** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**FORM 10-Q/A**

**Amendment No. 1**

**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended June 30, 2007**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from***            *to

**CommissionFile Number: 001-33471**

**EnerNOC,Inc.**

(Exact Name of Registrantas 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, MA**                 | **02110**                          |
| (Address of Principal  Executive Offices)                        | (Zip Code)                         |

 

**(617) 224-9900**

(Registrant’s TelephoneNumber, Including Area Code)

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

Indicate by check mark whether the Registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. (Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act). (Check one):

| Large Accelerated  Filer o   Accelerated Filer o   Non-Accelerated Filer x |
|---------------------------------------------------------------------------------------------------------------|

 

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

There were 18,255,021 shares of the Registrant’scommon stock, $.001 par value per share, outstanding as of August 7, 2007.

 

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**EXPLANATORY NOTE**

** **

This Amendment No. 1 (the “Amended Filing”) tothe Registrant's Quarterly Report on Form 10-Q for the fiscal quarterended June 30, 2007 (the “Original Filing”), originally filed onAugust 10, 2007, is being filed solely to amend (i) the averageweighted number of shares outstanding during the six months ended June 30,2007 to correct a computational error, (ii) the basic and diluted net lossper share attributable to such shares to correct a computational error, and(iii) a non-cash adjustment in the statement of cash flows relating to theissuance of common stock to a related party to correct the inadvertentinclusion of parentheses indicating a negative non-cash effect instead of apositive one.

 

Other than described above, no changes have been madeto any other items in the Original Filing. This Amended Filing does not reflectevents occurring after the date of the Original Filing or modify or updatethose disclosures made pursuant to subsequent events.

 

 

 

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**Table ofContents**

**EnerNOC,Inc.**

**Indexto Form 10-Q**
| ** **                                     | ** ** | ** **                                                                                                                 | ** ** | **Page** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **Part I  -  Financial Information** | ** ** | ** **                                                                                                                 | ** ** |
|                                           |       |                                                                                                                       |       |     |       |
| Item 1.                                   |       | Unaudited Condensed  Consolidated Financial Statements                                                                     |       |     |       |
|                                           |       |                                                                                                                       |       |     |       |
|                                           |       | Condensed  Consolidated Balance Sheets at June 30, 2007 (unaudited) and December 31,  2006                                 |       | 4        |       |
|                                           |       |                                                                                                                       |       |     |       |
|                                           |       | Unaudited  Condensed Consolidated Statements of Operations for the three and six months  ended June 30, 2007 and 2006 |       | 5        |       |
|                                           |       |                                                                                                                       |       |     |       |
|                                           |       | Unaudited  Condensed Consolidated Statements of Cash Flows for the six months ended June  30, 2007 and 2006                |       | 6        |       |
|                                           |       |                                                                                                                       |       |     |       |
|                                           |       | Notes to  Unaudited Condensed Consolidated Financial Statements                                                            |       | 7        |       |
|                                           |       |                                                                                                                       |       |     |       |
| Item 2.                                   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                |       | 13       |       |
|                                           |       |                                                                                                                       |       |     |       |
| Item 3.                                   |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                |       | 20       |       |
|                                           |       |                                                                                                                       |       |     |       |
| Item 4T.                                  |       | Controls and  Procedures                                                                                                   |       | 21       |       |
|                                           |       |                                                                                                                       |       |     |       |
| **Part II -  Other Information**     | ** ** | ** **                                                                                                                 | ** ** |
|                                           |       |                                                                                                                       |       |     |       |
| Item 1A.                                  |       | Risk  Factors                                                                                                              |       | 21       |       |
|                                           |       |                                                                                                                       |       |     |       |
| Item 2.                                   |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               |       | 33       |       |
|                                           |       |                                                                                                                       |       |     |       |
| Item 4.                                        |       | Submission  of Matters to a Vote of Security Holders                                                                       |       | 34       |       |
|                                           |       |                                                                                                                       |       |     |       |
| Item 6.                                   |       | Exhibits                                                                                                                   |       | 34       |       |
|                                           |       | Signatures                                                                                                                 |       | 35       |       |
|                                           |       | Exhibit  Index                                                                                                             |       | 36       |       |

 

 

3

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**PART I — FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**EnerNOC,INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**
| ** **                                                                                                                                                                               | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                               | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                               | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets                                                                                                                                                                           |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                |       | $                       | 99,627     |                        | $          | 9,184 |   |
| Restricted cash                                                                                                                                                                          |       | 2,553                   |       | 510                         |       |
| Accounts  receivable, net allowance for doubtful accounts of $7 at December 31, 2006                                                                                                     |       | 8,081                   |       | 4,447                       |       |
| Deferred costs  of sales                                                                                                                                                                 |       | 1,157                   |       | 410                         |       |
| Prepaid expenses  and other current assets                                                                                                                                               |       | 912                     |       | 328                         |       |
| Total current  assets                                                                                                                                                                    |       | 112,330                 |       | 14,879                      |       |
| Property and  equipment, net                                                                                                                                                             |       | 16,447                  |       | 6,547                       |       |
| Goodwill and  other intangible assets, net                                                                                                                                               |       | 6,033                   |       | 7,132                       |       |
| Deferred  financing costs                                                                                                                                                                |       | 581                     |       | 668                         |       |
| Other assets                                                                                                                                                                             |       | 671                     |       | 724                         |       |
| Total assets                                                                                                                                                                             |       | $                       | 136,062    |                        | $          | 29,950 |   |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                                                                                                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current  liabilities                                                                                                                                                                     |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                         |       | $                       | 4,363      |                        | $          | 1,660 |   |
| Accrued capacity  payments                                                                                                                                                               |       | 7,359                   |       | 5,210                       |       |
| Current portion  of deferred related-party acquisition payments                                                                                                                          |       | 1,968                   |       | 1,989                       |       |
| Accrued payroll  and related expenses                                                                                                                                                    |       | 2,247                   |       | 1,275                       |       |
| Accrued expenses  and other current liabilities                                                                                                                                          |       | 1,492                   |       | 1,215                       |       |
| Deferred revenue                                                                                                                                                                         |       | 2,612                   |       | 971                         |       |
| Current portion  of long-term debt                                                                                                                                                       |       | 2,291                   |       | 1,128                       |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Total current  liabilities                                                                                                                                                               |       | 22,332                  |       | 13,448                      |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Long-term  liabilities                                                                                                                                                                   |       |                    |       |                        |       |
| Long-term debt,  net of current portion                                                                                                                                                  |       | 4,921                   |       | 4,072                       |       |
| Deferred  related-party acquisition payments, net of current portion                                                                                                                     |       | —                  |       | 400                         |       |
| Contingent  consideration provision                                                                                                                                                      |       | 2,247                   |       | 2,247                       |       |
| Deferred revenue                                                                                                                                                                         |       | —                  |       | 420                         |       |
| Redeemable  convertible preferred stock warrant liability                                                                                                                                |       | —                  |       | 606                         |       |
| Other  liabilities                                                                                                                                                                       |       | 144                     |       | 149                         |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Total long-term  liabilities                                                                                                                                                             |       | 7,312                   |       | 7,894                       |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Redeemable  convertible preferred stock                                                                                                                                                  |       |                    |       |                        |       |
| Series A  Redeemable Convertible Preferred Stock, $0.001 par value; 713,118 shares  authorized, issued, and outstanding at December 31, 2006, at redemption value                        |       | —                  |       | 828                         |       |
| Series A-1  Redeemable Convertible Preferred Stock, $0.001 par value; 916,212 shares  authorized, issued, and outstanding at December 31, 2006, at redemption value                      |       | —                  |       | 1,739                       |       |
| Series B  Redeemable Convertible Preferred Stock, $0.001 par value; 1,177,097 shares  authorized, issued and outstanding at December 31, 2006, at redemption value                       |       | —                  |       | 7,685                       |       |
| Series B-1  Redeemable Convertible Preferred Stock, $0.001 par value; 296,632 shares  authorized, 277,778 shares issued, and outstanding at December 31, 2006,  at redemption value |       | —                  |       | 2,691                       |       |
| Series C  Redeemable Convertible Preferred Stock, $0.001 par value; 271,346 shares  authorized, 104,921 shares issued and outstanding at December 31, 2006,  at redemption value    |       | —                  |       | 5,749                       |       |
| Stockholders’  equity (deficit)                                                                                                                                                     |       |                    |       |                        |       |
| Common stock,  $0.001 par value; 50,000,000 shares authorized, 18,228,046 and 4,245,324  shares issued and outstanding at June 30, 2007 and December 31, 2006,  respectively             |       | 18                      |       | 4                           |       |
| Additional  paid-in capital                                                                                                                                                              |       | 128,695                 |       | 771                         |       |
| Redeemable  convertible preferred stock subscription receivable                                                                                                                          |       | —                  |       | (800                        | )          |
| Accumulated  deficit                                                                                                                                                                     |       | (22,295                 | )          | (10,059                     | )          |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Total  stockholders’ equity (deficit)                                                                                                                                               |       | 106,418                 |       | (10,084                     | )          |
| Total  liabilities, redeemable convertible preferred stock and stockholders’ equity                                                                                                 |       | $                       | 136,062    |                        | $          | 29,950 |   |

*See accompanying notes.*

 

4

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**EnerNOC,INC.**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**
| ** **                                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                          | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Revenues                                                            |       | $                                                   | 12,015     |                                              | $          | 4,100 |   | $ | 21,987 |   | $ | 9,214 |   |
| Cost of revenues                                                    |       | 7,910                                               |       | 2,669                                             |       | 14,974 |   | 7,083 |   |
| Gross profit                                                        |       | 4,105                                               |       | 1,431                                             |       | 7,013 |   | 2,131 |   |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Operating  expenses:                                                |       |                                                |       |                                              |       |   |   |   |   |
| Selling and  marketing expenses                                     |       | 4,372                                               |       | 1,214                                             |       | 7,478 |   | 2,087 |   |
| General and  administrative expenses                                |       | 7,907                                               |       | 1,548                                             |       | 11,337 |   | 3,045 |   |
| Research and  development expenses                                  |       | 498                                                 |       | 161                                               |       | 839 |   | 493 |   |
| Total operating  expenses                                           |       | 12,777                                              |       | 2,923                                             |       | 19,654 |   | 5,625 |   |
| Loss from  operations                                               |       | (8,672                                              | )          | (1,492                                            | )          | (12,641 | ) | (3,494 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Interest and  other income                                          |       | 558                                                 |       | 40                                                |       | 828 |   | 91 |   |
| Interest expense                                                    |       | (92                                                 | )          | (71                                               | )          | (207 | ) | (145 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                                            |       | $                                                   | (8,206     | )                                                 | $          | (1,523 | ) | $ | (12,020 | ) | $ | (3,548 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Net loss per  share:                                                |       |                                                |       |                                              |       |   |   |   |   |
| Basic and  diluted (restated) (1)                                   |       | $                                                   | (0.74      | )                                                 | $          | (0.43 | ) | $ | (1.56 | ) | $ | (1.02 | ) |
|                                                                |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average number of basic and diluted shares (restated)  (1) |       | 11,157                                              |       | 3,506                                             |       | 7,688 |   | 3,475 |   |

 

 

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(1)See Note 3.

*See accompanying notes.*

 

5

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**EnerNOC,INC.**

** **

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(inthousands)**
| ** **                                                                     | ** ** | **Six Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                      | ** ** | **2006**                                      | ** ** |
| ** **                                                                     | ** ** | (restated)                                    | ** ** | ** **                                    | ** ** |
| **Cash  flows from operating activities**                                      | ** ** |                                          | ** ** | ** **                                    | ** ** |
| Net loss                                                                       |       | $                                             | (12,020    | )                                             | $          | (3,548 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities    |       |                                          |       |                                          |       |
| Depreciation                                                                   |       | 918                                           |       | 343                                           |       |
| Amortization of  intangibles                                                   |       | 1,099                                         |       | 1,044                                         |       |
| Stock-based  compensation expense                                              |       | 4,320                                         |       | 32                                            |       |
| Non-cash  interest expense                                                     |       | 87                                            |       | —                                        |       |
| Increase (decrease)  in cash from changes in operating assets and liabilities: |       |                                          |       |                                          |       |
| Accounts  receivable                                                           |       | (3,634                                        | )          | (2,988                                        | )          |
| Deferred revenue                                                               |       | 1,221                                         |       | 614                                           |       |
| Prepaid expenses  and other current assets                                     |       | (584                                          | )          | (316                                          | )          |
| Deferred cost of  sales                                                        |       | (747                                          | )          | (232                                          | )          |
| Other assets                                                                   |       | 53                                            |       | (21                                           | )          |
| Accrued capacity  payments                                                     |       | 2,149                                         |       | —                                        |       |
| Other noncurrent  liabilities                                                  |       | (5                                            | )          | (73                                           | )          |
| Accounts payable  and accrued expenses                                         |       | 3,952                                         |       | 1,027                                         |       |
| Net cash used in  operating activities                                         |       | (3,191                                        | )          | (4,118                                        | )          |
|                                                                           |       |                                          |       |                                          |       |
| **Cash  flows from investing activities**                                      | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| Deferred related  party acquisition payment for Pinpoint Power DR LLC          |       | (355                                          | )          | (31                                           | )          |
| Purchase of  eBidenergy, Inc.                                                  |       | —                                        |       | (27                                           | )          |
| Purchase of  Celerity Energy Partners                                          |       | —                                        |       | (3,057                                        | )          |
| Purchases of  property and equipment                                           |       | (10,818                                       | )          | (1,085                                        | )          |
| Net cash used in  investing activities                                         |       | (11,173                                       | )          | (4,200                                        | )          |
|                                                                           |       |                                          |       |                                          |       |
| **Cash  flows from financing activities**                                      | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| Proceeds from  the issuance of common stock, net of issuance costs             |       | 95,159                                        |       | —                                        |       |
| Proceeds from  exercises of stock options                                      |       | 84                                            |       | 2                                             |       |
| Proceeds from  borrowing                                                       |       | 2,500                                         |       | —                                        |       |
| Repayment of  borrowings                                                       |       | (488                                          | )          | (365                                          | )          |
| Increase in  restricted cash                                                   |       | (2,043                                        | )          | —                                        |       |
| Proceeds from  the issuance of preferred stock, net of issuance costs          |       | 9,990                                         |       | 2,630                                         |       |
| Repurchase of  treasury stock                                                  |       | (395                                          | )          | —                                        |       |
| Net cash  provided by financing activities                                     |       | 104,807                                       |       | 2,267                                         |       |
| Net change in  cash and cash equivalents                                       |       | 90,443                                        |       | (6,051                                        | )          |
| Cash and cash  equivalents at beginning of period                              |       | 9,184                                         |       | 9,719                                         |       |
|                                                                           |       |                                          |       |                                          |       |
| Cash and cash  equivalents at end of period                                    |       | $                                             | 99,627     |                                          | $          | 3,668 |   |
|                                                                           |       |                                          |       |                                          |       |
| **Non-cash  financing and investing activities**                               | ** ** | ** **                                    | ** ** | ** **                                    | ** ** |
| Purchase of  fixed assets through a capital lease obligation                   |       | $                                             | —     |                                          | $          | 3 |   |
| Deferred related  party stock issuance for Pinpoint Power DR LLC               |       | $                                             | 66         |                                          | $          | 92 |   |
| Conversion and  net exercise into common stock of preferred stock warrant      |       | $                                             | 606        |                                          | $          | — |   |
| Purchase of  eBidenergy, Inc. through the issuance of common stock             |       | $                                             | —     |                                          | $          | 35 |   |
| Issuance of  common stock to related party                                     |       | $                                             | 395        |                                          | $          | — |   |
| Accretion of  preferred stock issuance costs                                   |       | $                                             | 216        |                                          | $          | 21 |   |

 

*See accompanying notes.*

 

6

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**EnerNOC, INC.**

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

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

**Description of Business**

EnerNOC, Inc. (the Company) is a service companythat was incorporated in Delaware on June 5, 2003. The Company operates ina single segment providing full-service demand response and energy managementsolutions. The Company enables energy users, energy suppliers, systemoperators, and utilities to reduce demand for electricity during periods ofpeak demand or supply shortfalls by proactively shedding noncritical loads,dispatching backup generators, and analyzing real-time data to optimize energyconsumption. The Company’s demand response and energy management solutionsdeliver immediate bottom-line benefits to end-use customers and energysuppliers while helping to create a more reliable and efficient electricitygrid for system operators and utilities.

**Basis of Consolidation**

The unaudited condensed consolidated financial statementsof the Company include the accounts of its wholly-owned subsidiaries andhave been prepared in conformity with accounting principles generally acceptedin the United States (GAAP). Intercompany transactions and balances are eliminatedupon consolidation. In the opinion of the Company’s management, the unauditedcondensed consolidated financial statements include all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of theresults of operations for this period.

The results of operations for the three and six monthsended June 30, 2007 are not necessarily indicative of the results expectedfor the full fiscal year ending December 31, 2007 or for any other fiscalperiod. The accompanying unaudited condensed consolidated financial statementsshould be read in conjunction with the audited consolidated financialstatements for the year ended December 31, 2006 and the footnotes theretoincluded in the Company’s final prospectus dated May 17, 2007.

**Liquidity**

In May 2007, the Company completed an initial publicoffering (IPO) of 4,312,500 shares of common stock at a price of $26.00 pershare, which includes the exercise of the underwriters’ over-allotment optionto purchase 562,500 shares and the sale of 225,000 shares by certain of theCompany’s stockholders. Net proceeds to the Company from the offering wereapproximately $98,800 (net of underwriting discounts and commissions but beforethe deduction of offering expenses). Priorto the IPO, the Company had primarily funded its operations through theissuance of an aggregate of $27,900 in preferred stock and $7,500 in borrowingsunder its loan and security agreement described below. The Company used theseproceeds to fund its operations, to develop its technology for its demandresponse programs, to open new markets and to make acquisitions.

The Company had $99,627 in cashand cash equivalents as of June 30, 2007, compared to $9,184 at December 31,2006. The Company believes that its existing cash and cash equivalents,including the proceeds from its IPO and borrowings under its loan and securityagreement, will be sufficient to meet its anticipated cash needs for at leastthe next 24 months.

**2. Recent Accounting Pronouncements**

In September 2006, the Financial AccountingStandards Board (FASB) issued Statement of Financial Accounting Standards(SFAS) No. 157, *Fair Value Measurements*(SFASNo. 157). This statement defines fair value as used in numerous accountingpronouncements, establishes a framework for measuring fair value in GAAP andexpands disclosure related to the use of fair value measures in financialstatements. SFAS No. 157 does not expand the use of fair value measures infinancial statements, but standardizes its definition and guidance in GAAP. Thestandard emphasizes that fair value is a market-based measurement and notan entity-specific measurement based on an exchange transaction in whichthe entity sells an asset or transfers a liability (exit price). SFASNo. 157 establishes a fair value hierarchy from observable market data asthe highest level to fair value based on an entity’s own fair value assumptionsas the lowest level. SFAS No. 157 is to be effective for the Company’sfinancial statements issued in 2008, however, earlier application isencouraged. The Company does not expect the pronouncement to have a materialimpact on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for Financial Assets and Financial Liabilities*(SFAS 159). SFAS No. 159 provides an entity with the option, at specifiedelection dates, to measure certain financial assets and liabilities and otheritems at fair value, with changes in fair value recognized in earnings as thosechanges occur. SFAS No. 159 also establishes presentation and disclosurerequirements that include displaying the fair value of those assets on the faceof the balance sheet and providing management’s reasons for electing the fairvalue option for each eligible item. The provisions of SFAS No. 159 willbecome effective beginning January 1, 2008. Early adoption is

 

7

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permitted provided that an election is also made toapply the provisions of SFAS No. 157. The Company is currently evaluatingthe impact that SFAS No. 159 may have on its results of operations andfinancial condition.

**3. Net Loss Per Share**

In connection with the preparation of the unauditedfinancial statements, a computational error was identified in the calculationused to compute the weighting of the average shares outstanding included in thecalculation of the basic shares outstanding in connection with the 2.831 forone split of the common stock on May 1, 2007. This resulted in improperly reporting the basic weighted average sharesoutstanding used to compute basic and diluted net loss per share for the sixmonths ended June 30, 2007.  The impactof this error was in an increase of the basic weighted average sharesoutstanding from 6,362,662 to 7,687,756, which decreased by the basic loss pershare by $.33 from ($1.89) to ($1.56) for the six months ended June 30,2007.  The result of the computationalerror had no impact on net loss, financial position, or cash flows in any period.

As a result, the Company has restated its previouslyissued unaudited consolidated financial statements for the six months endedJune 30, 2007.  The consolidatedfinancial statements and the computation for the six months ended June 30, 2007include the effects of this restatement.

Basic net loss per share is computed by dividing net lossby the weighted average number of common shares outstanding for the period.Diluted net loss per share is computed using the weighted average number ofcommon shares outstanding and, when dilutive, potential common shares fromoptions and warrants using the treasury stock method, and from convertiblesecurities using the as-converted method. The calculation of dilutive weightedaverage shares outstanding is as follows:

 
| ** **                                         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
| Basic weighted  average shares outstanding         |       | 11,156,858                       |       | 3,506,246                      |       | 7,687,756 |   | 3,474,833 |   |
| Dilutive effect  of:                               |       |                             |       |                           |       |   |   |   |   |
| Series A  Redeemable Convertible Preferred Stock   |       | 1,042,696                        |       | 2,018,837                      |       | 1,528,070 |   | 2,018,837 |   |
| Series A-1  Redeemable Convertible Preferred Stock |       | 1,339,653                        |       | 2,593,796                      |       | 1,963,260 |   | 2,593,796 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Series B  Redeemable Convertible Preferred Stock   |       | 1,721,110                        |       | 3,332,362                      |       | 2,522,285 |   | 3,332,362 |   |
| Series B-1  Redeemable Convertible Preferred Stock |       | 406,157                          |       | 786,389                        |       | 595,223 |   | 196,597 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Series C  Redeemable Convertible Preferred Stock   |       | 396,923                          |       | —                         |       | 577,962 |   | — |   |
| Outstanding  options and warrants                  |       | 2,854,176                        |       | 1,576,443                      |       | 2,706,569 |   | 1,434,828 |   |
| Dilutive  weighted average shares outstanding      |       | 18,917,573                       |       | 13,814,073                     |       | 17,581,125 |   | 13,051,253 |   |

 

Because the Company reported a net loss for the three and six monthsended June 30, 2007 and June 30, 2006, all potential common shares have beenexcluded from the computation of dilutive net loss per share because the effectwould have been antidilutive.

Included in the calculation of the weighted averagenumber of common shares outstanding at June 30, 2007 and June 30, 2006 are44,260 and 110,211 contingently issuable shares of common stock, respectively.These shares were issuable in connection with the Company’s acquisition ofPinpoint Power DR LLC (PPDR) in 2005. These shares have been included in thecalculation as there are no restrictions for issuance except for the passage oftime.

**4. Property and Equipment**

Property and equipment as of June30, 2007 and December 31, 2006 consisted of the following:
| ** **                                                | ** ** | **Estimated Useful  Life (Years)** | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Computers and  office equipment                           |       | 3                                            |       | $                       | 2,035      |                        | $          | 745 |   |
| Software                                                  |       | 3                                            |       | 2,132                   |       | 117                         |       |
| Demand response  equipment                                |       | 3-5                                          |       | 2,624                   |       | 1,767                       |       |
| Back-up  generators                                       |       | 5                                            |       | 6,401                   |       | 885                         |       |
| Furniture and  fixtures                                   |       | 5                                            |       | 594                     |       | 37                          |       |
| Leasehold  improvements                                   |       | Lesser of the useful  life or lease term     |       | 688                     |       | 14                          |       |
| Assets under  capital lease                               |       | Lesser of the useful  life or lease term     |       | 201                     |       | 200                         |       |
| Construction-in-progress,  including capitalized interest |       |                                         |       | 3,857                   |       | 3,949                       |       |
|                                                      |       |                                         |       | 18,532                  |       | 7,714                       |       |
| Accumulated  depreciation                                 |       |                                         |       | (2,085                  | )          | (1,167                      | )          |
| Property and  equipment, net                              |       |                                         |       | $                       | 16,447     |                        | $          | 6,547 |   |

 

Depreciation expense was $624 and $180 for the threemonths ended June 30, 2007 and June 30, 2006, respectively. For the six monthsended June 30, 2007 and June 30, 2006, depreciation expense was $918 and $343,respectively.  For the three months endedJune 30, 2007 and June 30, 2006, $317 and $128 were included in cost ofrevenue, and $307 and $52 were included in general and administrative expenses,respectively. For the six months ended, June 30, 2007 and June 30, 2006, $511 and$242 were included in cost of revenues and $407 and $101 were included ingeneral and administrative expenses, respectively.

 

 

8

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Software development costs of $279 and $677 for the threeand six months ended June 30, 2007 have been capitalized in accordance withStatement of Position No. 98-1, *Accountingfor the Cost of Computer Software Developed or Obtained for Internal Use*.No amounts were capitalized during the three or six months ended June 30,2006. The Company ceased capitalizing software development costs as of May 31,2007 when the system became operational. These expenses are currentlyrecorded in research and development costs. The capitalized amount is includedas software in property and equipment at June 30, 2007.

Construction-in-progress consists principallyof demand response equipment and back-up generators that have not beenplaced in service. Construction-in-progress at June 30, 2007 andDecember 31, 2006 consisted of the following:
| ** **                 | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Software                   |       | $                       | —     |                        | $          | 786 |   |
| Demand response  equipment |       | 436                     |       | —                      |       |
| Back-up  generators        |       | 3,237                   |       | 3,036                       |       |
| Capitalized  interest      |       | 184                     |       | 127                         |       |
|                       |       | $                       | 3,857      |                        | $          | 3,949 |   |

 

**5. Letters of Credit**

The Company is contingently liable under unused lettersof credit. Included in the June 30, 2007 and December 31, 2006 restrictedcash balances are unused letters of credit in the amount of $2,553 and $510,respectively.

**6. Financing Arrangements**

In November 2006, the Company entered into a loanand security agreement with a debt lender, which loan and security agreementprovides for borrowings of up to $19,500 pursuant to a term loan facility of upto $7,500 and an equipment term loan facility of up to $12,000. The term loanportion of the facility allowed the Company to borrow $7,500 on or beforeMarch 31, 2007. Borrowings under the term loan facility will mature on a36 month amortization schedule. Under the equipment term loan portion ofthe facility, the Company may borrow up to $8,000 on or before June 30,2007 and up to an additional $4,000 as of December 31, 2007, in each case,if the Company is not in default under the terms of the loan and securityagreement at the time of the borrowing. Borrowings made under the equipmentterm loan facility will require repayment over a 36 to 84 monthperiod, depending on the type of equipment financed. Borrowings under the loanand security agreement currently bear interest at (a) the greater of 5.22%or the yield on three-year U.S. Treasury Notes on the date of the loan plus(b) in the case of the term loans, 655 basis points per annum, and in thecase of the equipment loans, 695 basis points per annum. Provisions in the loanand security agreement impose restrictions on the Company’s ability to, amongother things (i) incur more debt; (ii) pay dividends and makedistributions; (iii) redeem or repurchase capital stock; (iv) createliens; (v) enter into transactions with affiliates; and (vi) merge orconsolidate. The loan and security agreement contains other customary covenantsbut does not impose financial ratio maintenance requirements. The agreementpermits the lender to declare an event of default under various circumstances,including if any event occurs that has a material adverse effect on the Company.The borrowings under the term loan facility are collateralized by all assets ofthe Company and the equipment term loan facilities are collateralized by theunderwritten equipment. In connection with the loan and security agreement, theCompany has deferred costs of $74 to execute the agreement, which are amortizedover the loan term.

During 2006, the Company borrowed $5,000 under the termloan facility, which amount matures on February 1, 2010. In connectionwith this amount, on January 1, 2007, the Company began making monthlyinterest-only payments and commencing April 1, 2007, the Company beganmaking monthly principal and interest payments of $168. During March 2007, theCompany borrowed $2,500 under the term loan facility which matures on April 1,2010. In connection with this amount, on April 1, 2007, the Company beganmaking monthly interest-only payments and commencing on May 1, 2007,the Company began making monthly principal and interest payments of $83. As ofJune 30, 2007, no borrowings were outstanding under the equipment loanfacility and $12,000 was available for future borrowing under the equipmentloan facility.

In connection with the term loan financing, the Companyissued warrants to purchase up to $700 of the Series B-1 redeemableconvertible preferred stock. Prior to the IPO, these warrants automaticallyconverted into warrants to purchase 53,372 shares of common stock. The warrantswere exercised using the net exercise method which resulted in the issuance of26,477 shares of common stock. There were no proceeds received by the Companyrelated to this transaction.

**7. Stockholders’ Equity**

**Stock Split**

On May 1, 2007, the Company effected a 2.831 for onesplit of its common stock. All financial information in the financialstatements presented reflects the impact of this split.

**Initial Public Offering**

On May18, 2007, the Company successfully completed its IPO. The IPO consisted of thesale of 4,312,500 shares of common stock at a price of $26.00 per share. Ofthese 4,312,500 shares, 4,087,500 shares were sold in the IPO by the Company,including 562,500 shares

 

 

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sold pursuant to the exercise by the underwriters oftheir over-allotment option, which exercise occurred in May 2007, and 225,000shares were sold by certain stockholders of the Company. Net proceeds to theCompany from the IPO after deducting underwriters’ discounts and commissionsbut before the deduction of offering expenses, were approximately $98,800. Uponclosing of the IPO, all of the Company’s outstanding shares of convertiblepreferred stock converted into an aggregate of 9,499,556 shares of commonstock. Also in connection with the IPO, outstanding warrants to purchase SeriesB-1 redeemable convertible preferred stock were automatically converted intowarrants to purchase 26,477 shares of the Company’s common stock.

Subsequentto the IPO, a significant amount of stock options were exercised. A total of 110,022shares were issued as a result of option exercises from May 18, 2007 throughthe date of this filing.

**8. Stock-Based Compensation**

For the three months ended June 30, 2007 and 2006, theCompany recorded total stock-based compensation expense of $3,724 and $32,respectively.  For the six months endedJune 30, 2007 and 2006, the Company recorded stock-based compensation of $4,320and $32, respectively.  The components ofstock-based compensation expense are disclosed below.

*Stock Grants*

On April 25, 2007, theCompany granted certain of its executives 104,393 shares of common stock thatwere held in treasury at March 31, 2007. The $2,300 fair value of theseshares at the date of grant was recognized in full as compensation expense inthe second quarter of 2007. The shares of common stock were issued at no costto the recipients.

*Stock Options*

Under the Company’s Amended and Restated 2003 StockOption and Incentive Plan (the 2003 Plan), options may be granted to personswho are, at the time of grant, employees, officers, or directors of, orconsultants or advisors to, the Company. The 2003 Plan provides for thegranting of nonstatutory stock options, incentive stock options, stock bonuses,and rights to acquire restricted stock. The provisions of the 2003 Plan limitthe exercise of incentive stock options, but in no case may the exercise periodextend beyond 10 years from the date of grant. Prior to the IPO, the optionprice at the date of grant was determined by the Board and was supported by acontemporaneous valuation by a third party valuation specialist. The 2003 Planexpired upon the IPO in May 2007.

The Company’s 2007 Employee, Director and ConsultantStock Plan (the 2007 Plan and together with the 2003 Plan, the Plans) wasadopted by its Board of Directors in April 2007 and by its stockholders in May2007 and became effective on May 17, 2007. The 2007 Plan provides for the grantof incentive stock options, nonqualified stock options, restricted andunrestricted stock awards and other stock-based awards to eligible employees,directors and consultants of the Company for up to an aggregate maximum of2,600,000 shares of the Company’s common stock. Options granted under the 2007Plan are exercisable for a period determined by the Company, but in no eventlonger than ten years from the date of the grant. Options generally vest ratablyover four years.

On January 1, 2006 the Company adopted SFASNo. 123(R), *Share Based Payment*(SFAS No. 123 (R)). The Company has elected to use the Black-Scholesoption pricing model to determine the weighted average fair value of stockoptions granted under the Plans. In accordance with SFAS No. 123(R), theCompany recognizes the compensation cost of stock-based awards on astraight-line basis over the vesting period of the award. Stock basedcompensation for stock options issued to employees for the three and six monthsended June 30, 2007 was $1,235 and $1,786, respectively. For the three andsix months ended June 30, 2006, the stock based compensation to employees was $24in both periods.

In order to estimate the fair value of options granted in2007, the Company utilized the Black-Scholes option pricing model,utilizing the following assumptions (weighted averages based on grants duringthe period):
| Risk-free  interest rate            |   | 4.6-5.0 | %      |
|-------------------------------------|--------|---------|--------|
| Expected term of  options, in years |   | 6.25    |   |
| Expected annual  volatility         |   | 87      | %      |
| Expected  dividend yield            |   | 0       | %      |

 

Volatility measures the amount that a stock price hasfluctuated or is expected to fluctuate during a period. The Company determinesvolatility based on an analysis of comparable public companies. The risk-freeinterest rate is the rate available as of the option date on zero-coupon U.S.government issues with a remaining term equal to the expected life of theoption. Because the Company does not have a sufficient history to estimate theexpected term, the Company uses SAB No. 107’s simplified method forestimating expected term. The simplified method is based on vesting-tranchesand the contractual life of each grant. The Company has not paid dividends inthe past and does not plan to pay any dividends in the foreseeable future.

The Company accounts for transactions in which servicesare received from non-employees in exchange for equity instruments basedon the fair value of such services received or of the equity instrumentsissued, whichever is more reliably measured, in accordance withSFAS No. 123, *Accounting for Stock-BasedCompensation*, and Emerging Issue Task Force (EITF) No. 96-18, *Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction With Selling, Goods orServices*. The stock-based compensation

 

 

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expense related to stock option grants tonon-employees for the three and six months ended June 30, 2007 wasapproximately $96 and $127, respectively. For the three and six months endedJune 30, 2006, the stock-based compensation to non-employees was $8 in bothperiods.

A summary of the Company’s stock option activity as ofJune 30, 2007 and the stock option activity for all stock option plans duringthe during the six months ended June 30, 2007:
| ** **                                      | ** ** | **Six Months Ended June 30, 2007** | ** ** | ** **                          | ** **              |
|-------------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|-------------------------|
| ** **                                      | ** ** | ** **                                                  | ** ** | ** **                          | ** **              | **Weighted-** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | ** **                                                  | ** ** | ** **                          | ** **              | **Average** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Number of  Options**                                 | ** ** | **Exercise  Price  Per Share** | ** **              | **Exercise  Price  Per Share** | ** ** | **Aggregate  Intrinsic  Value (2)** | ** ** |
| ** **                                      | ** ** | **(in Shares)**                                        | ** ** | ** **                          | ** **              | ** ** | ** ** | ** ** | ** ** |
| Outstanding at  beginning of year               |       | 2,416,706                                                   |       | $                                   | 0.44                    |   |   |   |   |   |
| Granted                                         |       | 862,697                                                     |       |                                |                    |   |   |   |   |
| Exercised                                       |       | (261,249                                                    | )          |                                |                    |   |   |   |   |
| Cancelled                                       |       | (68,579                                                     | )          |                                |                    |   |   |   |   |
| Outstanding at  end of period                   |       | 2,949,575                                                   |       | $                                   | 0.11 - $38.13 |   | $ | 5.25 |   | $ | 96,991 |   |
| Exercisable at  end of period                   |       | 229,822                                                     |       | $                                   | 0.11  - $16.60          |   | $ | 1.78 |   | $ | 8,354 |   |
| Vested of  expected to vest at June 30, 2007(1) |       | 2,677,600                                                   |       | $                                   | 0.11  - $38.13          |   | $ | 5.22 |   | $ | 88,120 |   |

----

(1)             Thisrepresents the number of vested options as of June 30, 2007 plus the number ofunvested options expected to vest as of June 30, 2007 based on the unvestedoptions outstanding at June 30, 2007, adjusted for the estimated forfeiturerate of 10%.

(2)             Theaggregate intrinsic value was calculated based on the positive differencebetween the estimated fair value of the Company’s common stock on June 30, 2007of $38.13 and the exercise price of the underlying options.

The following table summarizes information aboutoutstanding stock options as of June 30, 2007:
| ** **                          | ** ** | **Outstanding as of June 30, 2007** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|
| **Exercise Price Ranges** | ** ** | **Number of  Outstanding  Options**                     | ** ** | **Average  Remaining  Contractual  Life** | ** ** | **Number  Exercisable** | ** ** |
| ** **                          | ** ** | **(in Shares)**                                         | ** ** | **(in Years)** | ** ** | **(in Shares)** | ** ** |
| $0.00-$3.81                         |       | 2,097,069                                                    |       | 8.81 |   | 207,174 |   |
| $3.82-$7.63                         |       | 269,336                                                      |       | 9.61 |   | — |   |
| $7.64-$11.44                        |       | 236,520                                                      |       | 9.75 |   | 8,493 |   |
| $15.25-$19.07                       |       | 146,567                                                      |       | 9.82 |   | 14,155 |   |
| $34.32-$38.13                       |       | 200,083                                                      |       | 10.00 |   | — |   |
| Total                               |       | 2,949,575                                                    |       | 9.11 |   | 229,822 |   |

 

Of the stock options outstanding as of June 30, 2007,2,853,619 options were held by employees and 95,956 options were held bynon-employees. The grant-date fair value of the 862,697 options granted duringthe six months ended June 30, 2007 was $14,617, after the Companyreassessed the fair value of its common stock in connection with its IPOconsiderations. Subsequent to the $1,913 of stock-based compensationexpense recognized in the six months ended June 30, 2007, the amount of stock-basedcompensation expense that may be recognized for outstanding, unvested optionsas of June 30, 2007 was $16,141, which is to be recognized over a weightedaverage period of 3.7 years. The amount that may be recognized into expenseover the next four years is as follows:
| Remainder of  2007 |   | $     | 2,302  |   |
|--------------------|--------|-------|--------|--------|
| 2008               |   | 4,545 |   |
| 2009               |   | 4,427 |   |
| 2010               |   | 4,199 |   |
| 2011               |   | 668   |   |
|               |   | $     | 16,141 |   |
|                    |        |       |        |        |  |

 

 

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*Restricted Stock*

The following table summarizes the Company’s grants ofrestricted stock during the six months ended June 30, 2007:
| ** **                      | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** |
|---------------------------------|------------|----------------------------|------------|-------------------------------------------------------------------------|------------|
| Nonvested at  December 31, 2006 |       | 152,460                    |       | $1.53                                                                   |       |
| Granted                         |       | 42,000                     |       | $38.13                                                                  |       |
| Vested                          |       | (2,000                     | )          | $38.13                                                                  |       |
| Nonvested at  June 30, 2007     |       | 192,460                    |       | $9.14                                                                   |       |

 

All shares underlying awards of restricted stock arerestricted in that they are not transferable until they vest. The shares vestannually over a four year period from the date of issuance, with the exceptionof 2,000 shares issued in 2007 that vested immediately. The fair value of therestricted stock is expensed ratably over the vesting period. The shares ofrestricted stock have been issued at no cost to the recipients, except for the 152,460shares of restricted stock granted in 2006 that were purchased for $0.51 per share.The Company records the proceeds received for unvested shares in accruedexpenses. The amount will be amortized into additional paid-in capital as theyvest. Subject to limited exceptions, if the employee who received therestricted stock leaves the Company prior to the vesting date for any reason,the shares of restricted stock will be forfeited and returned to the Company.The stock-based compensation expense related to restricted stock awardsfor the three and six months ended June 30, 2007 was $93 and $107,respectively. There were no restricted awards granted or outstanding during thesix months ended June 30, 2006. For restricted stock at June 30, 2007, theCompany had $1,719 of stock-based compensation expense which is expectedto be recognized over a weighted-average period of 3.9 years.

**9. Income Taxes**

TheCompany provides for income taxes as set forth in SFAS No. 109, *Accounting for Income Taxes*. Under SFAS No. 109, theliability method is used in accounting for income taxes. Deferred tax assetsand liabilities are determined based on differences between financial reportingand tax bases of assets and liabilities and are measured using the enacted taxrates in effect when the differences are expected to reverse. Deferred taxassets are reduced by a valuation allowance to reflect the uncertaintyassociated with their ultimate realization.

TheCompany adopted FASB Interpretation 48, *Accounting for Uncertaintyin Income Taxes—An Interpretation of Statement 109*(FIN 48), as ofJanuary 1, 2007. The adoption did not have a material impact on theconsolidated financial statements.

**10. Related Party Transactions**

**Deferred Acquisition Payments**

On June 1, 2005, the Companyacquired all of the outstanding membership interests in PPDR from the solemember of PPDR (the Sole Member) in a purchase business combination pursuant toa purchase agreement (Purchase Agreement). Under the Purchase Agreement, theCompany is required to (i) make fixed payments of $5,925 and (ii) issue 303,001shares of the Company’s common stock to the Sole Member. As of June 30, 2007,44,260 shares remain to be issued through May 31, 2008. As part of the PurchaseAgreement, the Company acquired a contract that contains a one-year option toextend, as of May 31, 2008, at the sole discretion of a certain customer. Ifexercised, the Company is obligated to make an additional payment of $2,366 andissue an additional 28,287 shares of the Company’s common stock in connectionwith the Purchase Agreement.

As of June 30, 2007 and December 31, 2006, deferredpayments to the Sole Member and the fair value of the common stock to be issuedto the Sole Member are as follows:
| **At June 30, 2007** | ** ** | **Gross  Payment** | ** ** | **Discount  Payment** | ** ** | **Common  Stock** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|-----------|------------|
| Current  liability                  |       | $                  | 2,043      |                  | $          | 1,924             |       | $         | 44         |   | $ | 1,968 |   |
| Long-term  liability                |       | —             |       | —                |       | —            |       | —    |       |
| Total                               |       | $                  | 2,043      |                  | $          | 1,924             |       | $         | 44         |   | $ | 1,968 |   |
|                                     |            |                    |            |                       |            |                   |            |           |            |  |  |  |  |  |

 
| **At December 31, 2006** | ** ** | **Gross  Payment** | ** ** | **Discount  Payment** | ** ** | **Common  Stock** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|-----------|------------|
| Current  liability                      |       | $                  | 2,023      |                  | $          | 1,923             |       | $         | 66         |   | $ | 1,989 |   |
| Long-term  liability                    |       | 440                |       | 356                   |       | 44                |       | 400       |       |
| Total                                   |       | $                  | 2,463      |                  | $          | 2,279             |       | $         | 110        |   | $ | 2,389 |   |

 

**Contingent Consideration**

As of June 30, 2007 and December 31, 2006, theCompany recorded $2,247 in contingent consideration provisions to the SoleMember as a noncurrent liability since the extension option cannot be exerciseduntil 2008.

 

 

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**11. Industry Segment Information**

Based on qualitative and quantitative criteriaestablished by SFAS No. 131 *Disclosuresabout Segments of an Enterprise and Related Information*, the Companyoperates within one reportable segment.

The Company had certain customers whose revenueindividually represents 10% or more of the Company’s total revenues as follows:

 
| ** ** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------|------------|-----------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** ** | ** ** | **Revenues**                                        | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| Customer 1 |       | $                                                   | 6,223      |   | 51.8 | % | $ | 2,318 |   | 56.5 | % |
| Customer 2 |       | $                                                   | 3,276      |   | 27.3 | % | $ | 868 |   | 21.2 | % |
| Customer 3 |       | $                                                   | 1,228      |   | 10.2 | % | $ | 599 |   | 14.6 | % |
| Total      |       | $                                                   | 10,727     |   | 89.3 | % | $ | 3,785 |   | 92.3 | % |
|            |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |

 
| ** ** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------|------------|---------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** ** | ** ** | **Revenues**                                      | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| Customer 1 |       | $                                                 | 13,530     |   | 61.5 | % | $ | 7,254 |   | 78.7 | % |
| Customer 2 |       | $                                                 | 5,365      |   | 24.4 | % | * |   | * |   |
| Customer 3 |       | *                                                 |       | * |   | * |   | * |   |
| Total      |       | $                                                 | 18,895     |   | 85.9 | % | $ | 7,254 |   | 78.7 | % |
|            |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |

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*              Less than 10% of total Revenue

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*The following discussion should be read with our unaudited financial statements and notes included in Item 1 of this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2007 and 2006, as well as the audited financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2006, included in our final prospectus dated May 17, 2007, as filed with the SEC. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, 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 those terms and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding our results of operations, selling and marketing expenses, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. We assume no obligation to revise or update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth below under this Item 2 — “Management’s Discussion 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. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC.*

**Overview**

We are a leading developer and provider of clean andintelligent power solutions. We use our Network Operations Center, or NOC, toremotely manage and reduce electricity consumption across a network ofcommercial, institutional and industrial customer sites to enable a moreinformation-based and responsive, or intelligent, electric power grid.Our customers are electric power grid operators and utilities, as well ascommercial, institutional and industrial end-users of electricity. Ourdemand response and energy management solutions help optimize the balance ofelectric supply and demand and create a lower risk and more environmentallysound alternative to building additional power plants and transmission lines.Grid operators and utilities pay us a stream of recurring cash flows formanaging demand response capacity that we share with participating end-usecustomers. We receive most of our revenues from grid operators and utilitiesand we make payments to end-users of electricity for both contracting toreduce electricity usage and actually doing so when called upon. In doing so,we establish a base of installed users for an expanding portfolio of technology-enabledenergy management solutions.

Our customer base has grown from 19 commercial,institutional and industrial customers with 70 sites in our network at the endof 2004 to 595 end-use customers with approximately 1,852 sites in ournetwork as of June 30, 2007. The demand response capacity we managethrough our network has grown from 10 megawatts, or MW, at the end of 2004to approximately 756 MW as of June 30, 2007. In addition, as ofJune 30, 2007, we have entered into two new utility contracts which aresubject to regulatory approval which enable us to enroll up to an additional55 MW of demand response capacity.

 

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Wecontinue to devote substantially all of our efforts toward the sale of ourdemand response and energy management solutions. We have incurred losses of$22.3 million from inception to June 30, 2007. Our net losses were $5.8million for the year ended December 31, 2006 and $12.0 million for the sixmonths ended June 30, 2007.

On May 23, 2007, we completed an initial publicoffering, or IPO, of 4,312,500 shares of common stock at a price of $26.00 pershare, which includes the exercise of the underwriters’ over-allotment optionto purchase 562,500 shares and the sale of 225,000 by certain of ourstockholders. Net proceeds to us from the offering were approximately $98.8million (net of underwriting discounts and commissions but before the deductionof offering expenses.)

We made three acquisitions through December 31,2006. In June 2005, we acquired Pinpoint Power DR, the demand responsebusiness of Pinpoint Power LLC. This acquisition increased our base of end-usecustomers and capacity under management in the New England region. To furtherstrengthen our technology platform, we acquired certain assets and obligationsof eBidenergy, Inc. from Trillium Capital Partners LLC in February 2006.In May 2006, we acquired substantially all of the assets of CelerityEnergy Partners LLC, a demand response provider for grid operators andutilities, including all of the membership interests in Celerity EnergyPartners San Diego LLC. This acquisition increased our base of end-usecustomers and capacity under management in California.

**Revenues and Expense Components**

***Revenues***

We derive recurring revenues from the sale of our demandresponse and energy management solutions. Our revenues from our demand responsesolutions consist primarily of capacity and energy payments. In certain marketswe enter into long-term capacity contracts with grid operators and utilities,generally ranging from three to 10 years in duration, to deploy our demandresponse solutions. In addition, we derive revenues from demand responsecapacity we make available in open market programs, which are open marketbidding opportunities established by grid operators or utilities. In these openmarket programs, grid operators and utilities seek bids from companies such asours to provide demand response capacity based on prices offered in competitivebidding. These opportunities are generally characterized by flexible capacitycommitments and prices that vary by month.

Where we have a long-term contract, we receiveperiodic capacity payments, which may vary monthly or seasonally, based uponenrolled capacity and predetermined payment rates. Where we operate in openmarkets, our revenues from demand response capacity payments generally varymonth-to-month based upon our enrolled capacity and the market payment rate.Under both long-term contracts and open market programs, we receivecapacity payments regardless of whether we are called upon to reduce demand forelectricity from the electric power grid. At least once per year we demonstrateour capacity either through a demand response event or a measurement andverification test. This demonstrated capacity is typically used to calculatethe continuing periodic capacity payments to be made to us until the nextdemand response event or test establishes a new demonstrated capacity amount.In most cases, we also receive a second type of payment for the amount ofenergy usage we actually curtail from the grid; we call this an energy payment.The energy payment is based upon the amount of energy usage we actually reducefrom the electricity grid in kilowatt hours during the demand response event.

In accordance with SAB No. 101, *Revenue Recognition in Financial Statements,*asamended by SAB No. 104, *Revenue Recognition*(SAB No. 104), in all of our arrangements, we do not recognize any revenuesuntil we can determine that persuasive evidence of an arrangement exists,delivery has occurred, the fee is fixed or determinable, and we deem collectionto be probable. As the program rules may differ for each contract and/or regionwhere we operate, we assess whether or not we have met the specific deliveryrequirements and defer revenues as necessary. In accordance with SAB No. 104,we recognize demand response revenues when we have provided verification to thegrid operator or utility of our ability to deliver the committed capacity underthe agreement. Committed capacity is verified through the results of an actualdemand response event or a measurement and verification test. Once the capacityamount has been verified, the revenues are recognized and future revenuesbecome fixed and determinable and are recognized monthly until the nextverification event. In subsequent verification events, if our verified capacityis below the previously verified amount, the grid operator or utility willreduce future payments based on the adjusted verified capacity amounts. Thepayments received from the customer can be decreased or increased, up to thecommitted capacity amounts under the agreement, in connection with subsequentverification events. Revenues recognized between demand response events ortests are not subject to penalty or customer refund.

Our energy management solutions include demand responseaudits where we evaluate end-use customers’ energy utilization and operatingflexibility to determine potential savings opportunities from implementingdemand response, conserving energy and limiting peak demand. We receive a feefrom our electric grid operator and utility customers for each audit typicallybased upon a rate times the amount of kilowatts, or kW, that we identify thatcan be reduced from the electric power grid. We also use our PowerTrak platformto deliver energy analytics and control, energy procurement services andemissions tracking and trading support. We generally receive either asubscription-based fee or a percentage savings fee for these energymanagement solutions. We have yet to earn substantial revenues from theseenergy management solutions.

A majority of our revenues have been generated fromcontracts with, and open market sales to, ISO New England Inc., a gridoperator customer. This customer accounted for 51.8% and 56.5% our totalrevenues for the three months ended June 30, 2007 and 2006, respectivelyand 61.5% and 78.7% for the six months ended June 30, 2007 and 2006,respectively. Moreover, revenues from our three largest grid operator andutility customers represented approximately 89.3% and 92.3% of our totalrevenues during the three months ended June 30, 2007 and 2006,respectively. For the six months ended June 30, 2007 and 2006, revenues fromour three largest grid operator and utility customers represented

 

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91.5% and 94.7%, respectively. The termination ofthese contracts or key customer relationships could have a material adverseeffect on our business. However, we anticipate that our dependence on thesecustomer relationships will decrease as we expand further into existinggeographic markets and continue to extend our network to encompass new markets.

Less than half of our revenues are derived from threefixed price contracts, one with Connecticut Light and Power Company and twowith ISO New England Inc. For the three months ended June 30, 2007, thesecontracts accounted for approximately 27.3%, 16.0% and 5.6%, respectively, ofour total revenues. For the six months ended June 30, 2007, these contractsaccounted for approximately 30.6%, 11.8% and 5.7%, respectively, of our totalrevenues. Although we are regularly in discussion with our customers to extendour existing contracts, the three major contracts described above expire in2008. The contracts with ISO New England Inc. provide for an extension of itsterm by one year at the option of ISO New England Inc. Under one of thecontracts, the amount that we are paid per MW of committed capacity fluctuatesbased on the month for which payment is made, with the amount per MW beinghigher during the summer months of June through September than during themonths of January through May and October through December, which are known asthe shoulder months.

***Cost of Revenues***

Cost of revenues for our demand response solutionsconsists of payments we make to our commercial, institutional and industrialcustomers for their participation in our demand response network. We generallyenter into one to five year contracts with our end-use customers under which wedeliver recurring cash payments to them for the capacity they commit to makeavailable on demand. We also generally make an additional payment when acustomer reduces consumption of energy from the electric power grid. Theequipment and installation costs for our devices at our commercial,institutional and industrial customer sites are capitalized and depreciatedover the lesser of the remaining term of the contract or the estimated usefullife of the equipment and this depreciation is also reflected in cost ofrevenues. When services have been provided, but the revenue associated with theagreement have been deferred as a result of not meeting the revenue recognitioncriteria required by SAB No. 104, we also defer the related direct costsof revenues for the service.

***Gross Profit***

Our gross profit has been, and will be, affected by manyfactors, including (a) the demand for our demand response and energymanagement solutions, (b) the selling price of our solutions, (c) ourcost of revenues, (d) the introduction of new clean and intelligent powersolutions and (e) our ability to open and enter new markets/regions andexpand deeper into markets we already serve.

***Operating Expenses***

Operating expenses consist of selling and marketing,general and administrative, and research and development expenses. Personnel-relatedcosts are the most significant component of each of these expense categories.We grew from 65 employees at June 30, 2006 to 161 employees at June 30, 2007. Weexpect to continue to hire employees to support our growth.

Selling and marketing expenses consist primarily of(a) salaries and related personnel costs, (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 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 selling andmarketing expenses to decrease as a percentage of total annual revenues as weleverage our current sales and marketing personnel.

General and administrative expenses consist primarily of(a) salaries and related personnel costs related to our executive,finance, human resource, information technology and operations organizations,(b) facilities expenses, (c) accounting and legal professional fees,and (d) other related overhead. We expect general and administrativeexpenses to continue to increase in absolute dollar terms for the foreseeablefuture as we invest in infrastructure to support continued growth and incuradditional expenses related to being a public company, including increasedaudit and legal professional fees, costs of compliance with securities andother regulations, investor relations expenses, and higher insurance premiums.

Research and development expenses consist primarily of(a) salaries and related personnel costs related to our engineeringorganization, (b) payments to suppliers for design and consultingservices, (c) costs relating to the design and development of newsolutions and enhancement of existing solutions, (d) quality assurance andtesting, and (e) other related overhead. During 2006 and throughMay 31, 2007, we have capitalized internal software and development costsof $1.5 million in accordance with Statement of Position 98-1, *Accounting for the Cost of Computer SoftwareDeveloped or Obtained for Internal Use*, and the amount is includedas software in property and equipment at June 30, 2007. We intend tocontinue to invest in our research and development efforts. We expect researchand development expenses to increase in absolute dollar terms for theforeseeable future and to decrease as a percentage of total revenues in thelong term.

***Stock-BasedCompensation***

Effective as of January 1, 2006, we adopted therequirements of Statement of Financial Accounting Standards (SFAS)No. 123(R), *Share Based Payment* (SFASNo. 123(R)). SFAS No. 123(R) addresses all forms of share-basedpayment awards, including shares issued under employee stock purchase plans,stock options, restricted stock and stock appreciation rights. SFASNo. 123(R) requires us to expense share-based payment awards withcompensation cost for share-based payment transactions measured at fairvalue. We continue to evaluate the effect that the adoption of SFASNo. 123(R) will have on our financial position and results of operations.We currently expect that our adoption of SFAS No. 123(R) will affect ouroperating results in future periods. For the three and six months endedJune 30, 2007, we recorded stock-based compensation expenses ofapproximately $3.7 million and $4.3 million, respectively, in connection withshare-based payment awards to employees and non-employees. Includedwithin these amounts is $2.3 million in compensation expense associated with agrant that we made to our chief executive officer and our president in April

 

 

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2007. With respect to grants through June 30,2007, a future expense of non-vested options of approximately $16.1 millionis expected to be recognized over a weighted-average period of3.7 years. For restricted stock at June 30, 2007, the Company had $1.7million of stock-based compensation expense which is expected to berecognized over a weighted-average period of 3.9 years. See Footnote 8, “StockBased Compensation,” to the Unaudited Condensed Consolidated FinancialStatements for further discussion regarding stock options.

***Interest and OtherIncome (Expense), Net***

Interest and other income (expense) consists primarily ofinterest income earned on cash balances. We historically have invested our cashin money market funds. Interest and other income (expense) includes interestexpense on our debt facilities.

**Consolidated Results of Operations**

***Three and Six Months EndedJune 30, 2007 Compared to the Three and Six Months Ended June 30,2006***

***Revenues***

The following table summarizes our revenues for the threeand six months ended June 30, 2007 and 2006 (dollars in thousands):

| ** **                   | ** ** | **Three Months  Ended  June 30, 2007** | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Percentage  Change** | ** ** |
|------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------|------------|
| Revenues:                    |       |                                                  |       |                                                  |       |                   |       |
| Demand response  solutions   |       | $                                                     | 11,910     |                                                  | $          | 4,100                  |       | 190.5 | % |
| Energy  management solutions |       | 105                                                   |       | —                                                |       | —                 |       |
| Total revenues               |       | $                                                     | 12,015     |                                                  | $          | 4,100                  |       | 193.1 | % |

 

| ** **                   | ** ** | **Six Months  Ended  June 30, 2007** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** | **Percentage  Change** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|------------------------|------------|
| Revenues:                    |       |                                                |       |                                                |       |                   |       |
| Demand response  solutions   |       | $                                                   | 21,514     |                                                | $          | 9,138                  |       | 135.4 | % |
| Energy  management solutions |       | 473                                                 |       | 76                                                  |       | 522.4                  | %          |
| Total revenues               |       | $                                                   | 21,987     |                                                | $          | 9,214                  |       | 138.6 | % |

 

For the three months ended June 30, 2007, we hadrevenues of $12.0 million compared to $4.1 million for the three monthsended June 30, 2006, an increase of $7.9 million, or 193.1%.

For the six months ended June 30, 2007, we hadrevenues of $22.0 million compared to $9.2 million for the six monthsended June 30, 2006, an increase of $12.8 million, or 138.6%.

Our demand response solutions revenues were$11.9 million for the three months ended June 30, 2007 compared to$4.1 million for the three months ended June 30, 2006, an increase of $7.8million, or 190.5%. For the six months ended June 30, 2007, our demand responsesolutions revenues were $21.5 million, compared to $9.1 million for the sixmonths ended June 30, 2006, an increase of $12.4 million, or 135.4%. During thethree and six months ended June 30, 2007, we increased our capacity undermanagement in all operating regions including enrolling new end-use customersin our demand response programs. As of June 30, 2007, we had approximately756 MW of electric capacity under management compared to 152 MW of electriccapacity as of June 30, 2006.

Our energy management solutions revenues were $0.1million for the three months ended June 30, 2007, compared to $0 for thethree months ended June 30, 2006, For the six months ended June 30, 2007,our energy management solutions revenues were $0.5 million compared to $0.1million for the six months ended June 30, 2006 due to an increase in consultingengagements and the initiation of our energy efficiency and procurement solutions.

***Gross Profit and GrossMargin***

The following tables summarize our gross profit and grossmargin percentages for our demand response solutions for the three and sixmonths ended June 30, 2007 and 2006 (dollars in thousands):

 

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| **Three Months Ended June 30,** | ** ** |
|-----------------------------------------------------|------------|
| **2007**                                            | ** ** | **2006** | ** ** |
| **Gross Profit**                                    | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| $                                                   | 4,105      |   | 34.2 | % | $ | 1,431 |   | 34.9 | % |
|                                                |       |   |   |   |   |   |   |
| **Six  Months Ended June 30,**                      | ** ** |
| **2007**                                            | ** ** | **2006** | ** ** |
| **Gross Profit**                                    | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| $                                                   | 7,013      |   | 31.9 | % | $ | 2,131 |   | 23.1 | % |

 

Our gross profit was $4.1 million for the three monthsended June 30, 2007 compared to $1.4 million for the three months endedJune 30, 2006, an increase of $2.7 million, or 186.9%. For the sixmonths ended June 30, 2007, our gross profit was $7.0 million compared to $2.1million for the six months ended June 30, 2006, an increase of $4.9 million, or229.1%. Our gross margin was 34.2% for the three months ended June 30, 2007compared to 34.9% for the three months ended June 30, 2006. The decrease in thegross margin percentage for the second quarter of 2006 is primarily due to achange in the mix of demand response programs in which we participated. For thesix months ended June 30, 2007, our gross margin increased as a percentage to31.9% compared to 23.1% for the same period in 2006. The increase in the grossmargin percentage is primarily due to ISO New England Inc. not running atemporary Demand Response Winter Supplemental program in 2007. The program in2006 was in response to an anticipated shortage in natural gas resulting fromHurricanes Katrina and Rita. The program ran from December 2005 through March2006. Due to the short-term nature of the program, we made payments toour commercial, institutional and industrial customers for their participationthat were higher than those we offer in most of our long term programsresulting in lower gross margins associated with the program.

***Operating Expenses***

The following tables summarize our operating expenses forthe three and six months ended June 30, 2007 and 2006 (dollars inthousands):
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2007**                                            | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Operating  Expenses:                 |       |                                                |       |       |       |   |   |
| Selling and  marketing expenses      |       | $                                                   | 4,372      |       | $          | 1,214 |   | 260.1 | % |
| General and  administrative expenses |       | 7,907                                               |       | 1,548      |       | 410.8 | % |
| Research and  development expenses   |       | 498                                                 |       | 161        |       | 209.3 | % |
| Total                                |       | $                                                   | 12,777     |       | $          | 2,923 |   | 337.1 | % |

 
| ** **                           | ** ** | **Six Months Ended June 30,** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|------------|------------|
| ** **                           | ** ** | **2007**                                          | ** ** | **2006**   | ** ** | **Percentage  Change** | ** ** |
| Operating  Expenses:                 |       |                                              |       |       |       |   |   |
| Selling and marketing  expenses      |       | $                                                 | 7,478      |       | $          | 2,087 |   | 258.3 | % |
| General and  administrative expenses |       | 11,337                                            |       | 3,045      |       | 272.3 | % |
| Research and  development expenses   |       | 839                                               |       | 493        |       | 70.2 | % |
| Total                                |       | $                                                 | 19,654     |       | $          | 5,625 |   | 249.4 | % |

 

***Selling and MarketingExpenses***

Selling and marketing expenses were $4.4 million for thethree months ended June 30, 2007 compared to $1.2 million for thethree months ended June 30, 2006, an increase of $3.2 million, or 260.1%. Forthe six months ended June 30, 2007, selling and marketing expenses were $7.5 million,compared to $2.1 million for the six months ended June 30, 2006, an increase of$5.4 million or 258.3%. During the three and six months ended June 30, 2007,the increases in expenses were primarily driven by the costs associated with anincrease in the number of employees from 24 at June 30, 2006 to 59 at June 30,2007. Stock-based compensation expense for the three and six months ended June30, 2007, increased $0.4 million and $0.7 million, respectively, when comparedto the same periods in 2006.

***General andAdministrative Expenses***

General and administrative expenses were $7.9 million forthe three months ended June 30, 2007 compared to $1.5 million for thethree months ended June 30, 2006, an increase of $6.4 million, or410.8%. For the six months ended June 30, 2007, general and administrativeexpenses were $11.3 million compared to $3.0 million for the six months endedJune 30, 2006, an increase of $8.3 million, or 272.3%. During the three and sixmonths ended June 30, 2007, the increases in expenses were primarily due tocosts associated with an increase in the number of employees

 

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from 30 at June 30, 2006 to 81 at June 30, 2007, aswell as to greater costs associated with being a public company. Stock-basedcompensation expense for the three and six months ended June 30, 2007,increased $3.3 million and $3.5 million, respectively, when comparedto the same periods in 2006. Included in the stock-based compensation duringthe second quarter of 2007 is $2.3 million related to stock-grants stockgranted to certain of our executives which was recognized in full ascompensation expense.

***Research and Development Expenses***

Research and development expenses were $0.5 million forthe three months ended June 30, 2007 compared to $0.2 million for thethree months ended June 30, 2006, an increase of $0.3 million, or 209.3%.For the six months ended June 30, 2007, research and development expenses were$0.8 million compared to $0.5 million for the six months ended June 30, 2006,an increase of $0.3 million, or 70.2%. During the three and six months endedJune 30, 2007, the increases in expenses were primarily due to costs associatedwith an increase in the number of employees from 11 at June 30, 2006 to 21 atJune 30, 2007. Stock-based compensation expense for the three and six monthsended June 30, 2007 increased $63 and $104, respectively, when compared to thesame periods in 2006. Expense increases for the three and six months ended June30, 2007 were slightly offset by capitalized internal software and developmentcosts of $0.3 million and $0.7 million, respectively. On May 31, 2007, weceased capitalizing internal software and development costs as the asset wasput into service.

***Interest and OtherIncome (Expense), Net***

Net interest and other income was $0.5 million for thethree months ended June 30, 2007 compared to net interest and otherexpense of $31,000 for the three months ended June 30, 2006. For the sixmonths ended June 30, 2007, net interest and other income was $0.6 millioncompared to net interest and other expense of $54,000 for the six months endedJune 30, 2006. The changes in the three and six months ended June 30, 2007 ascompared to June 30, 2006 are primarily due to interest income earned on theproceeds from our IPO, partially offset by an increase in interest expense onour outstanding debt.

***Income Taxes***

No provision for income taxes was recorded for either thethree or six month periods ended June 30, 2007 or 2006. We provided a fullvaluation allowance for our deferred tax assets because the realization of anyfuture tax benefits could not be sufficiently assured as of June 30, 2007 or2006.

**Liquidity and Capital Resources**

***Overview***

In May 2007, we completed an initial public offeringof 4,312,500 shares of common stock at a price of $26.00 per share, whichincludes the exercise of the underwriters’ over-allotment option to purchase562,500 shares and the sale of 225,000 shares by certain of our stockholders.Net proceeds to us from the offering were approximately $98.8 million (net ofunderwriting discounts and commissions but before the deduction of offeringexpenses). Prior to our IPO, we primarilyfunded our operations through the issuance of an aggregate of$27.9 million in preferred stock and $7.5 million in borrowings under ourloan and security agreement. We used these proceeds to fund our operations, todevelop our technology for our demand response programs, to open new marketsand for acquisitions.

We had approximately $99.6million in cash and cash equivalents as of June 30, 2007, compared to $9.2million at December 31, 2006. We believe that our existing cash and cashequivalents, including the net proceeds from our IPO and borrowings under ourloan and security agreement, will be sufficient to meet our anticipated cashneeds for at least the next 24 months.

***Cash Flows***

The following table summarizes our cash flows for the sixmonths ended June 30, 2007 and 2006 (dollars in thousands):
| ** **                                            | ** ** | **Six Months  Ended  June 30,  2007** | ** ** | **Six Months  Ended  June 30,  2006** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                            | ** ** | **(In thousands)**                         | ** ** |
| Cash flows used  in operating activities              |       | $                                               | (3,191     | )                                               | $          | (4,118 | ) |
| Cash flows used  in investing activities              |       | (11,173                                         | )          | (4,200                                          | )          |
| Cash flows  provided by financing activities          |       | 104,807                                         |       | 2,267                                           |       |
| Net increase  (decrease) in cash and cash equivalents |       | $                                               | 90,443     |                                            | $          | (6,051 | ) |

 

 

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***Cash Flows Used inOperating Activities***

Cash used in operating activities primarily consists ofnet income (loss) adjusted for certain non-cash items includingdepreciation and amortization, stock-based compensation expenses, and theeffect of changes in working capital and other activities.

Cash used in operating activities in the six months endedJune 30, 2007 was $3.2 million and consisted of a $12.0 million netloss offset by $6.4 million of non-cash items, consisting primarily ofdepreciation and amortization and stock-based compensation charges, and$2.4 million of net cash used for working capital purposes and otheractivities. Cash used for working capital and other activities primarilyreflected a $4.0 million increase in accounts payable and accruedexpenses, an increase in accrued capacity payments of $2.1 million and anincrease in deferred revenue of $1.2 million as our operations continuedto grow, which were partially offset by a $3.6 million increase inaccounts receivable attributable to the significant increase in revenues and a$0.7 million increase in deferred costs of sales.

Cash used in operating activities ended June 30, 2006 was$4.1 million and consisted of a $3.5 million net loss offset by$1.4 million of non-cash items, consisting primarily of depreciationand amortization and stock-based compensation charges and $2.0 million ofnet cash used by working capital and other activities. Cash used by workingcapital and other activities primarily reflected a $1.0 million increasein accounts payable and accrued expenses as our operations continued to grow,and a $0.6 million increase in deferred revenue as new and untestedcapacity was added, which increases were offset by a $3.0 million increase inaccounts receivable attributable to the significant increase in revenues, and a$0.6 million increase in deferred cost of sales and prepaid expenses andother assets.

***Cash Flows Used inInvesting Activities***

Cash used in investing activities was $11.2 millionand $4.2 million for the six months ended June 30, 2007 and 2006,respectively. Our principal cash investments related to installation servicesused to build out and expand our demand response programs, purchases of propertyand equipment, the cash portion of the purchase price for our acquisition ofPinpoint Power DR, the purchase of the assets of eBidenergy Inc, and thepurchase of Celerity Energy Partners.

***Cash Flows Provided byFinancing Activities***

Cash flows provided by financing activities were $104.8million and cash used in financing activities were $2.3 million for the sixmonths ended June 30, 2007 and 2006, respectively. Cash flows provided byfinancing activities consisted of the following:

*EquityFinancing Activities*

In May 2007, we completed an initial public offeringof 4,312,500 shares of common stock at a price of $26.00 per share, whichincludes the exercise of the underwriters’ over-allotment option to purchase562,500 shares and the sale of 225,000 shares by certain of our stockholders.Net proceeds to us from the offering were approximately $98.8 million (net ofunderwriting discounts and commissions and but before the deduction of offeringexpenses). In January 2007, we raised $10 million of proceeds through sales ofour Series C Convertible Preferred Stock. In May 2006, we raised $2.6 millionof proceeds through sales of our Series B-1 Convertible Preferred Stock. In addition, we received approximately $84,000and $2,000 from exercises of common stock options during the six months endedJune 30, 2007 and June 30, 2006, respectively.

In February 2007, we repurchased104,393 shares of our common stock for $0.4 million and during the sixmonths ended June 30, 2007 we increased our restricted cash by$2.0 million and incurred $3.6 million of costs associated with the filingof our IPO.

*CreditFacility Borrowings*

For the six months ended June 30, 2006 we made $365 ofscheduled principal payments on our outstanding debt. In November 2006, weentered into a new loan agreement. During the six months ended June 30, 2007 weborrowed $2.5 million under the agreement and made scheduled principal paymentson our outstanding debt and capital lease obligations of $488.

 

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**CapitalSpending**

We have made capital expenditures primarily for generalcorporate purposes to support our growth and for equipment installation relatedto our demand response programs. Our capital expenditures totaled$10.8 million and $1.0 million for the six months ended June 30, 2007 and2006. Under certain of our contracts we are required to make capitalexpenditures of $4.0 million to $6.0 million related to environmentalcontrol facilities. Most of those expenditures are expected to be made in 2007and the first half of 2008, and we do not expect to make additional capitalexpenditures in connection with those contracts unless our capacity commitmentis expanded under the contracts.

**Contractual Obligations**

Thedisclosures relating to our contractual obligations in our final prospectusdated May 17, 2007, which is on file with the SEC, have not materially changedsince we filed that prospectus.

**Off-BalanceSheet Arrangements**

We have no off-balance sheet arrangements other thanletters of credit issued in the ordinary course of business.

**Application of Critical AccountingPolicies and Use of Estimates**

Our financial statements are prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires that we make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances. We evaluate ourestimates and assumptions on an ongoing basis. Our actual results may differsignificantly from these estimates under different assumptions or conditions.There have been no material changes to these estimates during the secondquarter of 2007. For a detailed explanation of the judgments made in theseareas, refer to “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” within our final prospectus dated May 17, 2007,which is on file with the SEC.

**Item 3.  Quantitative and Qualitative Disclosure AboutMarket Risk**

***Foreign Exchange Risk***

We face minimal exposureto adverse movements in foreign currency exchange rates.

***Interest Rate Risk***

As of June 30, 2007, all of our $7.5 million ofoutstanding debt was at floating interest rates. An increase of 1.0% in theprime rate or the three-month LIBOR rate would result in an increase in ourinterest expense of approximately $63 per year.

As ourinvestments are made with highlyrated, short-term securities, we are not anticipating any significant impact inthe short term from a change in interest rates.

 

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**Item 4T.  Controls and Procedures**

***Evaluation of Disclosure Controls andProcedures***

Our management, with the participation of ourchief executive officer and chief financial officer, evaluated theeffectiveness of the Company’s disclosure controls and procedures as of June 30,2007. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,or the Exchange Act, means controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by a company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial 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, 2007, ourchief executive officer and chief financial officer concluded that, as of suchdate, our disclosure controls and procedures were effective at the reasonableassurance level.

***Internal Controlover Financial Reporting***

No change in our internal control overfinancial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the fiscal quarter ended June 30, 2007,which has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting.

**PART II — OTHER INFORMATION**

**Item 1A.  Risk Factors**

*An investment in our common stockinvolves a high degree of risk. You should carefully read and consider therisks and uncertainties described below together with the other informationcontained in this Quarterly Report on Form 10-Q, including our financialstatements and the notes thereto and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” before making an investmentdecision. If any of these risks actually occurs, our business, financialcondition, results of operations, and future growth prospects may suffer. As aresult, the trading price of our common stock could decline, and you may loseall or part of your investment.*

The following riskfactors restate and supersede the risk factors previously disclosed in ourfinal prospectus dated May 17, 2007, which is on file with the SEC.

**Risks Related to Our Business**

***We have incurred net operating losses sinceour inception, and we may continue to incur net operating losses in the futureand may never reach profitability.***

Ournet operating losses in 2004, 2005 and 2006 were $1.9 million,$1.7 million and $5.8 million, respectively. Our net operating loss forthe three and six months ended June 30, 2007 was $8.2 million and$12.0 million, respectively. We have not achieved profitability for anycalendar year, although we have for certain quarters, and we expect to continueto incur operating losses for the foreseeable future. As of June 30, 2007,we had an accumulated deficit of $22.3 million. Initially, our operating losseswere principally driven by start-up costs and the costs of developing ourtechnology, which included research and development. More recently, our netoperating losses have been principally driven by selling and marketing, andgeneral and administrative expenses. As we seek to grow our revenues andcustomer base, we plan to continue to expand our demand response and energymanagement solutions, which will require increased selling and marketing, andresearch and development expenses. These increased operating costs may cause usto incur net losses for the foreseeable future, and there can be no assurancethat we will be able to grow our revenues, sustain the growth rate of our revenues,expand our customer base or become profitable. Furthermore, these expenses arenot the only factors that may contribute to our net losses. For example,interest expense on our currently outstanding debt and on any debt that weincur in the future could contribute to our net losses. As a result, even if wesignificantly increase our revenues, we may continue to incur net losses in thefuture. If we fail to achieve profitability, the market price of our commonstock could decline substantially.

***We have a limited operating history in anemerging market, which may make it difficult to evaluate our business andprospects, and may expose us to increased risks and uncertainties.***

Webegan operating as a New Hampshire limited liability company inDecember 2001, and were incorporated as a Delaware corporation inJune 2003. We first began generating revenues in 2003. Accordingly, wehave only a limited history of generating revenues, and the future revenuepotential of our business in the emerging market for clean and intelligentpower solutions is uncertain. As a result of our short operating history, wehave limited financial data that can be used to evaluate our business,strategies, performance and prospects or an investment in our

 

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common stock. Any evaluation of our business and ourprospects must be considered in light of our limited operating history and therisks and uncertainties encountered by companies at our stage of development.To address these risks and uncertainties, we must do the following:

·                  maintain our currentrelationships and develop new relationships with grid operators and utilitiesand the entities that regulate them;

·                  maintain and expand our currentrelationships and develop new relationships with commercial, institutional andindustrial customers;

·                  maintain and enhance our existingdemand response and energy management solutions;

·                  continue to develop clean andintelligent power solutions that achieve significant market acceptance;

·                  continue to enhance ourinformation processing systems;

·                  execute our business andmarketing strategies successfully;

·                  respond to competitivedevelopments;

·                  attract, integrate, retain andmotivate qualified personnel; and

·                  continue to participate in shapingthe regulatory environment.

Wemay be unable to accomplish one or more of these objectives, which could causeour business to suffer. In addition, accomplishing many of these goals might bevery expensive, which could adversely impact our operating results andfinancial condition. Any predictions about our future operating results may notbe as accurate as they could be if we had a longer operating history.

***Our results of operations could beadversely affected if our operating expenses do not correspond with the timingof our revenues.***

Mostof our operating expenses, such as employee compensation and rental expense forproperties, are either relatively fixed in the short-term or incurred inadvance of sales. Moreover, our spending levels are based in part on ourexpectations regarding future revenues. As a result, if revenues for aparticular quarter are below expectations, we may not be able toproportionately reduce operating expenses for that quarter. For example, if ademand response event or metering and verification test does not occur in aparticular quarter, we may not be able to recognize revenues for theundemonstrated capacity in that quarter. This shortfall in revenues couldadversely affect our operating results for that quarter and could cause themarket price of our common stock to decline substantially.

***We operate in highly competitive markets;if we are unable to compete successfully, we could lose market share andrevenues.***

Themarket for clean and intelligent power solutions is fragmented. Sometraditional providers of advanced metering solutions have added, or may add,demand response services to their existing business. We face strong competitionfrom clean and intelligent power solutions providers, both larger and smallerthan we are. We also compete against traditional supply-side resources such asnatural gas-fired peaking power plants. In addition, utilities and competitiveelectricity suppliers offer their own demand response solutions, which coulddecrease our base of potential customers along with our revenues andprofitability.

Manyof our competitors have greater financial resources than we do. Our competitorscould focus their substantial financial resources to develop a competingbusiness model or develop products or services that are more attractive topotential customers than what we offer. Some advanced metering infrastructureservice providers, for example, are substantially larger and better capitalizedthan we are and have the ability to combine advanced metering and demandresponse solutions into an integrated offering to a large, existing customerbase. Our competitors may offer clean and intelligent power solutions at pricesbelow cost or even for free in order to improve their competitive positions.Any of these competitive factors could make it more difficult for us to attractand retain customers, cause us to lower our prices in order to compete, andreduce our market share and revenues, any of which could have a materialadverse effect on our financial condition and results of operations. Inaddition, we may also face competition based on technological developments thatreduce peak demand for electricity, increase power supplies through existinginfrastructure or that otherwise compete with our demand response and energymanagement solutions.

***If we fail to successfully educate existingand potential grid operator and utility customers regarding the benefits of ourdemand response and energy management solutions or a market otherwise fails todevelop for those solutions, our ability to sell our solutions and grow ourbusiness could be limited.***

Ourfuture success depends on commercial acceptance of our clean and intelligentpower solutions and our ability to obtain additional contracts. We anticipatethat revenues related to our demand response solutions will constitute asubstantial portion of our revenues for the foreseeable future. The market forclean and intelligent power solutions in general is relatively new. If we areunable to educate our potential customers about the advantages of our solutionsover competing products and services, or our existing customers no longer relyon our demand response solutions, our ability to sell our solutions will belimited. In addition, because the clean and intelligent power solutions sectoris rapidly

 

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evolving, we cannot accurately assess the size of themarket, and we may have limited insight into trends that may emerge and affectour business. For example, we may have difficulty predicting customer needs anddeveloping clean and intelligent power solutions that address those needs. Ifthe market for our demand response and our energy management solutions does notcontinue to develop, our ability to grow our business could be limited and wemay not be able to achieve profitability.

***If the actual amount of demand responsecapacity that we make available under our capacity contracts is materially lessthan required, our committed capacity could be reduced and we could be requiredto make refunds and pay penalty fees.***

Weprovide demand response capacity to our grid operator and utility customerseither under fixed price long-term contracts, or under terms established inopen bidding markets where capacity is purchased. Under the long-term contractsand open bidding market commitments, grid operators and utilities make periodicpayments to us based on the amount of demand response capacity that we areobligated to make available to them during the contract period, or make monthlypayments to us based on the amount of demand response capacity that we chose tomake available to them during the relevant period. We refer to these paymentsas committed capacity payments. Committed capacity is negotiated andestablished by the contract and is subject to subsequent confirmation bymeasurement and verification tests or performance in a demand response event.In our open bidding markets, we offer different amounts of committed capacityto our grid operator and utility customers based on market rules on a periodicbasis, which is typically monthly. We refer to measured and verified capacityas our demonstrated or proven capacity. Once demonstrated, the proven capacityamounts typically establish a baseline of capacity for each end-use customersite in our portfolio, on which committed capacity payments are calculatedgoing forward and until the next demand response event or measurement andverification test when we are called to make capacity available.

Thecapacity level that we are able to achieve varies with the electricity demandof targeted equipment, such as heating and cooling equipment, at the time anend-use customer is called to perform. Accordingly, our ability to delivercommitted capacity depends on factors beyond our control, such as temperatureand humidity and the time of day that an end-use customer is called to perform.The correct operation of, and timely communication with, devices used tocontrol equipment are also important factors that affect available capacity.Under some of our contracts, any difference between our demonstrated capacityand the committed capacity on which capacity payments were previously made willresult in either a refund payment from us to our grid operator or utilitycustomer or an additional payment to us by such customer. Any refund payable byus would reduce our deferred revenues, but would not impact our previouslyrecognized revenues. If there is a true-up settlement due to a grid operator orutility customer, we generally make a corresponding adjustment in our paymentsto the end-use customer or customers who failed to make the appropriate levelof capacity available, however we are sometimes unable to do so. In addition,some of our contracts with our grid operator and utility customers provide forpenalty payments, which can be substantial, in certain circumstances in whichwe do not meet our capacity commitments, either in measurement and verificationtests or in demand response events. Further, because measurement andverification test results for some capacity contracts establish capacity levelson which payments will be made until the next test or demand response event,the payments to be made to us under such capacity contracts would be reduceduntil the level of capacity is established at the next test or demand responseevent. To date we have been required to make only de minimis refund and penaltypayments, and we have incurred only immaterial downward adjustments in capacitypayments, as a result of failures to achieve our committed capacity levels.However, we could experience significant period-to-period fluctuations in ourfinancial results in future periods due to true-up settlements, capacitypayment adjustments, replacement costs or other payments, which could besubstantial. We incurred aggregate penalty payments of $0 and $1,971 during thesix months ended June 30, 2007 and June 30, 2006, respectively.

***Our business may become subject to modifiedor new government regulation, which may negatively impact our ability to marketour clean and intelligent power solutions.***

Whilethe electric power markets in which we operate are regulated, we are notdirectly subject to the regulatory framework applicable to the generation andtransmission of electricity. However, the installation of devices used inproviding those solutions and electric generators sometimes installed oractivated when providing demand response solutions may be subject togovernmental oversight and regulation under state and local ordinances relatingto building codes, public safety regulations pertaining to electricalconnections and local and state licensing requirements. In the future, federal,state, provincial or local governmental entities may seek to change existingregulations or impose additional regulations. Any modified or new governmentregulation applicable to our current or future solutions, whether at thefederal, state, provincial or local level, may negatively impact theinstallation, servicing and marketing of those solutions and increase our costsand the price of our solutions. In a relatively few instances, we have agreedto own and operate a back-up generator at a commercial, institutional orindustrial customer location for a period of time and to activate the generatorwhen capacity is called for dispatch so that the commercial, institutional orindustrial customer can reduce its consumption of electricity from the electricpower grid. These generators could become ineligible to participate in demandresponse programs in the future, or be compensated less for such participation,thereby reducing our revenues and adversely affecting our financial position.

***A substantial majority of our revenues aregenerated from contracts with, and open market sales to, a small number of gridoperator and utility customers, including in particular one grid operatorcustomer, and the modification or termination of these contracts or salesrelationships could materially adversely affect our business.***

Amajority of our revenues have been generated from contracts with, and openmarket sales to, ISO New England Inc. This customer accounted for 86%, 65% and62% of our total revenues in 2005, 2006 and

 

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the six months ended June 30, 2007, respectively.Moreover, revenues from our three largest grid operator and utility customersrepresented approximately 88%, 93% and 92% of our total revenues in 2005, 2006and the six months ended June 30, 2007, respectively. Any modification ortermination of these contracts or key customer relationships could have amaterial adverse effect on our business.

Asubstantial portion of our revenues are derived from three fixed pricecontracts. In 2005 and 2006, and the six months ended June 30, 2007,these contracts accounted for approximately 86%, 62% and 48%, respectively, ofour total revenues. Although we have entered into additional long-termcontracts in different geographic regions and are regularly in discussions withour customers to extend our existing contracts or enter into new contracts withthese existing customers, the three major contracts described above expire inMay and December 2008. There can be no assurance that any of these contractswill be extended or that we will enter into new contracts on favorable terms.If these contracts are not extended or replaced, we would expect to enroll thecapacity that we make available under such contracts in another demand responsecapacity program, although there is no assurance that we would be able to doso. In addition, other programs could provide lower capacity payments than ourexisting fixed price contracts. Thus, the failure to renew any of thesecontracts could significantly reduce our revenues.

***Failure of third parties to manufacturequality products or provide reliable services in a timely manner could causedelays in the delivery of our solutions, which could damage our reputation,cause us to lose customers and negatively impact our growth.***

Oursuccess depends on our ability to provide quality, reliable demand response andenergy management solutions in a timely manner, which in part requires theproper functioning of facilities and equipment owned, operated or manufacturedby third parties upon which we depend. For example, our reliance on thirdparties includes:

·                  utilizing components that we installor have installed at commercial, institutional and industrial locations;

·                  outsourcing email notificationand cellular and paging wireless communications that are used to notify ourend-use customers of their need to reduce electricity consumption at aparticular time and to execute instructions to devices installed at ourcustomer locations and which are programmed to automatically reduce consumptionon receipt of such communications; and

·                  outsourcing certain installationand maintenance operations to third-party providers.

Anydelays, malfunctions, inefficiencies or interruptions in these products,services or operations could adversely affect the reliability or operation ofour demand response and energy management solutions, which could cause us toexperience difficulty retaining current customers and attracting new customers.Such delays could also result in our making refunds or paying penalty fees toour grid operator and utility customers. In addition, our brand, reputation andgrowth could be negatively impacted.

***If we lose key personnel upon whom we aredependent, we may not be able to manage our operations and meet our strategicobjectives.***

Ourcontinued success depends to a considerable degree upon the continuedavailability, contributions, vision, skills, experience and effort of oursenior management, sales and marketing, engineering and operations teams. We donot maintain “key person” insurance on any of our employees. We have enteredinto employment agreements with the members of our senior management team, butnone of these agreements guarantees the services of the individual for aspecified period of time. All of the agreements with members of our seniormanagement team provide that employment is at-will and may be terminated by theemployee at any time and without notice. Although we do not have any reason tobelieve that we may lose the services of any of these persons in theforeseeable future, the loss of the services of any of these persons mightimpede our operations or the achievement of our strategic and financialobjectives. We rely on our engineering team to research, design and develop newand enhanced demand response and energy management solutions. We rely on ouroperations team to install, test, deliver and manage our demand responsesolutions. The loss or interruption of the service of members of our seniormanagement, sales and marketing, engineering or operations teams, or ourinability to attract or retain other qualified personnel or advisors could havea material adverse effect on our business, financial condition and results ofoperations and could significantly reduce our ability to manage our operationsand implement our strategy.

***We expect to continue to expand our salesand marketing, operations, engineering, research and development capabilitiesand financial and reporting systems, and as a result, we may encounterdifficulties in managing our growth, which could disrupt our operations.***

Weexpect to experience significant growth in the number of our employees and thescope of our operations. To manage our anticipated future growth, we mustcontinue to implement and improve our managerial, operational, financial andreporting systems, expand our facilities, and continue to recruit and trainadditional qualified personnel. All of these measures will require significantexpenditures and will demand the attention of management. Due to our limitedresources, we may not be able to effectively manage the expansion of ouroperations or recruit and adequately train additional qualified personnel. Thephysical expansion of our operations may lead to significant costs and maydivert our management and business development resources. Any inability tomanage growth could delay the execution of our business plans or disrupt our operations.

Weare currently in the process of implementing a new software system that willintegrate all of our departments and functions onto a single computer system.****Any difficulties or delays in implementing this systemcould make it more difficult for us to grow and manage our operations, divertmanagement attention from operations and require further expense.

 

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Wecompete for personnel and advisors with other companies and otherorganizations, many of which are larger and have greater name recognition andfinancial and other resources than we do. If we are not able to hire, train andretain the necessary personnel, or if these managerial, operational, financialand reporting improvements are not implemented successfully, we could losecustomers and revenues.

Weallocate our operations, sales and marketing, research and development, generaland administrative, and financial resources based on our business plan, whichincludes assumptions about current and future contracts with grid operator andutility customers and commercial, institutional and industrial customers,variable prices in open markets for demand response capacity, the developmentof ancillary services markets which enable demand response as a revenuegenerating resource and a variety of other factors relating to electricitymarkets, and the resulting demand for our demand response and energy managementsolutions. However, these factors are uncertain. If our assumptions regardingthese factors prove to be incorrect or if alternatives to those offered by oursolutions gain further acceptance, then actual demand for our demand responseand energy management solutions could be significantly less than the demand weanticipate and we may not be able to sustain our revenue growth or achieveprofitability.

***An oversupply of electric generationcapacity and varying regulatory structures in certain regional power marketscould negatively affect our business and results of operations.***

Althoughdemand for electric capacity has been increasing throughout North America, abuildup of new electric generation facilities could result in excess electricgeneration capacity in certain regional power markets. In addition, theelectric power industry is highly regulated. The regulatory structures inregional electricity markets are varied and some regulatory requirements makeit more difficult for us to provide some or all of our demand responsesolutions in those regions. For instance, in some markets, such as Texas,regulated quantity or payment levels for demand response capacity or energymake it more difficult for us to cost-effectively enroll and manage manycommercial, institutional and industrial customers in demand response programs.Further, some markets, such as New York, have regulatory structures that do notyet include demand response as a qualifying resource for purposes of short-termreserve requirements known as ancillary services. As part of our businessstrategy, we intend to expand into additional regional electricity markets.However, the combination of excess electric generation capacity and unfavorableregulatory structures could limit the number of regional electricity marketsavailable to us for expansion. Unfavorable regulatory decisions in marketswhere we currently operate could also negatively affect our business. Forexample, regulators could modify market rules in certain areas to further limitthe use of back-up generators in demand response markets or could implementbidding caps that could lower our revenue opportunities. A limit on back-upgenerators would mean that some of the capacity reductions we aggregate fromend-use customers willing to reduce consumption from the grid byactivating their own back-up generators during demand response eventswould not qualify as capacity, and we would have to find additional sources ofcapacity from end-use customers willing to reduce load by curtailingconsumption rather than by generating electricity themselves.

***We face pricing pressure relating toelectric capacity made available to grid operators and utilities and in thepercentage or fixed amount paid to commercial, institutional and industrialcustomers for making capacity available, which could adversely affect ourresults of operations and financial position and delay or prevent our futureprofitability.***

Therapid growth of the clean and intelligent power solutions sector is resultingin increasingly aggressive pricing, which could cause the prices for clean andintelligent power solutions to decrease over time. Our grid operator andutility customers may switch to other clean and intelligent power solutionsproviders based on price, particularly if they perceive the quality of ourcompetitors’ products or services to be equal or superior to ours. Continueddecreases in the price of capacity by our competitors could result in a loss ofgrid operator and utility customers or a decrease in the growth of our business,or it may require us to lower our prices for capacity to remain competitive,which would result in reduced revenues and lower profit margins and wouldadversely affect our results of operations and financial position and delay orprevent our future profitability. Continued increases in the percentage orfixed amount paid to commercial, institutional and industrial customers by ourcompetitors for making capacity available could result in a loss of commercial,institutional and industrial customers or a decrease in the growth of ourbusiness. It also may require us to increase the percentage or fixed amount wepay to our commercial, institutional and industrial customers to remaincompetitive, which would result in increases in the cost of revenues and lowerprofit margins and would adversely affect our results of operations andfinancial position and delay or prevent our future profitability.

***Our inability to protect our intellectualproperty could negatively affect our business and results of operations.***

Ourability to compete effectively depends in part upon the maintenance andprotection of the intellectual property related to our demand responsesolutions. We hold only one issued patent. Patent protection is unavailable forcertain aspects of the technology and operational processes that are importantto our business. Any patent held by us or to be issued to us, or any of ourpending patent applications, could be challenged, invalidated, unenforceable orcircumvented. Moreover, some of our trademarks which are not in use may becomeavailable to others. To date, we have relied principally on copyright,trademark and trade secrecy laws, as well as confidentiality agreements andlicensing arrangements, to establish and protect our intellectual property.However, we have not obtained confidentiality agreements from all of ourcustomers and vendors and although we have entered into confidentialityagreements with all of our employees, we cannot be certain that theseagreements will be honored. Some of our confidentiality agreements are not inwriting, and some customers are subject to laws and regulations that requirethem to disclose information that we would otherwise seek to keep confidential.Policing unauthorized use of our intellectual property is difficult andexpensive, as is enforcing our rights against unauthorized use. The steps thatwe have taken or may take may not prevent misappropriation of the intellectualproperty on which we rely. In addition, effective protection may be unavailableor limited if we expand to other jurisdictions outside

 

 

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the United States, as the intellectual property lawsof foreign countries sometimes offer less protection or have onerous filingrequirements. From time to time, third parties may infringe our intellectualproperty rights. Litigation may be necessary to enforce or protect our rightsor to determine the validity and scope of the rights of others. Any litigationcould be unsuccessful, cause us to incur substantial costs, divert resourcesaway from our daily operations, and result in the impairment of ourintellectual property. Failure to adequately enforce our rights could cause usto lose rights in our intellectual property and may negatively affect our business.

***We may be subject to damaging anddisruptive intellectual property litigation related to allegations that ourdemand response and energy management solutions infringe on intellectualproperty held by others, which could result in the loss of use of thosesolutions.***

Third-partypatent applications and patents may be applicable to our clean and intelligentpower solutions. As a result, third-parties may in the future makeinfringement and other allegations that could subject us to intellectual propertylitigation relating to our solutions, which litigation could be time-consumingand expensive, divert attention and resources away from our daily operations,impede or prevent delivery of our solutions, and require us to pay significantroyalties, licensing fees and damages. In addition, parties making infringementand other claims may be able to obtain injunctive or other equitable reliefthat could effectively block our ability to provide our solutions and couldcause us to pay substantial damages. In the event of a successful claim ofinfringement, we may need to obtain one or more licenses from third parties,which may not be available at a reasonable cost, or at all.

***If our information technology systems failto adequately gather and assess data used in providing our clean andintelligent power solutions, or if we experience an interruption in theiroperation, our business, financial condition and results of operations could beadversely affected.***

Theefficient operation of our business is dependent on our information technologysystems. We rely on our information technology systems to effectively controlthe devices which enable our demand response solutions; gather and assess dataused in providing our energy management solutions; manage relationships withour customers; and maintain our research and development data. The failure ofour information technology systems to perform as we anticipate could disruptour business and product development and make us unable, or severely limit ourability, to respond to demand response events. In addition, our informationtechnology systems are vulnerable to damage or interruption from:

·                  earthquake, fire, flood and othernatural disasters;

·                  terrorist attacks and attacks bycomputer viruses or hackers;

·                  power loss; and

·                  computer systems, Internet,telecommunications or data network failure.

Althoughour information technology systems have fail-over redundancy where they arehoused, we do not have geographic fail-over redundancy. Any interruption in theoperation of our information technology systems could result in decreasedrevenues under our demand response contracts and energy management contractsand commitments, reduced margins on revenues where fixed payments are due toour commercial, institutional, and industrial customers, reductions in ourdemonstrated capacity levels going forward, customer dissatisfaction andlawsuits and could subject us to penalties, any of which could have a materialadverse effect on our business, financial condition and results of operations.

***We depend on the electric power industryfor revenues and, as a result, our operating results have experienced, and maycontinue to experience, significant variability due to volatility in electricpower industry spending and other factors affecting the electric utilityindustry, such as seasonality of peak demand.***

Wecurrently derive substantially all of our revenues from the sale of demandresponse solutions, directly or indirectly, to the electric power industry.Purchases of our demand response solutions by grid operators or electricutilities may be deferred or cancelled as a result of many factors, includingmergers and acquisitions involving electric utilities, changing regulations,fluctuations in interest rates and increased electric utility capital spendingon traditional supply-side resources. In addition, sales of capacity in openmarkets are particularly susceptible to variability based on changes in thespending patterns of our grid operator and utility customers and on associatedfluctuating market prices for capacity. In addition, peak demand forelectricity and other capacity constraints tend to be seasonal. Peak demand inthe United States tends to be most extreme in warmer months. Hence, somecapacity markets yield higher prices for capacity during these warmer months.As a result, our demand response revenues can be seasonal. For example, in2006, our demand response revenues in the third quarter were higher than ourdemand response revenues in the fourth quarter. Further, occasional events,such as a spike in natural gas prices, can lead grid operators and utilities toimplement short-term calls for demand response capacity to respond tothese events, but we cannot be sure that such calls will continue or that wewill be in a position to generate revenues when they do occur. In the firstquarter of 2006, we earned $3.6 million under the Demand Response WinterSupplemental Program, a temporary demand response program established by ISONew England Inc. in response to an anticipated shortage in natural gasresulting from Hurricanes Katrina and Rita. We have experienced, and may in thefuture experience, significant variability in our revenues, on both an annualand a quarterly basis, as a result of these and other factors. Pronouncedvariability or an extended period of reduction in spending by grid operatorsand utilities, or continued requests from grid operators and utilities to payfor demand response capacity at prices that

 

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are not equal on a monthly or quarterly basis over thecourse of a contract year, could negatively impact our business and make itdifficult for us to accurately forecast our future sales, which could lead toincreased spending by us that does not result in increases in revenues.

***Electric power industry sales cycles can belengthy and unpredictable and require significant employee time and financialresources with no assurances that we will realize revenues.***

Salescycles with grid operator and utility customers are generally long andunpredictable. The grid operators and utilities that are our potentialcustomers generally have extended budgeting, procurement and regulatoryapproval processes. They also tend to be risk averse and tend to followindustry trends rather than be the first to purchase new products or services,which can extend the lead time for or prevent acceptance of new products orservices such as our demand response solutions. Accordingly, our potentialcustomers may take longer to reach a decision to purchase services. Thisextended sales process requires the dedication of significant time by ourpersonnel and our use of significant financial resources, with no certainty ofsuccess or recovery of our related expenses. It is not unusual for a gridoperator or utility customer to go through the entire sales process and notaccept any proposal or quote.

***An increased rate of terminations by ourcommercial, institutional and industrial customers, or their failure to renewcontracts when they expire, would negatively impact our business by reducingour revenues and requiring us to spend more money to maintain and grow ourcommercial, institutional and industrial customer base.***

Ourability to provide demand response capacity under our demand response contractsdepends on the number of commercial, institutional and industrial customers whoenter into agreements with us to reduce electricity consumption on demand andthe levels of consumption which those customers agree to reduce. The averageannual rate of terminations by our commercial, institutional and industrialcustomers in 2004, 2005, 2006 and through June 30, 2007 was less than 1%. Ifthis termination rate increases, or if customers do not renew their contractsas they expire, we will need to acquire additional commercial, institutionaland industrial customers or expand our relationships with existing commercial,institutional and industrial customers in order to maintain our revenues andgrow our business. The loss of revenues resulting from terminations could besignificant, and limiting customer terminations is an important factor in ourability to achieve future profitability. If we are unsuccessful in controllingour commercial, institutional and industrial customer terminations, we may beunable to acquire a sufficient number of new customers or we may incursignificant costs to replace customers, which could cause our revenues todecrease and our cost of revenues to increase, and delay or prevent ourprofitability.

***The success of our businesses depends inpart on our ability to develop new clean and intelligent power solutions andincrease the functionality of our current demand response and energy managementsolutions.***

Themarket for demand response and energy management solutions is characterized byrapid technological changes, frequent new software introductions, Internet-relatedtechnology enhancements, uncertain product life cycles, changes in customerdemands, and evolving industry standards and regulations. We may not be able tosuccessfully develop and market new clean and intelligent power solutions thatcomply with present or emerging industry regulations and technology standards.Also, any new regulation or technology standard could increase our cost ofdoing business.

Fromtime to time, our customers have expressed a need for increased functionalityin our solutions. In response, and as part of our strategy to enhance our cleanand intelligent power solutions and grow our business, we plan to continue tomake substantial investments in the research and development of newtechnologies. Our future success will depend in part on our ability to continueto design new, competitive clean and intelligent power solutions, enhance ourexisting demand response and energy management solutions and provide new, value-addedservices to our customers. Initiatives to develop new solutions will requirecontinued investment, and we may experience unforeseen problems in theperformance of our technologies and operational processes, including newtechnologies and operational processes that we develop and deploy, to implementour solutions. In addition, software addressing the procurement and managementof energy assets is complex and can be expensive to develop, and new softwareand software enhancements can require long development and testing periods. Ifwe are unable to develop new clean and intelligent power solutions orenhancements to our existing demand response and energy management solutions ona timely basis, or if the market does not accept such solutions, we will loseopportunities to realize revenues and customers and our business and results ofoperations will be adversely affected.

***Any internal or external security breachesinvolving our demand response and energy management solutions could harm ourreputation, and even the perception of security risks of our solutions or thetransmission of data over the Internet, whether or not valid, could inhibitmarket acceptance of our solutions and cause us to lose customers.***

Weand our customers use our demand response and energy management solutions tocompile and analyze sensitive or confidential information related to ourcustomers. In addition, some of our demand response and energy managementsolutions allow us to remotely control equipment at commercial, institutionaland industrial locations. Our demand response and energy management solutionsrely on the secure transmission of proprietary data over the Internet for someof their functionality. Well-publicized compromises of Internet security could havethe effect of substantially reducing confidence in the Internet as a medium ofdata transmission. The occurrence or perception of security breaches in ourdemand response and energy management solutions or our customers’ concernsabout Internet security or the security of our solutions, whether or not theyare warranted, could have a material adverse effect on our business, harm ourreputation, inhibit market acceptance of our demand

 

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response and energy management solutions and cause usto lose customers, any of which could have a material adverse effect on ourfinancial condition and results of operations.

Wemay come into contact with sensitive consumer information or data when weperform operational, installation or maintenance functions for our customers.Even the perception that we have improperly handled sensitive, confidentialinformation could have a negative effect on our business. If, in handling thisinformation, we fail to comply with privacy or security laws, we could incurcivil liability to government agencies, customers and individuals whose privacyis compromised. In addition, third parties may attempt to breach our securityor inappropriately use our demand response and energy management solutionsthrough computer viruses, electronic break-ins and other disruptions. If abreach is successful, confidential information may be improperly obtained, andwe may be subject to lawsuits and other liabilities.

***We may require significant additional capitalto pursue our growth strategy, but we may not be able to obtain additionalfinancing on acceptable terms or at all.***

Thegrowth of our business will depend on substantial amounts of additional capitalfor marketing and product development of our demand response and energymanagement solutions. Our capital requirements will depend on many factors,including the rate of our revenue growth, our introduction of new solutions andenhancements to existing solutions, and our expansion of sales and marketingand product development activities. In addition, we may consider strategicacquisitions of complementary businesses or technologies to grow our business,which could require significant capital and could increase our capitalexpenditures related to future operation of the acquired business ortechnology. Because of our losses, we do not fit traditional credit lendingcriteria. We may not be able to obtain loans or additional capital onacceptable terms or at all. Moreover, our current loan and security agreementcontains restrictions on our ability to incur additional indebtedness, which,if not waived, could prevent us from obtaining needed capital. Any futurecredit facilities would likely contain similar restrictions. In the eventadditional funding is required, we may not be able to obtain bank creditarrangements or effect an equity or debt financing on terms acceptable to us orat all. A failure to obtain additional financing when needed could adverselyaffect our ability to maintain and grow our business.

***Our loan and security agreement containsfinancial and operating restrictions that may limit our access to credit. If wefail to comply with covenants in our loan and security agreement, we may berequired to repay our indebtedness thereunder, which may have an adverse effecton our liquidity.***

Provisionsin our senior loan and security agreement with Bluecrest Capital Partners,L.P., or Bluecrest Capital, as assignee of Ritchie Capital Finance, L.L.C.,impose restrictions on our ability to, among other things:

·                  incur more debt;

·                  pay dividends and makedistributions;

·                  redeem or repurchase capitalstock;

·                  create liens;

·                  enter into transactions withaffiliates; and

·                  merge or consolidate.

Ourloan and security agreement also contains other customary covenants. We may notbe able to comply with these covenants in the future. Our failure to complywith these covenants may result in the declaration of an event of default andcould cause us to be unable to borrow under our loan and security agreement withBluecrest Capital. In addition to preventing additional borrowings under ourloan and security agreement, an event of default, if not cured or waived, mayresult in the acceleration of the maturity of indebtedness outstanding underthe agreement, which would require us to pay all amounts outstanding. If anevent of default occurs, we may not be able to cure it within any applicablecure period, if at all. If the maturity of our indebtedness is accelerated, wemay not have sufficient funds available for repayment or we may not have theability to borrow or obtain sufficient funds to replace the acceleratedindebtedness on terms acceptable to us, or at all.

***Our ability to use our net operating losscarryforwards may be subject to limitation.***

Generally,a change of more than 50% in the ownership of a company’s stock, by value, overa three year period constitutes an ownership change for U.S. federal income taxpurposes. An ownership change may limit a company’s ability to use its netoperating loss carryforwards attributable to the period prior to such change.The number of shares of our common stock that we issued in our IPO may besufficient, taking into account prior or future shifts in our ownership over athree year period, to cause us to undergo an ownership change. As a result, ifwe earn net taxable income, our ability to use our pre-change net operatingloss carryforwards to offset U.S. federal taxable income may become subject tolimitations, which could potentially result in increased future tax liabilityfor us.

 

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***We may not be able to identify suitableacquisition candidates or complete acquisitions successfully, which may inhibitour rate of growth, and acquisitions that we complete may expose us to a numberof unanticipated operational and financial risks.***

Inaddition to organic growth, we intend to continue to pursue growth through theacquisition of companies or assets that may enable us to expand our projectskill-sets and capabilities, enlarge our geographic market, add experiencedmanagement personnel and increase our service offerings. However, we may beunable to implement this growth strategy if we cannot identify suitableacquisition candidates, reach agreement on potential acquisitions on acceptableterms, successfully integrate personnel or assets that we acquire, or for otherreasons. Our acquisition efforts may involve certain risks, including:

·                  we may have difficultyintegrating operations and systems;

·                  key personnel and customers ofthe acquired company may terminate their relationships with the acquiredcompany as a result of the acquisition;

·                  we may experience additionalfinancial and accounting challenges and complexities in areas such as taxplanning and financial reporting;

·                  we may assume or be held liablefor risks and liabilities (including for environmental-related costs) asa result of our acquisitions, some of which we may not discover during our duediligence;

·                  our ongoing business may bedisrupted or receive insufficient management attention; and

·                  we may not be able to realize thecost savings or other financial and operational benefits we anticipated.

Theprocess of negotiating acquisitions and integrating acquired products,services, technologies, personnel, or businesses might result in operatingdifficulties and expenditures and might require significant managementattention that would otherwise be available for ongoing development of ourbusiness, whether or not any such transaction is ever consummated. Moreover, wemight never realize the anticipated benefits of any acquisition. Futureacquisitions could result in potentially dilutive issuances of equitysecurities, the incurrence of debt, contingent liabilities, or impairmentexpenses related to goodwill, and impairment or amortization expenses relatedto other intangible assets, which could harm our financial condition. Inaddition, if we are unable to integrate any acquired businesses, products ortechnologies effectively, our business, financial condition and results ofoperations may be materially adversely affected.

***Our ability to provide bid bonds,performance bonds or letters of credit is limited and could negatively affectour ability to bid on or enter into significant long-term agreements.***

Weare occasionally required to provide bid bonds or performance bonds to secureour performance under long-term contracts with our grid operator and utilitycustomers. In addition, some of our customers also require collateral in theform of letters of credit to secure performance or to fund possible damages ortrue-up payments as the result of a failure to make available capacity atagreed levels or an event of default under our contracts with them. Our abilityto obtain such bonds and letters of credit primarily depends upon ourcapitalization, working capital, past performance, management expertise andreputation and external factors beyond our control, including the overallcapacity of the surety market. Surety companies consider those factors inrelation to the amount of our tangible net worth and other underwritingstandards that may change from time to time. Events that affect surety marketsgenerally may result in bonding becoming more difficult to obtain in thefuture, or being available only at a significantly greater cost. As of June 30,2007, we had $2.6 million of letters of credit outstanding. Our inabilityto obtain adequate bonding or letters of credit and, as a result, to bid orenter into significant long-term agreements, could have a material adverse effecton our future revenues and business prospects.

***If the software we use in providing ourdemand response and energy management solutions produces inaccurate informationor is incompatible with the systems used by our customers, it could make usunable to provide our solutions, which could lead to a loss of revenues andtrigger penalty payments.***

Oursoftware is complex and, accordingly, may contain undetected errors or failureswhen introduced or subsequently modified. Software defects or inaccurate datamay cause incorrect recording, reporting or display of information about thelevel of demand reduction at a commercial, institutional and industrialcustomer location, which could cause us to fail to meet our commitments to havecapacity available. Although we have not incurred penalty payments or adjustedrevenue in 2005 and 2006 for failures to have capacity available due toinaccurate software information, any such failures could cause us to be subjectto penalty payments to our grid operator and utility customers or reducerevenue in the period the adjustment is identified and result in reductions incapacity payments under contracts in subsequent periods. In addition, suchdefects and inaccurate data may prevent us from successfully providing ourenergy management solutions, which would result in lost revenues. Softwaredefects or inaccurate data may lead to customer dissatisfaction and ourcustomers may seek to hold us liable for any damages incurred. As a result, wecould lose customers, our reputation may be harmed and our financial conditionand results of operations could be materially adversely affected.

 

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Wecurrently serve a commercial, institutional and industrial customer base thatuses a wide variety of constantly changing hardware, software applications andoperating systems. Building control, process control and metering systemsfrequently reside on non-standard operating systems. Our demand response andenergy management solutions need to interface with these non-standard systemsin order to gather and assess data and to implement changes in electricityconsumption. Our business depends on the following factors, among others:

·                  our ability to integrate ourtechnology with new and existing hardware and software systems, includingmetering, building control, process control, and distributed generationsystems;

·                  our ability to anticipate andsupport new standards, especially Internet-based standards and buildingcontrol system protocol languages; and

·                  our ability to integrateadditional software modules under development with our existing technology andoperational processes.

Ifwe are unable to adequately address any of these factors, our results ofoperations and prospects for growth and profitability could be materiallyadversely effected.

***We may face certain product liability orwarranty claims if we disrupt our customers’ networks or applications.***

Forsome of our current and planned solutions, our software and hardware isintegrated with our customers’ networks and software applications. Theintegration of our software and hardware may entail the risk of productliability or warranty claims based on disruption to these networks orapplications. In addition, the failure of our software and hardware to performto customer expectations could give rise to warranty claims against us. Any ofthese claims, even if without merit, could result in costly litigation ordivert management’s attention and resources. Although we carry generalliability insurance, our current insurance coverage could be insufficient toprotect us from all liability that may be imposed under these types of claims.A material product liability claim may seriously harm our results ofoperations.

**Risks Related to Our Common Stock**

***We expect our quarterly revenues andoperating results to fluctuate. If we fail to meet the expectations of marketanalysts or investors, the market price of our common stock could declinesubstantially.***

Ourquarterly revenues and operating results have fluctuated in the past and mayvary from quarter to quarter in the future. Accordingly, we believe thatperiod-to-period comparisons of our results of operations may be misleading.You should not rely upon the results of one quarter as an indication of futureperformance. Our revenues and operating results may fall below the expectationsof securities analysts or investors in some future quarter or quarters. Our failureto meet these expectations could cause the market price of our common stock todecline substantially.

Ourquarterly revenues and operating results may vary depending on a number offactors, including:

·                  demand for and acceptance of ourclean and intelligent power solutions;

·                  delays in the implementation anddelivery of our clean and intelligent power solutions, which may impact thetiming of our recognition of revenues;

·                  delays or reductions in spendingfor clean and intelligent power solutions by our customers and potentialcustomers;

·                  the long lead time associatedwith securing new customer contracts;

·                  the mix of our revenues duringany period, particularly on a regional basis, since local payments for demandresponse capacity tend to vary according to the level of available capacity ingiven regions;

·                  the termination of existingcontracts with grid operator and utility customers;

·                  development of new relationshipsand maintenance and enhancement of existing relationships with customers andstrategic partners;

·                  the pricing terms of some long-termcapacity contracts that provide for higher payments during warmer months andlower payments during the rest of the year;

·                  temporary capacity programs thatcould be implemented by grid operators and utilities to address short-termcapacity deficiencies, such as the 2006 Demand Response WinterSupplemental Program in New England after Hurricanes Katrina and Rita;

·                  changes in open market rules andpricing for demand response capacity; and

·                  increased expenditures for salesand marketing, software development and other corporate activities.

 

 

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***We do not intend to pay dividends on ourcommon stock.***

Wehave not declared or paid any cash dividends on our common stock to date, andwe do not anticipate paying any dividends on our common stock in theforeseeable future. We currently intend to retain all available funds and anyfuture earnings for use in the development, operation and growth of ourbusiness. In addition, our loan and security agreement prohibits us from payingdividends and future loan agreements may also prohibit the payment ofdividends. Any future determination relating to our dividend policy will be atthe discretion of our board of directors and will depend on our results ofoperations, financial condition, capital requirements, business opportunities,contractual restrictions and other factors deemed relevant. To the extent we donot pay dividends on our common stock, investors must look solely to stockappreciation for a return on their investment in our common stock.

***Shares eligible for future sale may causethe market price for our common stock to decline even if our business is doingwell.***

Salesof substantial amounts of our common stock in the public market, or theperception that these sales may occur, could cause the market price of ourcommon stock to decline. This could also impair our ability to raise additionalcapital in the future through the sale of our equity securities. Under ouramended and restated certificate of incorporation that is currently in effect,we are authorized to issue up to 50,000,000 shares of common stock, of which18,228,046 shares of common stock were outstanding at June 30, 2007. Of theseshares, the shares of common stock sold in our IPO are freely transferablewithout restriction or further registration under the Securities Act by personsother than “affiliates,” as that term is defined in Rule 144 under theSecurities Act. In addition, 12,549,148 shares of common stock will becomefreely tradeable immediately upon the termination of the lock-upagreements described below and an additional 1,202,409 shares of common stockwill become freely tradeable thereafter, assuming no exercise of anyoutstanding warrants or options as of June 30, 2007. Certain of ourstockholders will be able to cause us to register common stock that they ownunder the Securities Act pursuant to registration rights that are described in “CertainRelationships and Related Transactions—Registration Rights” contained in ourfinal prospectus dated May 17, 2007, which is on file with the SEC. We alsoregistered all shares of common stock that we may issue under our Amended andRestated 2003 Stock Option and Incentive Plan, or 2003 Stock Plan, and our 2007Employee, Director and Consultant Stock Plan, or 2007 Stock Plan.

Ourexecutive officers and directors and most of our stockholders have entered intolock-up agreements in connection with our IPO, pursuant to which they haveagreed, subject to certain exceptions and extensions, not to sell or transfer,directly or indirectly, any shares of our common stock for a period of180 days from the date of our final prospectus dated May 17, 2007, whichis on file with the SEC or to exercise registration rights during such periodwith respect to such shares. However, after the lock-up period expires, or ifthe lock-up restrictions are waived by the underwriters, such persons will beable to sell their shares and exercise registration rights to cause them to beregistered. We cannot predict the size of future issuances of our common stockor the effect, if any, that future sales and issuances of shares of our commonstock, or the perception of such sales or issuances, would have on the marketprice of our common stock.

***Provisions of our charter, bylaws, andDelaware law and of some of our employment arrangements may make an acquisitionof us or a change in our management more difficult and could discourageacquisition bids or merger proposals, which may adversely affect the marketprice of our common stock.***

Certainprovisions of our amended and restated certificate of incorporation and amendedand restated bylaws that are currently in effect could discourage, delay, orprevent a merger, acquisition, or other change of control that stockholders mayconsider favorable, including transactions in which you might otherwise receivea premium for your shares. These provisions also could limit the price thatinvestors might be willing to pay in the future for shares of our common stock,thereby depressing the market price of our common stock. Stockholders who wishto participate in these transactions may not have the opportunity to do so.Furthermore, these provisions could prevent or frustrate attempts by ourstockholders to replace or remove our management. These provisions:

·                  allow the authorized number ofdirectors to be changed only by resolution of our board of directors;

·                  require that vacancies on theboard of directors, including newly-created directorships, be filled onlyby a majority vote of directors then in office;

·                  establish a classified board ofdirectors, providing that not all members of the board be elected at one time;

·                  authorize our board of directorsto issue, without stockholder approval, blank check preferred stock that, ifissued, could operate as a “poison pill” to dilute the stock ownership of apotential hostile acquirer to prevent an acquisition that is not approved byour board of directors;

·                  require that stockholder actionsmust be effected at a duly called stockholder meeting and prohibit stockholderaction by written consent;

 

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·                  prohibit cumulative voting in theelection of directors, which would otherwise allow holders of less than a majorityof stock to elect some directors;

·                  establish advance noticerequirements for stockholder nominations to our board of directors or forstockholder proposals that can be acted on at stockholder meetings;

·                  limit who may call stockholdermeetings; and

·                  require the approval of theholders of 75% of the outstanding shares of our capital stock entitled to votein order to amend certain provisions of our amended and restated certificate ofincorporation and restated bylaws.

Someof our employment arrangements and restricted stock and incentive stock optionagreements provide for severance payments and accelerated vesting of benefits,including accelerated vesting of restricted stock and options, upon a change ofcontrol.. These provisions may discourage or prevent a change of control.

Inaddition, because we are incorporated in Delaware, we are governed by theprovisions of Section 203 of the Delaware General Corporation Law, whichmay, unless certain criteria are met, prohibit large stockholders, in particularthose owning 15% or more of our outstanding voting stock, from merging orcombining with us for a prescribed period of time.

***The requirements of being a public company,including compliance with the reporting requirements of the Securities ExchangeAct of 1934 and the Nasdaq Global Market, will require greater resources,increase our costs and distract our management, and we may be unable to complywith these requirements in a timely or cost-effective manner.***

As a public company with equity securities listed on the Nasdaq Global Market, we must comply with statutes and regulations of the SEC and requirements of the Nasdaq Global Market, with which we were not required to comply prior to our IPO. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management and will substantially increase our costs and expenses. In particular, as a public company we are now required to implement additional corporate governance practices and adhere to a variety of reporting requirements and complex accounting rules. Compliance with these public company obligations will increase our legal and financial compliance costs and place significant additional demands on our finance and accounting staff and on our financial, accounting and information systems.

Inaddition, as a public company we expect that we will incur substantially highercosts to obtain director and officer liability insurance policies. Thesefactors could make it more difficult for us to attract and retain qualifiedmembers of our board of directors, particularly to serve on our auditcommittee.

***Our failure to maintain adequate internalcontrol over financial reporting in accordance with Section 404 of theSarbanes-Oxley Act of 2002 or prevent or detect material misstatements inour annual or interim consolidated financial statements in the future couldmaterially harm our business and cause our stock price to decline.***

As apublic company, our internal control over financial reporting will be requiredto comply with the standards adopted by the Public Company Accounting OversightBoard in compliance with the requirements of Section 404 of the Sarbanes-OxleyAct of 2002. Accordingly, we will be required to document and test our internalcontrols and procedures to assess the effectiveness of our internal controlover financial reporting. In addition, our independent registered publicaccounting firm will be required to report on management’s assessment of theeffectiveness of our internal control over financial reporting and theeffectiveness of our internal control over financial reporting in 2008. If weare unable to maintain effective control over financial reporting, suchconclusion would be disclosed in our Annual Report on Form 10-K for theyear ending December 31, 2008. In the future, we may identify materialweaknesses and deficiencies which we may not be able to remediate in a timelymanner. If we fail to maintain effective internal control over financialreporting in accordance with Section 404, we will not be able to concludethat we have and maintain effective internal control over financial reportingor our independent registered accounting firm may not be able to issue anunqualified report on the effectiveness of our internal control over financialreporting. As a result, our ability to report our financial results on a timelyand accurate basis may be adversely affected, we may be subject to sanctions orinvestigation by regulatory authorities, including the SEC or the Nasdaq GlobalMarket, and investors may lose confidence in our financial information, whichin turn could cause the market price of our common stock to decrease. We mayalso be required to restate our financial statements from prior periods. Inaddition, testing and maintaining internal control in accordance withSection 404 will require increased management time and resources. Anyfailure to maintain effective internal control over financial reporting couldimpair the success of our business and harm our financial results, and youcould lose all or a significant portion of your investment.

***Insiders have substantial control over us,which could delay or prevent a change of corporate control or result in theentrenchment of management and/or the board of directors.***

Asof June 30, 2007, our directors, executive officers and principal stockholders,together with their affiliates and related persons, beneficially own, in theaggregate, approximately 70% of our outstanding common stock. As a result,these stockholders, if acting together, will

 

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have the ability to determine the outcome of matterssubmitted to our stockholders for approval, including the election and removalof directors and any merger, consolidation, or sale of all or substantially allof our assets. In addition, these persons, if acting together, will have theability to control the management and affairs of our company. Accordingly, thisconcentration of ownership may harm the market price of our common stock by:

·                  delaying, deferring, orpreventing a change of control;

·                  entrenching our management and/orthe board of directors;

·                  impeding a merger, consolidation,takeover, or other business combination involving us;

·                  discouraging a potential acquirerfrom making a tender offer or otherwise attempting to obtain control of us; or

·                  causing us to enter intotransactions or agreements that are not in the best interests of allstockholders.

Inaddition, Delaware law limits the protection afforded minority stockholders,and we do not intend to enact provisions that may be beneficial to minorityholders, such as cumulative voting.

**Item 2.  Unregistered Sales of Equity Securities andUse of Proceeds**

(a)       UnregisteredSales of Equity Securities

We offered, issued and/or sold the followingunregistered securities during the quarter ended June 30, 2007:

(i)                         During the period ended June 30, 2007, wegranted options to purchase an aggregate of 411,194 shares of our common stockpursuant to our stock option plans, at a weighted average exercise price of$26.25 per share. In addition, we issued 213,986 shares of common stock inconnection with the exercise of outstanding options under our stock optionplans by optionees, at a weighted exercise price of $0.33 per share. Theseoption exercises resulted in aggregate proceeds to us of approximately $71,000.No underwriters were involved in the foregoing stock or option issuances. Theforegoing stock and option issuances were exempt from registration under theSecurities Act, either pursuant to Rule 701 under the Securities Act, astransactions pursuant to a compensatory benefit plan, or pursuant toSection 4(2) under the Securities Act, as a transaction by an issuer notinvolving a public offering.

(ii)                      On April 25, 2007, we issued an aggregateof 104,393 shares of our common stock to our chief executive officer and ourpresident. We received no consideration from those individuals in connectionwith the issuance of such shares.

(iii)                   On June 1, 2007, in connection with our acquisition of 100% of themembership interests of Pinpoint Power DR, LLC, we issued 65,951 shares of ourcommon stock to Thomas E. Atkins.

The issuance of securities described in (ii) and (iii) above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. The sales of these securities were made without general solicitation or advertising.

(b)       Use of Proceeds

We registered shares of our common stock in connection with our IPO under the Securities Act. The registration statement on Form S-1 (File No. 333-140632) filed in connection with our IPO was declared effective by the SEC on May 17, 2007. The offering commenced on May 17, 2007 and did not terminate before any securities were sold. As of the date of this filing, the offering has terminated. Including shares sold pursuant to the exercise by the underwriters of their over-allotment option, 4,087,500 shares of our common stock were registered and sold in the IPO by us and an additional 225,000 shares of common stock were registered and sold by the selling stockholders named in the registration statement. All the shares were sold at a price to the public of $26.00 per share.

The managing underwriters of the offering were Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated. The net offering proceeds received by us, after deducting underwriting discounts and commissions and expenses incurred in connection with the offering, were approximately $95.0 million. These expenses consisted of direct payments of:

i.   $7.4million in underwriters discounts, fees and commissions;

ii.   $3.6million in legal, accounting and printing fees; and miscellaneous expenses.

 

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No payments for such expenses were directly orindirectly to (i) any of our directors, officers or their associates, (ii) anyperson(s) owning 10% or more of any class of our equity securities or (iii) anyof our affiliates.

The net proceeds of approximately $95.0 millionfrom the IPO are invested in short-term investment grade securities and moneymarket accounts.******Wecurrently plan to use the net proceeds from the offering to fund the expansionof our business into new regions and expand our customer base, to financeresearch and development, to fund cash consideration for future acquisitionsand for other general corporate purposes. We also may repay indebtedness. Therehas been no material change in the planned use of proceeds from our IPO asdescribed in our final prospectus filed with the SEC pursuant to Rule 424(b).

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

On April 30, 2007, we distributed a written consent toour stockholders requesting approval of an amendment to our certificate ofincorporation to effect a stock split that was to become (and later became)effective prior to the closing of our IPO. Such action was effected pursuant toan action by written consent of our stockholders pursuant to Section 228 of theDelaware General Corporation Law. Written consents from stockholders holding anaggregate of 7,935,577 shares of our capital stock voting in favor of thismatter were received by us and written consents were not received by us fromstockholders holding an aggregate of 5,947,527 shares of our capital stockentitled to vote on such matter.

On May 9, 2007, we distributed a written consent toour stockholders requesting approval of the following matters in connectionwith our IPO: (i) the removal and re-election of Timothy Healy, Adam Grosser,David Brewster, William Lese, Philip Giudice, Richard Dieter and TJ Glauthieras directors, (ii) the amendment and restatement of our certificate ofincorporation to implement certain corporate governance requirements andincreases to our authorized capital stock that was to become (and later became)effective prior to the closing of our IPO, (iii) the amendment and restatementof our bylaws to provide certain changes consistent with our becoming a publiccompany that was to become (and later became) effective prior to the closing ofour IPO, (iv) the adoption of our 2007 Employee, Director and Consultant StockPlan and (v) the approval of a form of indemnification agreement to be enteredinto between us and our directors, officers and certain employees. All suchactions were effected pursuant to an action by written consent of ourstockholders pursuant to Section 228 of the Delaware General Corporation Law. Writtenconsents from stockholders holding an aggregate of 11,582,577 shares of ourcapital stock voting in favor of all of these matters were received by us andwritten consents were not received by us from stockholders holding an aggregateof 2,305,283 shares of our capital stock entitled to vote on such matters.

**Item 6.  Exhibits**

Thefollowing documents are filed as exhibits to this report:
| 31.1 |   | Certification of Chief Executive Officer of EnerNOC,  Inc. pursuant to Rule 13a-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) promulgated under the Securities  Exchange Act of 1934, as amended.                                                                                  |
| 32.1 |   | Certification of Chief Executive Officer of EnerNOC,  Inc. pursuant to Rule 13a-14(b) promulgated under the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code. |
| 32.2 |   | Certification of Chief Financial Officer of EnerNOC,  Inc. pursuant to Rule 13a-14(b) promulgated under the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code. |

 

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this Amendment No. 1 to Quarterly Report on Form 10-Q/Ato be signed on its behalf by the undersigned, thereunto duly authorized.
|                        |   | EnerNOC, Inc. |
|-----------------------------|--------|---------------|
|                        |   |          |   |
| Date: October 29, 2007 |   | By:           | /s/ Timothy G. Healy |
|                        |   |          | Timothy G. Healy |
|                        |   |          | Chief Executive Officer |
|                        |   |          | (principal executive officer) |
|                        |   |          |   |
| Date: October 29, 2007 |   | By:           | /s/ Neal C. Isaacson |
|                        |   |          | Neal C. Isaacson |
|                        |   |          | Chief Financial Officer |
|                        |   |          | (principal financial and accounting officer) |

 

 

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**ExhibitIndex**
| **Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                      |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                            |
| 31.1       |       | Certification of Chief Executive Officer of EnerNOC,  Inc. pursuant to Rule 13a-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) promulgated under the Securities  Exchange Act of 1934, as amended.                                                                                  |
| 32.1       |       | Certification of Chief Executive Officer of EnerNOC,  Inc. pursuant to Rule 13a-14(b) promulgated under the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code. |
| 32.2       |       | Certification of Chief Financial Officer of EnerNOC,  Inc. pursuant to Rule 13a-14(b) promulgated under the Securities  Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of  Title 18 of the United States Code. |

 

 

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