Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**Forthe quarterly period ended September 30, 2009**

 

**or**

 

| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For the transition period from**             **to**             

 

**CommissionFile Number: 001-33471**

 

**EnerNOC, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Delaware**                              | ** ** | **87-0698303**       |
|-------------------------------------------|------------|----------------------|
| (State or Other  Jurisdiction of          |       | (IRS Employer        |
| Incorporation or  Organization)           |       | Identification  No.) |
|                                      |       |                 |
| **101  Federal Street**                   |       |                 |
| **Suite 1100**                       |       |                 |
| **Boston,  Massachusetts**                | ** ** | **02110**            |
| (Address of  Principal Executive Offices) |       | (Zip Code)           |

 

**(617) 224-9900**

(Registrant’sTelephone Number, Including Area Code)

 

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

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o                |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                  |   | Smaller  reporting company o |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes  o   No x

 

There were 23,980,016shares of the registrant’s common stock, $0.001 par value per share,outstanding as of November 4, 2009.

 

 

 

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**EnerNOC, Inc.**

 

**Indexto Form 10-Q**

 
| ** **                                 | ** **                                                                                                                       | **Page**   |
|--------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** **                                                                                                                       | ** ** |
| **Part I -  Financial Information**   |                                                                                                                             |
|                                       |                                                                                                                             |       |
| Item 1.                               | Financial  Statements                                                                                                            |       |
|                                       |                                                                                                                             |       |
|                                       | Unaudited  Condensed Consolidated Balance Sheets at September 30, 2009 and  December 31, 2008                          | 3          |
|                                       |                                                                                                                             |       |
|                                       | Unaudited  Condensed Consolidated Statements of Operations for the three and nine months  ended September 30, 2009 and 2008 | 4          |
|                                       |                                                                                                                             |       |
|                                       | Unaudited  Condensed Consolidated Statements of Cash Flows for the nine months ended  September 30, 2009 and 2008           | 5          |
|                                       |                                                                                                                             |       |
|                                       | Notes  to Unaudited Condensed Consolidated Financial Statements                                                                  | 6          |
|                                       |                                                                                                                             |       |
| Item 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      | 15         |
|                                       |                                                                                                                             |       |
| Item 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                                      | 26         |
|                                       |                                                                                                                             |       |
| Item 4.                               | Controls and  Procedures                                                                                                         | 27         |
|                                       |                                                                                                                             |       |
| **Part II -  Other Information** |                                                                                                                             |
|                                       |                                                                                                                             |       |
| Item 1.                               | Legal Proceedings                                                                                                                | 27         |
|                                       |                                                                                                                             |       |
| Item 1A.                              | Risk Factors                                                                                                                     | 27         |
|                                       |                                                                                                                             |       |
| Item 2.                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                     | 29         |
|                                       |                                                                                                                             |       |
| Item 6.                               | Exhibits                                                                                                                         | 30         |
|                                       | Signatures                                                                                                                       | 31         |
|                                       | Exhibit Index                                                                                                               | 32         |

 

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**PART I— FINANCIAL INFORMATION**

 

**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**(inthousands, except par value and share data)**

 
| ** **                                                                                                                                                                                   | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                                   |       |                        |       |                       |       |
| Current assets                                                                                                                                                                               |       |                        |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                                   |       | $                           | 129,926    |                       | $          | 60,782 |   |
| Restricted cash                                                                                                                                                                              |       | 7,874                       |       | 1,419                      |       |
| Marketable securities                                                                                                                                                                        |       | —                      |       | 2,000                      |       |
| Trade accounts  receivable, net allowance for doubtful accounts of $52 and $37 at  September 30, 2009 and December 31, 2008, respectively                                          |       | 20,267                      |       | 11,150                     |       |
| Unbilled revenue                                                                                                                                                                             |       | 64,842                      |       | 11,585                     |       |
| Prepaid expenses,  deposits and other current assets                                                                                                                                         |       | 3,807                       |       | 3,250                      |       |
| Total current assets                                                                                                                                                                         |       | 226,716                     |       | 90,186                     |       |
| Property and equipment,  net                                                                                                                                                                 |       | 32,167                      |       | 26,975                     |       |
| Goodwill                                                                                                                                                                                     |       | 15,016                      |       | 13,395                     |       |
| Intangible assets, net                                                                                                                                                                       |       | 5,199                       |       | 5,140                      |       |
| Deposits and other  assets                                                                                                                                                                   |       | 3,273                       |       | 998                        |       |
| Total assets                                                                                                                                                                                 |       | $                           | 282,371    |                       | $          | 136,694 |   |
|                                                                                                                                                                                         |       |                        |       |                       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                               |       |                        |       |                       |       |
| Current liabilities                                                                                                                                                                          |       |                        |       |                       |       |
| Accounts payable                                                                                                                                                                             |       | $                           | 853        |                       | $          | 1,171 |   |
| Accrued capacity  payments                                                                                                                                                                   |       | 54,413                      |       | 18,643                     |       |
| Accrued payroll and  related expenses                                                                                                                                                        |       | 11,466                      |       | 6,309                      |       |
| Accrued expenses and  other current liabilities                                                                                                                                              |       | 2,538                       |       | 3,822                      |       |
| Deferred revenue                                                                                                                                                                             |       | 2,500                       |       | 1,057                      |       |
| Current portion of  long-term debt                                                                                                                                                           |       | 4,480                       |       | 47                         |       |
| Total current  liabilities                                                                                                                                                                   |       | 76,250                      |       | 31,049                     |       |
| Long-term liabilities                                                                                                                                                                        |       |                        |       |                       |       |
| Long-term debt, net of  current portion                                                                                                                                                      |       | 49                          |       | 4,516                      |       |
| Deferred tax liability                                                                                                                                                                       |       | 627                         |       | 362                        |       |
| Other liabilities                                                                                                                                                                            |       | 1,731                       |       | 1,547                      |       |
| Total long-term  liabilities                                                                                                                                                                 |       | 2,407                       |       | 6,425                      |       |
| Commitments and  contingencies (Note 8 and Note 13)                                                                                                                                          |       | —                      |       | —                     |       |
| Stockholders’ equity                                                                                                                                                                    |       |                        |       |                       |       |
| Undesignated preferred  stock, $0.001 par value; 5,000,000 shares authorized; no shares issued                                                                                               |       | —                      |       | —                     |       |
| Common stock, $0.001  par value; 50,000,000 shares authorized, 23,976,265 and 20,254,548 shares  issued and outstanding at September 30, 2009 and December 31, 2008,  respectively |       | 23                          |       | 20                         |       |
| Additional paid-in  capital                                                                                                                                                                  |       | 265,821                     |       | 169,800                    |       |
| Accumulated other  comprehensive income (loss)                                                                                                                                               |       | 10                          |       | (86                        | )          |
| Accumulated deficit                                                                                                                                                                          |       | (62,140                     | )          | (70,514                    | )          |
| Total stockholders’  equity                                                                                                                                                             |       | 203,714                     |       | 99,220                     |       |
| Total liabilities and  stockholders’ equity                                                                                                                                             |       | $                           | 282,371    |                       | $          | 136,694 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**(inthousands, except share and per share data)**

 
| ** **                                            | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Revenue                                               |       | $                                         | 103,117    |                                     | $          | 44,152 |   | $ | 163,942 |   | $ | 86,450 |   |
| Cost of revenues                                      |       | 51,440                                    |       | 25,792                                   |       | 86,232 |   | 52,748 |   |
| Gross profit                                          |       | 51,677                                    |       | 18,360                                   |       | 77,710 |   | 33,702 |   |
| Operating expenses:                                   |       |                                      |       |                                     |       |   |   |   |   |
| Selling and marketing                                 |       | 11,602                                    |       | 9,525                                    |       | 29,481 |   | 23,714 |   |
| General and  administrative                           |       | 12,155                                    |       | 10,041                                   |       | 33,252 |   | 30,519 |   |
| Research and  development                             |       | 2,111                                     |       | 1,567                                    |       | 5,524 |   | 4,560 |   |
| Total operating  expenses                             |       | 25,868                                    |       | 21,133                                   |       | 68,257 |   | 58,793 |   |
| Income (loss) from  operations                        |       | 25,809                                    |       | (2,773                                   | )          | 9,453 |   | (25,091 | ) |
| Other income (expense)                                |       | 89                                        |       | 319                                      |       | (6 | ) | 1,843 |   |
| Interest expense                                      |       | (47                                       | )          | (584                                     | )          | (1,511 | ) | (1,068 | ) |
| Income (loss) before  income taxes                    |       | 25,851                                    |       | (3,038                                   | )          | 7,936 |   | (24,316 | ) |
| Benefit from (provision  for) income taxes            |       | 786                                       |       | (22                                      | )          | 438 |   | (180 | ) |
| Net income (loss)                                     |       | $                                         | 26,637     |                                     | $          | (3,060 | ) | $ | 8,374 |   | $ | (24,496 | ) |
|                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Earnings (loss) per  share:                           |       |                                      |       |                                     |       |   |   |   |   |
| Basic earnings (loss)  per common share               |       | $                                         | 1.21       |                                     | $          | (0.16 | ) | $ | 0.40 |   | $ | (1.26 | ) |
| Diluted earnings (loss)  per common share             |       | $                                         | 1.12       |                                     | $          | (0.16 | ) | $ | 0.38 |   | $ | (1.26 | ) |
|                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Weighted average number  of common shares outstanding |       |                                      |       |                                     |       |   |   |   |   |
| Basic                                                 |       | 21,938,427                                |       | 19,606,287                               |       | 20,703,779 |   | 19,406,811 |   |
| Diluted                                               |       | 23,689,477                                |       | 19,606,287                               |       | 22,154,745 |   | 19,406,811 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(inthousands)**

 
| ** **                                                                            | ** ** | **Nine Months Ended********September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| **Cash  flow from operating activities**                                              |       |                                            |       |   |   |
| Net income (loss)                                                                     |       | $                                               | 8,374      |   | $ | (24,496 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |       |                                            |       |   |   |
| Depreciation                                                                          |       | 8,059                                           |       | 5,601 |   |
| Amortization of  acquired intangible assets                                           |       | 514                                             |       | 853 |   |
| Stock-based  compensation expense                                                     |       | 9,996                                           |       | 7,390 |   |
| Impairment of equipment                                                               |       | —                                          |       | 288 |   |
| Unrealized foreign  exchange transaction loss                                         |       | 71                                              |       | — |   |
| Deferred tax liability                                                                |       | 265                                             |       | 180 |   |
| Non-cash interest  expense                                                            |       | 45                                              |       | 505 |   |
| Loss on disposal of  equipment                                                        |       | 19                                              |       | — |   |
| Other, net                                                                            |       | 14                                              |       | — |   |
| Changes in operating  assets and liabilities, net of effects of acquisitions:         |       |                                            |       |   |   |
| Accounts receivable,  trade                                                           |       | (9,119                                          | )          | (5,270 | ) |
| Unbilled revenue                                                                      |       | (53,257                                         | )          | (18,643 | ) |
| Prepaid expenses and  other current assets                                            |       | (1,744                                          | )          | 507 |   |
| Other assets                                                                          |       | (1,615                                          | )          | (318 | ) |
| Other noncurrent  liabilities                                                         |       | 217                                             |       | 449 |   |
| Deferred revenue                                                                      |       | 1,410                                           |       | (2,169 | ) |
| Accrued capacity  payments                                                            |       | 35,760                                          |       | 15,609 |   |
| Accrued payroll and  related expenses                                                 |       | 5,655                                           |       | 3,969 |   |
| Accounts payable and  accrued expenses                                                |       | (1,622                                          | )          | 1,063 |   |
| Net cash provided by  (used in) operating activities                                  |       | 3,042                                           |       | (14,482 | ) |
|                                                                                  |       |                                            |       |   |   |
| **Cash  flows from investing activities**                                             |       |                                            |       |   |   |
| Purchase of marketable  securities                                                    |       | —                                          |       | (12,142 | ) |
| Sales and maturities of  marketable securities                                        |       | 2,000                                           |       | 22,742 |   |
| Payments made for  acquisitions of businesses, net of cash acquired                   |       | (984                                            | )          | (7,523 | ) |
| Purchases of property  and equipment                                                  |       | (13,236                                         | )          | (11,086 | ) |
| Change in restricted  cash and deposits for customer programs                         |       | (5,946                                          | )          | 6,665 |   |
| Net cash used in  investing activities                                                |       | (18,166                                         | )          | (1,344 | ) |
|                                                                                  |       |                                            |       |   |   |
| **Cash  flows from financing activities**                                             |       |                                            |       |   |   |
| Proceeds from public  offering of common stock, net of issuance costs                 |       | 83,485                                          |       | — |   |
| Proceeds from exercises  of stock options                                             |       | 792                                             |       | 368 |   |
| Repayment of borrowings  and payments under capital leases                            |       | (34                                             | )          | (1,516 | ) |
| Net cash provided by  (used in) financing activities                                  |       | 84,243                                          |       | (1,148 | ) |
| Effects of exchange  rate changes on cash                                             |       | 25                                              |       | — |   |
| Net change in cash and  cash equivalents                                              |       | 69,144                                          |       | (16,974 | ) |
| Cash and cash  equivalents at beginning of period                                     |       | 60,782                                          |       | 70,242 |   |
| Cash and cash  equivalents at end of period                                           |       | $                                               | 129,926    |   | $ | 53,268 |   |
|                                                                                  |       |                                            |       |   |   |
| **Supplemental  disclosure of cash flow information**                                 |       |                                            |       |   |   |
|                                                                                  |       |                                            |       |   |   |
| **Non-cash  financing and investing activities**                                      |       |                                            |       |   |   |
| Issuance of common  stock in connection with acquisitions                             |       | $                                               | 1,235      |   | $ | 1,791 |   |
| Issuance of common  stock in satisfaction of bonuses                                  |       | $                                               | 500        |   | $ | 844 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**EnerNOC, Inc.**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(inthousands, except share and per share data)**

 

**1. Description of Business andBasis of Presentation**

 

**Description of Business**

 

EnerNOC, Inc. (theCompany) is a service company that was incorporated in Delaware on June 5,2003.  The Company operates in asingle segment providing full-service demand response services, energyefficiency, or monitoring-based commissioning, services, energy procurementservices and emissions tracking and trading services. The Company uses its NetworkOperations Center (NOC) and PowerTrak enterprise software platform to remotelymanage and reduce electricity consumption across a network of commercial,institutional and industrial customer sites, making demand response capacityavailable to grid operators and utilities on demand while helping end-users ofelectricity achieve energy savings, environmental benefits and improvedfinancial results. The Company builds upon its position as a leadingdemand response services provider by using its NOC and scalable PowerTraktechnology platform to also deliver a portfolio of additional energy managementservices to its customers, including cross-selling of these energy management servicesto existing end-use customers.  These additional services include the Company’smonitoring-based commissioning services, energy procurement services andemissions tracking and trading services. The Company’s demand response and energy management services deliver immediate bottom-line benefitsto end-use customers and energy suppliers while helping to create a morereliable and efficient electricity grid for system operators and utilities.

 

The preparation of theseunaudited condensed consolidated financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results could differ from those estimates.

 

**Reclassifications**

 

Certain reclassificationshave been made to the September 30, 2008 statements of operations toconform to the September 30, 2009 presentation. The reclassificationsprimarily consist of costs related to facilities, information technology, humanresources and certain employee-related expenses, such as employee benefits.These reclassifications were determined on a headcount-based allocation. Theseamounts, which were previously included in general and administrative expenses,have been allocated among cost of revenues, selling and marketing expenses, andresearch and development expenses. The Company believes that by allocatingthese costs in this manner it better represents the expenses associated witheach of these activities.

 

**Basis of Consolidation**

 

The unaudited condensedconsolidated financial statements of the Company include the accounts of itswholly-owned subsidiaries and have been prepared in conformity with accountingprinciples generally accepted in the United States (GAAP). Intercompanytransactions and balances are eliminated upon consolidation. In the opinion ofthe Company’s management, the unaudited condensed consolidated financialstatements include all adjustments, consisting only of normal recurringadjustments, necessary for a fair presentation of the results of operations forthe periods presented.

 

The results of operationsfor the three and nine months ended September 30, 2009 are not necessarilyindicative of the results expected for the full fiscal year ending December 31,2009 or for any other fiscal period. The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and the footnotes thereto included inthe Company’s annual report on Form 10-K for the fiscal year ended December 31,2008, as filed with the Securities and Exchange Commission (SEC) on March 16,2009.

 

We evaluated subsequentevents through November 9, 2009, the date on which the Company filed thisquarterly report on Form 10-Q with the SEC.

 

**ComprehensiveIncome (Loss)**

 

Comprehensive income isdefined as the change in equity of a business enterprise during a period fromtransactions and other events and circumstances from non-owner sources.Comprehensive income (loss) is composed of net income (loss), unrealized gainsand losses on marketable securities and cumulative foreign currency translationadjustments.

 

Comprehensive income (loss)for the three and nine months ended September 30, 2009 and 2008 was asfollows:

 

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| ** **                                | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income (loss)                         |       | $                                         | 26,637     |                                     | $          | (3,060 | ) | $ | 8,374 |   | $ | (24,496 | ) |
| Foreign currency  translation adjustments |       | (55                                       | )          | —                                   |       | 96 |   | — |   |
| Total comprehensive  income (loss)        |       | $                                         | 26,582     |                                     | $          | (3,060 | ) | $ | 8,470 |   | $ | (24,496 | ) |

 

**Impairmentof Property and Equipment**

 

The Company reviews property and equipment forimpairment whenever events or changes in circumstances indicate that thecarrying amount of assets may not be recoverable. Recoverability of theseassets is measured by comparison of their carrying amount to the futureundiscounted cash flows the assets are expected to generate over theirremaining economic lives. If these assets are considered to be impaired, theimpairment is recognized in earnings and equals the amount by which thecarrying value of the assets exceeds their fair market value determined byeither a quoted market price, if any, or a value determined by utilizing adiscounted cash flow technique. If these assets are not impaired, but their usefullives have decreased, the remaining net book value is amortized over therevised useful life. For the nine months ended September 30, 2009, therewere no indicators of impairment.

 

**2. Acquisitions**

 

**eQuilibrium Solutions Corporation**

 

InJune 2009, the Company acquired substantially all of the assets ofeQuilibrium Solutions Corporation (eQ), a software company specializing in the development of enterprisesustainability management products and services.  The total purchase pricepaid by the Company at closing was approximately $751, of which $250 was paidin cash and the remainder of which was paid by the issuance of 21,464 shares ofthe Company’s common stock that had a value of approximately $501.  These shares were measured as of theacquisition date using the closing price of the Company’s common stock, asreported on The NASDAQ Global Market on June 11, 2009.

 

Transactioncosts related to the business combination have been expensed as incurred. TheCompany’s unaudited consolidated financial statements reflect eQ’s results ofoperations from June 11, 2009 forward.

 

The financial informationbelow reflects the final allocation of the purchase price, which was based onpreliminary information as of June 30, 2009.  During the three monthsended September 30, 2009, the Company allocated $120 to software which hadpreviously been recorded as goodwill as of June 30, 2009.  Additionally, the Company reduced theallocation of customer relationships to $390 from $480, a $90 reduction whichwas recorded as goodwill.

 

| Property and equipment |   | $   | 26     |   |
|------------------------|--------|-----|--------|--------|
| Customer relationships |   | 390 |   |
| Trade name             |   | 50  |   |
| Software               |   | 120 |   |
| Non-compete agreements |   | 12  |   |
| Goodwill               |   | 153 |   |
| Total                  |   | $   | 751    |   |

 

**South River Consulting, LLC**

 

In May 2008, the Company acquired 100% of themembership interests of South River Consulting, LLC (SRC), an energyprocurement and risk management services provider, for a purchase price equalto $5,524, which consisted of $3,603 in cash, $174 in related expenses and120,000 shares of the Company’s common stock that had a value of approximately$1,747 as of the closing date.  Inaddition to the amounts paid at closing, the Company incurred a contingentobligation to pay to the former holders of SRC membership interests an earnoutamount equal to 50% to 60% of the revenues of SRC’s business during eachtwelve-month period from May 1, 2008 through April 30, 2010, whichwould be recognized as additional purchase price when earned. The earnoutpayments are based on the achievement of certain minimum revenue-basedmilestones of SRC and are paid in a combination of cash and shares of theCompany’s common stock. These additional earnout payments, if any, are recordedas additional purchase price. The 

 

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additionalpurchase price recorded in the second quarter of 2009, which was related to theMay 1, 2008 to April 30, 2009 earnout period, totaled $1,468, ofwhich $734 was paid in cash during the second quarter of 2009 and the remainderof which was paid by the issuance of 44,776 shares of the Company’s commonstock during the third quarter of 2009. The final earnout payment, if any, related to the May 1, 2009through April 30, 2010 earnout period will be determined during the secondquarter of 2010.

 

**Mdenergy, LLC**

 

In September 2007, the Company acquired 100% ofthe membership interests of Mdenergy, LLC (MDE), an energy procurement serviceprovider, pursuant to the terms of a merger agreement. The total purchase pricepaid by the Company at closing was approximately $7,900, of which $3,501 waspaid in cash and the remainder of which was paid by the issuance of 139,056shares of the Company’s common stock that had a value of approximately $4,399as of the closing date.  In addition tothe amounts paid at closing, the Company was obligated to pay to the formerholders of MDE membership interests an earnout payment equal to two times therevenues of MDE’s business during the period from July 1, 2007 through December 31,2007. The contingent consideration related to the earnout payment in the amountof approximately $3,357 was paid in January 2008 and was recorded asadditional purchase price.

 

Pursuant to the merger agreement, the Company was alsoobligated to pay to certain employees of MDE a cash bonus payment of up to $300in the first quarter of 2008 and up to $600 in the first quarter of 2009 uponthe achievement of certain revenue-based milestones during 2007 and 2008,respectively. The amounts actually earned by, and paid to, the MDE employees inconnection with the achievement of the revenue-based milestones during 2007 and2008 were $300 and $500, respectively, and were charged to operations.

 

**3. Goodwill and Other IntangibleAssets**

 

Operating segments are defined as components of anenterprise about which separate financial information is available that isevaluated regularly by the chief operating decision maker, or decision makinggroup, in making decisions on how to allocate resources and assess performance.The Company’s chief decision maker is considered to be the team comprised ofthe chief executive officer and the executive management team. The Companyviews its operations and manages its business as one operating segment.

 

Purchased goodwill and intangible assets withindefinite lives are not amortized, but instead tested for impairment at leastannually and whenever events or changes in circumstances indicate the carryingvalue may not be recoverable. Intangible assets with finite lives continue tobe amortized over their useful lives. The Company performs its annualimpairment test during the fourth quarter using a two-step approach. Step oneof the goodwill impairment test, used to identify potential impairment,compares the fair value of the reporting unit with its carrying amount,including goodwill.  If the fair value ofthe reporting unit exceeds its carrying amount, goodwill of the reporting unitis considered not impaired, and the second step of the impairment test is notrequired.  If the carrying amount of areporting unit exceeds its fair value, the second step of the goodwillimpairment test will be performed to measure the amount of impairment loss, ifany. Based on the Company’s most recent analysis, there has been no impairmentof goodwill or other intangible assets.

 

Thefollowing table shows the change of the carrying amount of goodwill from December 31,2008 to September 30, 2009:

 

| Balance at  December 31, 2008  |   | $     | 13,395 |   |
|-------------------------------------|--------|-------|--------|--------|
| Additions during the  period        |   | 1,621 |   |
| Balance at September 30,  2009 |   | $     | 15,016 |   |

 

Theadditions of $1,621 during the nine months ended September 30, 2009consisted of $153 for the eQ acquisition and $1,468 for the SRC earnoutpayment.

 

The following tableprovides the gross carrying amount and related accumulated amortization ofintangible assets as of September 30, 2009 and December 31, 2008:

 
| ** **                                        | ** ** | **As of September 30, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **Gross Carrying  Amount**        | ** ** | **Accumulated  Amortization**    | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer contracts                                |       | $                                 | 4,217      |                             | $          | (1,077 | ) | $ | 4,217 |   | $ | (767 | ) |
| Employment agreements  and non-compete agreements |       | 182                               |       | (92                              | )          | 170 |   | (53 | ) |
| Software                                          |       | 120                               |       | (13                              | )          | 33 |   | (31 | ) |
| Customer relationships                            |       | 2,110                             |       | (298                             | )          | 1,720 |   | (149 | ) |
| Trade name                                        |       | 50                                |       | —                           |       | — |   | — |   |
| Total                                             |       | $                                 | 6,679      |                             | $          | (1,480 | ) | $ | 6,140 |   | $ | (1,000 | ) |

 

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The increase in softwarefrom December 31, 2008 to September 30, 2009 was due to the allocationof purchase price related to the eQ acquisition, offset by the write-off offully amortized intangible assets in the first half of 2009.  The increase in customer relationships andtrade name from December 31, 2008 to September 30, 2009 was due to theallocation of purchase price related to the eQ acquisition.  Total amortization expense was $182 and $208for the three months ended September 30, 2009 and 2008, respectively.  Total amortization expense was $514 and $853for the nine months ended September 30, 2009 and 2008, respectively.

 

**4.  Recent AccountingPronouncements**

 

***Multiple-DeliverableRevenue Arrangements, a consensus of the FASB Emerging Issues Task Force***

 

InOctober 2009, the FinancialAccounting Standards Board (FASB) issued Accounting Standards Update (ASU)2009-13, which amends Accounting Standards Codification (ASC) 605, *Revenue Recognition*(ASC 605)*,*to require companies to allocate revenue in multiple-element arrangements basedon an element’s estimated selling price if vendor-specific or other third-partyevidence of value is not available.  ASU2009-13 is effective beginning January 1, 2011.  Earlier application is permitted.  The Company is currently evaluating both thetiming and the impact of the pending adoption of ASU 2009-13 on itsconsolidated financial statements.

 

***The FASB AccountingCodification and the Hierarchy of Generally Accepted Accounting Principle***

 

In July 2009, the FASB issued ASC 105, *The FASB Accounting Codification and the Hierarchy of GenerallyAccepted Accounting Principle*(ASC 105)*. *ASC 105 will become the source ofauthoritative GAAP recognized by the FASB to be applied by nongovernmentalentities. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative GAAP for SECregistrants. On the effective date, ASC 105 superseded all then-existingnon-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not includedin ASC 105 will become nonauthoritative. ASC 105 is effective for interim and annual periods ending after September 15,2009.   All references made to GAAP inthe Company’s condensed consolidated financial statements now use the newcodification referencing system.  ASC 105does not change or alter GAAP; therefore, the adoption did not impact theCompany’s financial position or results of operations.

 

***Subsequent Events***

 

InMay 2009, the Subsequent Events Topic (ASC 855) was issued.   The standard does not requiresignificant changes regarding recognition or disclosure of subsequent events,but does require disclosure of the date through which subsequent events havebeen evaluated for disclosure and recognition.  The standard iseffective for financial statements issued after June 15,2009.  The implementation of this standard did not have a significantimpact on the financial statements of the Company.  Subsequent eventsthrough the filing date of this quarterly report on Form 10-Q have beenevaluated for disclosure and recognition.

 

**5. ****Earnings (Loss) Per Common Share**

 

The following representsa reconciliation of shares used to compute basic and diluted earnings (loss)per share:

 
| ** **                                                         | ** ** | **Three Months Ended********September 30,** | ** ** | **Nine Months Ended********September 30,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                         | ** ** | **2009**                                         | ** ** | **2008**                                        | ** ** | **2009** | ** ** | **2008** | ** ** |
| Numerator:                                                         |       |                                             |       |                                            |       |   |   |   |   |
| Net income (loss)                                                  |       | $                                                | 26,637     |                                            | $          | (3,060 | ) | $ | 8,374 |   | $ | (24,496 | ) |
| Denominator:                                                       |       |                                             |       |                                            |       |   |   |   |   |
| Basic weighted average  common shares outstanding                  |       | 21,938                                           |       | 19,606                                          |       | 20,704 |   | 19,407 |   |
| Effect of dilutive  securities:                                    |       |                                             |       |                                            |       |   |   |   |   |
| Shares held in escrow                                              |       | 136                                              |       | —                                          |       | 126 |   | — |   |
| Incremental shares  pursuant to stock options and restricted stock |       | 1,615                                            |       | —                                          |       | 1,325 |   | — |   |
| Weighted average common  shares outstanding assuming dilution      |       | 23,689                                           |       | 19,606                                          |       | 22,155 |   | 19,407 |   |
|                                                               |       |                                             |       |                                            |       |   |   |   |   |
| Basic earnings (loss)  per common share                            |       | $                                                | 1.21       |                                            | $          | (0.16 | ) | $ | 0.40 |   | $ | (1.26 | ) |
| Diluted earnings (loss)  per common share                          |       | $                                                | 1.12       |                                            | $          | (0.16 | ) | $ | 0.38 |   | $ | (1.26 | ) |

 

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Included in the weighted average number of commonshares outstanding at September 30, 2009 were 44,776 shares of commonstock issued in connection with the acquisition of SRC. 

 

For the three and nine months ended September 30,2009, 120,000 shares related to the SRC acquisition and 15,767 related to theeQ acquisition were excluded from the basic earnings per common sharecalculation, however these shares were included in the diluted earnings percommon share calculation.  These sharesfor the three and nine months ended September 30, 2008 were excluded from boththe basic and diluted loss per common share calculations.

 

During the three months ended September 30, 2009,options to purchase 201,988 shares of the Company’s common stock and 100,991shares of the Company’s restricted stock were outstanding but not included inthe computation of diluted earnings per share because the options’ exerciseprice or unamortized compensation expense per share was greater than theaverage market price of the common shares for this respective period, thusmaking them anti-dilutive.  

 

During the nine months ended September 30, 2009,options to purchase 365,241 shares of the Company’s common stock and 101,991shares of the Company’s restricted stock were outstanding but not included inthe computation of diluted earnings per share because the options’ exerciseprice or unamortized compensation expense per share was greater than theaverage market price of the common shares for this respective period, thusmaking them anti-dilutive. 

 

**6. FairValue Measurements**

 

The Fair Value Measurements and Disclosures Topic (ASC820) establishes a fair value hierarchy that requires the use of observablemarket data, when available, and prioritizes the inputs to valuation techniquesused to measure fair value in the following categories:

 

·                      Level 1 - Valuation is based upon quotedprices for identical instruments traded in active markets. Level 1 instrumentsinclude securities traded on active exchange markets, such as the New YorkStock Exchange.

 

·                      Level 2 - Valuation is based upon quotedprices for similar instruments in active markets, quoted prices for identicalor similar instruments in markets that are not active and model-based valuationtechniques for which all significant assumptions are observable in the market.

 

·                      Level 3 - Valuation is generated frommodel-based techniques that use significant assumptions not observable in themarket. These unobservable assumptions reflect the Company’s own estimates ofassumptions market participants would use in pricing the asset or liability.

 

The table below presents the balances of assets andliabilities measured at fair value on a recurring basis at September 30, 2009:

 
| ** **             | ** ** | **Fair Value Measurement at September 30, 2009 Using** | ** ** |
|------------------------|------------|-------------------------------------------------------------|------------|
| ** **             | ** ** | **Totals**                                                  | ** ** | **Quoted Prices in Active  Markets for Identical  Assets (Level 1)** | ** ** | **Significant Other  Observable Inputs (Level 2)** | ** ** | **Unobservable Inputs  (Level 3)** | ** ** |
| Money market funds (1) |       | $                                                           | 100,527    |   | $ | 100,527 |   | $ | — |   | $ | — |   |
|                   |       | $                                                           | 100,527    |   | $ | 100,527 |   | $ | — |   | $ | — |   |

 

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(1)  Included in cash and cash equivalents in theaccompanying unaudited condensed consolidated balance sheets.

 

At September 30,2009, the Company had restricted cash of approximately $7,874 invested incertificates of deposit. All certificates of deposit have contractualmaturities of twelve months or less. The Company’s investments in certificatesof deposit have a fair value that approximates cost.

 

The carrying amounts ofcash and cash equivalents, restricted cash, trade accounts receivable, accountspayable, and accrued expenses included in the condensed consolidated balancesheets approximate fair value given the short-term nature of these financialinstruments.

 

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**7****. FinancingArrangements**

 

On August 5, 2008, the Company and one ofits subsidiaries entered into a $35,000 secured revolving credit and termloan facility with Silicon Valley Bank (SVB) pursuant to a loan andsecurity agreement, which was subsequently amended on May 29, 2009 (theCredit Facility).  Pursuant to the termsof the Credit Facility, SVB will, among other things, make revolvingcredit and term loan advances and issue letters of credit for theCompany’s account.  The interest on loans under the Company’s revolvingcredit loan accrues at interest rates based upon either SVB’s prime rateor the 30, 60 or 90-day LIBOR plus 2.25%, at the Company’s election.  Theinterest on the Company’s term loan accrues at SVB’s prime rate plus 0.50% orthe 30, 60 or 90-day LIBOR plus 2.75%, at the Company’s election.  Theterm advance is payable in thirty-six consecutive equal monthly installments ofprincipal, calculated by SVB, based upon the amount of the term advanceand an amortization schedule equal to thirty-six months.  All unpaidprincipal and accrued interest is due and payable in full on August 5,2010, which is the maturity date.  In connectionwith the issuance or renewal of letters of credit for the Company’s account,the Company is charged a letter of credit fee of 1.25%. The Company expensesthe interest and letter of credit fees, as applicable, in the period incurred.

 

TheCompany’s obligations under the Credit Facility are secured by all of theassets of the Company and its subsidiaries, excluding any intellectualproperty.  The Credit Facility contains customary terms and conditions forcredit facilities of this type, including restrictions on the Company’s abilityto incur additional indebtedness, create liens, enter into transactions withaffiliates, transfer assets, pay dividends or make distributions on, orrepurchase, the Company’s stock, consolidate or merge with other entities,or suffer a change in control.  In addition, the Company is required tomeet certain financial covenants customary with this type of credit facility,including maintaining a minimum specified tangible net worth and a minimumspecified ratio of current assets to current liabilities.  The Credit Facilitycontains customary events of default, including payment defaults, breaches ofrepresentations, breaches of affirmative or negative covenants, cross defaultsto other material indebtedness, bankruptcy and failure to discharge certainjudgments. If a default occurs and is not cured within any applicable cureperiod or is not waived, the Company’s obligations under the Credit Facilitymay be accelerated.  The Company was in compliance with all financialcovenants under the Credit Facility at December 31, 2008 andSeptember 30, 2009.

 

Asof September 30, 2009, the Credit Facility was fully drawn. Unless earlierpayment is required by an event of default, all principal and unpaid interestwill be due and payable on August 5, 2010. The Company is also required topay an unused line fee on the daily unused amount of its facility at a perannum rate of 0.25%. The Company incurred financing costs of $120 in connectionwith the Credit Facility, which were deferred and are being amortized to interestexpense over the life of the debt. At September 30, 2009, the Company hadborrowings of $4,442 accruing interest at 4.0% and letters of credit of $30,539outstanding under the Credit Facility.

 

OnOctober 29, 2009, the Company repaid the outstanding borrowings of $4,442 underthe Credit Facility.

 

**8.Commitments and Contingencies**

 

The Company is subject tocertain performance guarantee requirements under certain customer contracts andopen market bidding program participation rules. The Company had deposits heldby certain customers of $9,572 and $2,386, respectively, at September 30,2009 and December 31, 2008. These amounts primarily represent up-frontpayments required by utility and grid operator customers as a condition ofparticipation in certain demand response programs and to ensure that theCompany will deliver its committed capacity amounts in the applicable demandresponse programs. If the Company fails to meet its minimum enrollment requirements,a portion or all of the deposit may be forfeited. The Company assessed theprobability of default under these customer contracts and open market biddingprograms and has determined the likelihood of default to be remote.

 

In connectionwith the Company’s participation in an open market bidding program, the Companyentered into an arrangement with a third party during the second quarter of2009 to bid capacity into the program and provide the corresponding financialassurance required in connection with the bid. The arrangement included anup-front payment by the Company equal to $2,000, of which $1,100 was expensedas interest expense during the second quarter of 2009 and $900 was deferred.   Inaddition, the Company will be required to pay the third party an additionalcontingent fee, up to a maximum of $3,000, based on the revenue that theCompany expects to earn in 2012 in connection with the bid.  This additional fee will be recognized asearned.

 

**9.Stock-Based Compensation**

 

*StockOptions*

 

The Company’sAmended and Restated 2003 Stock Option and Incentive Plan (2003 Plan) and the2007 Employee, Director and Consultant Stock Plan (the 2007 Plan, andcollectively with the 2003 Plan, the Plans) provide for the grant of incentivestock options, nonqualified stock options, restricted and unrestricted stockawards and other stock-based awards to eligible employees, 

 

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directors and consultantsof the Company. Options granted under the Plans are exercisable for a perioddetermined by the Company, but in no event longer than ten years from the dateof the grant. Options generally vest ratably over four years. The 2003 Planexpired upon the Company’s initial public offering in May 2007. Anyforfeitures after May 2007 under the 2003 Plan are available for futuregrant under the 2007 Plan.

 

For stock optionsgranted prior to January 1, 2009, the fair value of each option wasestimated at the date of grant using a Black-Scholes option-pricing model. Forstock options granted on or after January 1, 2009, the fair value of eachoption has been and will be estimated on the date of grant using a trinomialvaluation model. The trinomial model considers characteristics of fair valueoption pricing that are not available under the Black-Scholes model. Similar tothe Black-Scholes model, the trinomial model takes into account variables suchas expected volatility, dividend yield rate, and risk free interest rate.However, in addition, the trinomial model considers the probability that theoption will be exercised prior to the end of its contractual life and theprobability of termination or retirement of the option holder in computing thevalue of the option. For these reasons, the Company believes that the trinomialmodel provides a fair value that is more representative of actual experienceand future expected experience than that value calculated using theBlack-Scholes model.

 

The fair value ofoptions granted was estimated at the date of grant using the following weightedaverage assumptions:

 
| ** **                              | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| Risk-free  interest rate                |       | 3.18                                | %          | 2.30-3.60 | % |
| Expected term  of options, in years (1) |       | —                              |       | 6.25 |   |
| Vesting term,  in years (1)             |       | 2.16                                |       | — |   |
| Expected  annual volatility             |       | 86                                  | %          | 87 | % |
| Expected  dividend yield                |       | —                              | %          | — | % |
| Exit rate  pre-vesting (1)              |       | 4.88                                | %          | — | % |
| Exit rate  post-vesting (1)             |       | 10.89                               | %          | — | % |

 

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(1) Change in assumptionsreflects the Company’s use of a trinomial valuation model as of January 1, 2009.

 

Ifthe Company had continued using the Black-Scholes option pricing model in 2009,stock-based compensation expense would not have been materially different forthe three and nine months ended September 30, 2009.

 

InDecember 2008, the Company’s board of directors approved a one-time offerto the Company’s employees, including its executive officers, and directors toexchange option grants that had an exercise price per share that was equal toor greater than the higher of $12.00 or the closing price of the Company’scommon stock as reported on The NASDAQ Global Market on January 21, 2009(the Exchange). The Exchange closed on January 21, 2009, and the Companyexchanged options that had exercise prices equal to or greater than $12.00 pershare. As a result, an aggregate of 744,401 options, with exercise pricesranging from $12.27 to $48.54 per share, were exchanged for 424,722 optionswith an exercise price per share of $8.63 for employees who are not alsoexecutive officers of the Company, 142,179 options with an exercise price pershare of $11.47 for executive officers who are not also directors of theCompany and 45,653 options with an exercise price per share of $12.94 for theCompany’s directors. On the date of the Exchange, the estimated fair value ofthe new options did not exceed the fair value of the exchanged stock optionscalculated immediately prior to the Exchange.  As such, there was noincremental fair value of the new options, and the Company will not recordadditional compensation expense related to the Exchange.  The Company willcontinue to recognize the remaining compensation expense related to theexchanged options over the remaining vesting period of the original options.

 

The following is a summaryof the Company’s stock option activity:

 

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| ** **                                | ** ** | **Nine Months Ended September 30, 2009**  | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Number of Shares   Underlying Options** | ** ** | **Exercise Price   Per Share** | ** ** | **Weighted-Average   Exercise Price Per   Share** | ** ** | **Aggregate   Intrinsic   Value(1)** | ** ** |
| Outstanding at  beginning of period       |       | 2,746,835                                 |       | $0.11 - $48.54 |   | $ | 13.88 |   |   |   |
| Granted                                   |       | 1,093,454                                 |       |   |   | 13.55 |   |   |   |
| Exercised                                 |       | (327,447                                  | )          |   |   | 3.73 |   | $ | 5,678 |   |
| Cancelled                                 |       | (937,049                                  | )          |   |   | 26.11 |   | — |   |
| Outstanding at  end of period             |       | 2,575,793                                 |       | $0.11 - $48.54 |   | 10.07 |   | 59,176 |   |
| Remaining  contractual life in years: 7.0 |       |                                      |       |   |   |   |   |   |   |
| Exercisable at  end of period             |       | 859,301                                   |       | $0.11 - $48.54 |   | $ | 7.51 |   | $ | 22,220 |   |
| Remaining  contractual life in years: 7.2 |       |                                      |       |   |   |   |   |   |   |

 

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(1)  The aggregateintrinsic value was calculated based on the positive difference between theestimated fair value of the Company’s common stock on the date of exercise orSeptember 30, 2009, as appropriate, and the exercise price of the underlyingoptions.

 

The Companyrecognized stock-based compensation expense of $9,996 and $7,390 during thenine months ended September 30, 2009 and 2008, respectively.  Theamount of unrecognized stock-based compensation expense that may be recognizedfor outstanding unvested options as of September 30, 2009 was $17,596,which is to be recognized over a weighted average period of 2.3 years. For restricted stock at September 30, 2009, the Company had $4,489of unrecognized stock-based compensation expense, which is expected to berecognized over a weighted average period of 2.3 years.

 

During the first quarter of2009, certain of the Company’s executives received their performance-basedbonus awards in shares of fully-vested common stock of the Company.  Theshares issued totaled 45,085 and had an approximate value of $500.

 

During the secondquarter of 2009, the Company granted to certain members of its board ofdirectors an aggregate of 24,000 fully-vested options to purchase shares of theCompany’s common stock and 16,000 shares of the Company’s common stock, whichhad an estimated combined fair value of $718.

 

During thethird quarter of 2009, the Company granted to its former chief financialofficer an acceleration of a certain portion of options to purchase shares ofcommon stock, which had an estimated fair value of $441.

 

During thethird quarter of 2009, the Company granted to its newly-hired chief financialofficer an aggregate of 80,000 options to purchase shares of the Company’scommon stock and 20,000 shares of the Company’s common stock, which had anestimated combined fair value of $1,761.

 

**10. EquityFinancing**

** **

During the third quarterof 2009, the Company completed an underwritten public offering of3,963,889 shares of common stock at an offering price of $27.00 per share,which includes the exercise of the underwriters’ over-allotment option topurchase 213,889 shares and the sale of 709,026 shares by certain sellingstockholders. After deducting underwriting discounts and commissions andoffering expenses payable by the Company, the Company received net proceeds of approximately$83.5 million from the offering.

 

**11. IncomeTaxes**

 

No current provision forfederal or state income taxes has been recorded, as the Company has incurredcumulative net operating losses for each tax year since inception.  TheCompany has recorded a deferred benefit from income taxes related to tax amortizationof indefinite lived intangibles of $786 and $438, respectively, for the threeand nine months ended September 30, 2009. The Company has recorded a deferred tax provision for $22 and $180,respectively, related to tax deductible goodwill for the three and nine monthsended September 30, 2008. Amounts due to various states for excise taxes areincluded in general and administrative expenses, accrued expenses and othercurrent liabilities as of September 30, 2009 and December 31, 2008.

 

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**12.Industry Segment Information**

 

TheCompany operates within one reportable segment.

 

During the three and ninemonths ended September 30, 2009 and 2008, the Company had certaincustomers whose revenue individually represented 10% or more of the Company’stotal revenues as follows:

 
| ** ** | ** ** | **Three Months Ended September 30,** | ** ** |
|------------|------------|--------------------------------------|------------|
| ** ** | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** ** | ** ** | **Revenues**                         | ** ** | **% of Total   Revenues** | ** ** | **Revenues** | ** ** | **% of Total   Revenues** | ** ** |
| PJM        |       | $                                    | 75,029     |   | 72.8 | % | $ | 22,067 |   | 50.0 | % |
| ISO-NE     |       | 12,390                               |       | 12.0 | % | 7,999 |   | 18.1 | % |
| CL&P   |       | *                                    |       | * |   | * |   | * |   |
| Total      |       | $                                    | 87,419     |   | 84.8 | % | $ | 30,066 |   | 68.1 | % |

 
| ** ** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                                | ** ** | **2008** | ** ** |
| ** ** | ** ** | **Revenues**                                            | ** ** | **% of Total   Revenues** | ** ** | **Revenues** | ** ** | **% of Total   Revenues** | ** ** |
| PJM        |       | $                                                       | 98,216     |   | 59.9 | % | $ | 29,580 |   | 34.2 | % |
| ISO-NE     |       | 37,045                                                  |       | 22.6 | % | 27,490 |   | 31.8 | % |
| CL&P   |       | *                                                       |       | * |   | 12,036 |   | 14.0 | % |
| Total      |       | $                                                       | 135,261    |   | 82.5 | % | $ | 69,106 |   | 80.0 | % |

 

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*Less than 10% of totalrevenues and not included in totals.

 

Accountsreceivable from these customers was approximately $7,999 and $9,121 atSeptember 30, 2009 and December 31, 2008, respectively. Unbilled revenue fromthese customers was $64,842 and $11,585 for the periods ended September 30,2009 and December 31, 2008, respectively.

 

**13. Legal Proceedings**

 

The Company issubject to legal proceedings, claims and litigation arising in the ordinarycourse of business. The Company does not expect the ultimate costs to resolvethese matters to have a material adverse effect on the Company’s consolidatedfinancial condition, results of operations or cash flows.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

 

*Thefollowing discussion should be read in conjunction with our unaudited condensedconsolidated financial statements and related notes thereto included elsewherein this Quarterly Report on Form 10-Q, as well as our audited financialstatements and notes thereto and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2008, as filed withthe Securities and Exchange Commission, or the SEC, on March 16, 2009.This Quarterly Report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, or the Securities Act, and Section 21E of the Securities ExchangeAct of 1934, as amended, or the Exchange Act. Without limiting the foregoing,the words “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,”“anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,”“target” and variations of those terms or the negatives of those terms andsimilar expressions are intended to identify forward-looking statements. Allforward-looking statements included in this Quarterly Report on Form 10-Qare based on current expectations, estimates, forecasts and projections and thebeliefs and assumptions of our management including, without limitation, ourexpectations regarding our results of operations, operating expenses and thesufficiency of our cash for future operations. We assume no obligation torevise or update any such forward-looking statements. Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of certain important factors, including those set forth below underthis Item 2 — “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” Part II, Item 1A — “Risk Factors” andelsewhere in this Quarterly Report on Form 10-Q, as well as in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008. Youshould carefully review those factors and also carefully review the risksoutlined in other documents that we file from time to time with the SEC.*

 

**Overview**

 

We are aleading provider of clean and intelligent energy solutions, which includedemand response services, energy efficiency, or monitoring-based commissioning,services, energy procurement services and emissions tracking and tradingservices. These solutions help optimize the balance of electric supply anddemand, provide cost-efficient alternatives to traditional power generation,transmission and distribution resources, and drive significant cost-savings forour customers. Our customers are commercial, institutional and industrialend-users of energy, as well as electric power grid operators and utilities.

 

We believe that weare the largest national demand response service provider for commercial,institutional and industrial customers. As of September 30, 2009, we hadover 3,250 megawatts, or MW, under management in our demand response networkacross an end-use customer base of approximately 2,500 accounts and 5,600customer sites throughout multiple electric power grids. Demand response is analternative to traditional power generation and transmission infrastructureprojects that enables grid operators and utilities to reduce the likelihood ofservice disruptions, such as brownouts and blackouts, during periods of peakelectricity demand, and otherwise manage the electric power grid duringshort-term imbalances of supply and demand. We use our Network OperationsCenter, or NOC, and PowerTrak enterprise software platform to remotely manageand reduce electricity consumption across a growing network of commercial,institutional and industrial customer sites, making demand response capacityavailable to grid operators and utilities on demand while helping end-users ofelectricity achieve energy savings, environmental benefits and improvedfinancial results. To date, we have received substantially all of our revenuesfrom grid operators and utilities, who make recurring payments to us formanaging demand response capacity that we share with end-users of electricityin exchange for such end-users reducing their power consumption when calledupon.

 

We build on ourposition as a leading demand response services provider by using our NOC andscalable PowerTrak technology platform to also deliver a portfolio ofadditional energy management services to our customers, including cross-sellingof these energy management services to existing end-use customers.  Theseadditional solutions include our monitoring-based commissioning, or MBCx,services, energy procurement services and emissions tracking and tradingservices. Our MBCx services combine advanced metering, building managementsystems, and energy analytics software applications to identify energyefficiency opportunities in large buildings. Our energy procurement servicesprovide our commercial, institutional and industrial customers located inrestructured or deregulated markets throughout the United States with theability to more effectively manage the energy supplier selection process,including energy supply product procurement and implementation. Our emissionstracking and trading services include a comprehensive, software-basedaccounting system for our commercial, institutional and industrial customers toeffectively monitor, mitigate and monetize their greenhouse gas emissions inresponse to existing and pending greenhouse gas reporting requirements.

 

We continue todevote substantially all of our efforts toward the sale of our demand responseand energy management solutions. We have incurred cumulative net losses of $62.1million from inception to September 30, 2009. Our net income was $26.6 millionand $8.4 million, respectively, for the three and nine months endedSeptember 30, 2009.

 

**SignificantRecent Developments**

 

In July 2009, we andNeal C. Isaacson, our then-current chief financial officer and treasurer,agreed that Mr. Isaacson would resign as chief financial officer and treasurereffective as of the close of business on July 30, 2009.  Also inJuly 2009, we entered into 

 

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an employment offer letter to hire and retain TimothyWeller as our chief financial officer and treasurer.  Mr. Weller’semployment with our company commenced on July 31, 2009.

 

In August 2009, wecompleted an underwritten public offering of 3,963,889 shares of our commonstock at an offering price of $27.00 per share, which includes the exercise ofthe underwriters’ over-allotment option to purchase 213,889 shares and the saleof 709,026 shares by certain of our selling stockholders. After deductingunderwriting discounts and commissions and offering expenses payable by us, wereceived net proceeds of approximately $83.5 million from the offering.

 

**Revenuesand Expense Components**

 

***Revenues***

 

We deriverecurring revenues from the sale of our demand response and energy management services.Our revenues from our demand response services primarily consist of capacityand energy payments. We derive revenues from demand response capacity that wemake available in open market programs, which are open market biddingopportunities established by grid operators or utilities. In these open marketprograms, grid operators and utilities generally seek bids from companies suchas ours to provide demand response capacity based on prices offered incompetitive bidding. These opportunities are generally characterized byflexible capacity commitments and prices that vary by hour, day, month, biddingperiod or supplemental, new or modified programs. In certain markets, we enterinto long-term capacity contracts with grid operators and utilities, generallyranging from three to 10 years in duration, to deploy our demand response solutions.  Revenues have historically increased in oursecond and third fiscal quarters compared to other quarters in our fiscal yeardue to seasonal demand related to the demand response market.

 

Where we operatein open markets, our revenues from demand response capacity payments generallyvary month-to-month based upon our enrolled capacity and the market paymentrate. Where we have a long-term contract, we receive periodic capacitypayments, which may vary monthly or seasonally, based upon enrolled capacityand predetermined payment rates. Under both long-term contracts and open marketprograms, we receive capacity payments regardless of whether we are called uponto reduce demand for electricity from the electric power grid and we recognizerevenue over the applicable delivery period, even where payments are made overa different period.  We generally demonstrateour capacity either through a demand response event or a measurement andverification test.  This demonstrated capacity is typically used tocalculate the continuing periodic capacity payments to be made to us until thenext demand response event or test establishes a new demonstrated capacityamount. In most cases, we also receive an additional payment for the amount ofenergy usage that we actually curtail from the grid during a demand responseevent; we call this an energy payment.

 

We do notrecognize any revenues until we can determine that persuasive evidence of anarrangement exists, delivery has occurred, the fee is fixed or determinable,and we deem collection to be probable. As program rules may differ foreach contract and/or region where we operate, we assess whether or not we havemet the specific service requirements under the program rules andrecognize or defer revenues as necessary. We recognize demand response revenueswhen we have provided verification to the grid operator or utility of ourability to deliver the committed capacity under the contract or open marketprogram. Committed capacity is verified through the results of an actual demandresponse event or a measurement and verification test. Once the capacity amounthas been verified, the revenues are recognized and future revenues become fixedor determinable and are recognized monthly until the next verificationevent.  In subsequent verification events, if our verified capacity isbelow the previously verified amount, the grid operator or utility customerwill reduce future payments based on the adjusted verified capacity amounts.The payments received from the grid operator or utility customer can bedecreased or increased, up to the committed capacity amounts under the contractor open market program, in connection with subsequent verification events.

 

We deferincremental direct costs incurred related to the acquisition or origination ofa contract or open market program in a transaction that results in the deferralor delay of revenue recognition.  We haddeferred contract origination costs of approximately $0.9 million as ofSeptember 30, 2009 and $0.0 million as of December 31, 2008. Thesedeferred expenses would not have been incurred without our participation in anopen market bidding program and will be expensed in proportion to the relatedrevenue being recognized. We believe that this accounting treatmentappropriately matches expenses with the associated revenue.

 

As of September 30,2009, we had over 3,250 MW under management in our demand response network,meaning that we had entered into definitive contracts with our commercial,institutional and industrial customers with respect to over 3,250 MW of demandresponse capacity. We generally begin earning revenues from our MW undermanagement within approximately one month from the date on which we “enable”the MW, or the date on which we can reduce the MW from the electricity grid ifcalled upon to do so. An exception is the PJM Interconnection, or PJM, forwardcapacity market, which is a market in which we materially increased ourparticipation beginning in the first quarter of 2008 and in which we expect tocontinue to increase our participation and derive revenues for the foreseeablefuture. Because PJM operates on a June to May program-year basis, aMW that we enable after June of each year may not begin earning revenueuntil June of the following year. This results in a longer average revenuerecognition lag time in our end-use customer portfolio from the point in timewhen we consider a MW to be under management to when we earn revenues from theMW. Certain other markets in which we currently participate or choose toparticipate in the future may operate in a manner similar to the PJM forwardcapacity market, which would create a delay in recognizing revenue from the MWthat we enable in those markets.

 

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Ourportfolio of additional energy management solutions includes our MBCx services,energy procurement services, and emissions tracking and trading services.  Our MBCx services combine advanced metering,building management systems, and energy analytics software applications toidentify energy efficiency opportunities in large buildings.  Our energy procurement services provide ourend-use customers located in restructured or deregulated markets throughout theUnited States with the ability to more effectively manage the energy supplierselection process, including energy supply product procurement andimplementation.  We also use ourPowerTrak platform to deliver emissionstracking and trading services, which include a comprehensive, software-basedaccounting system for our commercial, institutional and industrial customers toenable them to more effectively monitor, mitigate and monetize their greenhousegas emissions in response to existing and pending greenhouse gas reportingrequirements.  We generally receive either asubscription-based or consulting fee or a percentage savings fee for theseenergy management solutions.  Revenuesderived from our energy management solutions increased from $4.8 million to$5.0 million, respectively, for the nine months ended September 30, 2008and 2009.

 

Revenues generated fromopen market sales to PJM, a grid operator customer, accounted for 73% and 50%,respectively, of our total revenues in each of the three months ended September30, 2009 and 2008 and 60% and 34%, respectively, of our total revenues in eachof the nine months ended September 30, 2009 and 2008.

 

Revenues generatedfrom two fixed price contracts with, and open market sales to, ISO New EnglandInc., or ISO-NE, a grid operator customer, accounted for 12% and 18%,respectively, of our total revenues in each of the three months ended September30, 2009 and 2008 and 23% and 32%, respectively, of our total revenues in eachof the nine months ended September 30, 2009 and 2008. Our two fixed pricecontracts with ISO-NE expired on May 31, 2008.  In addition, 0% and 14% of our total revenuesfor each of the nine months ended September 30, 2009 and 2008 were generatedunder a fixed price contract with The Connecticut Light and Power Company, orCL&P, which expired on December 31, 2008.  We have enrolled asignificant portion of the MW represented by our expired fixed price contractswith ISO-NE and CL&P in other available demand response programs.

 

***Cost of Revenues***

 

Cost of revenues for ourdemand response solutions consists primarily of payments that we make to ourcommercial, institutional and industrial customers for their participation inour demand response network. We generally enter into three to five year contractswith our end-use customers under which we deliver recurring cash payments tothem for the capacity they commit to make available on demand. We alsogenerally make an additional payment when a customer reduces consumption ofenergy from the electric power grid. The equipment and installation costs forour devices at our commercial, institutional and industrial customer sites arecapitalized and depreciated over the lesser of the remaining term of thecontract, for fixed contracts, or the estimated useful life of the equipment,and this depreciation is reflected in cost of revenues. We also include in costof revenues the monthly telecommunications and data costs we incur as a resultof being connected to our commercial, institutional and industrial sites andour internal payroll and related costs specifically allocated to a customersite. Cost of revenues for energy management solutions include third partyservices, equipment depreciation and the wages and associated benefits that wepay to our project managers for the performance of their services.

 

***Gross Profit and Gross Margin***

 

Grossprofit consists of our total revenues less our cost of revenues. Our grossprofit has been, and will be, affected by many factors, including (a) thedemand for our demand response and energy management solutions, (b) theselling price of our solutions, (c) our cost of revenues, (d) theintroduction of new clean and intelligent energy solutions and (e) ourability to open and enter new markets and regions and expand deeper intomarkets we already serve.  In our demand response business we matchobligation, in the form of MW that we agree to deliver to our utility and gridoperator customers, with supply, in the form of MW that we are able to curtailfrom the electric power grid.  Weincrease, and occasionally decrease, our obligation through open market biddingprograms and auctions, open program registrations and bilateral contracts.  We increase our ability to curtail demandfrom the electric power grid by deploying a sales team to contract with ourcommercial, institutional and industrial customers and by installing ourequipment at these customers’ sites to connect them to our network. When we arecalled upon by our utility or grid operator customers to deliver MW, we use oursoftware application to dispatch this network to meet the demands of theseutility and grid operator customers. We refer to the above activities asmanaging our portfolio of demand response capacity.  In some of our arrangements, we collectadditional revenues for successful performance or we pay penalties forunderperformance. Our outcomes in negotiating favorable contracts with ourcommercial, institutional and industrial customers, as well as with our utilityand grid operator customers, and managing our portfolio of demand responsecapacity are the primary determinants of our gross profit and margin.

 

***Operating Expenses***

 

Operating expenses consistof selling and marketing, general and administrative, and research anddevelopment expenses. Personnel-related costs are the most significantcomponent of each of these expense categories. We grew from 335 full-timeemployees at September 30, 2008 to 370 full-time employees at September 30,2009. We expect to continue to hire employees to support our growth for theforeseeable future. In addition, we incur significant up-front costs associatedwith the expansion of the number of MW under our management, which we expect tocontinue for the foreseeable future. Although we expect our overall operatingexpenses to increase in absolute dollar terms for the foreseeable future as wegrow our MW under management and further 

 

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increase our headcount, weexpect our overall annual operating expenses to decrease as a percentage oftotal annual revenues as we leverage our existing employee base and continuegenerating revenues from our MW under management.

 

*Sellingand Marketing*

 

Selling and marketingexpenses consist primarily of (a) salaries and related personnel costs,including costs associated with share-based payment awards,(b) commissions, (c) travel, lodging and other out-of-pocketexpenses, (d) marketing programs such as trade shows and (e) otherrelated overhead. Commissions are recorded as an expense when earned by theemployee. We expect increases in selling and marketing expenses in absolutedollar terms for the foreseeable future as we further increase the number of salesprofessionals and, to a lesser extent, increase our marketing activities. Weexpect annual selling and marketing expenses to decrease as a percentage oftotal annual revenues as we leverage our current sales and marketing personnel.

 

*Generaland Administrative*

 

General and administrativeexpenses consist primarily of (a) salaries and related personnel costs,including costs associated with share-based payment awards, related to ourexecutive, finance, human resource, information technology and operationsorganizations, (b) facilities expenses, (c) accounting and legalprofessional fees, (d) depreciation and amortization and (e) otherrelated overhead. We expect general and administrative expenses to continue toincrease in absolute dollar terms for the foreseeable future as we invest ininfrastructure to support our continued growth. We expect general andadministrative expenses to decrease as a percentage of total annual revenues aswe leverage our current infrastructure and employee base.

 

*Researchand Development*

 

Research and developmentexpenses consist primarily of (a) salaries and related personnel costs,including costs associated with share-based payment awards, related to ourengineering organization, (b) payments to suppliers for design and consultingservices, (c) costs relating to the design and development of newsolutions and enhancement of existing solutions, (d) quality assurance andtesting and (e) other related overhead. During the three and nine monthsended September 30, 2009, we capitalized internal software and developmentcosts of $0.5 million and $1.7 million, respectively, and the amount isincluded as software in property and equipment at September 30, 2009.During the three and nine months ended September 30, 2008, we capitalizedinternal software and development costs of $0.4 million and $1.1 million,respectively. We expect research and development expenses to increase inabsolute dollar terms for the foreseeable future and to decrease as apercentage of total revenues in the long term.

 

***Stock-Based Compensation***

 

Stock-basedcompensation is recognized and measured at fair value. For the three and ninemonths ended September 30, 2009, we recorded expenses of approximately $3.9million and $10.0 million, respectively, in connection with share-basedpayment awards to employees and non-employees. With respect to grants through September 30,2009, a future expense of non-vested options of approximately $17.6 million isexpected to be recognized over a weighted average period of 2.3 years and afuture expense of restricted stock awards of approximately $4.5 million isexpected to be recognized over a weighted average period of 2.3 years. Forstock options granted prior to January 1, 2009, the fair value for theseoptions was estimated at the date of grant using a Black-Scholes option-pricingmodel and for stock options granted on or after January 1, 2009, the fairvalue of each award is estimated on the date of grant using a trinomialvaluation model. If we had continued using the Black-Scholes option pricingmodel in 2009, stock-based compensation expense would not have been materiallydifferent for the three and nine months ended September 30, 2009.

 

In July 2009, we andNeal C. Isaacson, our then-current chief financial officer and treasurer,agreed that Mr. Isaacson would resign as chief financial officer and treasurereffective as of the close of business on July 30, 2009.  In connection with Mr. Isaacson’sresignation, the vesting of a certain portion of his outstanding options to purchaseshares of our common stock was accelerated. Also in July 2009, we entered into an employment offer letter tohire and retain Timothy Weller as our chief financial officer andtreasurer.   As part of thisemployment offer letter, we granted Mr. Weller an aggregate of 80,000 optionsto purchase shares of our common stock and 20,000 shares of our common stock.

 

InDecember 2008, our board of directors approved a one-time offer to ouremployees, including our executive officers, and directors to exchange optiongrants that had an exercise price per share that was equal to or greater thanthe higher of $12.00 or the closing price of our common stock as reported onThe NASDAQ Global Market on January 21, 2009, which we refer to as theexchange. The exchange closed on January 21, 2009, and we exchanged optionsthat had exercise prices equal to or greater than $12.00 per share. As aresult, an aggregate of 744,401 options, with exercise prices ranging from$12.27 to $48.54 per share, were exchanged for 424,722 options with anexercise price per share of $8.63 for employees who are not also our executiveofficers, 142,179 options with an exercise price per share of $11.47 forexecutive officers who are not also our directors and 45,653 options with anexercise price per share of $12.94 for our directors.  On the date of the exchange, the estimatedfair value of the new options 

 

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didnot exceed the fair value of the exchanged options calculated immediately priorto the exchange.  As such, there was noincremental fair value of the new options, and we will not record additionalcompensation expense related to the exchange.  We will continue to recognize the remainingcompensation expense related to the exchanged options over the remainingvesting period of the original options.

 

***Other Income and Expense***

 

Other income and expenseconsist primarily of interest income earned on cash balances, gain or loss onforeign currency transactions and other non-operating income. We historicallyhave invested our cash in money market funds, treasury funds, commercial paper,municipal bonds and auction rate securities. We do not currently hold anyauction rate securities.

 

***Interest Expense***

 

Interest expense consists ofinterest on our credit facility and fees associated with issuing letters ofcredit.

 

**ConsolidatedResults of Operations**

 

***Three and Nine Months Ended September 30, 2009 Compared to theThree and Nine Months Ended September 30, 2008***

 

***Revenues***

 

The following tablesummarizes our revenues for the three and nine months ended September 30,2009 and 2008 (dollars in thousands):

 
| ** **                   | ** ** | **Three Months Ended September 30,** | ** ** | **Dollar** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Revenues:                    |       |                                 |       |       |       |           |       |   |   |
| Demand  response solutions   |       | $                                    | 101,227    |       | $          | 42,186         |       | $ | 59,041 |   | 140.0 | % |
| Energy  management solutions |       | 1,890                                |       | 1,966      |       | (76            | )          | (3.9 | )% |
| Total revenues               |       | $                                    | 103,117    |       | $          | 44,152         |       | $ | 58,965 |   | 133.6 | % |

 
| ** **                   | ** ** | **Nine Months Ended September 30,** | ** ** | **Dollar ** | ** ** | **Percentage ** | ** ** |
|------------------------------|------------|---------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                   | ** ** | **2009**                                                | ** ** | **2008**         | ** ** | **Change**           | ** ** | **Change** | ** ** |
| Revenues:                    |       |                                                    |       |             |       |                 |       |   |   |
| Demand  response solutions   |       | $                                                       | 158,931    |             | $          | 81,699               |       | $ | 77,232 |   | 94.5 | % |
| Energy  management solutions |       | 5,011                                                   |       | 4,751            |       | 260                  |       | 5.5 | % |
| Total revenues               |       | $                                                       | 163,942    |             | $          | 86,450               |       | $ | 77,492 |   | 89.6 | % |

 

During the threeand nine months ended September 30, 2009, our demand response solutionsrevenues increased by $59.0 million and $77.2 million, respectively, from thesame periods in 2008. The increase in our demand response solutions revenues wasprimarily attributable to an increase in our MW under management in thefollowing operating areas:

 

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| ** **                  | ** ** | **September 30, 2009** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| PJM                         |       | $                      | 52,608     |   | $ | 68,239 |   |
| Tennessee  Valley Authority |       | 1,877                  |       | 3,062 |   |
| California                  |       | 1,326                  |       | 2,016 |   |
| New York                    |       | 574                    |       | 86 |   |
| New England                 |       | 556                    |       | 3,481 |   |
| Other                       |       | 2,100                  |       | 348 |   |
| Total                       |       | $                      | 59,041     |   | $ | 77,232 |   |

 

During the three monthsended September 30, 2009, our energy management solutions revenuesdecreased by $0.1 million, or 4%, as compared to the three months endedSeptember 30, 2008. The decrease was primarily due to a $0.1 millionreduction in energy efficiency audits performed during the period. During thenine months ended September 30, 2009, our energy management solutionsrevenues increased by $0.3 million, or 6%, as compared to the nine months endedSeptember 30, 2008. The increase primarily resulted from our acquisitionin May 2008 of South River Consulting, LLC, or SRC, an energy procurementand risk management services provider. During the nine months ended September 30,2009, we recognized revenue of $2.2 million related to the SRC acquisitioncompared to $1.3 million during the nine months ended September 30,2008.  This increase was partially offset by a reduction in energyefficiency audits performed during the period.

 

We currently expect ourrevenues to continue to increase in 2009 compared to 2008 as we seek to furtherincrease our MW under management in all operating regions, enroll new end-usecustomers in our demand response programs, continue to sell our energymanagement solutions to our new and existing demand response customers, andpursue more favorable pricing opportunities.

 

***Gross Profit and Gross Margin***

 

The following tablessummarize our gross profit and gross margin percentages for our demand responseand energy management solutions for the three and nine months endedSeptember 30, 2009 and 2008 (dollars in thousands):

 
| **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|
| **2009**                             | ** ** | **2008** | ** ** |
| **Gross Profit**                     | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                    | 51,677     |   | 50.1 | % | $ | 18,360 |   | 41.6 | % |
|                                      |            |  |  |  |  |  |  |  |  |

 
| **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|
| **2009**                                                | ** ** | **2008** | ** ** |
| **Gross Profit**                                   | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                                       | 77,710     |   | 47.4 | % | $ | 33,702 |   | 39.0 | % |
|                                                         |            |  |  |  |  |  |  |  |  |

 

Our gross profit increasedduring the three and nine months ended September 30, 2009 when compared to thethree and nine months ended September 30, 2008 primarily due to the substantialincrease in our revenues, as well as the effective management of our portfolioof demand response capacity and strong demand response event performance, particularlyin the PJM region from which we derive a substantial portion of our revenues.

 

Our gross margin increasedduring the three and nine months ended September 30, 2009 as compared tothe three and nine months ended September 30, 2008 primarily due to the effectivemanagement of our portfolio of demand response capacity, as well as thesubstantial increase in our revenues and strong demand response eventperformance, particularly in the PJM region from which we derive a substantialportion of our revenues. We currently expect that our gross margin for thethird quarter of 2009 will be the highest gross margin among our four quarterlyreporting periods in 2009, consistent with our gross margin pattern in 2008,and that there will also be a trend in 2010 of increased gross margin in ourthird fiscal quarter as compared to the other quarters in our fiscal year.

 

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***Operating Expenses***

 

The following tables summarize our operating expensesfor the three and nine months ended September 30, 2009 and 2008 (dollarsin thousands):

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                  | ** ** | **2009**                                  | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
| Operating Expenses:         |       |                                      |       |       |       |   |   |
| Selling and marketing       |       | $                                         | 11,602     |       | $          | 9,525 |   | 21.8 | % |
| General and  administrative |       | 12,155                                    |       | 10,041     |       | 21.1 | % |
| Research and  development   |       | 2,111                                     |       | 1,567      |       | 34.7 | % |
| Total                       |       | $                                         | 25,868     |       | $          | 21,133 |   | 22.4 | % |

 
| ** **                  | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|------------|------------|
| ** **                  | ** ** | **2009**                                 | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
| Operating Expenses:         |       |                                     |       |       |       |   |   |
| Selling and marketing       |       | $                                        | 29,481     |       | $          | 23,714 |   | 24.3 | % |
| General and  administrative |       | 33,252                                   |       | 30,519     |       | 9.0 | % |
| Research and development    |       | 5,524                                    |       | 4,560      |       | 21.1 | % |
| Total                       |       | $                                        | 68,257     |       | $          | 58,793 |   | 16.1 | % |

 

Personnel-related costs are the most significantcomponent of each of these expense categories, including costs associated withshare-based payment awards. We grew from 335 full-time employees at September 30,2008 to 370 full-time employees at September 30, 2009. We expect tocontinue to hire employees to support our growth for the foreseeablefuture.  In addition, we incur significant up-front costs associated withthe expansion of the number of MW under our management, which we expect tocontinue for the foreseeable future. Although we expect our overall operatingexpenses to increase in absolute dollar terms for the foreseeable future as wegrow our MW under management and further increase our headcount, we expect ouroverall operating expenses to decrease as a percentage of total annual revenuesas we leverage our existing employee base and continue generating revenues fromour MW under management.

 

In certain forward capacity markets in which we chooseto participate, such as PJM, we may enable our commercial, institutional andindustrial customers up to twelve months in advance of enrolling them in aparticular program. This market feature creates a longer average revenuerecognition lag time across our end-use customer portfolio from the point intime when we consider a MW to be under management to when we earn revenues fromthat MW.  Because we incur selling andmarketing and operational expenses, including salaries and related personnelcosts, at the time of enablement, we believe there may be a trend of higherup-front costs than we have incurred historically.

 

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*Sellingand Marketing Expenses*

 
| ** **                 | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                  | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
|                       | ** ** |                                      |       |       |       |   |   |
| Payroll and related  costs |       | $                                         | 7,938      |       | $          | 6,512 |   | 21.9 | % |
| Stock-based  compensation  |       | 1,181                                     |       | 945        |       | 25.0 | % |
| Other                      |       | 2,483                                     |       | 2,068      |       | 20.1 | % |
| Total                      |       | $                                         | 11,602     |       | $          | 9,525 |   | 21.8 | % |

 
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                 | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
| Payroll and related  costs |       | $                                        | 19,872     |       | $          | 16,442 |   | 20.9 | % |
| Stock-based  compensation  |       | 3,001                                    |       | 2,656      |       | 13.0 | % |
| Other                      |       | 6,608                                    |       | 4,616      |       | 43.2 | % |
| Total                      |       | $                                        | 29,481     |       | $          | 23,714 |   | 24.3 | % |

 

The increase in selling and marketing expenses for thethree and nine months ended September 30, 2009 compared to the sameperiods in 2008 was primarily driven by the payroll and related costsassociated with an increase in the number of selling and marketing full-timeemployees from 108 at September 30, 2008 to 138 at September 30,2009.  The increase in payroll andrelated costs for the three and nine months ended September 30, 2009compared to the same periods in 2008 was primarily attributable to an increasein sales commissions payable to certain members of our sales force, as well asthe timing associated with our hiring new full-time employees during 2009 ascompared to 2008. The increase in stock-based compensation for the three andnine months ended September 30, 2009 compared to the same periods in 2008 wasprimarily due to costs related to granting stock options to certain existingand newly-hired employees.  The increasein other selling and marketing expenses for the three months ended September 30,2009 as compared to the same period in 2008 was primarily due to increases inmarketing and facility costs. The increase in other selling and marketingexpenses for the nine months ended September 30, 2009 as compared to thesame period in 2008 was primarily due to increases in professional services,marketing expenses and facility costs.

 

*Generaland Administrative Expenses*

 
| ** **                 | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                  | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
| Payroll and related  costs |       | $                                         | 6,561      |       | $          | 5,411 |   | 21.3 | % |
| Stock-based  compensation  |       | 2,567                                     |       | 1,407      |       | 82.4 | % |
| Other                      |       | 3,027                                     |       | 3,223      |       | (6.1 | )% |
| Total                      |       | $                                         | 12,155     |       | $          | 10,041 |   | 21.1 | % |

 
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                 | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
| Payroll and related  costs |       | $                                        | 17,199     |       | $          | 15,862 |   | 8.4 | % |
| Stock-based  compensation  |       | 6,494                                    |       | 4,347      |       | 49.4 | % |
| Other                      |       | 9,559                                    |       | 10,310     |       | (7.3 | )% |
| Total                      |       | $                                        | 33,252     |       | $          | 30,519 |   | 9.0 | % |

 

The increase in general and administrative expensesfor the three and nine months ended September 30, 2009 compared to thesame periods in 2008 was primarily driven by payroll and related costs due toan increase in executive compensation. The increase in payroll and related costs for the three and nine monthsended September 30, 2009 compared to the same periods in 2008 was attributableto an increase in full-time employees from 183 at September 30, 2008 to184 at September 30, 2009. Additionally, payroll and related costs increased as a result of thetiming associated with our hiring new full-time employees, coupled with thepayment of bonuses to certain of our employees and an increase in certainemployees’ salaries.  The increase instock-based compensation for the three and nine months ended September 30,2009 compared to the same periods in 2008 was primarily due to stock-basedcompensation expenses associated with our current and former chief financialofficer and other officers and 

 

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directors, including the costs related to acceleratingthe vesting of a certain portion of our former chief financial officer’soptions to purchase shares of our common stock. The decrease in other for the three and nine months ended September 30,2009 compared to the same periods in 2008 was due to a reduction inprofessional services.

 

*Researchand Development Expenses*

 
| ** **                 | ** ** | **Three Months Ended September 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                  | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
| Payroll and related  costs |       | $                                         | 1,205      |       | $          | 942 |   | 27.9 | % |
| Stock-based compensation   |       | 174                                       |       | 157        |       | 10.8 | % |
| Other                      |       | 732                                       |       | 468        |       | 56.4 | % |
| Total                      |       | $                                         | 2,111      |       | $          | 1,567 |   | 34.7 | % |

 
| ** **                 | ** ** | **Nine Months Ended September 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                                 | ** ** | **2008**   | ** ** | **Percentage  Change** | ** ** |
| Payroll and related  costs |       | $                                        | 3,051      |       | $          | 3,001 |   | 1.7 | % |
| Stock-based  compensation  |       | 501                                      |       | 387        |       | 29.5 | % |
| Other                      |       | 1,972                                    |       | 1,172      |       | 68.3 | % |
| Total                      |       | $                                        | 5,524      |       | $          | 4,560 |   | 21.1 | % |

 

The increase in research and development expenses forthe three and nine months ended September 30, 2009 compared to the sameperiods in 2008 was primarily driven by the costs associated with an increasein the number of research and development full-time employees from 44 at September 30,2008 to 48 at September 30, 2009. This increase was partially offset bycapitalized internal software and development costs of $0.5 million and $1.7million, respectively, for the three and nine months ended September 30,2009 as compared to $0.4 million and $1.1 million, respectively, for the sameperiods in 2008. The increase in other research and development expenses forthe periods presented was primarily due to an increase in professional servicesand facility costs.

 

***Other Income andExpense***

 

Other income for the three months ended September 30,2009 was $0.1 million as compared to $0.3 million for the three months ended September 30,2008. Other expense for the nine months ended September 30, 2009 was $0.0million as compared to other income of $1.8 million for the nine months ended September 30,2008.  The change in other income andexpense for the three and nine months ended September 30, 2009 as comparedto the same periodsin 2008 was primarily due to the global change in interest rates, which hasaffected the yields on our investments and, to a lesser extent, lower averageinvestment balances and the recognition of net foreign currency transactions.

 

***Interest Expense***

 

Interest expense for the three months ended September 30,2009 and 2008 was $0.0 million and $0.6 million, respectively. Interest expensefor the nine months ended September 30, 2009 and 2008 was $1.5 million and$1.1 million, respectively. Interest expense includes interest on ouroutstanding debt, letters of credit origination fees, and amortization ofdeferred financing fees.  The decrease ininterest expense for the three months ended September 30, 2009 as comparedto the same period in 2008 was primarily due to a decrease in letter of creditorigination fees.

 

The increase in interest expense for the nine monthsended September 30, 2009 as compared to the same period in 2008 was due toa $1.1 million increase in fees associated with outstanding letters of credit, primarilyattributable to the arrangement that we entered into with a third party in May 2009in connection with bidding capacity into a certain open market bidding program.  This was offset by a $0.4 million decrease infees associated with our outstanding debt due to the replacement in August 2008of our BlueCrest Capital Finance, L.P., or BlueCrest, debt facility with ourrevolving credit and term loan facility with Silicon Valley Bank, or SVB.

 

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***Income Taxes***

 

We recorded a deferred tax benefit of$0.8 million and $0.4 million, respectively, for the three and nine monthsended September 30, 2009 due to tax amortization for indefinite livedintangibles.  We had a provision forincome taxes of $0.0 million and $0.2 million, respectively, for the threeand nine months ended September 30, 2008. The provision for income taxes related to the amortization of taxdeductible goodwill, which generated a deferred tax liability that cannot beoffset by net operating losses or other deferred tax assets since its reversalis considered indefinite in nature. We provided a full valuation allowance forour deferred tax assets because the realization of any future tax benefitscould not be sufficiently assured as of September 30, 2009.

 

**Liquidity and Capital Resources**

 

***Overview***

 

Since inception, we havegenerated significant losses. As of September 30, 2009, we had anaccumulated deficit of $62.1 million and our principal sources ofliquidity were cash and cash equivalents totaling $129.9 million, anincrease of $69.1 million from the December 31, 2008 balance of$60.8 million. We are contingently liable for $30.5 million inconnection with outstanding letters of credit under the SVB credit facility.

 

Included in the September 30,2009 and December 31, 2008 restricted cash balances are amounts used tocollateralize outstanding letters of credit in the amount of $7.9 million and$1.4 million, respectively.

 

As of September 30,2009, we no longer have investments in marketable securities.  This is a result of a bond that matured inthe second quarter of 2009. Our holdings of marketable securities as of December 31,2008 were $2.0 million, of which $1.5 million was invested in commercialpaper and $0.5 million was invested in government securities.

 

We believe our existingcash and cash equivalents at September 30, 2009 and our anticipated cashflows from operating activities will be sufficient to meet our anticipated cashneeds, including investing activities, for at least the next 12 months. Ourfuture working capital requirements will depend on many factors, including,without limitation, the rate at which we sell our demand response services toutilities and grid operators and the increasing rate at which letters of creditor security deposits are required by those utilities and grid operators, theintroduction and market acceptance of new demand response and energy managementsolutions, the expansion of our sales and marketing and research anddevelopment activities, and the geographic expansion of our businessoperations.  We also may raise additionalfunds in the event we determine in the future to effect one or moreacquisitions of businesses, technologies or products, although we have nocurrent understandings, commitments or agreements with respect to any suchacquisition.  To the extent that our cashand cash equivalents and our anticipated cash flows from operating activities,as well as our $35.0 million credit facility with SVB, which was fully drawn asof September 30, 2009, are insufficient to fund our future activities orplanned future acquisitions, we may be required to raise additional fundsthrough bank credit arrangements or public or private equity or debtfinancings.  In addition, we may elect toraise additional funds even before we need them if the conditions for raisingcapital are favorable. Accordingly, we have filed a shelf registration statementwith the SEC to register shares of our common stock and other securities forsale, giving us the opportunity to raise funding when needed or otherwiseconsidered appropriate at prices and on terms to be determined at the time ofany such offerings.  Any equity orequity-linked financing could be dilutive to existing stockholders.  In the event we require additional cashresources, we may not be able to obtain bank credit arrangements or effect anyequity or debt financing on terms acceptable to us or at all.

 

***Cash Flows***

 

The following table summarizes our cash flows for thenine months ended September 30, 2009 and 2008 (dollars in thousands):

 
| ** **                                             | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Cash flows provided by  (used in) operating activities |       | $                                        | 3,042      |   | $ | (14,482 | ) |
| Cash flows used in  investing activities               |       | (18,166                                  | )          | (1,344 | ) |
| Cash flows provided by  (used in) financing activities |       | 84,243                                   |       | (1,148 | ) |
| Effects of exchange  rate changes on cash              |       | 25                                       |       | — |   |
| Net change in cash and  cash equivalents               |       | $                                        | 69,144     |   | $ | (16,974 | ) |

 

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***Cash Flows Providedby (Used in) Operating Activities***

 

Cash provided by operating activities primarily consistsof net income (loss) adjusted for certain non-cash items including depreciationand amortization, stock-based compensation expenses, and the effect of changesin working capital and other activities.

 

Cash provided by operating activities for the ninemonths ended September 30, 2009 was $3.0 million and consisted of $8.4million of net income and $18.9 million of non-cash items, primarily consistingof depreciation and amortization, unrealized foreign exchange transaction loss,deferred taxprovision, stock-based compensation charges and other miscellaneousitems, offset by $24.3 million of net cash used for working capital and otheractivities.  Cash used for workingcapital and other activities consisted of an increase of $53.3 million inunbilled revenues relating to the PJM demand response market, an increase inaccounts receivable of $9.1 million due to the timing of cash receipts underthe demand response programs in which we participate, an increase in otherassets of $3.4 million due to increases in prepaid expenses, and a decrease of$1.6 million in accounts payable and accrued expenses due to the timing ofpayments. These amounts were partially offset by cash provided by workingcapital and other activities, which reflected a $1.4 million increase indeferred revenue, a $35.8 million increase in accrued capacity payments, themajority of which was related to the PJM demand response market, a $5.7 millionincrease in accrued payroll and related expenses, and an increase of $0.2million in other noncurrent liabilities.

 

Cash used inoperating activities for the nine months ended September 30, 2008 was$14.5 million and consisted of a $24.5 million net loss and $4.8 million of netcash used for working capital purposes and other activities partially offset by$14.8 million of non-cash items, consisting primarily of depreciation andamortization, impairment of fixed assets, interest expense, a deferred taxliability and stock-based compensationcharges. Cash used for working capital and other activities primarily reflecteda $18.6 million increase in unbilled revenues relating to the PJM demandresponse market, a $5.3 million increase in trade accounts receivable and a$2.2 million decrease in deferred revenues. These amounts were partially offsetby a $15.6 million increase in accrued capacity payments, the majority of whichwas related to the PJM demand response market, an increase of $4.1 million inpayroll and related expenses, an increase of $1.1 million in accounts payableand accrued expenses, and an increase of $0.5 million in other noncurrentliabilities.

 

***Cash Flows Used inInvesting Activities***

 

Cash used in investing activities for the nine monthsended September 30, 2009 was $18.1 million. Our principal cash investmentsduring this period related to installation services used to build out andexpand our demand response and energy management solutions and purchases ofproperty and equipment. Cash provided by the sales of available-for-salesecurities during this period was $2.0 million, and we had an increase inrestricted cash and deposits for customer programs resulting in a reduction ofcash of $5.9 million primarily as a result of our cash deposits made inconnection with demand response programs in which we participate. During thenine months ended September 30, 2009, we also incurred $13.2 million incapital expenditures primarily related to the purchase of office equipment,demand response equipment and other miscellaneous expenditures. Additionally,our cash investments included the cash portion of the earnout payment due inconnection with our acquisition of SRC of $0.7 million and $0.3 million of cashused for our acquisition of eQuilibrium Solutions Corporation, or eQ.

 

Cash used in investing activities for the nine monthsended September 30, 2008 was $1.3 million. For the nine months ended September 30,2008, purchases of available-for-sale securities were approximately$12.1 million and sales of available-for-sale maturities were $22.7million.  Our principal cash investments related to installation servicesused to build out and expand our demand response programs, purchases ofproperty and equipment, and cash payments made for acquisitions ofbusinesses totaling $7.5 million.  During the nine months ended September 30,2008, we decreased our restricted cash and deposits for customer programs by$6.7 million.  During the nine months ended September 30, 2008, weincurred $11.1 million in capital expenditures primarily related to thepurchase of office equipment, demand response equipment and other miscellaneousexpenditures.

 

***Cash Flows Providedby (Used in) Financing Activities***

 

Cash provided by financing activities was $84.2million for the nine months ended September 30, 2009. Cash used infinancing activities was $1.1 million for the nine months ended September 30,2008. Cash provided by financing activities consisted of the following:

 

*Equity Financing Activities*

 

In August 2009, wecompleted an underwritten public offering of 3,963,889 shares of our commonstock at an offering price of $27.00 per share, which includes the exercise ofthe underwriters’ over-allotment option to purchase 213,889 shares and the saleof 709,026 shares by certain of our stockholders. Net proceeds to us from theoffering were approximately $83.5 million.

 

We received approximately $0.8 million and $0.4million, respectively, from exercises of options to purchase shares of ourcommon stock during the nine months ended September 30, 2009 and September 30,2008.

 

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*Credit Facility Borrowings*

 

In August 2008, we and one of our subsidiariesentered into a $35.0 million secured revolving credit and term loan facilitywith SVB pursuant to a loan and security agreement, which was subsequentlyamended in May 2009.  We refer tothis as the SVB credit facility.  Pursuantto the terms of the SVB credit facility, SVB will, among other things, makerevolving credit and term loan advances and issue letters of credit for ouraccount. The SVB credit facility replaced our credit facility withBlueCrest.  All unpaid principal andaccrued interest is due and payable in full on August 5, 2010, which isthe maturity date. Our obligations under the SVB credit facility are secured byall of our assets and the assets of our subsidiaries, excluding anyintellectual property. The SVB credit facility contains customary terms andconditions for credit facilities of this type. In addition, we are required tomeet certain financial covenants customary with this type of facility,including maintaining a minimum specified tangible net worth and a minimummodified quick ratio. The SVB credit facility contains customary events ofdefault. If a default occurs and is not cured within any applicable cure periodor is not waived, our obligations under the SVB credit facility may beaccelerated. We were in compliance with all financial covenants under the SVBcredit facility at September 30, 2009. As of September 30, 2009, theSVB credit facility was fully drawn, as we had borrowings of $4.4 millionoutstanding under the SVB credit facility, in addition to an aggregate of $30.5million in letters of credit issued for our account. For additional informationregarding the SVB credit facility, see Note 7 to our unaudited consolidatedfinancial statements contained herein.

 

During the nine months ended September 30, 2009,we made scheduled payments on our outstanding debt and capital leaseobligations of $0.1 million. During the nine months ended September 30,2008, we made scheduled payments on our outstanding debt and capital leaseobligations of $1.5 million.

 

**Capital Spending**

 

We have made capitalexpenditures primarily for general corporate purposes to support our growth andfor equipment installation related to our demand response programs. Our capitalexpenditures totaled $13.2 million and $11.1 million, respectively, during thenine months ended September 30, 2009 and 2008. As we continue to grow, weexpect our capital expenditures for 2009 to increase as compared to 2008.

 

**Contractual Obligations**

 

As of September 30, 2009, our contractualobligations disclosure contained in our Annual Report on Form 10-K for thefiscal year ended December 31, 2008, which we filed with the SEC on March 16,2009, has not materially changed.

 

**Off-Balance Sheet Arrangements**

 

As of September 30, 2009, we did not have anyoff-balance sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K, that have or are reasonably likely to have a current or futureeffect on our financial condition, changes in our financial condition, revenuesor expenses, results of operations, liquidity, capital expenditures or capitalresources that is material to investors. We have issued letters of credit inthe ordinary course of our business in order to participate in certain demandresponse programs. As of September 30, 2009, we had outstanding letters ofcredit totaling $30.5 million.

 

**Critical Accounting Policies and Useof Estimates**

 

Our financial statements are prepared in accordancewith accounting principles generally accepted in the United States. Thepreparation of these financial statements requires that we make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances. Weevaluate our estimates and assumptions on an ongoing basis. Our actual resultsmay differ significantly from these estimates under different assumptions orconditions.  There have been no material changes to these estimates duringthe three months ended September 30, 2009.  For a detailedexplanation of the judgments made in these areas, refer to “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”within our Annual Report on Form 10-K for the fiscal year ended December 31,2008, which we filed with the SEC on March 16, 2009.

 

**Item 3.  Quantitative andQualitative Disclosures About Market Risk.**

 

At September 30,2009, there had not been a material change in the interest rate riskinformation and foreign exchange risk information disclosed in the “Quantitativeand Qualitative Disclosures about Market Risk” subsection of the sectionentitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2008, which we filed with the SEC on March 16,2009.

 

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**Item 4.  Controls andProcedures.**

 

***Disclosure Controlsand Procedures***

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures as of September 30, 2009. The term “disclosurecontrols and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, means controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by a company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  Our disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their desired controlobjectives. Based on the evaluation of our disclosure controls and proceduresas of September 30, 2009, our chief executive officer and chief financialofficer concluded that, as of such date, our disclosure controls and procedureswere effective at the reasonable assurance level.

 

***Internal Controlover Financial Reporting***

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the fiscal quarter ended September 30, 2009,which has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting.

 

**PART II — OTHER INFORMATION**

 

**Item 1.    LegalProceedings.**

 

We are subject tolegal proceedings, claims and litigation arising in the ordinary course ofbusiness. We do not expect the ultimate costs to resolve these matters to havea material adverse effect on our consolidated financial condition, results ofoperations or cash flows.

 

**Item 1A.  Risk Factors.**

 

We operate in a rapidlychanging environment that involves a number of risks that could materiallyaffect our business, financial condition or future results, some of which arebeyond our control.  In addition to the other information set forth in thisQuarterly Report on Form 10-Q, the risks and uncertainties that we believeare most important for you to consider are discussed in Part I — Item 1Aunder the heading “Risk Factors” in our Annual Report on Form 10-K for thefiscal year ended December 31, 2008, or our 2008 Form 10-K, which we filedwith the SEC on March 16, 2009.   During the three months ended September 30,2009, there were no material changes to the risk factors that were disclosed inPart I — Item 1A under the heading “Risk Factors” in our 2008 Form 10-K,other than as set forth below:

 

The risk factors titled “*We are currently subject to securities class action litigation, theunfavorable outcome of which may have a material adverse effect on ourfinancial condition, results of operation and cash flows*” and “*Our investments in marketable securities are subject to market riskswhich may cause losses and affect the liquidity of these investments*”are deleted in their entirety from the risk factors set forth in our 2008 Form 10-K.

 

The following riskfactors replace and supersede the corresponding risk factors set forth in our 2008Form 10-K:

 

***A substantial majority of our revenues are and have beengenerated from contracts with, and open market program sales to, a small numberof grid operator and utility customers, and the modification or termination ofthese open market programs or sales relationships could materially adverselyaffect our business.***

 

During the yearsended December 31, 2006, 2007 and 2008 and the nine months ended September 30,2009, revenues generated from open market sales to PJM, a grid operatorcustomer, accounted for 1%, 4%, 28% and 60%, respectively, of our totalrevenues. The PJM forward capacity market is a market in which we materiallyincreased our participation beginning in the first quarter of 2008 and in whichwe expect to continue to increase our participation and derive revenues for theforeseeable future. The modification or termination of our sales relationshipwith PJM, or the modification or termination of any of PJM’s open marketprograms in which we participate, could significantly reduce our futurerevenues and have a material adverse effect on our results of operations andfinancial condition and delay or prevent our future profitability. In addition,recent open market auctions of capacity in the PJM market have achieved pricesthat have been significantly lower than those achieved in prior periods.Accordingly, our revenues and operating margins would be adversely affected tothe extent such low pricing continues.

 

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Revenues generatedfrom two fixed price contracts with, and open market sales to ISO-NE, a gridoperator customer, accounted for 65%, 60%, 36% and 23%, respectively, of ourtotal revenues for the years ended December 31, 2006, 2007 and 2008 andthe nine months ended September 30, 2009. Our fixed price contracts withISO-NE expired on May 31, 2008. We have enrolled a significant portion ofthe MW represented by our expired fixed price contracts with ISO-NE in otheravailable demand response programs. The modification or termination of oursales relationship with ISO-NE, or the modification or termination of any ofISO-NE’s open market programs in which we participate, could significantlyreduce our future revenues and have a material adverse effect on our results ofoperations and financial condition and delay or prevent our futureprofitability.

 

In addition, 19%,21% and 15%, respectively, of our total revenues for the years ended December 31,2006, 2007 and 2008 were generated under a fixed price contract with CL&P,a grid operator customer, which expired on December 31, 2008, although wehave already enrolled a significant portion of the MW represented by this fixedprice contract in other available demand response programs.

 

***Our business is subject to government regulation, and maybecome subject to modified or new government regulation, which may negativelyimpact our ability to sell and market our clean and intelligent energysolutions.***

 

While the electricpower markets in which we operate are regulated, most of our business is notdirectly subject to the regulatory framework applicable to the generation andtransmission of electricity. However, we may become directly subject to theregulation of the Federal Energy Regulatory Commission, or FERC, to the extentwe own, operate, or control generation used to make wholesale sales of power.In addition, our subsidiary, Celerity Energy Partners San Diego, LLC, orCelerity, is subject to direct regulation by FERC because Celerity exportspower to the electric power grid for resale pursuant to a contract with SanDiego Gas & Electric Co., or SDG&E.

 

The installationof devices used in providing our solutions and electric generators sometimesinstalled or activated when providing demand response solutions may be subjectto governmental oversight and regulation under state and local ordinancesrelating to building codes, public safety regulations pertaining to electricalconnections and local and state licensing requirements. In a relatively fewinstances, we have agreed to own and operate a back-up generator at acommercial, institutional or industrial customer location for a period of timeand to activate the generator when capacity is called for dispatch so that thecommercial, institutional or industrial customer can reduce its consumption ofelectricity from the electric power grid. These generators are ineligible toparticipate in demand response programs in certain regions, and in others theymay become ineligible to participate in the future or may be compensated lessfor such participation, thereby reducing our revenues and adversely affectingour financial condition. In addition, certain of our contracts and expansion ofexisting contracts with grid operators and utility customers are subject toapproval by federal, state, provincial or local regulatory agencies. There canbe no assurance that such approvals will be obtained or be issued on a timelybasis, if at all.

 

Additionally,federal, state, provincial or local governmental entities may seek to changeexisting regulations, impose additional regulations or change theirinterpretation of the applicability of existing regulations. Any modified ornew government regulation applicable to our current or future solutions,whether at the federal, state, provincial or local level, may negatively impactthe installation, servicing and marketing of those solutions and increase ourcosts and the price of our solutions.

 

***We may incur significant penalties and fines if found to bein non-compliance with any applicable State or Federal regulation.***

 

While the electric power markets in which we operateare regulated, most of our business is not directly subject to the regulatoryframework applicable to the generation and transmission of electricity.However, regulations by FERC related to market design, market rules, tariffs,and bidding rules impact how we can interact with our grid operator andutility customers. In addition, our subsidiary Celerity exports some power tothe electric power grid and is thus subject to direct regulation by FERC andits regulations related to the sale of wholesale power at market based rates.Despite our efforts to manage compliance with such regulations, we may be foundto be in non-compliance with such regulations and therefore subject topenalties or fines.

 

***We may require significant additional capital to pursue ourgrowth strategy, but we may not be able to obtain additional financing onacceptable terms or at all.***

 

The growth of ourbusiness will depend on substantial amounts of additional capital for postingfinancial assurances in order to enter into contracts and open market bidding programswith utilities and grid operators, and marketing and product development of ourdemand response and energy management solutions. Our capital requirements willdepend on many factors, including the rate of our revenue and sales growth, ourintroduction of new solutions and enhancements to existing solutions, and ourexpansion of sales and marketing and product development activities. Inaddition, we may consider strategic acquisitions of complementary businesses ortechnologies to grow our business, such as our acquisitions of SRC in May 2008and eQ in June 2009, which could require significant capital and couldincrease our capital expenditures related to future operation of the acquiredbusiness or technology. Because of our losses, we do not fit traditional creditlending criteria. Moreover, the current financial turmoil affecting the bankingsystem and financial markets and the possibility that financial institutionsmay consolidate or go out of business have resulted in a reduction in theavailability of credit in the credit markets, which will likely adverselyaffect our ability to obtain additional funding. We may not be able to obtainloans or additional capital on acceptable terms or at all. Moreover, our SVBcredit facility contains restrictions on our ability to incur additionalindebtedness, which, if not waived, could prevent us from obtaining neededcapital. Any future credit facilities would likely contain similarrestrictions. In the event additional funding is required, we may not be ableto obtain bank credit arrangements or effect an equity or debt financing onterms acceptable to us or at all. A failure to obtain additional financing whenneeded could adversely affect our ability to maintain and grow our business.

 

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***Our ability to provide security deposits or letters ofcredit is limited and could negatively affect our ability to bid on or enterinto significant long-term agreements or arrangements with utilities or gridoperators.***

 

We areincreasingly required to provide security deposits in the form of cash tosecure our performance under long-term contracts or open market biddingprograms with our grid operator and utility customers. In addition, some of ourutility or grid operator customers also require collateral in the form ofletters of credit to secure performance or to fund possible damages or true-uppayments as the result of a failure to make available capacity at agreed levelsor an event of default under our contracts or open market bidding programs withthem. Our ability to obtain such letters of credit primarily depends upon ourcapitalization, working capital, past performance, management expertise andreputation and external factors beyond our control, including the overallcapacity of the credit market. Events that affect credit markets generally mayresult in letters of credit becoming more difficult to obtain in the future, orbeing available only at a significantly greater cost. As of September 30,2009, we had $30.5 million of letters of credit outstanding, leaving noroom under our SVB credit facility for additional letters of credit. We may berequired, from time to time, to seek alternative sources of security depositsor letters of credit, which may be expensive and difficult to obtain, ifavailable at all. For example, because we had no additional credit availableunder our SVB credit facility, we entered into a credit arrangement with athird-party in May 2009 in connection with bidding capacity into a certainopen market bidding program. The arrangement included an up-front payment of$2.0 million, and we will be required to pay the third party an additionalcontingent fee, up to a maximum of $3.0 million, based on the revenue thatwe expect to earn and recognize in 2012 in connection with the bid. Ourinability to obtain letters of credit and, as a result, to bid or enter intosignificant long-term agreements or arrangements with utilities or gridoperators, could have a material adverse effect on our future revenues andbusiness prospects. In addition, in the event that we default under long-termcontracts or open market bidding programs with our grid operator and utility customerspursuant to which we have posted collateral, we may lose a portion or all ofsuch collateral, which could have a material adverse effect on our financialcondition and results of operations.

 

The following riskfactor is added to the risk factors included in our 2008 Form 10-K:

 

***We face risks related to our potential expansion intointernational markets.***

 

Weintend to expand our addressable market by pursuing opportunities to providedemand response and energy management solutions in international markets. Wehave had no experience operating in markets outside of the United States andCanada. Accordingly, new markets may require us to respond to new andunanticipated regulatory, marketing, sales and other challenges. There can beno assurance that we will be successful in responding to these and otherchallenges we may face as we enter and attempt to expand in internationalmarkets. International operations also entail a variety of other risks,including:

 

·                  unexpected changes in legislative or regulatory requirements of foreigncountries;

·                  currency exchange fluctuations;

·                  longer payment cycles and greater difficulty in accounts receivablecollection; and

·                  significant taxes or other burdens of complying with a variety offoreign laws.

 

Internationaloperations are also subject to general geopolitical risks, such as political,social and economic instability and changes in diplomatic and trade relations.One or more of these factors could adversely affect any internationaloperations and result in lower revenue than we expect and could significantlyaffect our profitability.

 

**Item 2.   Unregistered Sales of EquitySecurities and Use of Proceeds.**

 

(b)          Use of Proceeds

 

We registeredshares of our common stock in connection with our initial public offering, orIPO, under the Securities Act. The registration statement on Form S-1(File No. 333-140632) filed in connection with our IPO was declaredeffective by the SEC on May 17, 2007. Including shares sold pursuant tothe exercise by the underwriters of their over-allotment option, 4,087,500shares of our common stock were registered and sold in the IPO by us and anadditional 225,000 shares of common stock were registered and sold by theselling stockholders named in the registration statement. All the shares weresold at a price to the public of $26.00 per share. The net offering proceedsreceived by us, after deducting underwriting discounts and commissions andexpenses incurred in connection with the offering, were approximately $95.2million.  From the effective date of ourregistration statement through September 30, 2009, we used approximately $95.2million to fund our operating expenses and for general corporate purposes,including purchases of equipment, repayment of indebtedness and fundingacquisitions.  As of September 30, 2009, all proceeds from our IPOhad been utilized.

 

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**Item 6. Exhibits.**

 
| 10.1   |   | Offer Letter, dated as  of July 27, 2009, between EnerNOC, Inc. and Timothy Weller, filed  as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  filed July 31, 2009 (File No. 001-33471), is hereby incorporated by  reference as Exhibit 10.1.                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                               |
| 10.2   |   | Severance Agreement,  dated as of July 27, 2009, by and between EnerNOC, Inc. and Timothy  Weller, filed as Exhibit 10.2 to the Registrant’s Current Report on  Form 8-K filed July 31, 2009 (File No. 001-33471), is hereby  incorporated by reference as Exhibit 10.1.   |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief  Executive Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Chief  Financial Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification of Chief  Executive Officer and Chief Financial Officer of EnerNOC, Inc. pursuant  to Rule 13a-14(b) promulgated under the Securities Exchange Act of  1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                        | EnerNOC, Inc. |
|-----------------------------|--------------------|
|                        |               |   |
| Date: November 9, 2009 | By:                | /s/ Timothy G. Healy |
|                        |               | Timothy G. Healy |
|                        |               | Chief Executive Officer |
|                        |               | (principal executive officer) |
|                        |               |   |
| Date: November 9, 2009 | By:                | /s/ Timothy Weller |
|                        |               | Timothy Weller |
|                        |               | Chief Financial Officer |
|                        |               | (principal financial officer) |

 

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**Exhibit Index**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 10.1                    |       | Offer Letter, dated as  of July 27, 2009, between EnerNOC, Inc. and Timothy Weller, filed  as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  filed July 31, 2009 (File No. 001-33471), is hereby incorporated by  reference as Exhibit 10.1.                 |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 10.2                    |       | Severance Agreement,  dated as of July 27, 2009, by and between EnerNOC, Inc. and Timothy  Weller, filed as Exhibit 10.2 to the Registrant’s Current Report on  Form 8-K filed July 31, 2009 (File No. 001-33471), is hereby  incorporated by reference as Exhibit 10.1.   |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 31.1                    |       | Certification of Chief  Executive Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                              |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 31.2                    |       | Certification of Chief  Financial Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                              |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 32.1                    |       | Certification of Chief  Executive Officer and Chief Financial Officer of EnerNOC, Inc. pursuant  to Rule 13a-14(b) promulgated under the Securities Exchange Act of  1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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