (10,523
              )Purchase
      of treasury stock
              
              
              (98,873
              )
              
              
              —
              
              
              
              (12,500
              )Net
      cash provided by (used in) financing activities
              
              
              (103,692
              )
              
              
              (53,445
              )
              
              
              15,778,404Net
      (decrease) increase in cash and cash equivalents
              
              
              (5,270,473
              )
              
              
              (10,482,002
              )
              
              
              15,899,820Cash
      and cash equivalents, beginning of year
              
              
              7,001,884
              
              
              
              17,483,886
              
              
              
              1,584,066Cash
      and cash equivalents, end of year
              
              $
              1,731,411
              
              
              $
              7,001,884
              
              
              $
              17,483,886Supplemental
      Disclosure of Cash Flow Information:Net
      cash received (paid) for interest
              
              $
              45,419
              
              
              $
              612,303
              
              
              $
              (129,401
              )Non-cash
      investing and financing activities:
                Property
      and equipment acquired through capital lease obligations
              
              $
              —
              
              
              $
              —
              
              
              $
              12,943Non-cash
      investing and financing activities:Fair
      value of common stock issued in acquisition of
    EnergyGateway
              
              $
              —
              
              
              $
              6,536,000
              
              
              $
              —Reversal
      of accrued expenses related to initial public offeringof
      common stock
              
              $
              —
              
              
              $
              48,468
              
              
              $
              —Conversion
      of series A preferred stock to common stock
              
              $
              —
              
              
              $
              —
              
              
              $
              1,507,997Conversion
      of non-voting common stock to common stock
              
              $
              —
              
              
              $
              —
              
              
              $
              898Issuance
      of warrants in connection with initial public offering of common
      stock
              
              $
              —
              
              
              $
              —
              
              
              $
              274,129
 
   The
accompanying notes are an integral part of these consolidated financial
statements.
 
 45
 WORLD
ENERGY SOLUTIONS, INC.
 
 Notes
to Consolidated Financial Statements
   
 NOTE 1 —
NATURE OF BUSINESS, BASIS OF PRESENTATION AND MANAGEMENT’S PLANS
 
 World
Energy Solutions, Inc. (“World Energy” or the “Company”) was incorporated in
1999 as a Delaware corporation and is focused in one operating segment –
brokering energy and environmental commodities utilizing online auction
platforms. The Company commenced operations through an entity named Oceanside
Energy, Inc. (“Oceanside”), which was incorporated under the laws of the State
of Delaware on September 3, 1996.  We incorporated World Energy
Solutions, Inc. under the laws of the State of Delaware under the name “World
Energy Exchange, Inc.” on June 22, 1999 and on October 31, 1999, Oceanside
became a wholly-owned subsidiary of World Energy Solutions, Inc. Oceanside was
subsequently dissolved on May 18, 2006.  On December 15, 2006 the
Company established World Energy Securities Corp., a Massachusetts corporation,
as a wholly-owned subsidiary.
 
 World
Energy is an energy and environmental commodities brokerage company that has
developed online auction platforms, the World Energy Exchange and the World
Green Exchange. On the World Energy Exchange, retail energy consumers
(commercial, industrial and government) and wholesale energy participants
(utilities, electricity retailers and intermediaries) in the United States are
able to negotiate for the purchase or sale of electricity and other energy
resources from competing energy suppliers which have agreed to participate on
our auction platform. Although the Company’s primary source of revenue is from
brokering electricity and natural gas, the Company adapted its World Energy
Exchange auction platform to accommodate the brokering of green power in 2003
(i.e., electricity generated by renewable resources), wholesale electricity in
2004 and certain other energy-related products in 2005.  In 2007, the
Company created the World Green Exchange based on the World Energy Exchange
technology and business process. On the World Green Exchange, buyers and sellers
negotiate for the purchase or sale of environmental commodities such as
Renewable Energy Certificates, Verified Emissions Reductions, and Certified
Emissions Reductions and Regional Greenhouse Gas Initiative
allowances.
 
 On November 16, 2006, the Company
completed its initial public offering of common stock for the sale of 23,000,000
shares of common stock resulting in net proceeds to the Company of approximately
$17.5 million (net of offering costs of approximately $3.6
million).
 
 On June 1, 2007, the Company acquired
substantially all of the assets of EG Partners, LLC, formerly known
as  EnergyGateway LLC (“EnergyGateway”), for $4,951,758 in cash and
5,375,000 common shares of World Energy plus the assumption of certain
liabilities.  The EnergyGateway operations are included in these
financial statements from June 1, 2007.  See Note 11 for further
discussion of this acquisition.
 
 We have
incurred $19.6 million of cumulative operating losses to date. For the year
ended December 31, 2008, we incurred net losses of $6.8 million and generated
negative cash flow of $5.3 million. We have historically funded our operations
with cash flow from operations and the issuance of various debt and equity
instruments. We have approximately $1.7 million of cash and cash equivalents and
no bank debt as of December 31, 2008.  We expect to continue to fund
our operations from existing cash resources, operating cash flow and, when
required, the issuance of various debt and equity instruments. That
notwithstanding, we believe that our current financial resources are adequate to
fund our ongoing operations and pursue our strategic initiatives. Management
anticipates the Company will attain cash flow positive and improve its liquidity
through continued growth. We have consistently decreased our quarterly operating
loss and cash usage during 2008. In the fourth quarter, our operating loss was
$1.0 million and cash usage was $25,000. While cash usage benefitted from
certain working capital reductions in the fourth quarter, we have reduced our
operating cash usage substantially through growth and certain cost reductions
implemented during 2008. To the extent our revenue growth does not meet our
anticipated targets, we will adjust our cost structure as deemed appropriate.
However no assurance can be given that management’s actions will result in
profitable operations or cash flow.
 
  NOTE 2 —
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 
 The
Company’s consolidated financial statements include its wholly-owned subsidiary
World Energy Securities Corp.  All intercompany accounts and
transactions have been eliminated in consolidation.
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“generally accepted
accounting principles”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Accordingly, actual results could differ from those estimates.
 
 46
 The
Company’s most judgmental estimates affecting the consolidated financial
statements are those relating to revenue recognition and the estimate of actual
energy purchased from the energy supplier by the end user, or energy consumer,
of such energy; software development costs; the fair value of equity securities
prior to the Company’s initial public offering when there was no ready market
for the purchase and sale of these shares; the valuation of intangible assets
and goodwill; impairment of long-lived assets; and estimates of future taxable
income as it relates to the realization of net deferred tax
assets.  The Company regularly evaluates its estimates and assumptions
based upon historical experience and various other factors that it believes to
be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. To the extent actual results differ
from those estimates, future results of operations may be affected. The Company
believes the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of the consolidated financial
statements.
 
 Revenue
Recognition
 
 The
Company generates revenue through commissions on sales of energy usage or
environmental commodity transacted on the Company’s online auction platform. The
Company recognizes revenues in accordance with the United States Securities and
Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 104, Revenue Recognition(“SAB 104”). SAB 104 requires that four basic criteria must be
met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) the service has been rendered; (3) the fee is
fixed or determinable; and (4) collectibility is reasonably
assured.
 
 The
Company participates in four primary markets: retail electricity, retail natural
gas, wholesale energy and environmental commodities.  Prior to the
June 1, 2007 acquisition of EnergyGateway, the Company primarily received
revenue from the brokering of electricity on the World Energy Exchange,
utilizing reverse auction technology (“retail electricity transactions”). While
EnergyGateway also utilized an online auction format, its primary focus was on
the brokering of natural gas and its “post and bid” methodology (“retail natural
gas transactions”). In addition, the Company adapted the World Energy Exchange
to conduct reverse and forward online auctions for the wholesale electricity and
natural gas markets and environmental commodities (“wholesale and green
transactions”). The revenue recognition policy and related third party
commissions for each of these products is more fully described
below.
 
 Retail Electricity
Transactions
 
 The
Company receives a monthly commission on energy sales contracted through our
online auction platform from each energy supplier based on the energy usage
generated and transacted between the energy supplier and energy
consumer.  The Company’s commissions are not based on the retail price
for electricity; rather, commissions are based on the energy usage generated and
transacted between the energy supplier and energy consumer multiplied by the
contractual commission rate. Revenue from commissions is recognized as earned on
a monthly basis over the life of each contract as energy is consumed, provided
there is persuasive evidence of an arrangement, the sales price is fixed or
determinable, collection of the related receivable is reasonably assured, and
customer acceptance criteria, if any, has been successfully
demonstrated.
 
 The
Company records brokerage commissions based on actual usage data obtained from
the energy supplier for that accounting period, or to the extent actual usage
data is not available, based on the estimated amount of electricity and gas
delivered to the energy consumers for that accounting period.  The
Company develops its estimates on a quarterly basis based on the following
criteria:
 
 •
              Payments
      received prior to the issuance of the financial
  statements;
 •
              Usage
      updates from energy
suppliers;
 •
              Usage
      data from utilities;
 •
              Comparable
      historical usage data; and
 •
              Historical
      variances to previous estimates.
 
 To the
extent usage data cannot be obtained, the Company estimates revenue as
follows:
 
 •
              Historical
      usage data obtained from the energy consumer in conjunction with the
      execution of the auction;
 •
              Geographic/utility
      usage patterns based on actual data
received;
 •
              Analysis
      of prior year usage
patterns; and
 •
              Specific
      review of individual energy supplier/location
  accounts.
 
 In
addition, the Company analyzes this estimated data based on overall industry
trends including prevailing weather and usage data. Once the actual data is
received, the Company adjusts the estimated accounts receivable and revenue to
the actual total amount in the period during which the payment is received.
Based on management’s current capacity to obtain actual energy usage, the
Company currently estimates four to six weeks of revenue at the end of its
accounting period. Differences between estimated and actual revenue have been
within management’s expectations and have not been material to
date.
 
 47
 The
Company generally does not directly invoice its electricity energy suppliers
and, therefore, it reports a substantial portion of its receivables as
“unbilled.” Unbilled accounts receivable represents management’s best estimate
of energy provided by the energy suppliers to the energy consumers for a
specific completed time period at contracted commission rates and is made up of
two components. The first component represents energy usage for which the
Company has received actual data from the supplier and/or the utility but for
which payment has not been received at the balance sheet date. The majority of
the Company’s contractual relationships with energy suppliers require them to
supply actual usage data to us on a monthly basis and remit payment to us based
on that usage. The second component represents energy usage for which the
Company has not received actual data, but for which has estimated
usage.  Commissions paid in advance by certain energy suppliers are
recorded as deferred revenue and amortized to commission revenue on a monthly
basis on the energy exchanged that month.
  Retail Natural Gas
Transactions
 
 There are
two primary fee components to the Company’s retail natural gas services -
transaction fees and management fees.  Transaction fees are billed to
and paid by the energy supplier awarded business on the
platform.  Transaction fees for natural gas awards are established
prior to award and are the same for each supplier. For the majority of our
natural gas transactions, we bill the supplier upon the conclusion of the
transaction based on the estimated energy volume transacted for the entire award
term multiplied by the transaction fee.  Management fees are paid by
our energy consumers and are generally billed on a monthly basis for services
rendered based on terms and conditions included in contractual arrangements.
While substantially all of the Company’s retail natural gas transactions are
accounted for in accordance with this policy, a certain percentage is accounted
for as the natural gas is consumed by the customer and recognized as revenue in
accordance with the retail electricity transaction revenue recognition
methodology described above.
 
 Wholesale and Green
Transactions
 
 Substantially
all transaction fees are invoiced upon the conclusion of the auction based on a
fixed fee.  These revenues are not tied to future energy usage and are
recognized upon the completion of the online auction.  For reverse
auctions where our customers bid for a consumer’s business, the fees are paid by
the bidder.  For forward auctions where a lister is selling energy or
credits, the fees are typically paid by the lister. In addition, revenue may not
be recognized on certain green transactions until the credits being auctioned
have been verified and/or delivered. While substantially all wholesale and green
transactions are accounted for in this fashion, a small percentage of our
wholesale revenue is accounted for as the wholesale electricity or gas is
delivered similar to the retail electricity transaction revenue recognition
methodology described above.
 
 Channel Partner
Commissions
 
 The
Company pays commissions to its channel partners at contractual rates based on
monthly energy transactions between energy suppliers and energy consumers. The
commission is accrued monthly and charged to sales and marketing expense as
revenue is recognized.  The Company pays commissions to its
salespeople at contractual commission rates based upon cash collections from its
customers.
 
 Revenue
Estimation
 
 The
Company’s estimates in relation to revenue recognition affect revenue and sales
and marketing expense as reflected on its statements of operations, and trade
accounts receivable and accrued commissions accounts as reflected on its balance
sheets. For any quarterly reporting period, the Company may not have actual
usage data for certain energy suppliers and will need to estimate revenue. The
Company records revenue based on the energy consumers’ historical usage profile.
At the end of each reporting period, historical revenue is adjusted to reflect
actual usage for the period. For the year ended December 31, 2008, the Company
estimated usage for approximately 10% of our revenue resulting in a negative
0.2%, orapproximately $23,000,
adjustment. This decrease in revenue, which is based on adjusted year to date
revenue, resulted in an approximate $6,000 decrease in sales and marketing
expense related to third party commission expense associated with those
revenues. Corresponding adjustments were made to trade accounts receivable and
accrued commissions, respectively. A 1% difference between this estimate and
actual usage would have an approximate $10,000 effect on our revenue for the
year ended December 31, 2008.
 
 Software
Development
 
 Certain
acquired software and significant enhancements to the Company’s software are
recorded in accordance with Statement of Position (“SOP”) 98-1, “Accounting for Costs of Computer Software Developed or
Obtained for Internal Use”.Accordingly, internally developed software
costs of approximately $403,000, $469,000, and $66,000 related to
implementation, coding and configuration have been capitalized in 2008, 2007,
and 2006, respectively. The Company amortizes internally developed and purchased
software over the estimated useful life of the software (generally three years).
During 2008, 2007, and 2006, approximately $239,000, $111,000, and $73,000,
respectively, were amortized to cost of revenues resulting in accumulated
amortization of approximately $512,000 and $273,000 at December 31, 2008
and 2007, respectively. At December 31, 2008, future amortization expense
for capitalized internally developed software is as follows:
 
 48
 2009
              
              $
              298,0002010
              
              
              240,0002011
      and thereafter
              
              
              89,000$
              627,000
 
 Pre- and
post- software implementation and configuration costs have historically been
immaterial and charged to cost of revenue as incurred.
 
 Goodwill
 
 The
Company uses assumptions in establishing the carrying value and fair value of
its goodwill.  Goodwill represents the excess of the purchase price
over the fair value of identifiable net assets of acquired
businesses.  The Company accounts for goodwill that results from
acquired businesses in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 142, “Goodwill and Other Intangible
Assets” (“SFAS No. 142”).  Under SFAS No. 142, goodwill and
intangible assets having indefinite lives are not amortized but instead are
assigned to reporting units and tested for impairment annually or more
frequently if changes in circumstances or the occurrence of events indicate
possible impairment.
 
 Pursuant
to SFAS No. 142, the Company performs an annual impairment review during the
fourth quarter of each year or earlier if indicators of potential impairment
exist. The impairment test for goodwill is a two-step process.  Step
one consists of a comparison of the fair value of a reporting unit with its
carrying amount, including the goodwill allocated to each reporting
unit.  If the carrying amount is in excess of the fair value, step two
requires the comparison of the implied fair value of the reporting unit whereby
the carrying amount of the reporting unit’s goodwill over the implied fair value
of the reporting unit’s goodwill will be recorded as an impairment loss. The
Company performed its annual impairment analysis in December 2008 and determined
that no impairment of goodwill or intangible assets existed.  Future
events could cause management to conclude that impairment indicators exist and
that goodwill of previously acquired businesses is impaired.  Any
related impairment loss could have a material impact on the Company’s financial
condition and results of operations.
 
 Intangible
Assets
 
 The
Company uses assumptions in establishing the carrying value, fair value and
estimated lives of its intangible assets.  The criteria used for these
assumptions include management’s estimate of the assets continuing ability to
generate positive income from operations and positive cash flow in future
periods compared to the carrying value of the asset, as well as the strategic
significance of any identifiable intangible asset in our business
objectives.  If assets are considered impaired, the impairment
recognized is the amount by which the carrying value of the assets exceeds the
fair value of the assets.  Useful lives and related amortization
expense are based on an estimate of the period that the assets will generate
revenues or otherwise be used by the Company.  Factors that would
influence the likelihood of a material change in the Company’s reported results
include significant changes in the asset’s ability to generate positive cash
flow, a significant decline in the economic and competitive environment on which
the asset depends and significant changes in the Company’s strategic business
objectives.
 
 Intangible
assets consist of customer relationships and contracts, purchased technology and
other intangibles, and are stated at cost less accumulated amortization.
Intangible assets with a definite life are amortized using the straight-line
method over their estimated useful lives, which range from one to ten
years.  Amortization expense was approximately $1,367,000 and $813,000
for the years ended December 31, 2008 and 2007, respectively. Accumulated
amortization of intangible assets amounted to approximately $2,180,000 at
December 31, 2008. The approximate future amortization expense of intangible
assets is as follows:
  2009
                
                $
                1,199,0002010
                
                
                1,027,0002011
                
                
                957,0002012
                
                
                675,0002013
      and thereafter
                
                
                2,092,000$
                5,950,000
 Impairment
of Long-Lived and Intangible Assets
 
 In
accordance with SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the Company periodically reviews
long-lived assets and intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable or that the useful lives of those assets are no longer
appropriate. Recoverability of these assets is determined by comparing the
forecasted undiscounted net cash flows of the operation to which the assets
relate to the carrying amount.  During 2008, no impairment of the
Company’s long-lived assets was recorded as no change in circumstances indicated
that the carrying value of assets was non-recoverable.
 
 Cash
and Cash Equivalents
 
 The
Company considers all highly liquid debt instruments purchased with an original
maturity of 90 days or less to be cash equivalents. The Company invests
excess cash in a US Treasury money market fund that is Federal Deposit Insurance
Corporation insured.
 
 Property
and Equipment
 
 Property
and equipment is stated at cost. Depreciation is provided on a straight-line
basis over the estimated useful lives of the related assets or the life of the
related lease, whichever is shorter, which range from 3 to
7 years.
 
 49
 Income
Taxes
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).Deferred tax assets and liabilities are determined at the end of each
period based on the future tax consequences that can be attributed to net
operating loss carryforwards, as well as differences between the financial
statement carrying amounts of the existing assets and liabilities and their
respective tax basis. Deferred income tax expense or credits are based on
changes in the asset or liability from period to period. Valuation allowances
are provided if, based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. The
realization of deferred tax assets is dependent upon the generation of future
taxable income. In determining the valuation allowance, the Company considers
past performance, expected future taxable income, and qualitative factors which
are considered to be appropriate in estimating future taxable income. The
Company’s forecast of expected future taxable income is for future periods that
can be reasonably estimated.  The Company has historically utilized a
three year forecasting window to determine its expected future taxable income.
As of December 31, 2006, the Company had cumulative net income for the three
years then ended and the expected future taxable income anticipated from 2007
through 2009 was deemed adequate on a present value basis to benefit the
majority of our deferred tax assets (primarily net operating loss
carryforwards).  During 2007, the Company accelerated its growth in
excess of its initial expectations to address the strategic initiatives outlined
at the time of our initial public offering.  The Company grew from 20
employees as of December 31, 2006 to 63 as of December 31, 2007, acquired one of
its main competitors in the retail energy market, and developed its wholesale
and environmental commodity product lines. These initiatives increased the
Company’s loss for 2007 resulting in a three-year cumulative loss as of December
31, 2007 and increased its near term operating expenses. A three-year cumulative
loss is significant negative evidence in considering whether the deferred tax
assets are realizable and generally precludes relying on projections of future
taxable income to support the recovery of deferred tax assets. While the Company
expects its future income will be adequate on a present value basis to benefit
substantially all of its current deferred tax assets, the recent three-year
cumulative loss is given more weight than projected future income when
determining the need for a valuation.  Therefore, during the fourth
quarter of 2007, the Company recorded a full valuation allowance against its
deferred tax assets, and maintains a cumulative valuation allowance of
approximately $7.3 million at December 31, 2008.
  The
Company has reviewed the tax positions taken, or to be taken, in its tax returns
for all tax years currently open to examination by the taxing authority in
accordance with the recognition and measurement standards of FIN
48.  At December 31, 2008, there are no expected material, aggregate
tax effect of differences between tax return positions and the benefits
recognized in our financial statements.
 
 Advertising
Expense
 
 Advertising
expense primarily includes promotional expenditures and is expensed as incurred,
as such efforts have not met the direct-response criteria required for
capitalization. Amounts incurred for advertising expense were not material for
the years ended December 31, 2008, 2007, and 2006.
 
 Comprehensive
Income
 
 SFAS No. 130,
“Reporting Comprehensive
Income”,establishes standards
for reporting and displaying comprehensive income (loss) and its components in
financial statements. Comprehensive income (loss) is defined as the change in
stockholders’ equity of a business enterprise during a period from transactions
and other events and circumstances from non-owner sources. The comprehensive
income (loss) for all periods presented does not differ from the reported net
income (loss).
 
 Fair
Value of Financial Instruments
 
 SFAS No. 107,
“Disclosures about Fair Value
of Financial Instruments”, requires management to disclose the estimated
fair value of certain assets and liabilities defined by SFAS 107 as
financial instruments.  Financial instruments are generally defined as
cash, evidence of ownership interest in an entity, or a contractual obligation
that both conveys to one entity a right to receive cash or other financial
instruments from another entity and imposes on the other entity the obligation
to deliver cash or other financial instruments to the first entity. At
December 31, 2008, management believes that the carrying value of cash and
cash equivalents, receivables and payables approximated fair value because of
the short maturity of these financial instruments.
  Segment
Reporting
 
 SFAS No. 131,
“Disclosures about Segments of
an Enterprise and Related Information”,established standards for reporting
information about operating segments in financial statements. Operating segments
are defined as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief decision maker
in deciding how to allocate resources and in assessing performance. The
Company’s chief decision maker is the president and chief operating officer. The
Company’s chief decision maker reviews the results of operations based on one
industry segment: the brokering of energy and environmental commodities by
conducting structured
   50
 events
utilizing online exchanges. The Company delivers these services to three (3)
distinctive markets: retail energy, wholesale energy and environmental
commodity. The brokerage process is substantially the same regardless of the
market being serviced and are supported by the same operations personnel
utilizing the same basic technology and back office support. There is no
discrete financial information for these product lines nor are there segment
managers who have operating responsibility for each product line.
 
 Concentration
of Credit Risk and Off-Balance Sheet Risk
 
 Financial
instruments that potentially expose the Company to concentrations of credit risk
consist principally of cash and trade accounts receivable. The Company has no
significant off-balance sheet risk such as foreign exchange contracts, option
contracts, or other foreign hedging arrangements. The Company places its cash
with primarily one institution, which management believes is of high credit
quality.
 
 The
Company receives commission payments from energy suppliers based on the energy
usage transacted between energy consumers and energy suppliers.  The
Company provides credit in the form of invoiced and unbilled accounts receivable
to energy suppliers and energy consumers in the normal course of
business.  Collateral is not required for trade accounts receivable,
but ongoing credit evaluations of energy suppliers and energy consumers are
performed.  Management provides for an allowance for doubtful accounts
on a specifically identified basis, as well as through historical experience
applied to an aging of accounts, if necessary.  Trade accounts
receivable are written off when deemed uncollectible.  To date
write-offs have not been material.
 
 The
following represents revenue and trade accounts receivable from energy suppliers
exceeding 10% of the total in each category:
 
 Revenue for the year ended December
      31,
              
              Trade accounts receivable as
      ofDecember
    31,Energy supplier
              
              2008
              
              2007
              
              2006
              
              2008
              
              2007A
              
              22%
              
              21%
              
              9%
              
              33%
              
              22%B
              
              8%
              
              7%
              
              10%
              
              16%
              
              10%C
              
              7%
              
              11%
              
              18%
              
              18%
              
              10%D
              
              2%
              
              5%
              
              13%
              
              5%
              
              7%E
              
              4%
              
              6%
              
              10%
              
              8%
              
              12%
 
 During
2006, supplier C was acquired by another supplier who is not reflected above as
its revenues represented less than 10% of total revenue. If these suppliers were
combined as of January 1, 2006, revenue attributable to these customers would
have been 27% for the year ended December 31, 2006 and unbilled accounts
receivable would have represented 46% of total unbilled accounts receivable as
of December 31, 2006.
 
 In
addition to its direct relationship with energy suppliers, the Company also has
direct contractual relationships with energy consumers for the online
procurement of certain of their energy needs.  These energy consumers
are primarily large businesses and government organizations.  For the
years ended December 31, 2008, 2007 and 2006, two, two and four of these energy
consumers accounted for transactions resulting in over 10% individually,
respectively, and 23%, 30% and 63% in the aggregate of our revenue,
respectively.
 
 Reclassifications
 
 Certain
prior year amounts have been reclassified to conform with the current
presentation.
 
 Loss
Per Share
 
 On
November 16, 2006, the Company completed an initial public offering of its
common stock.  As a result, all issued and outstanding shares of
Series A Preferred Stock and non-voting common stock were automatically
converted into voting common stock.  As of December 31, 2008, 2007 and
2006, the Company only had one issued and outstanding class of stock – common
stock.  As a result, the basic loss per share for the years ended
December 31, 2008, 2007 and 2006 is computed by dividing net loss available to
common stockholders by the weighted average number of common shares outstanding
for the period.  The computed loss per share does not assume
conversion, exercise, or contingent exercise of securities that would have an
anti-dilutive effect on loss per share. The following table reflects the
weighted average shares used to calculate basic and diluted earnings per
share:
  For the Years Ended
      December 31,2008
              
              
              2007
              
              
              2006Weighted
      average number of voting common shares — basic anddiluted
              
              
              83,103,145
              
              
              
              79,793,590
              
              
              
              45,576,477
 
 51
 For the
year ended December 31, 2008, 827,237, 2,666,466, and 245,834 weighted
average shares issuable relative to common stock warrants, common stock options
and restricted stock, respectively, were excluded from net loss per share since
the inclusion of such shares would be anti-dilutive due to the Company’s net
loss position.  For the year ended December 31, 2007, 1,048,575,
1,826,375 and 493,718 weighted average shares issuable relative to common stock
warrants, common stock options and restricted stock, respectively, were excluded
from net loss per share since the inclusion of such shares would be
anti-dilutive due to the Company’s net loss position.
 
 At
December 31, 2008, 1,150,000 and 2,218,250 shares issuable relative to common
stock warrants and common stock options, respectively, had exercise prices that
exceeded the average market price of the Company’s common stock during the year
ended December 31, 2008 and were excluded from the calculation of diluted shares
since the inclusion of such shares would be anti-dilutive.  At
December 31, 2008, 658,431 shares of restricted stock were excluded from the
calculation of diluted shares during the year ended December 31, 2008, since the
inclusion of such shares would be anti-dilutive. For the year ended December 31,
2007, 2,320,000 shares issuable relative to common stock options had exercise
prices that exceeded the average market price of the Company’s common stock and
were excluded from the calculation of diluted shares since the inclusion of such
shares would be anti-dilutive.
 
 The
Company did not declare or pay any dividends in 2008, 2007 and
2006.
 
 Share-Based
Compensation
 
 At
December 31, 2008, the Company had two share-based employee compensation
plans, which are more fully described in Note 6. Effective January 1, 2006,
the Company accounted for stock-based compensation in accordance with
SFAS No. 123(R), “Stock-Based Compensation”
(“SFAS No. 123(R)”). SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options
and restricted stock, to be recognized in the income statement based on their
fair values.  Pro forma disclosure is no longer an
alternative.
 
 SFAS No. 123(R)
requires nonpublic companies that used the minimum value method in
SFAS No. 123 for either recognition or pro forma disclosures to apply
SFAS No. 123(R) using the prospective-transition method. As such, the
Company will continue to apply APB 25 in future periods to equity awards
outstanding at the date of SFAS No. 123(R)’s adoption that were
measured using the minimum value method. In accordance with this standard, the
prior period pro forma stock information has not been restated. In accordance
with SFAS No. 123(R), the Company will recognize the compensation cost
of share-based awards on a straight-line basis over the vesting period of the
award.
 
 The
per-share weighted-average fair value of stock options granted during the years
ended December 31, 2008 and 2007 was $0.12 and $0.58, respectively, on the date
of grant, using the Black-Scholes option-pricing model with the following
weighted-average assumptions and estimated forfeiture rates of 15% and 13% in
2008 and 2007, respectively:
 
 Year
      ended
                December
      31,
              
              Expected
                Dividend
      Yield
              
              Risk
                Interest
      Rate
              
              Expected
                Option
      Life
              
              Expected
                Volatility2008
              
              —
              
              1.67%
              
              4.75
      years
              
              87%2007
              
              —
              
              4.66%
              
              4.61
      years
              
              54%2006
              
              —
              
              4.66%
              
              4.75
      years
              
              48%
 
 Effective
with the adoption of SFAS No. 123(R), the Company elected to use the
Black-Scholes option pricing model to determine the weighted average fair value
of options granted. As the Company’s stock has a limited trading history as of
December 31, 2008, the Company determined the volatility for stock options
granted in 2008 based on a weighted combination of per share closing prices
reported on the Toronto Stock Exchange, and historical and reported data for a
peer group of companies that issued options with substantially similar
terms.  The expected life of options has been determined utilizing the
“simplified” method as prescribed by the Securities and Exchange Commission’s
Staff Accounting Bulletin No. 107, “Share-Based Payment”.The
risk-free interest rate is based on a treasury instrument whose term is
consistent with the expected life of the stock options. The Company has not paid
and does not anticipate paying cash dividends on its common stock; therefore,
the expected dividend yield is assumed to be zero. In addition,
SFAS No. 123(R) requires companies to utilize an estimated forfeiture
rate when calculating the expense for the period, whereas,
SFAS No. 123 permitted companies to record forfeitures based on actual
forfeitures, which was the Company’s historical policy under
SFAS No. 123.  As a result, the Company applied an estimated
forfeiture rate of 15% in 2008 and estimated forfeiture rates of between 11% and
13%, during the year ended December 31, 2007 in determining the expense recorded
in the accompanying consolidated statements of operations.  The effect
on compensation expense for the year ended December 31, 2008 from changes in the
forfeiture rate in 2007 of previous years’ stock option grants, resulted in an
increase in compensation expense approximately $11,000.
 
 For the
years ended December 31, 2008, 2007 and 2006 the Company recorded share-based
compensation expense of approximately $1,007,000, $982,000 and $44,000 in
connection with share-based payment awards, respectively.  The
approximate total share-based compensation expense for the periods presented is
included in the following expense categories:
 
 52
 Years Ended
    December 31,2008
              
              
              2007
              
              
              2006Cost
      of revenue
              
              $
              197,000
              
              
              $
              103,000
              
              
              $
              2,000Sales
      and marketing
              
              
              670,000
              
              
              
              753,000
              
              
              
              20,000General
      and administrative
              
              
              140,000
              
              
              
              126,000
              
              
              
              22,000Total
      share-based compensation
              
              $
              1,007,000
              
              
              $
              982,000
              
              
              $
              44,000
 
 As of
December 31, 2008, there was approximately $1,740,000 of unrecognized
compensation expense related to share-based awards, including approximately
$815,000 related to non-vested stock option awards that is expected to be
recognized over a weighted-average period of 2.26 years, and approximately
$925,000 related to non-vested restricted stock awards that is expected to be
recognized over a weighted average period of 2.21 years. See Note 6 for a
summary of the share-based activity under the Company’s stock-based employee
compensation plans for the years ended December 31, 2008, 2007 and
2006.
 
 Prior to
January 1, 2006, the Company accounted for its stock-based awards to employees
using the intrinsic value method prescribed in APB 25 and related
interpretations. Under the intrinsic value method, compensation expense is
measured on the date of grant as the difference between the deemed fair value of
the Company’s common stock and the option exercise price multiplied by the
number of options granted. Generally, the Company grants stock options with
exercise prices equal to the estimated fair value of its common stock; however,
to the extent that the deemed fair value of the common stock exceeded the
exercise price of stock options granted to employees on the date of grant, the
Company recorded stock-based compensation expense ratably over the vesting
schedule of the options, generally four years. The fair value of the Company’s
common stock is determined by the Company’s Board of Directors (the
“Board”).
 
 Prior to
November 16, 2006, there had been no public market for the Company’s common
stock and the fair value for the Company’s common stock was estimated by the
Board, with input from management as well as from independent appraisals. The
Board exercised judgment in determining the estimated fair value of the
Company’s common stock on the date of grant based on several factors, including
the liquidation preferences, dividend rights, and voting control attributable to
the Company’s then-outstanding convertible preferred stock and, primarily, the
likelihood of achieving a liquidity event such as an initial public offering or
sale of the Company. In the absence of a public trading market for the Company’s
common stock, the Board considered objective and subjective factors in
determining the fair value of the Company’s common stock. The Company believes
this to have been a reasonable methodology based upon the Company’s internal
peer company analyses and based on arms-length transactions, when applicable,
involving the Company’s common stock supportive of the results produced by this
valuation methodology.
 
 For the
years ended December 31, 2008 and 2007, options to purchase 1,206,000 and
3,020,000 shares of common stock were granted, respectively, at weighted
exercise prices of $0.20 and $1.24, respectively.  The weighted
average fair value of the Company’s common stock at option grant date for the
years ended December 31, 2008 and 2007 was $0.19 and $1.17,
respectively.  Additionally, 793,000 and 1,928,500 shares of
restricted stock were granted for the year ended December 31, 2008 and 2007,
respectively.
 
 In
preparing for the initial public offering of the Company’s common stock, the
Company reassessed the valuations of its common stock during 2006, in accordance
with the American Institute of Certified Public Accountants (“AICPA’s”) Practice
Aid, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation (the
“Practice Aid”).In May 2006, the company engaged an unrelated
third-party valuation specialist to assist management in providing a
retrospective valuation report of option grants during the first quarter of 2006
and a prospective valuation of the July 31, 2006 option grants. The third-party
valuation specialist valued the Company’s common stock (both voting and
non-voting common stock) at approximately $0.30, $0.39 and $0.95 as of
January 16, 2006, February 10, 2006 and July 31, 2006, respectively,
representing the dates when certain stock options were granted.
 
 The
Company believes that the valuation methodologies that were used were consistent
with the Practice Aid. With the exception of one option to purchase
60,000 shares on March 30, 2006, the Company has concluded that for
all options granted to employees during the two years ended December 31,
2005 and the period from January 1, 2006 to November 16, 2006, the fair value of
its common stock, for financial reporting purposes, did not exceed the exercise
price for those options at the time of grant. The Company granted stock options
to purchase 60,000 shares of non-voting common stock, on March 30,
2006, to an employee with an exercise price of $0.38 per share, which was
$0.12 per share below fair value as subsequently determined by the Board of
Directors. Compensation expense related to this grant was deemed to be
immaterial. On July 19, 2006 the Company and the option holder agreed to
terminate the option grant. On July 31, 2006, the Company granted this
employee an option to purchase 72,000 shares of common stock at an exercise
price of $0.95, which the Board determined to be the fair value at that
date.
 
 The
Company accounts for transactions in which services are received from
non-employees in exchange for equity instruments based on the fair value of such
services received or of the equity instruments issued, whichever is more
reliably measured, in accordance with SFAS No. 123(R)and EITF 96-18,
“Accounting for Equity
Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction With Selling, Goods or Services”. The Company
granted 455,000 shares of restricted common stock during 2007 to
non-employees in consideration for services performed. At the time of the
grants, these shares of restricted stock had a fair value of approximately
$523,000, based on the fair value of the Company’s common stock at the grant
date.  The Company recognized a charge of approximately $35,000 and
$488,000 to sales and marketing expense in the statements of operations for the
year ended December 31, 2008 and 2007, respectively, related to these
grants.
 
 53
 The
Company provides the disclosures as required by SFAS No. 148, “Accounting for Stock-Based Compensation and
Disclosure, an Amendment of FASB Statement No. 123”.
 
 Recent
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 157, “Fair Value Measurements,”
(SFAS No. 157), which establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The FASB partially deferred
the effective date of SFAS 157 for non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis to fiscal years beginning after November 15, 2008. The
effective date for financial assets and liabilities that are recognized on a
recurring basis was January 1, 2008. The Company has determined that the
adoption of SFAS 157 on January 1, 2008 for financial assets and
liabilities did not have a material impact on its consolidated financial
statements.
 
 In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,” (SFAS 159), which provides companies
with an option to report selected financial assets and liabilities at fair
value. SFAS 159 establishes presentation and disclosure requirements designed to
facilitate comparisons between companies that choose different measurement
attributes for similar types of assets and liabilities and highlights the effect
of a company’s choice to use fair value on its earnings. It also requires a
company to display the fair value of those assets and liabilities for which it
has chosen to use fair value on the face of the balance sheet. SFAS 159 was
effective for the Company beginning January 1, 2008 and did not have an
impact on its consolidated financial statements as the Company did not choose to
use the fair value option.
 
 In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations”(“SFAS No. 141(R)”).  SFAS No. 141(R) requires an acquiring
entity in a business combination to recognize all (and only) the assets acquired
and liabilities assumed in the transaction; establishes the acquisition-date
fair value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all
of the information they need to evaluate and understand the nature and financial
effect of the business combination.  SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008.  The Company expects
to adopt SFAS No. 141(R) on January 1, 2009.
 
 In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS No. 160”).  SFAS No.
160 clarifies that a noncontrolling or minority interest in a subsidiary is
considered an ownership interest and, accordingly, requires all entities to
report such interests in subsidiaries as equity in the consolidated financial
statements.  SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008.  The Company adopted SFAS No. 160 on
January 1, 2009.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133” (“SFAS No. 161”).  The new standard is intended to improve
financial reporting about derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows.  Entities are required to provide enhanced disclosures about:
(a) how and why an entity uses derivative instruments; (b) how derivative
instruments and related hedged items are accounted for under SFAS No. 133 and
its related interpretations; and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance, and
cash flows.  This standard is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged.  The Company is currently
evaluating the impact, if any, SFAS No. 161 will have on its consolidated
financial position, results of operations or cash flows.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (“GAAP”) in the United
States (“the GAAP hierarchy).  This Statement is effective 60 days
following the Security and Exchange Commission’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles”.  The
Company currently adheres to the GAAP hierarchy as presented in SFAS No. 162,
and therefore does not expect its adoption will have a material impact on its
consolidated results of operations and financial condition.
  
 54
 NOTE 3 —
TRADE ACCOUNTS RECEIVABLE, NET
 
 The Company generally does not directly
invoice energy suppliers and, therefore, reports a significant portion of its
receivables as “unbilled.” Unbilled accounts receivable represents management’s
best estimate of energy provided by the energy suppliers to the energy consumers
for a specific completed time period at contracted commission
rates.
 
 Trade accounts receivable, net consists
of the following:
 December 31,2008
              
              
              2007Unbilled
      accounts receivable
              
              $
              1,901,892
              
              
              $
              1,619,440Billed
      accounts receivable
              
              
              487,089
              
              
              
              263,7932,388,981
              
              
              
              1,883,233Allowance
      for doubtful accounts
              
              
              (45,388
              )
              
              
              (5,000
              )Trade
      accounts receivable,
      net
              
              $
              2,343,593
              
              
              $
              1,878,233
 
  NOTE 4 —
PROPERTY AND EQUIPMENT, NET
 
 Property
and equipment, net consists of the following:
 December 31,2008
              
              
              2007Leasehold
      improvements
              
              $
              65,451
              
              
              $
              65,451Equipment
              
              
              452,312
              
              
              
              426,781Furniture
      and fixtures
              
              
              434,147
              
              
              
              418,974951,910
              
              
              
              911,206Less
      accumulated depreciation
              
              
              (464,699
              )
              
              
              (315,256
              )Property
      and equipment, net
              
              $
              487,211
              
              
              $
              595,950
 
 Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was $149,443,
$104,834 and $62,156, respectively. Property and equipment purchased under
capital lease obligations at December 31, 2008 and 2007 was $189,524 and
$271,104, respectively. Accumulated depreciation for property and equipment
purchased under capital lease was $133,466 and $182,872 at December 31,
2008 and 2007, respectively.
   NOTE 5 —
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
 
 On
November 16, 2006, in connection with its initial public offering, the Company
amended its Certificate of Incorporation to eliminate all references to the
Series A Preferred Stock and authorize 5,000,000 shares of $0.0001 par value
undesignated preferred stock.  No shares have been issued as of
December 31, 2008 and 2007.
 
 Prior to
November 16, 2006, the Company had authorized 15,000,000 shares of $0.0001 par
value Series A Redeemable Convertible Preferred Stock (the “Series A
Preferred”). The Series A Preferred had the following terms and
conditions:
 
 Dividends — In the event
that the Company pays a dividend (other than a dividend payable solely in shares
of common stock) on its common stock, the holders of shares of Series A
will be entitled to a proportionate share of any such distribution as though it
was the holder of the number of shares of common stock into which its share of
Series A is convertible as of the date fixed for the determination of the
holders of common stock entitled to receive the distribution.
 
 Automatic Conversion —
Shares of Series A Preferred will automatically convert into common stock
at the applicable conversion rate (one share of common stock for one share of
Series A Preferred) in the event of: (1) the closing of an
underwritten initial public offering with aggregate proceeds to the Company of
at least $10,000,000 and a per share price to the public of at least three times
the initial conversion price (a “qualified public offering”) or (2) the
election of the holders of a majority of the outstanding shares of Series A
Preferred.
 
 Optional Conversion —
The holders of Series A Preferred have the right to convert their shares,
at any time, into shares of voting common stock on a one for one
basis.
 
 Liquidation Preference —
In the event of liquidation or winding up of the Company, each holder of
Series A Preferred shall be entitled to be paid out of the assets of the
Company available for distribution to its stockholders in preference to the
common stockholders, in an amount equal to the price per share of the
Series A Preferred or $0.146 (the “Liquidation Amount”). After the payment
of this amount to holders of Series A Preferred, the common stockholders
will be entitled to receive any remaining assets of the Company on a pro rata
basis. The following qualify as events that would trigger a liquidation:
(1) a merger or consolidation (other than one in which the stockholders, at
the time of the merger or consolidation, continue to hold more than 50% of the
stock of the surviving entity) or (2) a sale or exclusive license of all or
substantially all of the assets or intellectual property of the
Company.
   55
 Redemption Provisions —
All shares of Series A Preferred will be redeemed by the Company, at the
Liquidation Amount, at any time after January 31, 2009, if the holders of
two-thirds of the outstanding shares of Series A Preferred request, by
written notice to the Company, that the shares be redeemed. The shares will be
redeemed within 60 days of the Company receiving such written
notice.
 
 The
Company had classified the Series A Preferred outside of permanent equity
due to its redemption feature being outside the control of the Company. The
activity within the Series A Preferred shares and redemption value for the
year ended December 31, 2006 is as follows:
 
 Number
      of
                Shares
              
              
              Redemption
                ValueBalance,
      December 31, 2005
              
              
              10,433,504
              
              
              $
              1,501,698Accretion
      of stock issuance costs
              
              
              —
              
              
              
              6,299Conversion
      of Series A Preferred into common stock
              
              
              (10,433,504
              )
              
              
              (1,507,997
              )Balance,
      December 31, 2006
              
              
              —
              
              
              $
              —
 
 
 NOTE 6 —
COMMON STOCK
 
 On
October 16, 2006, the Company amended its Certificate of Incorporation to
increase the authorized shares of voting common stock from 75,000,000 to
100,000,000 shares.  The total number of shares of all classes of
stock which the Company had the authority to issue after this amendment was
130,000,000, consisting of 15,000,000 shares of Non-Voting Common Stock,
100,000,000 shares of Voting Common Stock and 15,000,000 shares of Series A
Preferred.
 
 On
November 16, 2006, the Company completed its initial public offering of
27,441,064 shares of common stock at a price of CDN$1.05 (approximately U.S.
$0.93) per share. The offering was comprised of 20,000,000 shares sold by the
Company for gross proceeds to the Company of CDN$21,000,000 and 7,441,064 shares
sold by certain selling stockholders for gross proceeds to such stockholders of
approximately CDN$7,800,000. In connection with this offering, the Company
amended its Certificate of Incorporation to increase the authorized shares of
common stock from 100,000,000 to 150,000,000 shares.  The total number
of shares of all classes of stock which the Company has the authority to issue
after this amendment is 155,000,000, consisting of 150,000,000 shares of common
stock and 5,000,000 shares of undesignated preferred stock.
 
 On
December 5, 2006, the Company issued an additional 3,000,000 shares of common
stock in accordance with an over-allotment option granted to the underwriters of
the initial public offering at a price of CDN$1.05 (approximately U.S. $0.92)
per share for gross proceeds to the Company of CDN$3,150,000.  Net
proceeds to the Company from the initial public offering and over-allotment
option were approximately $17.5 million, after deducting the underwriting
discount of $1.3 million and other direct costs of $2.3 million.
 
 As of
December 31, 2008, 2007 and 2006, 83,976,845, 82,399,241 and 76,511,741
shares of common stock were issued and outstanding, respectively.
 
 On June
1, 2007, the Company issued 5,375,000 common shares of World Energy in
connection with the acquisition of substantially all of the assets of
EnergyGateway. The shares were valued at approximately $6,536,000 based on the
average closing price on the Toronto Stock Exchange for the two days before and
after the announcement date of $1.22 per share. Approximately 2.175 million of
the shares that the Company delivered to EnergyGateway in connection with this
transaction (or the proceeds upon any sale thereof) were held in escrow to
secure various indemnification obligations of EnergyGateway and its members.
These shares were released from escrow upon the expiration of indemnification
period on November 1, 2008.
 
 Guaranteed
Return on Voting Common Stock
 
 In 2002,
a certain shareholder purchased shares of Voting Common Stock of the Company and
the Company agreed to pay an 8% guaranteed return per year based on the initial
investment of $200,000 with payments to continue until the earlier of a liquid
market for the Company’s equity or August 31, 2006. In accordance with
SFAS 133, “Accounting for
Derivatives and Hedging Activities”, the Company bifurcated the
guaranteed return on the Voting Common Stock at its then deemed fair value of
$66,651 and recorded the guaranteed return as a liability. The payments on the
guaranteed return were being amortized to principal and interest, using the
interest method, through August 31, 2006. The Company has deemed the
difference between the stated value and the fair value of the derivative feature
to be immaterial and has not recorded a “mark-to-market” adjustment during the
life of the feature.
  
 56
 Fair
Value of Common Stock
 
 The
Company has granted common stock, common stock warrants, and common stock option
awards (“equity awards”) to consultants, employees, debt holders, and others
since its inception. The Company’s determination of the fair value of the
underlying common stock is a significant aspect in accounting for these
aforementioned equity awards in accordance with generally accepted accounting
principles.
 
 During
the year ended December 31, 2006, the Company and the Board had determined
the fair value of the Series A Preferred, the Voting and Non-Voting Common
Stock at each issuance of such equity awards. Prior to the consummation of the
Company’s initial public offering the fair value of the Voting and Non-Voting
Common Stock had been determined by the Board at the measurement date of each of
the aforementioned equity awards, based on a variety of different factors
including, but not limited to the Company’s financial position and historical
financial performance, the status of technological developments within the
Company, the composition and ability of the current engineering, operations, and
management team, an evaluation and benchmark of the Company’s competition, the
current climate in the marketplace, the illiquid nature of the common stock,
arms-length sales and anticipated sales of the Company’s capital stock
(including preferred stock), the effect of the rights and preferences of
preferred shareholders, independent third party appraisals, and the prospects of
a liquidity event, among others.
 
 Treasury
Stock
 
 On
March 14, 2006, the Company purchased 25,000 of its Voting Common Stock
from certain shareholders at $2.00 per share. The excess of the purchase
price and the then deemed fair value on the date of the purchase of
$0.50 per share, or $37,500, has been charged to general and administrative
expense. On June 19, 2006, the Board voted to retire all its treasury stock
(700,346 shares) which had a cost of $164,453.
 
 In
connection with the vesting of restricted stock granted to employees the Company
withheld shares with value equivalent to employees’ minimum statutory obligation
for the applicable income and other employment taxes, and remitted the cash to
the appropriate taxing authorities.  The total shares withheld of
130,426 for the year ended December 31, 2008 was based on the value of the
restricted stock on their vesting date as determined by the Company’s closing
stock price.  Total payment for employees’ tax obligations was
approximately $99,000.  These net-share settlements had the effect of
share repurchases by the Company as they reduced the number of shares that would
have otherwise been issued as a result of the vesting and did not represent an
expense to the Company.
 
 Common
Stock Warrants
 
 At
December 31, 2008, the Company had outstanding warrants to purchase 1,329,582
shares of common stock at a weighted average exercise price of $0.80. During
2005, the Company issued warrants to purchase 3,000,000 shares of Voting
Common Stock in connection with the subordinated note issued to Massachusetts
Capital Resource Company, or MCRC. Of the warrants that were issued in
connection with this note, 600,000 were vested upon issuance and the remaining
2,400,000 did not vest and subsequently expired due to the successful
consummation of the Company’s initial underwritten public offering of its common
stock on November 16, 2006. On December 4, 2006, MCRC exercised its warrant to
purchase 600,000 shares of the Company’s common stock at $0.40 in connection
with the redemption of the subordinated note by the Company.
 
 On
November 16, 2006 and December 5, 2006, the Company granted the underwriters of
the initial public offering warrants to purchase up to 1,000,000 and 150,000
shares of common stock, respectively at the initial public offering price. The
warrants are exercisable at the 1-year anniversary of the warrants issuance
(November 16,2007
and December 5, 2007, respectively) and expire 18 months from the date of the
one year anniversary (May 15, 2009 and June 4, 2009,
respectively).  These warrants allow for net share settlement and
certain of the holders of these warrants have piggy-back registration
rights.  The Company valued the warrants at $274,129 and recorded them
as a component of additional paid-in capital. The following table summarizes the
Company’s warrant activity:
 
 Shares
              
              
              Weighted
                Average
                Exercise
                PriceWarrants
      outstanding, December 31, 2005
              
              
              4,321,772
              
              
              $
              0.29Granted
              
              
              1,150,000
              
              
              $
              0.92Exercised
              
              
              (1,070,958
              )
              
              $
              0.24Canceled/expired
              
              
              (2,400,000
              )
              
              $
              0.40Warrants
      outstanding, December 31, 2006 and 2007
              
              
              2,000,814
              
              
              $
              0.54Granted
              
              
              —
              
              
              $
              —Exercised
              
              
              (671,232
              )
              
              $
              0.03Canceled/expired
              
              
              —
              
              
              $
              —Warrants
      outstanding, December 31, 2008
              
              
              1,329,582
              
              
              $
              0.80
 
 The
weighed average remaining contractual life of warrants outstanding is
0.4 years and 1.3 years as of December 31, 2008 and 2007,
respectively.
 
 57
 Stock
Options
 
 The
Company has two stock incentive plans: the 2003 Stock Incentive Plan, or the
2003 Plan, and the 2006 Stock Incentive Plan, or the 2006 Plan.  As of
December 31, 2008, 3,582,300 shares of common stock representing option grants
still outstanding were reserved under the 2003 Plan. No further grants are
allowed under the 2003 Plan.  On November 16, 2006, the Company
adopted the 2006 Plan and authorized 4,738,161 shares of common stock for grant
thereunder.  During the second quarter of 2008, stockholders amended
the 2006 Plan to increase the number of shares of common stock covered by the
plan by 4,000,000 shares. As of December 31, 2008, 8,738,161 shares of common
stock were reserved under the 2006 Plan representing 2,682,250 outstanding stock
options, 2,042,000 shares of restricted stock granted and 4,013,911 shares
available for grant.  A summary of stock option activity under both
plans for the years ended December 31, 2008, 2007 and 2006 are as
follows:
 
 Shares
              
              
              Weighted
      Average
                Exercise PriceOutstanding
      at December 31, 2005
              
              
              5,471,700
              
              
              $
              0.04Granted
              
              
              1,262,000
              
              
              $
              0.79Canceled
              
              
              (60,000
              )
              
              $
              0.38Exercised
              
              
              (2,190,671
              )
              
              $
              0.03Outstanding
      at December 31, 2006
              
              
              4,483,029
              
              
              $
              0.26Granted
              
              
              3,020,000
              
              
              $
              1.24Canceled
              
              
              (687,500
              )
              
              $
              0.82Exercised
              
              
              (112,500
              )
              
              $
              0.03Outstanding
      at December 31, 2007
              
              
              6,703,029
              
              
              $
              0.65Granted
              
              
              1,206,000
              
              
              $
              0.20Canceled
              
              
              (1,063,750
              )
              
              $
              1.29Exercised
              
              
              (580,729
              )
              
              $
              0.03Outstanding
      at December 31, 2008
              
              
              6,264,550
              
              
              $
              0.51
 
 A summary
of options outstanding and options exercisable as of December 31, 2008 is
as follows:
 
 Options
      Outstanding
              
              
              Options
      ExercisableWeighted
              
              
              
              
              
              
              WeightedAverage
              
              
              
              
              
              
              AverageRange
      of
              
              
              
              
              Remaining
              
              Aggregate
              
              
              Number
              
              Remaining
              
              AggregateExercise
              
              
              
              
              Contractual
              
              Intrinsic
              
              
              Of
      Shares
              
              Contractual
              
              IntrinsicPrices
              
              
              Options
              
              Life
              
              Value
              
              
              Exercisable
              
              Life
              
              Value$0.02
      - $0.19
              
              
              
              2,080,300
              
              1.84
      Years
              
              $
              627,496
              
              
              
              2,080,300
              
              1.84
      Years
              
              $
              627,496$0.20
      - $1.12
              
              
              
              2,708,000
              
              5.35
      Years
              
              
              189,112
              
              
              
              1,041,125
              
              3.94
      Years
              
              
              33,789$1.13
      - $1.34
              
              
              
              1,476,250
              
              5.35
      Years
              
              
              —
              
              
              
              577,500
              
              5.33
      Years
              
              
              —6,264,550
              
              4.18
      Years
              
              $
              816,608
              
              
              
              3,698,925
              
              2.98
      Years
              
              $
              661,285
 
 The
aggregate intrinsic value in the table above represents the total intrinsic
value of our outstanding options and exercisable options as of December 31,
2008. The aggregate intrinsic value of options exercised during the year ended
December 31, 2008 was approximately $416,000.  At December 31,
2008, the weighted average exercise price of options outstanding and exercisable
was $0.51 and $0.38, respectively.  The weighted average fair value of
option grants for the years ended December 31, 2008 and 2007 was $0.12 and
$0.58, respectively.
 
 Restricted
Stock
 
 A summary
of restricted stock activity for the year ended December 31, 2008 is as
follows:
 
 Shares
              
              
              Weighted
      Average
                Grant
      PriceOutstanding
      at December 31, 2007
              
              
              1,448,500
              
              
              $
              1.10Granted
              
              
              793,000
              
              
              $
              0.87Cancelled
              
              
              (599,500
              )
              
              $
              1.02Vested
              
              
              (456,069
              )
              
              $
              1.12Unvested
      at December 31, 2008
              
              
              1,185,931
              
              
              $
              0.98
 
 There
were 11,464,392 shares reserved for issuance under these plans at
December 31, 2008.
 
 58
 NOTE 7 —
RELATED PARTIES
 
 In 2006,
the Company entered into a consulting agreement with a member of the Board to
assist the Company with strategic planning. Costs incurred during the year ended
December 31, 2007 were approximately $209,000 and were charged to general
and administrative expense.  Amounts owed by the Company at December
31, 2007 on behalf of the agreement were $9,700. The agreement expired in 2007
and no amounts were charged to expense during the year ended December 31, 2008
and no amounts were outstanding at December 31, 2008.
 
  NOTE 8 —
INCOME TAXES
 
 The
components of the net deferred tax asset are as follows:
 
 December 31,2008
              
              
              2007Depreciation
      and amortization
              
              $
              481,668
              
              
              $
              166,694Commission
      income
              
              
              (623,358
              )
              
              
              (462,079
              )Accruals and
      reserves
              
              
              774,629
              
              
              
              753,407Prepaids
              
              
              (53,594
              )
              
              
              (13,428
              )Net
      operating loss carryforwards
              
              
              6,756,612
              
              
              
              4,254,0137,335,957
              
              
              
              4,698,607Valuation
      allowance
              
              
              (7,335,957
              )
              
              
              (4,698,607
              )$
              —
              
              
              $
              —
 
  The
provision for income taxes is comprised of the following:
 
 Years Ended
    December 31,2008
              
              
              2007
              
              
              2006Current
      income tax expense:Federal
              
              $
              —
              
              
              $
              —
              
              
              $
              —State
              
              
              —
              
              
              
              —
              
              
              
              ——
              
              
              
              —
              
              
              
              —Deferred
      income tax expense (benefit):Federal
              
              
              —
              
              
              
              823,703
              
              
              
              (232,091
              )State
              
              
              —
              
              
              
              238,017
              
              
              
              (72,137
              )—
              
              
              
              1,061,720
              
              
              
              (304,228
              )Total
      income tax expense (benefit)
              
              $
              —
              
              
              $
              1,061,720
              
              
              $
              (304,228
              )
 
  A
reconciliation of the Company’s federal statutory tax rate to its effective rate
is as follows:
 Years Ended
    December 31,2008
              
              2007
              
              2006Income
      tax at federal statutory rate
              (34.0)%
              
              (34.0)%
              
              (34.0)%Increase
      (decrease) in tax resulting from:State
      taxes, net of federal benefit
              (6.3)%
              
              (6.3)%
              
              (6.3)%Permanent
      differences
              0.7%
              
              0.7%
              
              2.1%Change
      in valuation allowance
              39.6%
              
              53.6%
              
              0.0%0.0%
              
              14.0%
              
              (38.1)%
 
 As of
December 31, 2008, the Company has federal net operating loss carryforwards
of approximately $17,200,000 which begin to expire in 2022, and state net
operating loss carryforwards of approximately $14,900,000, which begin to expire
in 2009.  A valuation allowance is established, if it is more likely
than not, that all or a portion of the deferred tax asset will not be
realized.
 
 The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).Deferred tax assets and liabilities are determined at the end of each
period based on the future tax consequences that can be attributed to net
operating loss carryforwards, as well as differences between the financial
statement carrying amounts of the existing assets and liabilities and their
respective tax basis. Deferred income tax expense or credits are based on
changes in the asset or liability from period to period. Valuation allowances
are provided if, based on the weight of available evidence, it is more likely
than not that some or all of the deferred tax assets will not be realized. The
realization of deferred tax assets is dependent upon the generation of future
taxable income. In determining the valuation allowance, the Company considers
past performance, expected future taxable income, and qualitative factors which
are considered to be appropriate in estimating future taxable income. The
Company’s forecast of expected future taxable income is for future periods that
can be
  59
 reasonably
estimated.  The Company has historically utilized a three year
forecasting window to determine its expected future taxable income. As of
December 31, 2006, the Company had cumulative net income for the three years
then ended and the expected future taxable income anticipated from 2007 through
2009 was deemed adequate on a present value basis to benefit the majority of the
Company’s deferred tax assets (primarily net operating loss
carryforwards).  During 2007, the Company accelerated its growth in
excess of its initial expectations to address the strategic initiatives outlined
at the time of our initial public offering.  The Company grew from 20
employees as of December 31, 2006 to 63 as of December 31, 2007, acquired one of
its main competitors in the retail energy market, and developed its wholesale
and environmental commodity product lines. These initiatives increased the
Company’s loss for 2007 resulting in a three-year cumulative loss as of December
31, 2007 and increased its near term operating expenses. A three-year cumulative
loss is significant negative evidence in considering whether the deferred tax
assets are realizable and generally precludes relying on projections of future
taxable income to support the recovery of deferred tax assets. While the Company
expects its future income will be adequate on a present value basis to benefit
substantially all of its current deferred tax assets, the recent three-year
cumulative loss is given more weight than projected future income when
determining the need for a valuation.  Therefore, during the fourth
quarter of 2007, the Company recorded a full valuation allowance against its
deferred tax assets of approximately $4.1 million, and maintains a cumulative
valuation allowance of approximately $7.3 million at December 31,
2008.
  The
amount of the net deferred tax asset considered realizable at December 31, 2008
could be reduced or increased in the near term if estimates of future taxable
income during the carryforward period change.
  The
Company has reviewed the tax positions taken, or to be taken, in its tax returns
for all tax years currently open to examination by the taxing authorities in
accordance with the recognition and measurement standards of FIN
48.  At December 31, 2008, there are no expected material, aggregate
tax effect of differences between tax return positions and the benefits
recognized in the financial statements.
 
 Under the
provisions of the Internal Revenue Code, certain substantial changes in the
Company’s ownership may have limited or may limit in the future the amount of
net operating loss carryforwards which could be utilized annually to offset
future taxable income and income tax liabilities. The amount of any annual
limitation is determined based upon the Company’s value prior to an ownership
change.
 
  NOTE 9 —
COMMITMENTS
 
 Leases
 
 The
Company leases certain equipment under capital leases that expire through May
2011 and are collateralized by the related equipment. The Company has accounted
for these leases using an incremental borrowing rate of 8%. The Company
maintains operating leases for office space in six locations in the United
States, paid in installments due the beginning of each month and that expire
through July 2012. Future aggregate minimum payments under capital and operating
leases as of December 31, 2008 were as follows:
 
 Capital
                Leases
              
              
              Operating
                Leases2009
              
              $
              44,745
              
              
              $
              316,5822010
              
              
              3,192
              
              
              
              164,2752011
              
              
              798
              
              
              
              142,0652012
              
              
              —
              
              
              
              42,9722013
              
              
              —
              
              
              
              —Total
      future minimum lease payments
              
              
              48,735
              
              
              $
              665,894Less:
      amounts representing interest
              
              
              (2,513
              )Present
      value of future minimum lease payments
              
              
              46,222Less:
      current portion
              
              
              42,485Capital
      lease obligation, net of current portion
              
              $
              3,737
 
 The
accompanying statement of operations for the years ended December 31, 2008,
2007, and 2006 includes $369,215, $242,813 and $118,902 of rent expense,
respectively.
 
 Service
Agreement
 
 In 2007,
the Company entered into a service agreement with an unrelated party for a
hosting environment and dedicated server for the Company’s online energy
procurement software. The terms of the agreement requires quarterly and monthly
payments amounting to approximately $8,400 per quarter. The agreement expires in
May 2009.
  
 60
 NOTE
10 —CREDIT
ARRANGEMENT
 
 On
September 8, 2008, the Company and its wholly-owned subsidiary, World Energy
Securities Corp., entered into a Loan and Security Agreement (the “Agreement”)
with Silicon Valley Bank (“SVB”). Under the Agreement, SVB has committed to make
advances to the Company in an aggregate amount of up to $3,000,000, subject to
availability against certain eligible account receivables, eligible retail
backlog and maintenance of financial covenants. The credit facility bears
interest at a floating rate per annum based on SVB’s prime rate plus
three-quarters of one percentage point (0.75%) on advances made against eligible
accounts receivable and prime plus one-and-one-half of one percentage point
(1.5%) on advances made against eligible retail backlog. These interest
rates are subject to change based on the Company’s maintenance of an adjusted
quick ratio of one-to-one. All unpaid principal and accrued interest is due
on September 7, 2009 (the “Maturity Date”). Until the Maturity Date, the Company
is only required to pay interest, with each such payment due in arrears on
the last calendar day of each month.
 
 There
were no outstanding borrowings from the credit facility at December 31, 2008 and
the Company was in compliance with its covenants as of December 31,
2008.
 
 
 NOTE 11 —
ACQUISITION
 
 On June
1, 2007, the Company acquired substantially all of the assets of EnergyGateway
for $4,951,758 in cash and 5,375,000 common shares of World Energy plus the
assumption of certain liabilities. The shares were valued at approximately
$6,536,000 based on the average closing price on the Toronto Stock Exchange for
the two days before and after the announcement date of $1.22 per share.
Approximately 2.175 million of the shares that the Company delivered to
EnergyGateway in connection with this transaction, or their cash value, if
liquidated, were being held in escrow for 18 months following the closing of the
sale to secure various indemnification obligations of EnergyGateway and its
members. The indemnification period was for 18 months and the shares were
released from escrow at the end of the indemnification period on November 1,
2008. EnergyGateway, located near Columbus, Ohio, provided on-line energy
procurement and value-added energy services to customers in many major
industries in the United States and Canada, from large multi-site Fortune 500
industrials to middle market manufacturing and small commercial
operations.
 
 The total
purchase price was $11,440,358, net of cash acquired, and includes related
acquisition costs of $229,500, plus the assumption of certain liabilities of
approximately $138,128. The EnergyGateway operations have been included within
our consolidated results from June 1, 2007.  The cost of the
acquisition was allocated to the assets and liabilities assumed based on
estimates of their respective fair values at the date of acquisition resulting
in net assets of $8,261,657. The excess purchase price of $3,178,701 has been
recorded as goodwill which is fully deductible for tax purposes. Management is
responsible for the valuation of net assets acquired and considered a number of
factors, including valuations and appraisals, when estimating the fair values
and estimated useful lives of acquired assets and liabilities. During the third
quarter of 2007, the Company refined estimates recorded in the second quarter of
2007 and finalized the valuation of intangible assets through a reduction of
$660,000 in customer relationships resulting in a corresponding increase to
goodwill.
 
 The
Company allocated the purchase price for the acquisition as
follows:
 
 Current
      assets
              
              $
              247,938Fixed
      assets
              
              
              18,755Other
      assets
              
              
              3,092Intangible
      assets:Non-compete
      agreements
              
              
              680,000Customer
      relationships
              
              
              4,740,000Customer
      contracts
              
              
              500,000Supplier
      agreements
              
              
              380,000Developed
      technology
              
              
              1,830,000Goodwill
              
              
              3,178,701Current
      liabilities
              
              
              (138,128
              )Net assets
acquired
              
              $
              11,440,358
 
 The
intangible assets, excluding goodwill, are being amortized on a straight-line
basis over their weighted average lives as follows: non-compete agreements – 1
to 5 years; customer relationships – 10 years; customer contracts – 3 years;
supplier agreements – 5 years; and developed technology – 5
years.  Pursuant to SFAS No. 142 “Goodwill and
Other Intangible
Assets”, the Company performs an annual impairment test for goodwill,
with any excess of the carrying value of a reporting unit’s goodwill over the
implied fair value of the goodwill recorded as an impairment loss.
 
 61
 The
following unaudited pro forma information assumes that the acquisition of
EnergyGateway assets had been completed as of the beginning of
2007:
  Year
      Ended
                December
      31, 2007Revenues
              
              $
              10,461,780Net
      loss available to common stockholders
              
              $
              (9,456,685
              )Loss
      per share:
                Net loss available to common
      stockholders per share – basic
              
              $
              (0.12
              )Net loss available to common
      stockholders per share – diluted
              
              $
              (0.12
              )Weighted
      average number of common and common equivalent sharesoutstanding
      – basic
              
              
              82,017,220Weighted
      average number of common and common equivalent sharesoutstanding
      – diluted
              
              
              82,017,220
 
 The pro
forma financial information is not necessarily indicative of the results to be
expected in the future as a result of the acquisition of
EnergyGateway.
 
  NOTE 12 —
401(k) PLAN
 
 During
the fourth quarter of 2006, the Company established the World Energy Solutions,
Inc. 401(k) Plan (the “401(k) Plan”) under Section 401(k) of the Internal
Revenue Code covering all eligible employees.  Employees of the
Company may participate in the 401(k) Plan after reaching the age of
21.  The Company may make discretionary matching contributions as
determined from time to time. Employee contributions vest immediately, while
Company matching contributions begin to vest after one year service and continue
to vest at 20% per year over the next five years.  To date, the
Company has not made any discretionary contributions to the 401(k)
Plan.
                    
 62
 EXHIBIT
INDEX
 
 
 
 Exhibit
              Description2
              .1
              
              Asset
      Purchase Agreement by and among World Energy Solutions, Inc.,
      EnergyGateway, LLC and the Members of EnergyGateway, LLC dated May 23,
      2007 (incorporated by reference to Exhibit 99.1 to our report on Form 8-K
      filed May 24, 2007 (File No. 333-136528)).3
              .1
              
              Form
      of Amended and Restated Certificate of Incorporation of World Energy
      (incorporated by reference to Exhibit 3.4 to our Registration
      Statement of Form S-1(File No. 333-136528)).3
              .2
              
              Form
      of Amended and Restated By-laws of World Energy (incorporated by reference
      to Exhibit 3.5 to our Registration Statement of Form S-1(File
      No. 333-136528)).4
              .1
              
              Specimen
      Certificate evidencing shares of common stock (incorporated by reference
      to Exhibit 4.1 to our Registration Statement of Form S-1(File
      No. 333-136528)).10
              .1+
              
              2003
      Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to
      our Registration Statement of Form S-1(File
      No. 333-136528)).10
              .2+
              
              2006
      Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to
      our Registration Statement of Form S-1(File
      No. 333-136528)).10
              .3
              
              Note
      and Warrant Purchase Agreement, dated November 7, 2005, between World
      Energy and Massachusetts Capital Resource Company (incorporated by
      reference to Exhibit 10.3 to our Registration Statement of
      Form S-1(File No. 333-136528)).10
              .4
              
              Subordinated
      Note due 2013, dated November 7, 2005 (incorporated by reference to
      Exhibit 10.4 to our Registration Statement of Form S-1(File
      No. 333-136528)).10
              .5
              
              Voting
      Common Stock Purchase Warrant, dated November 7, 2005 (incorporated
      by reference to Exhibit 10.5 to our Registration Statement of
      Form S-1(File No. 333-136528)).10
              .6
              
              Form
      of Common Stock Purchase Warrants (incorporated by reference to
      Exhibit 10.6 to our Registration Statement of Form S-1(File
      No. 333-136528)).10
              .7
              
              Solicitation/Contract/Order
      for Commercial Items, dated September 28, 2005, between
      U.S. General Services Administration and World Energy (incorporated
      by reference to Exhibit 10.7 to our Registration Statement of
      Form S-1(File No. 333-136528)).10
              .8
              
              Agreement
      to Provide Software and Support for a Reverse Energy Auction Procurement
      to the Maryland Department of General Services, dated March 16, 2006,
      by and between World Energy and the State of Maryland (incorporated
      by reference to Exhibit 10.8 to our Registration Statement of
      Form S-1(File No. 333-136528)).10
              .9++
              
              Contract,
      dated January 9, 2006, by and between Montgomery County, Maryland and
      World Energy (incorporated by reference to Exhibit 10.9 to our
      Registration Statement of Form S-1(File
      No. 333-136528)).10
              .10
              
              Emergency
      Purchase/Interim Agreement, dated March 28, 2006, by and between the
      Commonwealth of Pennsylvania, Department of General Services and World
      Energy (incorporated by reference to Exhibit 10.10 to our
      Registration Statement of Form S-1(File
      No. 333-136528)).10
              .11
              
              Professional
      Services Agreement, dated June 1, 2005, between World Energy and
      Science Applications International Corporation (incorporated by reference
      to Exhibit 10.11 to our Registration Statement of Form S-1(File
      No. 333-136528)).10
              .12
              
              Escrow
      Agreement (incorporated by reference to Exhibit 10.12 to our
      Registration Statement of Form S-1(File
      No. 333-136528)).10
              .13+
              
              Offer
      letter agreement, dated October 1, 2003, between World Energy and
      Philip V. Adams (incorporated by reference to Exhibit 10.13 to our
      Registration Statement of Form S-1(File
      No. 333-136528)).10
              .14+
              
              Offer
      letter agreement, dated April 5, 2006, between World Energy and James
      Parslow (incorporated by reference to Exhibit 10.14 to our
      Registration Statement of Form S-1(File
      No. 333-136528)).10
              .15
              
              Lease,
      dated September 8, 2004, between Sovereign Bank and World Energy
      (incorporated by reference to Exhibit 10.15 to our Registration
      Statement of Form S-1(File No. 333-136528)).10
              .16
              
              Lease,
      dated June 21, 2006, between Roosevelt Land, LP and World Energy
      (incorporated by reference to Exhibit 10.16 to our Registration
      Statement of Form S-1(File No. 333-136528)).10
              .17
              
              Form
      of Warrant being issued to Underwriters (incorporated by reference to
      Exhibit 10.17 to our Registration Statement of Form S-1(File
      No. 333-136528)).10
              .18
              
              Form
      of Registration Rights Agreement with Underwriters (incorporated by
      reference to Exhibit 10.18 to our Registration Statement of
      Form S-1(File No. 333-136528)).10
              .19
              
              Loan
      and Security Agreement with Silicon Valley Bank dated September 8, 2008
      (incorporated by reference to Exhibit 10.1 to our report on Form 8-K filed
      September 8, 2008 (File No. 333-136528)).21
              .1*
              
              List
      of Subsidiaries23
              .1*
              
              Consent
      of UHY LLP, Independent Registered Public Accounting
  Firm31
              .1*
              
              Certification
      of the Chief Executive Officer pursuant to Rule 15d-14(a) under the
      Securities Exchange Act.31
              .2*
              
              Certification
      of the Chief Financial Officer pursuant to Rule 15d-14(a) under the
      Securities Exchange Act.32
              .1*
              
              Certification
      of the Chief Executive Officer pursuant to Rule 15d-14(b) under the
      Securities Exchange Act.32
              .2*
              
              Certification
      of the Chief Financial Officer pursuant to Rule 15d-14(b) under the
      Securities Exchange Act.99
              .1+
              
              Third
      Amendment of Consulting Agreement dated October 9, 2007 (incorporated by
      reference to Exhibit 99.1 to our report on Form 8-K filed October 12, 2007
      (File No. 333-136528)).99
              .2+
              
              Second
      Amendment of Consulting Agreement dated July 5, 2007 (incorporated by
      reference to Exhibit 99.1 to our report on Form 8-K filed July 5, 2007
      (File No. 333-136528)).99
              .3+
              
              Amended
      Consulting Agreement dated April 5, 2007 (incorporated by reference to
      Exhibit 99.1 to our report on Form 8-K filed April 9, 2007 (File No.
      333-136528)).99
              .4+
              
              Consulting
      Agreement dated January 10, 2007 (incorporated by reference to Exhibit
      99.1 to our report on Form 8-K filed January 11, 2007 (File No.
      333-136528)).*   Filed
      herewith
                +   Indicates
      a management contract or any compensatory plan, contract or
      arrangement
                ++
      Confidential treatment requested as to certain portions, which portions
      have been filed separately with the Securities and
                Exchange
      Commission
 
 63