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** **

 

** **

**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** |
|------------|--------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                             |
| ** ** | **For the  quarterly period ended June 30, 2008**                                                 |

 

**or**

 

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

 

| ** ** | **For the  transition period from**               **to**             |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Commission File Number: 001-33471**

 

**EnerNOC, Inc.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Delaware**                                                     | ** ** | **87-0698303**                      |
|------------------------------------------------------------------|------------|-------------------------------------|
| (State  or Other Jurisdiction of  Incorporation or Organization) |       | (IRS  Employer  Identification No.) |
|                                                             |       |                                |
| **75 Federal Street  Suite 300  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 is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer  o         |
|------------------------------------------------|--------|------------------------------------|
|                                           |   |                               |
| Non-accelerated  filer x                       |   | 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 20,041,225 sharesof the registrant’s common stock, $.001 par value per share, outstanding as of August 11,2008.

 

 

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** **

**EnerNOC, Inc.**

 

**Index to Form 10-Q**

 
| ** **                                 | ** **                                                                                                                 | **Page**   |
|--------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** **                                                                                                                 | ** ** |
| **Part I -  Financial Information**   |                                                                                                                       |
|                                       |                                                                                                                       |       |
| Item 1.                               | Financial Statements                                                                                                       |       |
|                                       |                                                                                                                       |       |
|                                       | Condensed  Consolidated Balance Sheets at June 30, 2008 (unaudited) and  December 31, 2007                       | 3          |
|                                       |                                                                                                                       |       |
|                                       | Unaudited  Condensed Consolidated Statements of Operations for the three and six months  ended June 30, 2008 and 2007 | 4          |
|                                       |                                                                                                                       |       |
|                                       | Unaudited  Condensed Consolidated Statements of Cash Flows for the six months ended  June 30, 2008 and 2007           | 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                                                                | 24         |
|                                       |                                                                                                                       |       |
| Item 4T.                              | Controls and  Procedures                                                                                                   | 24         |
|                                       |                                                                                                                       |       |
| **Part II -  Other Information** |                                                                                                                       |
|                                       |                                                                                                                       |       |
| Item 1.                               | Legal Proceedings                                                                                                          | 25         |
|                                       |                                                                                                                       |       |
| Item 1A.                              | Risk Factors                                                                                                               | 25         |
|                                       |                                                                                                                       |       |
| Item 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               | 26         |
|                                       |                                                                                                                       |       |
| Item 4.                                    | Submission of  Matters to a Vote of Security Holders                                                                       | 26         |
|                                       |                                                                                                                       |       |
| Item 6.                               | Exhibits                                                                                                                   | 26         |
|                                       | Signatures                                                                                                                 | 28         |
|                                       | Exhibit Index                                                                                                         | 29         |
|                                            |                                                                                                                            |            |  |

 

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** **

**PART I— FINANCIAL INFORMATION**

 

**EnerNOC, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**(in thousands, except share data)**

 
| ** **                                                                                                                                                                                   | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                   |       |                    |       |                        |       |
| Current assets                                                                                                                                                                               |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                    |       | $                       | 62,331     |                        | $          | 70,242 |   |
| Restricted cash                                                                                                                                                                              |       | 600                     |       | 1,248                       |       |
| Marketable securities                                                                                                                                                                        |       | 3,410                   |       | 15,500                      |       |
| Trade accounts receivable, net allowance  for doubtful accounts of $68 and $368                                                                                                              |       | 9,956                   |       | 10,134                      |       |
| Unbilled revenue                                                                                                                                                                             |       | 3,781                   |       | —                      |       |
| Deposits, current                                                                                                                                                                            |       | 631                     |       | 1,955                       |       |
| Prepaid expenses and other current assets                                                                                                                                                    |       | 3,202                   |       | 2,315                       |       |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| Total current assets                                                                                                                                                                         |       | 83,911                  |       | 101,394                     |       |
| Property and equipment, net                                                                                                                                                                  |       | 27,811                  |       | 23,195                      |       |
| Goodwill and other intangible assets, net                                                                                                                                                    |       | 18,889                  |       | 16,421                      |       |
| Restricted cash—non current                                                                                                                                                             |       | 1,894                   |       | 1,770                       |       |
| Deposits, non-current                                                                                                                                                                        |       | 7,217                   |       | 12,496                      |       |
| Other assets                                                                                                                                                                                 |       | 261                     |       | 308                         |       |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| Total assets                                                                                                                                                                                 |       | $                       | 139,983    |                        | $          | 155,584 |   |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                |       |                    |       |                        |       |
| Current liabilities                                                                                                                                                                          |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                             |       | $                       | 2,627      |                        | $          | 2,112 |   |
| Accrued capacity payments                                                                                                                                                                    |       | 13,068                  |       | 9,069                       |       |
| Current portion of deferred related-party  acquisition payments                                                                                                                              |       | —                  |       | 431                         |       |
| Accrued payroll and related expenses                                                                                                                                                         |       | 4,730                   |       | 4,902                       |       |
| Accrued Mdenergy, LLC earn-out                                                                                                                                                               |       | —                  |       | 3,357                       |       |
| Accrued expenses and other current  liabilities                                                                                                                                              |       | 3,663                   |       | 1,586                       |       |
| Deferred revenue                                                                                                                                                                             |       | 919                     |       | 2,403                       |       |
| Contingent consideration provision                                                                                                                                                           |       | —                  |       | 2,247                       |       |
| Current portion of long-term debt                                                                                                                                                            |       | 4,758                   |       | 2,451                       |       |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| Total current liabilities                                                                                                                                                                    |       | 29,765                  |       | 28,558                      |       |
| Long-term liabilities                                                                                                                                                                        |       |                    |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                       |       | 142                     |       | 3,640                       |       |
| Deferred tax liability                                                                                                                                                                       |       | 258                     |       | 100                         |       |
| Other liabilities                                                                                                                                                                            |       | 993                     |       | 869                         |       |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| Total long-term liabilities                                                                                                                                                                  |       | 1,393                   |       | 4,609                       |       |
| Commitments and contingencies (Note 7)                                                                                                                                                       |       | —                  |       | —                      |       |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| Stockholders’ equity                                                                                                                                                                    |       |                    |       |                        |       |
| Common stock, $0.001 par value;  50,000,000 shares authorized, 20,038,221 and 19,180,504 shares issued  and outstanding at June 30, 2008 and December 31, 2007,  respectively |       | 20                      |       | 19                          |       |
| Additional paid-in capital                                                                                                                                                                   |       | 164,094                 |       | 156,250                     |       |
| Accumulated deficit                                                                                                                                                                          |       | (55,289                 | )          | (33,852                     | )          |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| Total stockholders’ equity                                                                                                                                                              |       | 108,825                 |       | 122,417                     |       |
|                                                                                                                                                                                         |       |                    |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                              |       | $                       | 139,983    |                        | $          | 155,584 |   |

 

See accompanying notes.

 

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** **

**EnerNOC, INC.**

 

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 

**(in thousands, except share and per share data)**

 
| ** **                                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                            |       | $                                                   | 23,686     |                                              | $          | 12,015 |   | $ | 42,298 |   | $ | 21,987 |   |
| Cost of revenues                                                    |       | 14,815                                              |       | 7,910                                             |       | 26,957 |   | 14,974 |   |
| Gross profit                                                        |       | 8,871                                               |       | 4,105                                             |       | 15,341 |   | 7,013 |   |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Operating expenses:                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Selling and marketing expenses                                      |       | 6,914                                               |       | 4,372                                             |       | 12,740 |   | 7,478 |   |
| General and administrative expenses                                 |       | 11,657                                              |       | 7,907                                             |       | 22,488 |   | 11,337 |   |
| Research and development expenses                                   |       | 921                                                 |       | 498                                               |       | 2,432 |   | 839 |   |
| Total operating expenses                                            |       | 19,492                                              |       | 12,777                                            |       | 37,660 |   | 19,654 |   |
| Loss from operations                                                |       | (10,621                                             | )          | (8,672                                            | )          | (22,319 | ) | (12,641 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Interest and other income                                           |       | 489                                                 |       | 558                                               |       | 1,524 |   | 828 |   |
| Interest expense                                                    |       | (231                                                | )          | (92                                               | )          | (484 | ) | (207 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Loss before income tax expense                                      |       | (10,363                                             | )          | (8,206                                            | )          | (21,279 | ) | (12,020 | ) |
| Provision for income tax expense                                    |       | (73                                                 | )          | —                                            |       | (158 | ) | — |   |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                                            |       | $                                                   | (10,436    | )                                                 | $          | (8,206 | ) | $ | (21,437 | ) | $ | (12,020 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net loss per share:                                                 |       |                                                |       |                                              |       |   |   |   |   |
| Basic and diluted (restated) (1)                                    |       | $                                                   | (0.54      | )                                                 | $          | (0.74 | ) | $ | (1.11 | ) | $ | (1.56 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of basic and  diluted shares (restated) (1) |       | 19,434,228                                          |       | 11,156,858                                        |       | 19,302,329 |   | 7,687,756 |   |

 

----

(1) See Note 4.

 

See accompanying notes.

 

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** **

**EnerNOC, INC.**

 

**UNAUDITED****CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

 

**(in thousands)**

 
| ** **                                                                                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| **Cash flows from operating activities**                                                                       |       |                                          |       |   |   |
| Net loss                                                                                                       |       | (21,437                                       | )          | $ | (12,020 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                                   |       |                                          |       |   |   |
| Depreciation                                                                                                   |       | 3,568                                         |       | 918 |   |
| Amortization of intangibles                                                                                    |       | 645                                           |       | 1,099 |   |
| Stock-based compensation expense                                                                               |       | 4,881                                         |       | 4,320 |   |
| Deferred tax liability                                                                                         |       | 158                                           |       | — |   |
| Non-cash interest expense                                                                                      |       | 90                                            |       | 87 |   |
| Increase (decrease) in cash from changes in  operating assets and liabilities, net of effects of acquisitions: |       |                                          |       |   |   |
| Accounts receivable, trade                                                                                     |       | 310                                           |       | (3,634 | ) |
| Deferred revenue                                                                                               |       | (1,484                                        | )          | 1,221 |   |
| Unbilled revenue                                                                                               |       | (3,781                                        | )          | — |   |
| Prepaid expenses and other current assets                                                                      |       | (834                                          | )          | (1,331 | ) |
| Other noncurrent assets                                                                                        |       | (43                                           | )          | 53 |   |
| Other noncurrent liabilities                                                                                   |       | 124                                           |       | (5 | ) |
| Accrued capacity payments                                                                                      |       | 3,999                                         |       | 2,149 |   |
| Accrued payroll and related expenses                                                                           |       | 683                                           |       | 972 |   |
| Accounts payable and accrued expenses                                                                          |       | 2,492                                         |       | 2,980 |   |
|                                                                                                           |       |                                          |       |   |   |
| Net cash used in operating activities                                                                          |       | (10,629                                       | )          | (3,191 | ) |
|                                                                                                           |       |                                          |       |   |   |
| **Cash flows from investing activities**                                                                       |       |                                          |       |   |   |
| Purchase of marketable securities                                                                              |       | (10,642                                       | )          | — |   |
| Sales and maturities of marketable securities                                                                  |       | 22,732                                        |       | — |   |
| Purchase of South River Consulting, LLC                                                                        |       | (3,757                                        | )          | — |   |
| Purchase of Mdenergy, LLC                                                                                 |       | (3,357                                        | )          | — |   |
| Purchase of Pinpoint Power DR LLC                                                                         |       | (389                                          | )          | (355 | ) |
| Purchases of property and equipment                                                                            |       | (8,125                                        | )          | (10,818 | ) |
| Increase (decrease) in restricted cash and  deposits for customer programs                                     |       | 7,127                                         |       | (2,043 | ) |
|                                                                                                           |       |                                          |       |   |   |
| Net cash (used in) provided by investing  activities                                                           |       | 3,589                                         |       | (13,216 | ) |
|                                                                                                           |       |                                          |       |   |   |
| **Cash flows from financing activities**                                                                       |       |                                          |       |   |   |
| Proceeds from the issuance of common stock,  net of issuance costs                                             |       | —                                        |       | 95,159 |   |
| Proceeds from exercises of stock options                                                                       |       | 319                                           |       | 84 |   |
| Proceeds from borrowing                                                                                        |       | —                                        |       | 2,500 |   |
| Repayment of borrowings and payments under  capital leases                                                     |       | (1,190                                        | )          | (488 | ) |
| Proceeds from the issuance of preferred  stock, net of issuance costs                                          |       | —                                        |       | 9,990 |   |
| Repurchase of treasury stock                                                                                   |       | —                                        |       | (395 | ) |
|                                                                                                           |       |                                          |       |   |   |
| Net cash (used in) provided by financing  activities                                                           |       | (871                                          | )          | 106,850 |   |
|                                                                                                           |       |                                          |       |   |   |
| Net change in cash and cash equivalents                                                                        |       | (7,911                                        | )          | 90,443 |   |
| Cash and cash equivalents at beginning of  period                                                              |       | 70,242                                        |       | 9,184 |   |
|                                                                                                           |       |                                          |       |   |   |
| Cash and cash equivalents at end of period                                                                     |       | $                                             | 62,331     |   | $ | 99,627 |   |
|                                                                                                           |       |                                          |       |   |   |
| **Supplemental disclosure of cash flow  information**                                                          |       |                                          |       |   |   |
| ** **                                                                                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Non-cash financing and investing activities**                                                                |       |                                          |       |   |   |
|                                                                                                           |       |                                          |       |   |   |
| Issuance of common stock to South River  Consulting LLC                                                        |       | $                                             | 1,747      |   | $ | — |   |
|                                                                                                           |       |                                          |       |   |   |
| Deferred related party stock issuance for  Pinpoint Power DR LLC                                               |       | $                                             | 44         |   | $ | 66 |   |
|                                                                                                           |       |                                          |       |   |   |
| Conversion and net exercise into common  stock of preferred stock warrant                                      |       | $                                             | —     |   | $ | 606 |   |
|                                                                                                           |       |                                          |       |   |   |
| Issuance of common stock as bonus payments                                                                     |       | $                                             | 844        |   | $ | — |   |
|                                                                                                           |       |                                          |       |   |   |
| Issuance of common stock to a related party                                                                    |       | $                                             | —     |   | $ | 395 |   |
|                                                                                                           |       |                                          |       |   |   |
| Accretion of preferred stock issuance costs                                                                    |       | $                                             | —     |   | $ | 216 |   |

 

See accompanying notes.

 

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**EnerNOC, INC.**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(in thousands, except share and per share data)**

 

**1. Descriptionof Business and Basis of Presentation**

 

**Descriptionof Business**

 

EnerNOC, Inc. (theCompany) is a service company that was incorporated in Delaware on June 5,2003. The Company operates in a single segment providing full-service demandresponse and energy management solutions. The Company enables energy users,energy suppliers, system operators, and utilities to reduce demand forelectricity during periods of peak demand or supply shortfalls by proactivelyshedding noncritical loads, dispatching backup generators, and analyzingreal-time data to optimize energy consumption. The Company’s demand responseand energy management solutions deliver immediate bottom-line benefits toend-use customers and energy suppliers while helping to create a more reliableand efficient electricity grid for system operators and utilities.

 

In May 2007, theCompany completed its initial public offering (IPO) of 4,312,500 shares ofcommon stock at a price of $26.00 per share, which included the exercise of theunderwriters’ over-allotment option to purchase 562,500 shares and the sale of225,000 shares by certain of the Company’s stockholders. Net proceeds to theCompany from the IPO were approximately $95,200. In November 2007, theCompany completed a follow-on public offering of 2,500,000 shares of its commonstock at a price of $43.00 per share. Of the 2,500,000 shares, the Company sold500,000 shares and selling stockholders sold 2,000,000 shares. This transactionresulted in net proceeds to the Company of $19,446.

 

**Reclassifications**

 

Certain amounts in priorperiods have been reclassified to conform to the 2008 presentation. Thesereclassifications have no material impact on previously reported results ofoperations or stockholders’ equity. The reclassifications made related to thebalance sheet account groupings and did not change the total current assets orcurrent liabilities.

 

**Basis ofConsolidation**

 

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 forthis period.

 

The results of operationsfor the three and six months ended June 30, 2008 are not necessarilyindicative of the results expected for the full fiscal year ending December 31,2008 or for any other fiscal period. The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended December 31,2007 and the footnotes thereto included in the Company’s annual report on Form 10-Kfor the fiscal year ended December 31, 2007, as filed with the Securitiesand Exchange Commission (SEC) on March 28, 2008.

 

**Unbilled Revenue**

 

A significant portion of theCompany’s revenue is derived from long-term contracts and open market biddingprograms with grid operators and utilities pursuant to which a monthly capacitypayment is made to the Company for agreeing to provide relief in the form ofcurtailment of energy usage during times of high energy demand.  TheCompany records these payments as revenue over the period during which theCompany is required to perform under these contracts and programs.  Undercertain contracts and programs, the period during which the Company isobligated to perform may be shorter than the period over which it receivespayments under that contract or program.  In these cases, the Companyrecords revenue over the mandatory performance obligation period, and a portionof the revenue is recorded and accrued as unbilled revenue because the revenuehas been earned but is not billable.  As of June 30, 2008, the Companyhad unbilled revenue of $3,781.

 

**2.Acquisitions**

 

**South River Consulting, LLC**

 

 In May 2008, the Company acquired 100% ofthe membership interests of South River Consulting, LLC (SRC), an energyprocurement and risk management services provider, for a purchase price equalto $5,504, which consisted of $3,603 in cash, $154 in related 

 

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expenses and 120,000 sharesof the Company’s common stock that had a value of approximately $1,747 as ofthe closing date.  In addition to the amounts paid at closing,the Company may be obligated to pay to the former holders of SRC membershipinterests an earnout amount equal to 50% to 60% of the revenues of SRC’sbusiness during each twelve-month period from May 1, 2008 through April 30,2010. The earnout payments will be based on the achievement of certain minimumrevenue-based milestones of SRC and will be paid in a combination of cash andshares of the Company’s common stock. The acquisition of SRC strengthens theCompany’s position in a growing energy procurement services market and providesa local presence for the Company in the PJM Interconnection service region.

 

TheSRC acquisition has been accounted for under Statement of Financial AccountingStandards (SFAS) No. 141,*BusinessCombinations*. The closing of the SRC acquisition was on May 1,2008, and as such, the Company’s consolidated financial statements reflect SRC’sresults of operations from that date forward.

 

Theaggregate purchase price of $5,504 consists of the following:

 
| Cash                         |   | $     | 3,603  |   |
|------------------------------|--------|-------|--------|--------|
| Common stock                 |   | 1,747 |   |
| Acquisition related expenses |   | 154   |   |
| Total purchase price         |   | $     | 5,504  |   |

 

Theaggregate purchase price has been allocated to the acquired assets based ontheir fair values as determined by the Company as follows:

 
| Total purchase price                                          |   | $   | 5,504  |   |
|---------------------------------------------------------------|--------|-----|--------|--------|
| Accounts receivable                                           |   | $   | 132    |   |
| Prepaids and other current assets                             |   | 53  |   |
| Customer contracts                                            |   | 710 |   |
| Fixed assets                                                  |   | 59  |   |
| Employment agreements                                         |   | 80  |   |
| Accrued expenses                                              |   | (40 | )      |
| Accounts payable                                              |   | (60 | )      |
| Net assets acquired                                           |   | $   | 934    |   |
| Excess purchase price over the fair value  of assets acquired |   | $   | 4,570  |   |
|                                                               |        |     |        |        |  |

 

Thefinancial information above reflects a preliminary allocation of the purchaseprice. The estimated fair values of the assets acquired and liabilities assumedare not yet complete and are subject to future adjustments. In addition to theamounts paid at closing, the Company may be obligated to pay the former holdersof SRC membership interests an earnout payment, as described above. Theseamounts will be assessed if additional purchase price is deemed probable. Thecustomer contracts will be amortized over a period of ten years, and theemployment agreement will be amortized over a period of three years.

 

**Mdenergy, LLC**

 

On September 13, 2007,the Company acquired all of the outstanding membership interests of Mdenergy,LLC (MDE), an energy procurement service provider, pursuant to the terms of amerger agreement. The total purchase price paid by the Company at closing was 

 

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approximately $7,900, ofwhich $3,501 was paid in cash and the remainder of which was paid by the issuanceof 139,056 shares of the Company’s common stock.

 

In addition to the amountspaid at closing, the Company was obligated to pay to the former holders of MDEmembership interests an earnout equal to two times the revenues of MDE’sbusiness during the period from July 1, 2007 through December 31,2007. The contingent consideration related to the earnout in the amount ofapproximately $3,357 was paid in January of 2008 and was recorded asadditional purchase price.

 

**SupplementalInformation**

 

The following unaudited proforma combined financial information is presented for comparative purposes forthe three and six months ended June 30, 2008 and June 30, 2007 andgives effect to certain adjustments, including amortization of the definitelife intangible assets as if the acquisitions occurred on January 1, 2007.The information below is not necessarily indicative of the results ofoperations that would have actually been reported had the purchase occurred atthe beginning of the period presented, nor is it necessarily indicative offuture financial position or results of operations:

 

| ** **                                | ** ** | **Three months  ended** | ** ** | **Six months  ended**  | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **June 30, 2008**       | ** ** | **June 30, 2007** | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| Revenues                                  |       | $                            | 23,895     |                        | $          | 13,398 |   | $ | 43,160 |   | $ | 24,539 |   |
| Net loss                                  |       | $                            | (10,379    | )                           | $          | (7,885 | ) | $ | (21,278 | ) | $ | (11,520 | ) |
| Pro forma net loss per share – basic |       | $                            | (0.53      | )                           | $          | (0.70 | ) | $ | (1.10 | ) | $ | (1.47 | ) |

 

**3. Recent Accounting Pronouncements**

 

***SFAS No. 162, The Hierarchy of Generally Accepted AccountingPrinciples***

 

In May 2008, theFinancial Accounting Standards Board (FASB) issued SFAS No. 162, “**The Hierarchyof Generally Accepted Accounting Principles”****(“SFAS No. 162”***)*. SFAS No. 162 identifies the sources of accountingprinciples to be used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with GAAP in the United States (theGAAP hierarchy). **SFASNo. 162** is effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board amendments to AU Section 411,“The Meaning of Present Fairly in Conformity with Generally Accepted AccountingPrinciples”. The Company currently adheres to the hierarchy of GAAP aspresented in SFAS No. 162 and does not expect its adoption will have amaterial impact on its consolidated results of operations and financialcondition.

 

***SFAS No. 141R, Business Combinations***

 

InDecember 2007, the FASB issued SFAS No. 141(R), *Business Combinations* (SFAS No. 141R).SFAS No. 141R will significantly change the accounting for andreporting of business combination transactions in consolidated financialstatements. SFAS No. 141R retains the fundamental requirements in SFASNo. 141, *Business Combinations,*while providing additional definitions, such as the definition of the acquirerin a purchase and improvements in the application of how the acquisition methodis applied. SFAS No. 141R becomes effective January 1, 2009. Earlyadoption is not permitted. The Company is currently evaluating the impact thisguidance will have on its consolidated financial statements.

 

**4. Net LossPer Share**

 

Basicnet loss per share is computed by dividing net loss by the weighted averagenumber of common shares outstanding for the period. Diluted net loss per shareis computed using the weighted average number of common shares outstanding and,when dilutive, potential common shares from options and warrants using thetreasury stock method, and from convertible securities using the as-convertedmethod. The calculation of dilutive weighted average shares outstanding doesnot include the following potentially dilutive shares as their effect would beantidilutive.

 

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| ** **                                          | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007**    | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| Redeemable Convertible Preferred Stock              |       | —                           |       | 4,906,539                      |       | — |   | 7,186,800 |   |
| Outstanding options, restricted stock and  warrants |       | 1,548,039                        |       | 2,854,176                      |       | 1,277,183 |   | 2,706,569 |   |
| Shares held in escrow                               |       | 95,111                           |       | —                         |       | 65,111 |   | — |   |
| Dilutive weighted average shares  outstanding       |       | 1,643,150                        |       | 7,760,715                      |       | 1,342,294 |   | 9,893,369 |   |

 

Included in the calculationof the weighted average number of common shares outstanding at June 30,2007 are 110,211 contingently issuable shares of common stock. These shareswere issuable in connection with the Company’s acquisition of Pinpoint Power DRLLC (PPDR) in 2005. These shares have been included in the calculation as thereare no restrictions for issuance except for the passage of time.

 

The weighted average commonshares outstanding at June 30, 2008 did not include 35,114 shares issuedin the MDE acquisition or 120,000 shares issued in the SRC acquisition that areheld in escrow. These shares are included in the calculation of diluted sharesoutstanding as if the contingency period ended on June 30, 2008. These shares contain restrictions which require the holder to return all or aportion of the shares if specific conditions are not met.

 

**5. MarketableSecurities**

 

Cashequivalents principally consist of money market funds and municipal bonds withoriginal maturities of three months or less at the date of purchase. Marketablesecurities at June 30, 2008 are classified as “available-for-sale.” The Company’sinvestments in securities include auction-rate securities (ARS) and state andmunicipal bonds. The securities the Company typically invests in are AAA-ratedgovernment-backed securities with interest rates typically ranging from 6.5% to6.8% that have approximate contractual maturities of at least 26 years.

 

As of June 30, 2008,all of the Company’s $2,910 par value ARS were subject to failed auctions, andnone of the ARS succeeded in an auction during the six months endedJune 30, 2008 or subsequent to June 30, 2008.  As a result ofthese failed auctions, the Company has the potential to benefit from a penaltyfeature in its interest rates, which allows it to earn an additional 5.1% to14.0% of interest on these securities until the next auction is set tooccur.  The Company will not be able to liquidate the investments until asuccessful auction occurs, a buyer is found outside the auction process, thesecurities are called or refinanced by the issuer, or the securitiesmature.  The Company believes that it will be able to liquidate theinvestments at par within a reasonable time period, and that the issuers of thesecurities are currently able and will continue to make interest payments atthe maximum rate.  The investments were classified as a current asset onthe Condensed Consolidated Balance Sheet as of June 30, 2008 as it isbelieved that the Company will be able to liquidate these securities within oneyear.  If in the future the Company nolonger believes that it will be able to liquidate these securities within oneyear, the investments may need to be reclassified as long-term assets or theCompany may be required to write down these securities to fair value based onfuture market conditions.TheCompany has not made any additional investments in ARS since June 30,2008.

 

The following is a summaryof the Company’s available-for-sale marketable securities as of June 30,2008 and December 31, 2007:

 
| ** **                                  | ** ** | **Gross unrealized** | ** ** |
|---------------------------------------------|------------|---------------------------|------------|
| **As of June 30, 2008** | ** ** | **Cost**                  | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair value** | ** ** |
| Auction rate securities                     |       | $                         | 2,910      |   | $ | — |   | $ | — |   | $ | 2,910 |   |
| Fixed income securities                     |       | 500                       |       | — |   | — |   | 500 |   |
|                                        |       |                      |       |   |   |   |   |   |   |
| Total                                       |       | $                         | 3,410      |   | $ | — |   | $ | — |   | $ | 3,410 |   |

 

 
| ** **                                      | ** ** | **Gross unrealized** | ** ** |
|-------------------------------------------------|------------|---------------------------|------------|
| **As of December 31, 2007** | ** ** | **Cost**                  | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair value** | ** ** |
| Auction rate securities                         |       | $                         | 5,600      |   | $ | — |   | $ | — |   | $ | 5,600 |   |
| State and municipal bonds                       |       | 9,900                     |       |   |   |   |   | 9,900 |   |
|                                            |       |                      |       |   |   |   |   |   |   |
| Total                                           |       | $                         | 15,500     |   | $ | — |   | $ | — |   | $ | 15,500 |   |

 

The following is a summaryof the cost and fair value of current available-for-sale marketable securitiesat June 30, 2008, by contractual maturity:

 
| ** **          | ** ** | **Cost** | ** ** | **Fair value** | ** ** |
|---------------------|------------|----------|------------|---------------------|------------|
| Due within one year |       | $        | 500        |                | $          | 500 |   |
| Due after ten years |       | 2,910    |       | 2,910               |       |
| Total               |       | $        | 3,410      |                | $          | 3,410 |   |

 

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At June 30, 2008, theCompany had restricted cash of approximately $2,494 invested in certificates ofdeposit with original maturities greater than 90 days at acquisition.  Allcertificates of deposit have contractual maturities of twelve months or less.The Company’s investments in certificates of deposit have a fair value thatapproximates cost.

 

**Fair ValueMeasurements**

 

In September 2006, theFASB issued SFAS No. 157, *Fair ValueMeasurements* (SFAS No. 157), which defines fair value,establishes a framework for measuring fair value in accordance with GAAP andexpands disclosures about fair value measurements.  SFAS No. 157 doesnot require any new fair value measurements, but its provisions apply to all otheraccounting pronouncements that require or permit fair value measurement. SFAS No. 157 is effective for the Company’s fiscal year beginning January 1,2008 and for interim periods within that year.  In February 2008, theFASB issued FASB Staff Position (“FSP”) No 157-2, *Effective date of FASB Statement No. 157,* which delayedfor one year the effective date of SFAS No. 157 for nonfinancial assetsand nonfinancial liabilities, except for items that are recognized or disclosedat fair value in the financial statements on a recurring basis (at leastannually).  As required, the Company adopted SFAS No. 157 for itsfinancial assets on January 1, 2008.  Adoption does not have amaterial impact on the Company’s financial position or results of operations atthis time. The Company has not yet determined the impact on its financialstatements of the January 1, 2009 adoption of SFAS No. 157 as itpertains to non-financial assets and liabilities.

 

SFASNo. 157 establishes a fair value hierarchy that requires the use ofobservable market data, when available, and prioritizes the inputs to valuationtechniques used 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 our own estimates of assumptionsmarket participants would use in pricing the asset or liability.

 

The table below presents thebalances of assets and liabilities measured at fair value on a recurring basisat June 30, 2008:

 
| ** **              | ** ** | ** ** | ** ** | **Fair Value Measurements at June 30, 2008 Using**           | ** ** |
|-------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Totals** | ** ** | **Quoted  Prices in Active  Markets for  Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** |
| Auction rate securities |       | $          | 2,910      |                                                                                            | $          | — |   | $ | 2,910 |   | — |   |
| Fixed income securities |       | 500        |       | 500                                                                                             |       | — |   | — |   |
|                    |       |       |       |                                                                                            |       |   |   |   |   |
|                    |       | $          | 3,410      |                                                                                            | $          | 500 |   | $ | 2,910 |   | — |   |
|                         |            |            |            |                                                                                                 |            |  |  |  |  |  |  |  |  |  |

 

**6. Propertyand Equipment**

 

Property and equipment as ofJune 30, 2008 and December 31, 2007 consisted of the following:

 
| ** **                     | ** ** | **Estimated Useful  Life (Years)** | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                           |       |                                         |       |                    |       |                        |       |
| Computers and office equipment |       | 3                                            |       | $                       | 7,685      |                        | $          | 3,870 |   |
| Software                       |       | 3                                            |       | 4,298                   |       | 2,499                       |       |
| Demand response equipment      |       | Lesser of useful life or contract term       |       | 7,554                   |       | 4,523                       |       |
| Back-up generators             |       | 5-10                                         |       | 12,077                  |       | 13,976                      |       |
| Furniture and fixtures         |       | 5                                            |       | 814                     |       | 777                         |       |
| Leasehold improvements         |       | Lesser of the useful life or lease term      |       | 1,251                   |       | 902                         |       |
| Assets under capital lease     |       | Lesser of the useful life or lease term      |       | 222                     |       | 200                         |       |
| Construction-in-progress       |       |                                         |       | 1,863                   |       | 833                         |       |
|                           |       |                                         |       |                    |       |                        |       |
|                           |       |                                         |       | 35,764                  |       | 27,580                      |       |
| Accumulated depreciation       |       |                                         |       | (7,953                  | )          | (4,385                      | )          |
|                           |       |                                         |       |                    |       |                        |       |
| Property and equipment, net    |       |                                         |       | $                       | 27,811     |                        | $          | 23,195 |   |

 

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Depreciation expense was$1,923 and $624, respectively, for the three months ended June 30, 2008 and 2007. Depreciation expense was $3,568 and $918, respectively, for the six months ended June 30, 2008and 2007.  For the three months ended June 30,2008 and 2007, $730 and $317, respectively, were included in cost of revenues and $1,193 and $307,respectively, was included in generaland administrative expenses.  For the sixmonths ended June 30, 2008 and 2007, $1,465 and $411, respectively, was included in cost of revenues and $2,103and $407, respectively, wereincluded in general and administrative expenses.

 

Software development costsof $663 for both the three and six months ended June 30, 2008 have beencapitalized in accordance with Statement of Position No. 98-1, *Accounting for the Cost of Computer SoftwareDeveloped or Obtained for Internal Use*.  Capitalized softwaredevelopment costs for the three and six months ended June 30, 2007 were$279 and $677, respectively.   Thecapitalized amounts are included as software in property and equipment at June 30,2008 and December 31, 2007. Construction-in-progress consists principallyof demand response equipment and back-up generators that have not been placedin service. Construction-in-progress at June 30, 2008 and December 31,2007 consisted of the following:

 
| ** **                | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Demand response equipment |       | $                       | 1,863      |                        |       | $ | 778 |   |   |
| Capitalized interest      |       | —                  |       | 55                          |       |
|                      |       | $                       | 1,863      |                        |       | $ | 833 |   |   |

 

**7.Commitments and Contingencies**

 

The Company is subject tocertain performance guarantee requirements under certain customer contacts andopen market bidding program participation rules. The Company had deposits heldby certain customers of $7,848 and $14,451, respectively, at June 30, 2008 and December 31,2007. These amounts primarily represent up-front payments required by customersto participate in certain programs and ensure that the Company will deliver itscommitted capacity amounts. If the Company fails to meet its minimum enrollmentrequirements, a portion or all of the deposit may be forfeited. The Companyassessed the probability of default under these agreements and has determinedit to be remote.

 

The Company is contingentlyliable under unused letters of credit. Restricted cash balances in the amountof $2,494 and $3,018, respectively, collateralize certain unused letters of credit at June 30, 2008and December 31, 2007.

 

As of June 30, 2008,the Company had $4,758 outstanding under its term loan facility with BluecrestCapital Partners, L.P.  The entirebalance is classified as the current portion of long-term debt in theaccompanying balance sheet.

 

**8.Stockholders’ Equity**

 

**Stock Split**

 

In May 2007, theCompany effected a 2.831 for one split of its common stock. All financialinformation in the financial statements presented retroactively reflects theimpact of this split.

 

**9.Stock-Based Compensation**

 

*StockOptions*

 

The Company’s Amended andRestated 2003 Stock Option and Incentive Plan and the 2007 Employee, Directorand Consultant Stock Plan (the Plans) provide for the grant of incentive stockoptions, nonqualified stock options, restricted and unrestricted stock awardsand other stock-based awards to eligible employees, 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.

 

In order to estimate thefair value of options granted during the six months ended June 30, 2008and June 30, 2007, the Company utilized the Black-Scholes option pricingmodel, utilizing the following assumptions (weighted averages based on grantsduring the period):

 

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| ** **                         | ** ** | **Six months ended** | ** ** |
|------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **June 30, 2008**    | ** ** | **June 30, 2007** | ** ** |
| Risk-free interest rate            |       | 2.91                           | %          | 4.57 | % |
| Expected term of options, in years |       | 6.25                           |       | 6.25 |   |
| Expected annual volatility         |       | 87                             | %          | 87 | % |
| Expected dividend yield            |       | 0                              | %          | 0 | % |

 

The components ofstock-based compensation expense are disclosed below:

 
| ** **                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007**    | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| Stock option expense (employees)     |       | $                                | 1,933      |                           | $          | 1,235 |   | $ | 3,839 |   | $ | 1,786 |   |
| Stock option expense (non-employees) |       | 493                              |       | 96                             |       | 598 |   | 127 |   |
| Restricted stock                     |       | 270                              |       | 93                             |       | 444 |   | 107 |   |
| Executive common stock               |       | —                           |       | 2,300                          |       | — |   | 2,300 |   |
| Total                                |       | $                                | 2,696      |                           | $          | 3,724 |   | $ | 4,881 |   | $ | 4,320 |   |

 

The following is a summaryof the Company’s stock option activity as of June 30, 2008 and the stockoption activity for all stock option plans during the six months ended June 30,2008:

 
| ** **                          | ** ** | **Six Months Ended June 30, 2008** | ** ** | ** **                              | ** **  |
|-------------------------------------|------------|-------------------------------------------------------------|------------|-----------------------------------------|-------------|
| ** **                          | ** ** | **Number of  Shares  Underlying  Options**             | ** ** | **Exercise Price  Per Share** | ** **  | **Weighted-Average  Exercise Price  Per Share** | ** ** | **Aggregate  Intrinsic  Value(1)** | ** ** |
|                                |       |                                                        |       |                                    |        |   |   |   |   |
| Outstanding at beginning of period  |       | 2,882,445                                                   |       | $                                       | 0.11-$48.54 |   | $ | 9.18 |   |   |   |
| Granted                             |       | 387,360                                                     |       |                                    |        | $ | 22.25 |   |   |   |
| Exercised                           |       | (488,996                                                    | )          |                                    |        | $ | 0.65 |   |   |   |
| Cancelled                           |       | (43,257                                                     | )          |                                    |        | $ | 15.89 |   |   |   |
|                                |       |                                                        |       |                                    |        |   |   |   |   |
| Outstanding at end of period        |       | 2,737,552                                                   |       | $                                       | 0.11-$48.54 |   | $ | 12.46 |   | $ | 27,321 |   |
| Remaining contractual life in years |       | 8.57                                                        |       |                                    |        |   |   |   |   |
| Exercisable at end of period        |       | 601,115                                                     |       | $                                       | 0.11-$48.54 |   | $ | 8.27 |   | $ | 6,891 |   |
| Remaining contractual life in years |       | 8.37                                                        |       |                                    |        |   |   |   |   |

 

----

*(1) * The aggregate intrinsic value was calculatedbased on the positive difference between the estimated fair value of theCompany’s common stock on June 30, 2008 of $17.95 and the exercise priceof the underlying options.

 

Of the stock optionsoutstanding as of June 30, 2008, 66,086 options were held by non-employeesand 2,671,466 options were held by employees. The amount of unrecognizedstock-based compensation expense that may be recognized for outstandingunvested options as of June 30, 2008 was $23,406, which is to be recognizedover a weighted average period of 3.0 years. The amount that may berecognized into expense over the next four years is as follows:

 
| 2008   |   | $     | 4,081        |   |
|--------|--------|-------|--------------|--------|
| 2009   |   | 7,969 |         |
| 2010   |   | 7,646 |         |
| 2011   |   | 3,564 |         |
| 2012   |   | 146   |         |
|   |   | $     |  23,406 |   |

 

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During the first quarter of2008, certain of the Company’s executives elected to take their bonuses inshares of fully vested common stock.  Theshares issued totaled 26,961 and had an approximate value of $844.

 

During the second quarter of2008, the Company granted fully vested options to certain members of its Boardof Directors to purchase an aggregate of 39,193 shares of its common stock,which had an estimated fair value of $511.

 

*RestrictedStock*

 

The following tablesummarizes restricted stock activity during the three months ended June 30,2008:

 
| ** **                         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** **  |
|------------------------------------|------------|----------------------------|------------|-------------------------------------------------------------------------|-------------|
| Unvested at December 31, 2007 |       | 152,460                    |       | $                                                                       | 0.51        |   |
| Granted                            |       | 177,500                    |       | $                                                                       | 15.48       |   |
| Vested                             |       | (29,057                    | )          | $                                                                       | 14.13       |   |
| Cancelled                          |       | (750                       | )          | $                                                                       | 13.76       |   |
|                               |       |                       |       |                                                                    |        |
| Unvested at June 30, 2008     |       | 300,153                    |       | $                                                                       |  13.82 |   |

 

Allshares underlying awards of restricted stock are restricted in that they arenot transferable until they vest. The shares typically vest ratably over a fouryear period from the date of issuance, with certain exceptions. The fair valueof the restricted stock is expensed ratably over the vesting period. The sharesof restricted stock have been issued at no cost to the recipients, except for152,460 shares of restricted stock granted in 2006 that were purchased for$0.51 per share. The Company records the proceeds received for unvested sharesin accrued expenses. The amount is amortized into additional paid-in capital asthe shares vest. If the employee who received the restricted stock leaves theCompany prior to the vesting date for any reason, the shares of restrictedstock will be forfeited and returned to the Company. For restricted stock at June 30,2008, the Company had $3,511 of stock-based compensation expense, which isexpected to be recognized over a weighted average period of 3.4 years.

 

**10. IncomeTaxes**

 

No current provision forfederal or state income taxes has been recorded, as the Company has incurredcumulative net operating losses since inception.  The Company has recordeda deferred tax provision for $73 and $158, respectively, related to tax deductible goodwill for thethree and six months ended June 30, 2008.  Amounts due to variousstates for excise taxes are included in general and administrative expense andaccrued expenses and other current liabilities as of June 30, 2008 and December 31,2007.

 

**11. RelatedParty Transactions**

 

**DeferredAcquisition Payments**

 

On June 1, 2005, theCompany acquired all of the outstanding membership interests in PPDR from thesole member of PPDR (the Sole Member) in a purchase business combinationpursuant to a purchase agreement (the Purchase Agreement). Under the PurchaseAgreement, the Company was required to (i) make fixed payments of $5,925and (ii) issue 303,001 shares of the Company’s common stock to the SoleMember. As part of the Purchase Agreement, the Company acquired a demandresponse contract that contained a one-year option to extend, as of May 31,2008, at the sole discretion of a certain customer. If exercised, the Companywould have been obligated to make an additional payment of $2,366 and issue anadditional 28,287 shares of the Company’s common stock in connection with thePurchase Agreement. In February 2008, the customer informed the Companythat it elected not to exercise the one-year option to extend; therefore, noadditional payments, including the contingent consideration of $2,247, orshares will be due to the Sole Member. This amount had been recorded as aliability at December 31, 2007 and was reversed, along with acorresponding reduction to intangible assets during the first quarter of 2008.

 

In June 2008, theCompany made a final payment of $348 and issued 44,260 shares of common stockto the Sole Member, which reduced the liability to zero.

 

**12.Industry Segment Information**

 

Based on qualitative andquantitative criteria established by SFAS No. 131 *Disclosures about Segments of an Enterprise andRelated Information*, the Company operates within one reportablesegment.

 

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During the three and six months ended June 30, 2008 and 2007,respectively, the Company had certain customers whose revenue individuallyrepresented 10% or more of the Company’s total revenues as follows:

 
| ** ** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** ** | ** ** | **Revenues**                                        | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| ** ** | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer 1 |       | $                                                   | 8,411      |   | 35.5 | % | $ | 6,223 |   | 51.8 | % |
| Customer 2 |       | 4,646                                               |       | 19.6 | % | 3,276 |   | 27.3 | % |
| Customer 3 |       | 6,640                                               |       | 28.0 | % | 409 |   | 3.4 | % |
|       |       |                                                |       |   |   |   |   |   |   |
| Total      |       | $                                                   | 19,697     |   | 83.1 | % | $ | 9,908 |   | 82.5 | % |

 

 
| ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** ** | ** ** | **Revenues**                                      | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| ** ** | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer 1 |       | $                                                 | 19,495     |   | 46.1 | % | $ | 13,530 |   | 61.5 | % |
| Customer 2 |       | 8,632                                             |       | 20.4 | % | 5,365 |   | 24.4 | % |
| Customer 3 |       | 7,514                                             |       | 17.8 | % | 477 |   | 2.2 | % |
|       |       |                                              |       |   |   |   |   |   |   |
| Total      |       | $                                                 | 35,641     |   | 84.3 | % | $ | 19,372 |   | 88.1 | % |

 

**13. LegalProceedings**

 

The Company is subject tolegal proceedings, claims and litigation arising in the ordinary course ofbusiness. The Company does not expect the ultimate costs to resolve thesematters to have a material adverse effect on its consolidated financialposition, results of operations or cash flows. In addition to ordinary-courselitigation, the Company is a party to the litigation described below.

 

In March 2008, threepurported class action lawsuits were filed in the United States District Courtfor the District of Massachusetts against the Company, several of its officersand directors, and certain of the underwriters from the Company’s November 2007follow-on public offering of its common stock. The three class actioncomplaints have been consolidated by the Court into a single action and anamended consolidated complaint is currently due on September 12, 2008. The plaintiffs in the class actions claim torepresent those persons who purchased shares of the Company’s common stock fromNovember 1, 2007 through February 27, 2008 and/or those persons whopurchased shares of the Company’s common stock in connection with its follow-onpublic offering. The plaintiffs allege, among other things, that the defendantsmade false and misleading statements and failed to disclose materialinformation in various SEC filings, press releases and other public statements.The class action complaints allege various claims under the Securities Act of1933, as amended, the Securities Exchange Act of 1934, as amended, and Rule 10b-5promulgated thereunder. The class action complaints seek, among other relief,class certification, unspecified damages, fees, and such other relief as thecourt may deem just and proper.

 

In addition,on May 14, 2008, a complaint was filed derivatively on behalf of the Company inthe United States District Court for the District of Massachusetts againstseveral of the Company’s officers and directors and certain of the underwritersfrom the Company’s follow-on public offering. The derivative complaint alleges various common law and equitableclaims, including breach of fiduciary duty, gross mismanagement, abuse ofcontrol, waste of corporate assets and unjust enrichment, in connection withpurported false and misleading statements and failures to disclose materialinformation in certain SEC filings, press releases and other public statementsfrom November 1, 2007 to May 14, 2008. The derivative plaintiff seeks, among other relief, unspecified damages,injunctive relief, restitution, disgorgement, fees and such other relief as theCourt may deem proper.  On August 12,2008, the Court stayed the Company’s obligation to respond to the derivativecomplaint pending a denial, if any, of the defendants’ anticipated motion todismiss the amended consolidated class action complaint.

 

The Company believes that itand the other defendants have substantial legal and factual defenses to theclaims and allegations contained in the class action and derivative suitcomplaints, and the Company intends to pursue these defenses vigorously. Therecan be no assurance, however, that the Company will be successful, and anadverse resolution of any of the lawsuits could have a material adverse effecton the Company’s consolidated financial position and results of operations inthe period in which a lawsuit is resolved. In addition, although the Companycarries insurance for these types of claims, a judgment significantly in excessof the Company’s insurance coverage could materially and adversely affect theCompany’s financial condition, results of operations and cash flows. TheCompany is not presently able to reasonably estimate potential losses, if any,related to the lawsuits.

 

**14.Subsequent Events**

 

On August 5, 2008,the Company and one of its subsidiaries entered into a $35 million securedrevolving credit and term loan facility with a bank, under which thebank will, among other things, make revolving credit and term loanadvances and issue letters of credit for the Company’s account.  Theinterest on loans under the Company’s credit facility will accrue atinterest rates based upon either the bank’s prime rate or LIBOR, at the Company’selection. The Company’s obligations under this credit facility are secured byall of the assets of the Company and its subsidiaries, excluding anyintellectual property.  This creditfacility contains customary terms and conditions for credit facilities of thistype, including restrictions on the Company’s ability to incur additionalindebtedness, create liens, enter into transactions with affiliates, transferassets, pay dividends or make distributions on, or repurchase, the Company’sstock,  consolidate or merge with other entities, or suffer a change 

 

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in control.  Inaddition, the Company is required to meet certain financial covenants customarywith this type of agreement, including maintaining a minimum specified tangiblenet worth and a minimum specified ratio of current assets to currentliabilities.  This credit facility contains customary events of default,including for payment defaults, breaches of representations, breaches ofaffirmative or negative covenants, cross defaults to other materialindebtedness, bankruptcy and failure to discharge certain judgments. If adefault occurs and is not cured within any applicable cure period or is notwaived, the Company’s obligations under the credit facility may beaccelerated.  This credit facility replaced the Company’s credit facility withBluecrest Capital, L.P that existed as of June 30, 2008.

 

**Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

*Thefollowing discussion should be read in conjunction with our unaudited financialstatements and related notes thereto included elsewhere in this QuarterlyReport on Form 10-Q, as well as the audited financial statements and notesthereto and Management’s Discussion and Analysis of Financial Condition andResults of Operations for the fiscal year ended December 31, 2007,included in our Annual Report on Form 10-K for the year ended December 31,2007, as filed with the Securities and Exchange Commission, or the SEC, on March 28,2008. This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Without limiting the foregoing, the words “may,” “will,” “should,” “could,”“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,”“continue,” “target” and variations of these terms or the negatives of thoseterms and similar expressions are intended to identify forward-lookingstatements. All forward-looking statements included in this Quarterly Report onForm 10-Q are based on current expectations, estimates, forecasts andprojections and the beliefs and assumptions of our management including,without limitation, our expectations regarding our contracted revenues, resultsof operations, selling and marketing expenses, general and administrativeexpenses, research and development expenses, and the sufficiency of our cashfor future operations. We assume no obligation to revise or update any suchforward-looking statements. Our actual results could differ materially fromthose anticipated in these forward-looking statements as a result of certainimportant factors, including those set forth below under this Item 2 — “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” Part II,Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q,as well as in our Annual Report on Form 10-K for the year ended December 31,2007. You should carefully review those factors and also carefully review therisks outlined in other documents that we file from time to time with the SEC.*

 

**Overview**

 

We are a leading developerand provider of clean and intelligent energy solutions. We use our NetworkOperations Center, or NOC, to remotely manage and reduce electricityconsumption across a network of commercial, institutional and industrialcustomer sites to enable a more information-based and responsive, orintelligent, electric power grid. Our customers are electric power gridoperators and utilities, as well as commercial, institutional and industrialend-users of electricity. Our demand response and energy management solutionshelp optimize the balance of electric supply and demand and create a lower riskand more environmentally sound alternative to building additional power plantsand transmission lines. Grid operators and utilities pay us a stream ofrecurring cash flows for managing demand response capacity that we share withparticipating end-use customers. We receive most of our revenues from gridoperators and utilities, and we make payments to end-users of electricity forboth contracting to reduce electricity usage and actually doing so when calledupon. In doing so, we establish a base of installed users for an expandingportfolio of our technology-enabled energy management solutions.

 

Our customer base has grownfrom 19 commercial, institutional and industrial customers with 70 sites in ournetwork as of December 31, 2004 to 1,252 end-use customers for our demandresponse solutions with 3,067 sites in our demand response network as of June 30,2008. The demand response capacity we manage through our network has grown from10 megawatts, or MW, as of December 31, 2004 to 1,643 MW as of June 30,2008.  We continue to devote substantially all ofour efforts toward the sale of our demand response and energy managementsolutions. We have incurred cumulative net losses of $55.3 million frominception to June 30, 2008. Our net losses were $10.4 million and$21.4 million, respectively,for the three and six months ended June 30, 2008.

 

**Significant Recent Developments**

 

In May 2008, weacquired 100% of the membership interests of South River Consulting, LLC, orSRC, an energy procurement and risk management services provider, for apurchase price equal to approximately $5.5 million, which consisted of approximately$3.6 million in cash, $0.2 million of acquisition related expenses, and 120,000shares of our common stock that had an aggregate value of approximately $1.75 millionas of the closing date, plus certain earn-out payments contingent on SRCattaining specific revenue and gross margin targets over a 24-month period. Theacquisition of SRC strengthens our position in a growing energy procurementservices market and provides a local presence for us in the PJMInterconnection, or PJM, service region.

 

 InJune 2008, Arthur W. Coviello, Jr. was elected to serve as a memberof our board of directors.  In addition, Mr. Coviellowas appointed to the audit committee of our board of directors.

 

On August 5, 2008,we and a subsidiary of ours entered into a $35 million secured revolvingcredit and term loan facility with Silicon Valley Bank, whichprovides for, among other things,  revolving credit and term loan advancesand letters of credit for our account. Our obligations under this creditfacility are secured by all of our assets and the assets of our subsidiaries,excluding any intellectual property. This credit facility replaced our creditfacility with Bluecrest Capital, L.P. that existed as of June 30, 2008.

 

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**Revenuesand Expense Components**

 

***Revenues***

 

We derive recurring revenuesfrom the sale of our demand response and energy management solutions. Ourrevenues from our demand response solutions primarily consist of capacity andenergy payments. In certain markets, we enter into long-term capacity contractswith grid operators and utilities, generally ranging from three to10 years in duration, to deploy our demand response solutions. Inaddition, we derive revenues from demand response capacity that we makeavailable in open market programs, which are open market bidding opportunitiesestablished by grid operators or utilities. In these open market programs, gridoperators and utilities generally seek bids from companies such as ours to providedemand response capacity based on prices offered in competitive bidding. Theseopportunities are generally characterized by flexible capacity commitments andprices that vary by month.

 

Where we have a long-termcontract, we receive periodic capacity payments, which may vary monthly orseasonally, based upon enrolled capacity and predetermined payment rates. Wherewe operate in open markets, our revenues from demand response capacity paymentsgenerally vary month-to-month based upon our enrolled capacity and the marketpayment rate. Under both long-term contracts and open market programs, wereceive capacity payments regardless of whether we are called upon to reducedemand for electricity from the electric power grid. At least once per year, wedemonstrate our capacity either through a demand response event or ameasurement and verification test. This demonstrated capacity is typically usedto calculate the continuing periodic capacity payments to be made to us untilthe next 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; we call this an energypayment. The energy payment is based upon the amount of energy usage that weactually reduce from the electricity grid in kilowatt hours during the demandresponse event.

 

Our energy managementsolutions include energy procurement services where we evaluate our end-usecustomers’ energy purchasing needs and assist them in procuring more costeffective electricity. We receive a monthly fee from the competitiveelectricity provider based upon the actual consumption of electricity used byour end-use customers. Demand response audits are services where we evaluateend-use customers’ energy utilization and operating flexibility to determinepotential savings opportunities from implementing demand response, conservingenergy and limiting peak demand. We receive a fee from our electric gridoperator and utility customers for each audit typically based upon acontractually specified rate times the amount of kilowatts, or kW, we identifythat can be reduced from the electric power grid. We also use our PowerTrakplatform to deliver energy analytics and control and emissions tracking andtrading support. We generally receive either a subscription-based fee or apercentage savings fee for these energy management solutions. We have yet toearn substantial revenues from these energy management solutions.

 

In accordance with Staff AccountingBulletin No. 104, Revenue Recognition, or SAB No. 104, in all of ourarrangements, we do not recognize any revenues until we can determine thatpersuasive evidence of an arrangement exists, services have been provided, thefee is fixed or determinable, and we deem collection to be probable. As programrules may differ for each contract and/or region where we operate, weassess whether or not we have met the specific service requirements under theprogram rules and recognize or defer revenues as necessary. In accordancewith SAB No. 104, we recognize demand response revenues when we haveprovided verification to the grid operator or utility of our ability to deliverthe committed capacity under the agreement or at the end of the servicedelivery period. Committed capacity is verified through the results of anactual demand response event or a measurement and verification test. Once thecapacity amount has been verified, revenues become fixed or determinable andare recognized over the delivery service period. Under certain contracts andprograms rules, if our verified capacity is below the previously verifiedamount, the customer will reduce future payments based on the adjusted verifiedcapacity amounts. Revenues recognized between demand response events or testsare not subject to customer refund. Under certain contracts and programs, the period during which we arerequired to perform may be shorter than the period over which we receivepayments under that contract or program.  In these cases, we recordrevenue over the mandatory performance obligation period, and a portion of therevenue is recorded and accrued as unbilled revenue because the revenue hasbeen earned but is not billable.

 

Asof June 30, 2008, we had 1,643 MW under management in our demand responsenetwork, meaning that we had entered into definitive contracts with ourcommercial, institutional and industrial customers with respect to 1,643 MW ofdemand response capacity. In most of the markets in which we originally focusedour growth, we generally begin earning revenues from our MW under managementwithin approximately one month from the date on which we “enable” the MW, orthe date on which we can reduce the MW from the electricity grid if called uponto do so. Anexception isthe PJM forward capacity market, which is a market in which we materiallyincreased our participation during the first quarter of 2008 and in which weexpect to continue to increase our participation and derive revenues. BecausePJM operates on a June to May fiscal year basis, a MW that we enable afterJune of each year may not begin earning revenue until June of thefollowing year. This results in a longer average lag time in our portfolio fromthe point in time when we consider a MW to be under management to when we earnrevenues from the MW.

 

Contracted revenuesrepresent our estimate of total payments that we currently expect to earn inconnection with providing demand response solutions to grid operators andutilities over the course of long-term contracts and pursuant to open marketbidding programs, as well as providing energy management solutions to ourcommercial, institutional and industrial end-use customers. In July 2008,we announced that we had surpassed $500 million in contracted revenues. Wecurrently expect approximately 90% of this contracted revenue to be earned by May 31,2012 and the remainder to be earned through 2018. Approximately 10% of thecontracted revenue referenced in this paragraph relates to contracts that weentered into with utility customers that are currently subject to regulatoryapproval.  For a discussion of the risksand uncertainties regarding our contracted revenues, please see the sectionentitled “Risk Factors” contained in Part II, Item 1A of this Quarterly Reporton Form 10-Q.

 

Revenues generated from two fixedprice contracts with, and open market sales to, ISO New England Inc., orISO-NE, a grid operator customer, accounted for 35.5% and 51.8%, respectively,of our total revenues in each of the three months ended June 30, 2008 and June 30,2007. For the six months ended June 30, 2008 and June 30, 2007, thiscustomer accounted for 46.1% and 61.5%, respectively, of our total revenues.

 

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Specifically, an aggregateof 4.0% and 5.8%, respectively, of our total revenues for the three and six months ended June 30,2008 were generated under two fixed price contracts with ISO-NE, both of whichexpired on May 31, 2008.  In addition, 19.6% and 27.3%, respectively,of our total revenues for the three months ended June 30, 2008 and June 30,2007 were generated under a fixed price contract with The Connecticut Light andPower Company, or CL&P, which expires on December 31, 2008.  Forthe six months ended June 30, 2008 and June 30, 2007, this customeraccounted for 20.4% and 24.4%, respectively, of our total revenues.  Although we entered into a new 170 MW fixedprice contract with CL&P in February 2008, which we expected topartially offset the impact of the expiration of our fixed price contracts withISO-NE and CL&P on our revenues, this new contract was denied regulatoryapproval by the Connecticut Department of Public Utility Control, or the DPUC,in April 2008.  We intend to enroll a significant portion of the MWrepresented by our fixed price contracts with ISO-NE and CL&P in otheravailable demand response programs, which other programs could providesignificantly lower capacity payments than our expired or expiring fixed pricecontracts with ISO-NE and CL&P. For example, capacity payments currently availableunder ISO-NE’s Real-Time Demand Response program are significantly lower thanthe capacity payments available under these fixed price contracts.

 

During thethree and six months ended June 30, 2008, revenues generated from open marketsales to PJM, a grid operator customer, accounted for 28.0% and 17.8%,respectively, of our total revenues.

 

***Cost of Revenues***

 

Cost of revenues for ourdemand response solutions consists of payments that we make to our commercial,institutional and industrial customers for their participation in our demandresponse network. We generally enter into one to five year contracts with ourend-use customers under which we deliver recurring cash payments to them forthe capacity they commit to make available on demand. We also generally make anadditional payment when a customer reduces consumption of energy from theelectric power grid. The equipment and installation costs for our devices atour commercial, institutional and industrial customer sites are capitalized anddepreciated over the lesser of the remaining term of the contract, for fixedcontracts, or the estimated useful life of the equipment and this depreciationis also reflected in cost of revenues. We also include the monthlytelecommunications/data costs we incur as a result of being connected to ourcommercial, institutional and industrial sites. Cost of revenues for energymanagement solutions include the wages and associated benefits that we pay toour project managers for the performance of those services.

 

***Gross Profit***

 

Gross profit consists of ourtotal revenues less our cost of revenues. Our gross profit has been, and willbe, affected by many factors, including (a) the demand for our demandresponse and energy management solutions, (b) the selling price of oursolutions, (c) our cost of revenues, (d) the introduction of newclean and intelligent energy solutions and (e) our ability to open andenter new markets/regions and expand deeper into markets we already serve.

 

***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 eight employees at December 31,2003 to 314 employees at June 30, 2008. We expect to continue to hire employeesto support our growth for the foreseeable future. In addition, we incursignificant up-front costs associated with the expansion of the number of MWunder our management, which we expect to continue for the foreseeable future.Although we expect our overall operating expenses to increase in absolutedollar terms for the foreseeable future as we grow our MW under management andfurther increase our headcount, we expect our overall annual operating expensesto decrease as a percentage of total annual revenues as we leverage ourexisting employee base and continue generating revenues from our MW undermanagement.

 

*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-pocket expenses, (d) marketingprograms such as trade shows, and (e) other related overhead. Commissionsare recorded as an expense when earned by the employee. We expect increases inselling and marketing expenses in absolute dollar terms for the foreseeablefuture as we further increase the number of sales professionals and, to alesser extent, increase our marketing activities. We expect annual selling andmarketing expenses to decrease as a percentage of total annual revenues as weleverage our current sales and marketing personnel.

 

*Generaland Administrative*

 

Generaland administrative expenses consist primarily of (a) salaries and relatedpersonnel costs, including costs associated with share-based payment awards,related to our executive, finance, human resource, information technology andoperations organizations, (b) facilities expenses, (c) accounting andlegal professional fees, and (d) other related overhead. We expect generaland administrative expenses to continue to increase in absolute dollar termsand as a percentage of total annual revenues for the foreseeable future as weinvest in infrastructure to 

 

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supportcontinued growth and incur additional expenses related to being apublic company, including increased audit and legal professional fees,costs of compliance with securities and other regulations, investor relationsexpenses, and higher insurance premiums.

 

*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 andconsulting services, (c) costs relating to the design and development ofnew solutions and enhancement of existing solutions, (d) quality assuranceand testing, and (e) other related overhead. During the three and sixmonths ended June 30, 2008, we capitalized $0.7 million of software anddevelopment costs in accordance with SOP 98-1, *Accounting for the Cost of Computer Software Developed or Obtained**for Internal Use,*and the amount is included as software in property and equipment at June 30,2008. During the three and six months ended June 30, 2007, we capitalizedsoftware and development costs of $0.3 million and $0.7 million,respectively. We intend tocontinue to invest in our research and development efforts. We expect researchand development expenses to increase in absolute dollar terms for the foreseeablefuture and to decrease as a percentage of total revenues in the long term.

 

***Stock-Based Compensation***

 

Effective as of January 1,2006, we adopted the requirements of Statement of Financial AccountingStandards (SFAS) No. 123R, *Share BasedPayment* (SFAS No. 123(R)) using the modified prospectivemethod. SFAS No. 123(R) addresses all forms of share-based paymentawards, including shares issued under employee stock purchase plans, stockoptions, restricted stock and stock appreciation rights. SFAS No. 123(R) requiresus to expense share-based payment awards with compensation cost for share-basedpayment transactions measured at fair value. For the three and six months endedJune 30, 2008, we recorded expenses of approximately $2.7 million and$4.9 million, respectively, in connection with share-based payment awardsto employees and non-employees. With respect to grants through June 30,2008, a future expense of non-vested options of approximately$23.4 million is expected to be recognized over a weighted average periodof 3.0 years and a future expense of restricted stock awards ofapproximately $3.5 million is expected to be recognized over a weighted averageperiod of 3.4 years.

 

***Interest and Other Income***

 

Interest and other incomeconsist primarily of interest income earned on cash balances and othernon-operating income. We historically have invested our cash in money marketfunds, municipal bonds and auction rate securities.

 

***Interest Expense***

 

Interestexpense consists of interest on our debt facilities.

 

**ConsolidatedResults of Operations**

 

***Three and Six Months Ended June 30, 2008 Compared to the Three andSix Months Ended June 30, 2007***

 

***Revenues***

 

The following tablesummarizes our revenues for the three and six months ended June 30, 2008and 2007 (dollars in thousands):

 
| ** **                  | ** ** | **Three Months  Ended  June 30, 2008** | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Percentage  Change** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------|------------|
| Revenues:                   |       |                                                  |       |                                                  |       |                   |       |
| Demand response solutions   |       | $                                                     | 21,868     |                                                  | $          | 11,910                 |       | 83.6 | % |
| Energy management solutions |       | 1,818                                                 |       | 105                                                   |       | 1631.4                 | %          |
| Total revenues              |       | $                                                     | 23,686     |                                                  | $          | 12,015                 |       | 97.1 | % |

 
| ** **                  | ** ** | **Six Months  Ended  June 30, 2008** | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Percentage  Change** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|
| Revenues:                   |       |                                                |       |                                                |       |                   |       |
| Demand response solutions   |       | $                                                   | 39,476     |                                                | $          | 21,514                 |       | 83.5 | % |
| Energy management solutions |       | 2,822                                               |       | 473                                                 |       | 496.6                  | %          |
| Total revenues              |       | $                                                   | 42,298     |                                                | $          | 21,987                 |       | 92.4 | % |

 

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*Demand Response SolutionsRevenues*

 

Duringour first year of participation in the PJM Emergency Load Response Program, orthe ELRP, which extended from June 2007 through May 2008, and inaccordance with accounting principles generally accepted in the UnitedStates, or GAAP, and SAB 104, werecognized capacity-based revenue from the ELRP over a twelve-month period dueto our lack of operating experience in the ELRP.  Beginning with the newPJM fiscal year in June 2008, we recognize capacity-based revenue from theELRP over its delivery period of June through September, consistent withGAAP, SAB 104 and how we recognize capacity-based revenue in other demandresponse programs.  As a result, during the three and six months endedJune 30, 2008, we were able to recognize additional revenue ofapproximately $3.8 million, approximately $3.3 million of which wasattributable to new megawatts enrolled in the ELRP in June 2008. Wecontinue to recognize energy-based revenue from the ELRP during the month inwhich the energy is delivered.  Theremaining increase in demand response solutions revenues of approximately $6.1million and $14.1 million, respectively, during the three and six months ended June 30, 2008 was due to anincrease in our MW under management in all operating regions and the enrollmentof new end-use customers in our demand response programs.

 

*Energy Management SolutionsRevenues*

 

During the three and sixmonths ended June 30, 2008, the increase in our energy managementsolutions revenues compared to the same period in 2007 was primarily due to ouracquisition of Mdenergy, LLC, or MDE, an energy procurement services provider,our acquisition of SRC, an energy procurement and risk management servicesprovider, and to end-use customers continuing to utilize our energy procurementservices offering, under which offering we evaluate our end-use customers’energy purchasing needs and assist them in procuring more cost effectiveelectricity. During the three and six months ended June 30, 2008, we alsoreceived revenues from our demand response audits, pursuant to which weevaluate end-use customers’ energy utilization and operating flexibility todetermine potential savings opportunities from implementing demand response,conserving energy and limiting peak demand.

 

We currently expect ourrevenues to increase in 2008 compared to 2007 as we seek to further increaseour MW under management in all operating regions, enroll new end-use customersin our demand response programs, continue to sell our energy management solutionsto our new and existing demand response customers and pursue more favorablepricing opportunities. In February 2008, ISO-NE notified us that it willnot extend our two fixed price contracts representing approximately 80 MW thatexpired on May 31, 2008. In February 2008, we entered into a new 170MW fixed price contract with CL&P, which we expected to partially offsetthe impact of the expiration of these ISO-NE contracts and our fixed pricecontract with CL&P, which represents approximately 110 MW and which expireson December 31, 2008, on our revenues. However, on April 2, 2008, wewere notified by the DPUC that this new contract was denied regulatoryapproval.  We intend to enroll a significant portion of the MW representedby our fixed price contracts with ISO-NE and CL&P in other available demandresponse programs, which other programs could provide significantly lowercapacity payments than our expired or expiring fixed price contracts withISO-NE and CL&P. As a result, our revenues may be significantly andadversely affected.

 

***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 six months ended June 30,2008 and 2007 (dollars in thousands):

 

| **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|
| **2008**                                            | ** ** | **2007** | ** ** |
| **Gross Profit**                                    | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| $                                                   | 8,871      |   | 37.5 | % | $ | 4,105 |   | 34.2 | % |
|                                                     |            |  |  |  |  |  |  |  |  |

 

| **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------|------------|
| **2008**                                          | ** ** | **2007** | ** ** |
| **Gross Profit**                             | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                                 | 15,341     |   | 36.3 | % | $ | 7,013 |   | 31.9 | % |
|                                                   |            |  |  |  |  |  |  |  |  |

 

Our gross profit increasedduring the three and six months ended June 30, 2008 when compared to thesame periods in 2007 primarily due to our continued growth and more favorablecontract terms with our commercial, institutional and industrial customers. In2008, we expect our gross margin percentage to increase as we seek to sellhigher gross margin energy management solutions to our existing demand responsecustomers and seek to achieve more favorable contract terms with ourcommercial, institutional and industrial customers.

 

As discussed  under “Revenues” above and in connection withour increased participation in the PJM ELRP, as a result of recognizingcapacity-based revenue over the four month delivery period of June throughSeptember, we recognized additional gross profit of approximately $1.3 millionduring the three and six months ended June 30, 2008.

 

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***Operating Expenses***

 

The following tablessummarize our operating expenses for the three and six months ended June 30,2008 and 2007 (dollars in thousands):

 
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2008**                                            | ** ** | **2007**   | ** ** | **Percentage  Change** | ** ** |
| Operating Expenses:                 |       |                                                |       |       |       |   |   |
| Selling and marketing expenses      |       | $                                                   | 6,914      |       | $          | 4,372 |   | 58.1 | % |
| General and administrative expenses |       | 11,657                                              |       | 7,907      |       | 47.4 | % |
| Research and development expenses   |       | 921                                                 |       | 498        |       | 84.9 | % |
| Total                               |       | $                                                   | 19,492     |       | $          | 12,777 |   | 52.6 | % |

 
| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                          | ** ** | **2008**                                          | ** ** | **2007**   | ** ** | **Percentage  Change** | ** ** |
| Operating Expenses:                 |       |                                              |       |       |       |   |   |
| Selling and marketing expenses      |       | $                                                 | 12,740     |       | $          | 7,478 |   | 70.4 | % |
| General and administrative expenses |       | 22,488                                            |       | 11,337     |       | 98.4 | % |
| Research and development expenses   |       | 2,432                                             |       | 839        |       | 189.9 | % |
| Total                               |       | $                                                 | 37,660     |       | $          | 19,654 |   | 91.6 | % |

 

Personnel-relatedcosts are the most significant component of each of these expense categories,including costs associated with share-based payment awards. We grew from 161employees at June 30, 2007 to 314 employees at June 30, 2008. In2008, we expect to increase our headcount by approximately 45% to 50% overheadcount at the end of 2007, when we had 253 employees, and we expect tocontinue to hire employees to support our growth for the foreseeable future. Inaddition, we incur significant up-front costs associated with the expansion ofthe number of MW under our management, which we expect to continue for theforeseeable future. Although we expect our overall operating expenses toincrease in absolute dollar terms for the foreseeable future as we grow our MWunder management and further increase our headcount, we expect our overalloperating expenses to decrease as a percentage of total annual revenues as weleverage our existing employee base and continue generating revenues from ourMW under management.

 

In certain forward capacitymarkets in which we choose to participate, such as PJM, we may enable ourcommercial, institutional and industrial customers up to twelve months inadvance of enrolling them in a particular program. This market feature createsa longer average lag time across our portfolio from the point in time when weconsider a MW to be under management to when we earn revenues from such MW.Because we incur selling and marketing and operational expenses, includingsalaries and related personnel costs, at the time of enrollment, we believethere may be a trend of higher up-front costs than we have incurredhistorically.

 

***Selling and Marketing Expenses***

 

The increase in selling andmarketing expenses was primarily due to an increase in employee related costs,excluding stock based compensation, from $2.6 million for the three monthsended June 30, 2007 to $5.3 million for the three months ended June 30,2008. For the six months ended June 30, 2008, employee related costs were$9.9 million compared to $4.2 million for the same period in 2007.  During the three and six months ended June30, 2008 and in connection with our revised sales commission policy, sellingand marketing expenses related to the payment of up-front commission fees to certainof our selling and marketing employees decreased as compared to the sameperiods in 2007, which decrease was offset by an increase in the number ofselling and marketing employees and an increase in the base salaries of certainof these employees.  The number ofselling and marketing employees increased from 59 at June 30, 2007 to 105at June 30, 2008. Stock-based compensation expense related to selling andmarketing employees for the three months ended June 30, 2008 increased to$0.9 million compared to $0.4 million for the same period in 2007.  For the six months ended June 30, 2008,stock-based compensation expense related to selling and marketing employees was$1.8 million, compared to $0.7 million for the same period in 2007.

 

***General and Administrative Expenses***

 

The increase in general andadministrative expenses was primarily due to an increase in employee relatedcosts, excluding stock based compensation, from $2.5 million for the threemonths ended June 30, 2007 to $5.5 million for the three months ended June 30,2008, as well as to greater costs associated with being a public company. Forthe six months ended June 30, 2008, employee related costs were $10.6million compared to $4.0 million for the same period in 2007. The number ofgeneral and administrative employees, including employees in our operationsgroup, increased from 81 at June 30, 2007 to 170 at June 30, 2008.Stock-based compensation expense related to general and administrativeemployees for the three months ended June 30, 2008 was $1.6 millioncompared to $3.3 million for the same period in 2007.  For the six months ended June 30, 2008,stock-based compensation expense related to general and administrativeemployees was $2.8 million, compared to $3.5 million for the same period in2007.  Included within the 2007stock-based compensation amounts is $2.3 million in compensation expense associatedwith a grant that we made to certain of our executives which was recognized infull as compensation expense during these respective periods.

 

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***Research and Development Expenses***

 

The increase in research anddevelopment expenses was primarily due to an increase in employee relatedcosts, excluding stock based compensation, from $0.4 million for the threemonths ended June 30, 2007 to $0.5 million for the three months ended June 30,2008. For the six months ended June 30, 2008, employee related costs were$1.9 compared to $0.7 million for the same period in 2007. The number ofresearch and development employees increased from 21 at June 30, 2007 to39 at June 30, 2008. Stock-based compensation expense related to researchand development employees for the three months ended June 30, 2008 and2007 was $0.1 million for both periods. For the six months ended June 30, 2008, stock-based compensationexpense related to research and development employees was $0.3 million,compared to $0.1 million for the same period in 2007.  The increase in research and developmentexpenses for the three and six months ended June 30, 2008 was slightly offsetby capitalized software and development costs of $0.7 million.

 

***Interest and Other Income (Expense), Net***

 

Net interest and otherincome was $0.3 million for the three months ended June 30, 2008, comparedto net interest and other expense of $0.5 million for the three months ended June 30,2007.  Net interest and other income was$1.0 million for the six months ended June 30, 2008, compared to netinterest and other expense of $0.6 million for the six months ended June 30,2007.

 

Interest and other income inthe three months ended June 30, 2008 was $0.5 million as compared to $0.6million at June 30, 2007.  The decrease was primarily due to a changein the mix of investment vehicles.  For thesix months ended June 30, 2008, interest and other income was $1.5 millioncompared to $0.8 million for the six months ended June 30, 2007.  This increase was due to investment of ourinitial public offering, or IPO, and follow-on offering proceeds over theperiod.

 

Interest expense for thethree months ended June 30, 2008 was $0.2 million compared to $0.1 millionfor the same period in 2007.  For the six months ended June 30, 2008,interest and other income was $0.5 million compared to $0.2 million for the sixmonths ended June 30, 2007.  Theincreases were primarily due to a higher average outstanding debt balanceduring both the three and six months ended June 30, 2008. In addition, forthe three and six months ended June 30, 2007, we capitalized interestrelated to construction in progress projects totaling approximately $0.3million and $0.7 million, respectively.

 

***Income Taxes***

 

We had a provision forincome taxes of $0.1 million and $0.2 million, respectively, for the three and six months ended June 30,2008.  There was no provision for thethree and six months ended June 20, 2007. The provision for the three andsix months ended June 30, 2008 relates to the amortization of taxdeductible goodwill, which generates a deferred tax liability that cannotbe offset by net operating losses orother deferred tax assets since its reversal is 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 June 30, 2008.

 

**Liquidityand Capital Resources**

 

***Overview***

 

Revenues generated from two fixedprice contracts with, and open market sales to, ISO-NE accounted for 35.5% and46.1%, respectively, ofour total revenues for the three and six months ended June 30, 2008.  For the three and six months ended June 30,2007, these amounts accounted for 51.8% and 61.5%, respectively. Specifically,an aggregate of 4.0% and 5.8%, respectively, of our total revenues for the three and six months ended June 30,2008 were generated under two fixed price contracts with ISO-NE, both of whichexpired on May 31, 2008.  Inaddition, 19.6% and 27.3%, respectively, of our total revenues for the three months ended June 30, 2008and June 30, 2007 were generated under a fixed price contract with CL&P,which expires on December 31, 2008. For the six months ended June 30,2008 and June 30, 2007, CL&P accounted for 20.4% and 24.4%,respectively, of our total revenues. Wedo not currently expect the expiration of our fixed price contracts with ISO-NEand CL&P to have a material impact on our liquidity.

 

Asof June 30, 2008, we had cash, cash equivalents, and marketable securitiestotaling $65.7 million, of which $62.3 million represented cash and cashequivalents, a decrease of $20.0 million from the December 31, 2007balance of $85.7 million.  This decrease includes the effect of posting$10.0 million of financial assurances to satisfy certain demand response marketrequirements.  As of June 30, 2008, we had restricted cash of $2.5million and financial assurance deposits of $7.8 million, totaling $10.3million compared to $17.5 million as of December 31, 2007, a decrease of$7.1 million primarily due to the release of deposits during the second quarterof 2008.  As we fulfill our obligations and enroll capacity in certainmarkets, a portion or all of these deposits will be released.  We believethat our existing cash and cash equivalents and marketable securities at June 30,2008, our anticipated net cash flows from operating activities and amountsavailable under our credit facility will be sufficient to meet our anticipatedcash needs, including investing activities, for at least the next24 months.

 

Contracted revenuesrepresent our estimate of total payments that we currently expect to earn inconnection with providing demand response solutions to grid operators andutilities over the course of long-term contracts and pursuant to open marketbidding programs, as well as providing energy management solutions to our commercial,institutional and industrial end-use customers. In July 2008, we announced that we had surpassed approximately $500million in contracted revenues. We currently expect approximately 90% of thiscontracted revenue to be earned by May 31, 2012 and the remainder to beearned through 2018.  Approximately 10%of the contracted revenue referenced in this paragraph relates to contractsthat we entered into with utility customers that are currently subject toregulatory approval. For a discussion of the risks and uncertaintiesregarding our contracted revenues, please see the section entitled “RiskFactors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

Our investments insecurities include auction-rate securities, or ARS, and state and municipalbonds. The securities we typically invest in are AAA-rated government-backedsecurities with interest rates typically ranging from 6.5% to 6.8% that haveapproximate contractual maturities of at least 26 years. However, becauseof the short-term nature of our investment in these ARS, they have beenclassified as available-for-sale and included in short-term investments on ourconsolidated balance sheet. Our holdings of ARS as of June 30, 2008 and December 31,2007 were $2.9 million and $5.6 million, respectively.

 

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As of June 30, 2008, wehad $2.9 million par value ARS that were subject to failed auctions, and noneof the ARS succeeded in an auction during the six months ended June 30,2008 or subsequent to June 30, 2008.  As a result of these failedauctions, we have the potential to benefit from a penalty feature in ourinterest rates, which allows us to earn an additional 5.1% to 14.0% of intereston these securities until the next auction is set to occur.  We will notbe able to liquidate the investments until a successful auction occurs, a buyeris found outside the auction process, the securities are called or refinancedby the issuer, or the securities mature.  We believe that we will be ableto liquidate the investments at par within a reasonable time period, and thatthe issuers of the securities are currently able and will continue to makeinterest payments at the maximum rate.  The investments were classified ascurrent assets in our condensed consolidated balance sheet as of June 30,2008 based on our current expectations regarding liquidity.  If in thefuture we no longer believe that we will be able to liquidate these securitieswithin one year, the investments may need to be reclassified as long-termassets or may require a write down to fair value based on future marketconditions.

 

We are contingently liableunder unused letters of credit. Included in the June 30, 2008 and December 31,2007 restricted cash balances are amounts used to collateralize unused lettersof credit in the amount of $2.5 million and $3.0 million, respectively.

 

***Cash Flows***

 

The following tablesummarizes our cash flows for the six months ended June 30, 2008 and 2007(dollars in thousands):

 
| ** **                                             | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Cash flows used in operating activities                |       | $                                             | (10,629    | ) | $ | (3,191 | ) |
| Cash flows provided by (used in) investing  activities |       | 3,589                                         |       | (13,216 | ) |
| Cash flows (used in) provided by financing  activities |       | (871                                          | )          | 106,850 |   |
| Net (decrease) increase in cash and cash  equivalents  |       | $                                             | (7,911     | ) | $ | 90,443 |   |

 

***Cash Flows Used in Operating Activities***

 

Cash used in operatingactivities primarily consists of net income (loss) adjusted for certainnon-cash items including depreciation and amortization, stock-basedcompensation expenses, and the effect of changes in working capital and otheractivities.

 

 Cash used in operatingactivities in the six months ended June 30, 2008 was $10.6 million andconsisted of a $21.4 million net loss offset by approximately $1.5 million ofnet cash provided for working capital purposes and other activities and by $9.4million of non-cash items, consisting primarily of depreciation andamortization, interest expense, deferred tax liability and stock-basedcompensation charges. Cash used for working capital and other activitiesprimarily reflected a $4.0 million increase in accrued capacity payments, themajority of which was related to the PJM demand response market, an increase of$2.5 million in accounts payable an accrued expenses, an increase of $0.7million in payroll and related expenses, an increase of $0.1 million in othernoncurrent liabilities and a $0.3 million decrease in trade accountsreceivable. These amounts were partially offset by an increase of $3.8 millionin unbilled revenue relating to the PJM demand response market, a decrease of$1.5 million in deferred revenues, and an increase of $0.8 million in prepaidand other assets.

 

Cash used in operatingactivities in the six months ended June 30, 2007 was $3.2 million andconsisted of a $12.0 million net loss partially offset by $2.4 million of netcash provided by working capital and other activities and by $6.4 million ofnon-cash items, consisting primarily of depreciation and amortization andstock-based compensation charges. Cash provided by working capital and otheractivities primarily reflected a $3.0 million increase in accounts payable andaccrued expenses as our operations continued to grow, an increase in accruedcapacity payments of $2.1 million, an increase of $1.2 million in deferredrevenues and an increase of $1.0 million in accrued payroll and relatedexpenses.  These amounts were offset by a $3.6 million increase inaccounts receivable attributable to the significant increase in revenues, a$0.6 million increase in prepaid and other noncurrent assets and an increase indeferred cost of sales of $0.7 million.

 

***Cash Flows Provided by (Used in) Investing Activities***

 

Cashprovided by investing activities was $3.6 million for the six months ended June 30,2008. For the six months ended June 30, 2008, purchases of available-for-salesecurities were approximately $10.6 million and sales ofavailable-for-sale maturities were $22.7 million.  Our principal cashinvestments related to installation services used to build out and expand ourdemand response programs, purchases of property and equipment, the cashportion earn-out for our acquisition of MDE of $3.4 million, and $3.8 millionof the cash used for the acquisition of SRC. During the six months ended June 30,2008, we decreased our restricted cash and deposits for customer programs by$7.1 million.  During the six months 

 

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endedJune 30, 2008, we incurred $8.1 million in capital expenditures primarilyrelated to office equipment, demand response equipment and other miscellaneousexpenditures.

 

For the six months ended June 30,2007, cash used in investing activities was $13.2 million. Our principalcash investments during this period related to purchases of equipment,furniture and fixtures, the cash portion of the purchase price for ouracquisition of all the membership interests of Pinpoint Power DR, andinstallation services used to build out and expand our demand response programs.

 

***Cash Flows (Used in) Provided by Financing Activities***

 

Cash flows used in financingactivities were $0.9 million for the six months ended June 30, 2008. Cashflows provided by financing activities were $106.9 million for the six monthsended June 30, 2007. Cash flows (used in) provided by financing activitiesconsisted of the following:

 

*Equity Financing Activities*

 

Duringthe six months ended June 30, 2007, we increased our restricted cash by$2.0 million.

 

InJanuary 2007, we raised $10.0 million of proceeds through sales of our Series CConvertible Preferred Stock.

 

InFebruary 2007, we repurchased 104,393 shares of our common stock for$0.4 million.

 

In May 2007, wecompleted an IPO of 4,312,500 shares of common stock at a price of $26.00 pershare, which included the exercise of the underwriters’ over-allotment optionto purchase 562,500 shares and the sale of 225,000 shares by certain of ourstockholders. Net proceeds to us from the offering were approximately $95.2million.

 

Inaddition, we received approximately $0.3 million and $84,000, respectively,from exercises of common stock options during the six months ended June 30,2008 and June 30, 2007.

 

*Credit Facility Borrowings*

 

During the six months ended June 30,2008, we made scheduled payments on our outstanding debt and capital leaseobligations of $1.2 million.  During the six months ended June 30,2007, we borrowed $2.5 million under our loan and security agreement and madescheduled payments on our outstanding debt and capital lease obligations of$0.5 million.

 

On August 5,2008, we and a subsidiary of ours entered into a $35 million secured revolvingcredit and term facility with Silicon Valley Bank, which provides for, amongother things, revolving credit and term loan advances and letters of credit forour account. This credit facility replaced our credit facility with BluecrestCapital, L.P. that existed as of June 30, 2008.

 

**CapitalSpending**

 

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 $8.1 million and $10.8 million, respectively, for the sixmonths ended June 30, 2008 and 2007.

 

**ContractualObligations**

 

InJune 2008, we entered into a sublease agreement pursuant to which we leasedapproximately 8,766 square feet of space located in San Francisco,California.  We will incur operatinglease obligations of approximately $0.2 million, $0.3 million, $0.4 million,$0.4 million and $0.2 million, respectively, in 2008, 2009, 2010, 2011 and 2012under this sublease agreement.

 

Other than as set forthabove, as of June 30, 2008, our contractual obligations disclosurecontained in our Annual Report on Form 10-K for the year ended December 31,2007, which we filed with the SEC on March 28, 2008, has not materiallychanged.

 

**Off-BalanceSheet Arrangements**

 

Wehave no off-balance sheet arrangements other than letters of credit issued inthe ordinary course of business.

 

**CriticalAccounting Policies and Use of Estimates**

 

Ourfinancial statements are prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires that we make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. We base ourestimates on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. We evaluate our estimates andassumptions on an ongoing basis. Our actual results may differ significantlyfrom these estimates under different assumptions or conditions.  There have been no material changes to theseestimates during the three months ended June 30, 2008.  For a detailed explanation of the judgmentsmade in these areas, refer to “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” within our Annual Report on Form 10-Kfor the year ended December 31, 2007, which we filed with the SEC on March 28,2008.

 

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**Item3.  Quantitative and Qualitative Disclosure About Market Risk.**

 

***Foreign Exchange Risk***

 

We face minimal exposure to adverse movements in foreign currencyexchange rates.

 

***Interest Rate Risk***

 

As of June 30, 2008,all of our $4.9 million of outstanding debt was at fixed interest rates;therefore, there was no significant impact from changes in interest rates.

 

We manage our cash and cashequivalents and marketable securities portfolio considering investmentopportunities and risks, tax consequences and overall financing strategies. Ourinvestment portfolio consists primarily of cash and cash equivalents, moneymarket funds, and municipal auction rate securities with carrying amountsapproximating market value. As our investments are made with highly ratedmunicipal auction rate securities and short-term securities, we are notanticipating any significant impact in the short term from a change in interestrates.

 

Our investments in securitiesinclude ARS and state and municipal bonds. The securities we typically investin are AAA-rated government-backed securities with interest rates typicallyranging from 6.5% to 6.8% that have approximate contractual maturities of atleast 26 years. However, because of the short-term nature of ourinvestment in these ARS, they have been classified as available-for-sale andincluded in short-term investments on our consolidated balance sheet. Ourholdings of ARS as of June 30, 2008 and December 31, 2007 were $2.9 millionand $5.6 million, respectively.

 

As of June 30, 2008, wehad $2.9 million par value ARS that were subject to failed auctions, and noneof the ARS succeeded in an auction during the six months ended June 30,2008 or subsequent to June 30, 2008.  As a result of these failedauctions, we have the potential to benefit from a penalty feature in ourinterest rates, which allows us to earn an additional 5.1% to 14.0% of intereston these securities until the next auction is set to occur.  We will notbe able to liquidate the investments until a successful auction occurs, a buyeris found outside the auction process, the securities are called or refinancedby the issuer, or the securities mature.  We believe that we will be ableto liquidate the investments at par within a reasonable time period, and thatthe issuers of the securities are currently able and will continue to makeinterest payments at the maximum rate.  The investments were classified ascurrent assets in our condensed consolidated balance sheet as of June 30,2008 based on our current expectations regarding liquidity.  However, theinvestments may need to be reclassified as long-term assets in the future ormay require a write down to fair value based on future market conditions if theliquidity of the investments does not improve.

 

**Item 4T. Controls and Procedures.**

 

***Evaluation of Disclosure Controls and Procedures***

 

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures as of June 30,2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended, or theExchange 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 officersas appropriate to allow timely decisions regarding required disclosure. Ourmanagement 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. Based on theevaluation of our disclosure controls and procedures as of June 30, 2008,our chief executive officer and chief financial officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

***Internal Control over Financial Reporting***

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedJune 30, 2008, which has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1.   Legal Proceedings.**

 

We are subject to legalproceedings, claims and litigation arising in the ordinary course of business.We do not expect the ultimate costs to resolve these matters to have a materialadverse effect on our consolidated financial position, results of operations orcash flows. In addition to ordinary-course litigation, we are a party to thelitigation described below.

 

In March 2008, threepurported class action lawsuits were filed in the United States District Courtfor the District of Massachusetts against us, several of our officers anddirectors and certain of the underwriters from the November 2007 follow-onpublic offering of our common stock. The three class action complaintshave been consolidated by the Court into a single action and an amendedconsolidated complaint is currently due on September 12, 2008. The plaintiffs in the class actions claim torepresent those persons who purchased shares of our common stock from November 1,2007 through February 27, 2008 and/or those persons who purchased sharesof our common stock in connection with our follow-on public offering. Theplaintiffs allege, among other things, that the defendants made false andmisleading statements and failed to disclose material information in variousSEC filings, press releases and other public statements. The class actioncomplaints allege various claims under the Securities Act of 1933, as amended,or the Securities Act, the Exchange Act, and Rule 10b-5 promulgated thereunder.The class action complaints seek, among other relief, class certification,unspecified damages, fees and such other relief as the court may deem just andproper.

 

In addition,on May 14, 2008, a complaint was filed derivatively on our behalf in the UnitedStates District Court for the District of Massachusetts against several of ourofficers and directors and certain of the underwriters from our follow-onpublic offering.  The derivativecomplaint alleges various common law and equitable claims, including breach offiduciary duty, gross mismanagement, abuse of control, waste of corporateassets and unjust enrichment, in connection with purported false and misleadingstatements and failures to disclose material information in certain SECfilings, press releases and other public statements from November 1, 2007 toMay 14, 2008.  The derivative plaintiffseeks, among other relief, unspecified damages, injunctive relief, restitution,disgorgement, fees and such other relief as the Court may deem proper. OnAugust 12, 2008, the Court stayed our obligation to respond to the derivativecomplaint pending a denial, if any, of the defendants’ anticipated motion todismiss the amended consolidated class action complaint.

 

We believe that we and theother defendants have substantial legal and factual defenses to the claims andallegations contained in the class action and derivative suit complaints, andwe will pursue these defenses vigorously. There can be no assurance, however,that we will be successful, and an adverse resolution of any of the lawsuitscould have a material adverse effect on our consolidated financial position andresults of operations in the period in which a lawsuit is resolved. Inaddition, although we carry insurance for these types of claims, a judgmentsignificantly in excess of our insurance coverage could materially andadversely affect our financial condition, results of operations and cash flows.We are not presently able to reasonably estimate potential losses, if any,related to the lawsuits.

 

**Item 1A.  Risk Factors.**

 

Weoperate in a rapidly changing environment that involves a number of risks thatcould materially affect our business, financial condition or future results,some of which are beyond our control.  In addition to the otherinformation set forth in this Quarterly Report on Form 10-Q, the risks anduncertainties that we believe are most important for you to consider arediscussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2007.  There are no material changesto the risk factors described in our Annual Report on Form 10-K for theyear ended December 31, 2007, other than changes set forth in ourQuarterly Report on Form 10-Q for the quarterly period ended March 31,2008 and the addition of a risk factor entitled *“We may notreceive the revenues anticipated by our long-term contracts, open marketbidding programs and/or our provision of energy management solutions, which mayresult in actual revenues earned in future periods differing from management’scurrent estimate of contracted revenues to be earned”* to reflectrecent developments in our growth strategy.  Additional risks anduncertainties not presently known to us, which we currently deem immaterial orwhich are similar to those faced by other companies in our industry or businessin general, may also impair our business operations.

 

***We may not receive the revenues anticipated by our long-term contracts,open market bidding programs and/or our provision of energy managementsolutions, which may result in actual revenues earned in future periodsdiffering from management’s current estimate of contracted revenues to beearned.***

 

Contractedrevenues represent our estimate of total payments that we currently expect toearn in connection with providing demand response solutions to grid operatorsand utilities over the course of long-term contracts and pursuant to openmarket bidding programs, as well as providing energy management solutions toour commercial, institutional and industrial end-use customers.  Our estimated contracted revenues from theselong-term contracts, open market bidding programs and our provision of energymanagement solutions are based on contractual terms, open market biddingprogram rules and a number of assumptions, including:

 

·                  ourability to provide our utility and grid operator customers the capacity that wehave committed to provide under long-term contracts and pursuant to open marketbidding programs;

·                  ourcontracts with utility and grid operator customers, and commercial,institutional and industrial end-use customers not being terminated, modifiedor delayed or becoming subject to governmental regulation that could materiallyand adversely affect our interests;

·                  therules and assumed pricing of the various open market bidding programs inwhich we participate remaining unchanged in all material respects;

·                  therate of termination of our commercial, institutional and industrial end-usecustomers under our long-term contracts remaining consistent with ourhistorical average;

·                  theelectricity consumption of our commercial, institutional and industrial end-usecustomers remaining consistent with historical use throughout the term of ourcontracts with such customers; and

·                  ourability to obtain regulatory approval for our long-term contracts with certainutility customers.

 

Anydifferences in these assumptions, other factors and our actual experiences mayresult in actual revenues earned in future periods being significantly lowerthan management’s current estimate of contracted revenues to be earned andcould have a material adverse effect on our business, financial condition andresults of operations.

 

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**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.**

 

(a)      UnregisteredSales of Equity Securities

 

We offered, issued and/orsold the following unregistered securities during the quarter ended June 30,2008:

 

(i)      On June 1, 2008, in connection with our acquisition of 100% of themembership interests of Pinpoint Power DR, LLC, we issued 44,260 shares of ourcommon stock to Thomas E. Atkins.

 

(ii)     On May 1, 2008, in connection with theacquisition of 100% of the membership interests of SRC, we issued 120,000shares of our common stock.

 

The issuance of securitiesdescribed in (i) and (ii) above were deemed to be exempt fromregistration under the Securities Act in reliance on Section 4(2) ofthe Securities Act as transactions by an issuer not involving any publicoffering. The recipients of securities in each such transaction representedtheir intention to acquire the securities for investment only and not with aview to or for sale in connection with any distribution thereof and appropriatelegends were affixed to the share certificates and other instruments issued insuch transactions. The sales of these securities were made without generalsolicitation or advertising.

 

(b)      Useof Proceeds

 

We registered shares of ourcommon stock in connection with our IPO under the Securities Act. Theregistration statement on Form S-1 (File No. 333-140632) filed inconnection with our IPO was declared effective by the SEC on May 17, 2007.Including shares sold pursuant to the exercise by the underwriters of theirover-allotment option, 4,087,500 shares of our common stock were registered andsold in the IPO by us and an additional 225,000 shares of common stock wereregistered and sold by the selling stockholders named in the registrationstatement. All the shares were sold at a price to the public of $26.00 pershare. The net offering proceeds received by us, after deducting underwritingdiscounts and commissions and expenses incurred in connection with the offering,were approximately $95.2 million.  Through June 30, 2008,approximately $11.9 million of the proceeds from our IPO have been used to fundthe operations of our business and for general corporate purposes,approximately $14.3 million have been used to purchase and install equipment,approximately $1.9 have been used to repay indebtedness and approximately $8.2million have been used to fund acquisitions and make payments outstanding onprior acquisitions. As of June 30, 2008, $10.3 million was posted as financialassurance deposits and letter of credit collateral.  The remainder of the net proceeds from theIPO are invested in short-term investment grade securities and money marketaccounts. There has been no material change in the planned use of proceeds fromour IPO as described in our final prospectus filed with the SEC on May 18,2007 pursuant to Rule 424(b).

 

**Item 4.  Submission of Matters toa Vote of Security Holders.**

 

Our annual meeting ofstockholders was held on Friday, May 9, 2008, in Boston, Massachusetts, atwhich the following matters were submitted to a vote of the stockholders:

 

| (a) |   | Votes  regarding the election of the person named below as a class I member to the  board of directors for a three-year term and until his successor has been  duly elected and qualified or until his earlier resignation or removal were  as follows: |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| ** **   | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------|------------|------------|------------|--------------|------------|
| Adam Grosser |       | 16,309,729 |       | 293,087      |       |

 

| (b) |   | Votes  regarding ratification of the appointment of the accounting firm of  Ernst & Young LLP as our independent registered public accounting  firm for the current fiscal year were as follows: |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|
| 16,578,615 |       | 12,278      |       | 11,922          |       |

 

**Item 6.  Exhibits.**

 

| 10.1   |   | Sub-Sublease Agreement by  and between Prosodie Interactive California and EnerNOC, Inc., dated  May 30, 2008.       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                           |
| 10.2@  |   | Form of Restricted  Stock Unit Agreement under the EnerNOC, Inc. 2007 Employee, Director and  Consultant Stock Plan. |
|   |   |                                                                                                                           |
| 10.3@  |   | EnerNOC, Inc.  Non-Employee Director Compensation Policy.                                                                 |

 

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| 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. |

 

----

 @ Management contract, compensatory plan orarrangement.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                       | EnerNOC, Inc. |
|----------------------------|--------------------|
|                       |               |   |
| Date: August 13, 2008 | By:                | /s/ Timothy G. Healy |
|                       |               | Timothy G. Healy |
|                       |               | Chief Executive Officer |
|                       |               | (principal executive  officer) |
|                       |               |   |
| Date: August 13, 2008 | By:                | /s/ Neal C. Isaacson |
|                       |               | Neal C. Isaacson |
|                       |               | Chief Financial Officer |
|                       |               | (principal financial and  accounting officer) |

 

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**Exhibit Index**

 

| **Number** | ** ** | **Description  of Exhibit**                                                                                                                                                                                                                                                                                   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1       |       | Sub-Sublease Agreement by  and between Prosodie Interactive California and EnerNOC, Inc., dated May 30,  2008.                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                          |
| 10.2@      |       | Form of Restricted  Stock Unit Agreement under the EnerNOC, Inc. 2007 Employee, Director and  Consultant Stock Plan.                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                          |
| 10.3@      |       | EnerNOC, Inc.  Non-Employee Director Compensation Policy.                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                          |
| 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. |

 

----

@ Management contract,compensatory plan or arrangement.

 

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