Table ofContents

 

 

 

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**                                                                                                                                                                                        | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                         |
| **For  the quarterly period ended June 30, 2009**                                                                                                                                       |
|                                                                                                                                                                                         |
| **or**                                                                                                                                                                                       |
|                                                                                                                                                                                         |
| **o**                                                                                                                                                                                        | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                         |
| **For  the transition period from**               **to**             |

 

**CommissionFile Number: 001-33471**

 

**EnerNOC, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

**(617) 224-9900**

(Registrant’sTelephone Number, Including Area Code)

 

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

 

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

 

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

 

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

 

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

 

There were 20,539,925 sharesof the registrant’s common stock, $.001 par value per share, outstanding as of July 24,2009.

 

 

 

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**EnerNOC, Inc.**

 

**Index to Form 10-Q**

 
| ** **                                 | ** **                                                                                                                 | **Page**   |
|--------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** **                                                                                                                 | ** ** |
| **Part I -  Financial Information**   |                                                                                                                       |
|                                       |                                                                                                                       |       |
| Item 1.                               | Financial Statements                                                                                                       |       |
|                                       |                                                                                                                       |       |
|                                       | Unaudited Condensed Consolidated Balance Sheets at  June 30, 2009 and December 31, 2008                          | 3          |
|                                       |                                                                                                                       |       |
|                                       | Unaudited  Condensed Consolidated Statements of Operations for the three and six months  ended June 30, 2009 and 2008 | 4          |
|                                       |                                                                                                                       |       |
|                                       | Unaudited Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2009 and 2008            | 5          |
|                                       |                                                                                                                       |       |
|                                       | Notes to Unaudited Condensed Consolidated Financial  Statements                                                            | 6          |
|                                       |                                                                                                                       |       |
| Item 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                | 14         |
|                                       |                                                                                                                       |       |
| Item 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                                | 23         |
|                                       |                                                                                                                       |       |
| Item 4.                               | Controls and  Procedures                                                                                                   | 23         |
|                                       |                                                                                                                       |       |
| **Part II -  Other Information** |                                                                                                                       |
|                                       |                                                                                                                       |       |
| Item 1.                               | Legal Proceedings                                                                                                          | 24         |
|                                       |                                                                                                                       |       |
| Item 1A.                              | Risk Factors                                                                                                               | 24         |
|                                       |                                                                                                                       |       |
| Item 2.                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                               | 24         |
|                                       |                                                                                                                       |       |
| Item 4.                                    | Submission  of Matters to a Vote of Security Holders                                                                       | 25         |
|                                       |                                                                                                                       |       |
| Item 6.                               | Exhibits                                                                                                                   | 25         |
|                                       | Signatures                                                                                                                 | 27         |
|                                       | Exhibit Index                                                                                                         | 28         |

 

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**PART I— FINANCIAL INFORMATION**

 

**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS**

 

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

 
| ** **                                                                                                                                                                              | ** ** | **June 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                              |       |                   |       |                       |       |
| Current assets                                                                                                                                                                          |       |                   |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                              |       | $                      | 43,526     |                       | $          | 60,782 |   |
| Restricted cash                                                                                                                                                                         |       | 177                    |       | 1,419                      |       |
| Marketable  securities                                                                                                                                                                  |       | —                 |       | 2,000                      |       |
| Trade accounts  receivable, net of allowance for doubtful accounts of $54 and $37 at  June 30, 2009 and December 31, 2008, respectively                                       |       | 13,540                 |       | 11,150                     |       |
| Unbilled revenue                                                                                                                                                                        |       | 16,344                 |       | 11,585                     |       |
| Prepaid  expenses, deposits and other current assets                                                                                                                                    |       | 5,064                  |       | 3,250                      |       |
| Total current  assets                                                                                                                                                                   |       | 78,651                 |       | 90,186                     |       |
| Property and  equipment, net                                                                                                                                                            |       | 31,661                 |       | 26,975                     |       |
| Goodwill                                                                                                                                                                                |       | 15,046                 |       | 13,395                     |       |
| Intangible  assets, net                                                                                                                                                                 |       | 5,350                  |       | 5,140                      |       |
| Deposits and  other assets                                                                                                                                                              |       | 1,926                  |       | 998                        |       |
| Total assets                                                                                                                                                                            |       | $                      | 132,634    |                       | $          | 136,694 |   |
|                                                                                                                                                                                    |       |                   |       |                       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                          |       |                   |       |                       |       |
| Current  liabilities                                                                                                                                                                    |       |                   |       |                       |       |
| Accounts payable                                                                                                                                                                        |       | $                      | 307        |                       | $          | 1,171 |   |
| Accrued capacity  payments                                                                                                                                                              |       | 23,233                 |       | 18,643                     |       |
| Accrued payroll  and related expenses                                                                                                                                                   |       | 6,582                  |       | 6,309                      |       |
| Accrued expenses  and other current liabilities                                                                                                                                         |       | 4,616                  |       | 3,822                      |       |
| Deferred revenue                                                                                                                                                                        |       | 2,380                  |       | 1,057                      |       |
| Current portion  of long-term debt                                                                                                                                                      |       | 41                     |       | 47                         |       |
| Total current  liabilities                                                                                                                                                              |       | 37,159                 |       | 31,049                     |       |
| Long-term  liabilities                                                                                                                                                                  |       |                   |       |                       |       |
| Long-term debt,  net of current portion                                                                                                                                                 |       | 4,500                  |       | 4,516                      |       |
| Deferred tax  liability                                                                                                                                                                 |       | 713                    |       | 362                        |       |
| Other  liabilities                                                                                                                                                                      |       | 1,598                  |       | 1,547                      |       |
| Total long-term  liabilities                                                                                                                                                            |       | 6,811                  |       | 6,425                      |       |
| Commitments and  contingencies (Note 8 and Note 12)                                                                                                                                     |       | —                 |       | —                     |       |
| Stockholders’  equity                                                                                                                                                              |       |                   |       |                       |       |
| Undesignated  preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares  issued                                                                                         |       | —                 |       | —                     |       |
| Common stock,  $0.001 par value; 50,000,000 shares authorized, 20,545,349 and 20,254,548  shares issued and outstanding at June 30, 2009 and December 31,  2008, respectively |       | 20                     |       | 20                         |       |
| Additional  paid-in capital                                                                                                                                                             |       | 177,356                |       | 169,800                    |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                          |       | 65                     |       | (86                        | )          |
| Accumulated  deficit                                                                                                                                                                    |       | (88,777                | )          | (70,514                    | )          |
| Total  stockholders’ equity                                                                                                                                                        |       | 88,664                 |       | 99,220                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                        |       | $                      | 132,634    |                       | $          | 136,694 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

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

 
| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                |       |                                 |       |                               |       |   |   |   |   |
| Revenue                                             |       | $                                    | 42,402     |                               | $          | 23,686 |   | $ | 60,825 |   | $ | 42,298 |   |
| Cost of revenues                                    |       | 24,267                               |       | 14,815                             |       | 34,792 |   | 26,957 |   |
| Gross profit                                        |       | 18,135                               |       | 8,871                              |       | 26,033 |   | 15,341 |   |
| Operating  expenses:                                |       |                                 |       |                               |       |   |   |   |   |
| Selling and  marketing expenses                     |       | 9,212                                |       | 7,678                              |       | 17,879 |   | 14,189 |   |
| General and  administrative expenses                |       | 11,395                               |       | 10,558                             |       | 21,097 |   | 20,478 |   |
| Research and  development expenses                  |       | 1,876                                |       | 1,256                              |       | 3,413 |   | 2,993 |   |
| Total operating  expenses                           |       | 22,483                               |       | 19,492                             |       | 42,389 |   | 37,660 |   |
| Loss from  operations                               |       | (4,348                               | )          | (10,621                            | )          | (16,356 | ) | (22,319 | ) |
| Other income  (expense)                             |       | 189                                  |       | 489                                |       | (95 | ) | 1,524 |   |
| Interest expense                                    |       | (1,403                               | )          | (231                               | )          | (1,464 | ) | (484 | ) |
| Loss before  income tax expense                     |       | (5,562                               | )          | (10,363                            | )          | (17,915 | ) | (21,279 | ) |
| Provision for  income tax expense                   |       | (167                                 | )          | (73                                | )          | (348 | ) | (158 | ) |
| Net loss                                            |       | $                                    | (5,729     | )                                  | $          | (10,436 | ) | $ | (18,263 | ) | $ | (21,437 | ) |
|                                                |       |                                 |       |                               |       |   |   |   |   |
| Basic and  diluted net loss per share               |       | $                                    | (0.29      | )                                  | $          | (0.54 | ) | $ | (0.91 | ) | $ | (1.11 | ) |
| Weighted average  number of basic anddiluted shares |       | 20,034,562                           |       | 19,434,228                         |       | 19,983,803 |   | 19,302,329 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(inthousands)**

 
| ** **                                                                                                      | ** ** | **Six Months Ended********June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2009**                                  | ** ** | **2008** | ** ** |
| **Cash  flow from operating activities**                                                                        |       |                                      |       |   |   |
| Net loss                                                                                                        |       | $                                         | (18,263    | ) | $ | (21,437 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                                    |       |                                      |       |   |   |
| Depreciation                                                                                                    |       | 5,104                                     |       | 3,568 |   |
| Amortization of  acquired intangible assets                                                                     |       | 332                                       |       | 645 |   |
| Stock-based  compensation expense                                                                               |       | 6,074                                     |       | 4,881 |   |
| Unrealized  foreign exchange transaction loss                                                                   |       | 132                                       |       | — |   |
| Deferred tax provision                                                                                          |       | 351                                       |       | 158 |   |
| Other, net                                                                                                      |       | 46                                        |       | 90 |   |
| Increase  (decrease) in cash from changes in operating assets and liabilities, net of  effects of acquisitions: |       |                                      |       |   |   |
| Accounts  receivable                                                                                            |       | (2,387                                    | )          | 310 |   |
| Unbilled revenue                                                                                                |       | (4,760                                    | )          | (3,781 | ) |
| Prepaid expenses  and other current assets                                                                      |       | 12                                        |       | (834 | ) |
| Other assets                                                                                                    |       | (2,765                                    | )          | (43 | ) |
| Other noncurrent  liabilities                                                                                   |       | 60                                        |       | 124 |   |
| Deferred revenue                                                                                                |       | 1,309                                     |       | (1,484 | ) |
| Accrued capacity  payments                                                                                      |       | 4,565                                     |       | 3,999 |   |
| Accrued payroll  and related expenses                                                                           |       | 809                                       |       | 683 |   |
| Accounts payable  and accrued expenses                                                                          |       | (838                                      | )          | 2,492 |   |
| Net cash used in  operating activities                                                                          |       | (10,219                                   | )          | (10,629 | ) |
|                                                                                                            |       |                                      |       |   |   |
| **Cash  flows from investing activities**                                                                       |       |                                      |       |   |   |
| Purchase of  marketable securities                                                                              |       | —                                    |       | (10,642 | ) |
| Sales and  maturities of marketable securities                                                                  |       | 2,000                                     |       | 22,732 |   |
| Payments made  for acquisitions of businesses, net of cash acquired                                             |       | (984                                      | )          | (7,503 | ) |
| Purchases of  property and equipment                                                                            |       | (9,763                                    | )          | (8,125 | ) |
| Decrease in  restricted cash and deposits for customer programs                                                 |       | 1,242                                     |       | 7,127 |   |
| Net cash (used  in) provided by investing activities                                                            |       | (7,505                                    | )          | 3,589 |   |
|                                                                                                            |       |                                      |       |   |   |
| **Cash  flows from financing activities**                                                                       |       |                                      |       |   |   |
| Proceeds from  exercises of stock options                                                                       |       | 471                                       |       | 319 |   |
| Repayment of  borrowings and payments under capital leases                                                      |       | (22                                       | )          | (1,190 | ) |
| Net cash  provided by (used in) financing activities                                                            |       | 449                                       |       | (871 | ) |
| Effects of  exchange rate changes on cash                                                                       |       | 19                                        |       | — |   |
| Net change in  cash and cash equivalents                                                                        |       | (17,256                                   | )          | (7,911 | ) |
| Cash and cash  equivalents at beginning of period                                                               |       | 60,782                                    |       | 70,242 |   |
| Cash and cash  equivalents at end of period                                                                     |       | $                                         | 43,526     |   | $ | 62,331 |   |
|                                                                                                            |       |                                      |       |   |   |
| **Supplemental  disclosure of cash flow information**                                                           |       |                                      |       |   |   |
|                                                                                                            |       |                                      |       |   |   |
| **Non-cash  financing and investing activities**                                                                |       |                                      |       |   |   |
| Issuance of  common stock in connection with acquisitions                                                       |       | $                                         | 501        |   | $ | 1,791 |   |
| Issuance of  common stock in satisfaction of bonuses                                                            |       | $                                         | 500        |   | $ | 844 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

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**EnerNOC, Inc.**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

 

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

 

**Description of Business**

 

EnerNOC, Inc.(the Company) is a service company that was incorporated in Delaware on June 5,2003. The Company operates in a single segment providing full-service demandresponse and energy management solutions. The Company enables energy users,energy suppliers, system operators, and utilities to reduce demand forelectricity during periods of peak demand or supply shortfalls by proactivelyshedding noncritical loads, dispatching backup generators, and analyzingreal-time data to optimize energy consumption. The Company builds upon itsposition as a leading demand response solutions provider by using its NetworkOperations Center and scalable technology platform to also deliver a portfolioof additional energy management solutions to its customers, including theCompany’s monitoring-based commissioning services, energy procurement servicesand emissions tracking and trading support. The Company’s demand response andenergy management solutions deliver immediate bottom-line benefits to end-usecustomers and energy suppliers while helping to create a more reliable andefficient electricity grid for system operators and utilities.

 

The preparation of these unauditedcondensed consolidated financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  The most significant estimates reflected in thesefinancial statements include stock-based compensation.  Actual resultscould differ from those estimates.

 

**Reclassifications**

 

Certain reclassificationshave been made to the June 30, 2008 statements of operations to conform tothe June 30, 2009 presentation. The reclassifications primarily consist ofcosts related to facilities, information technology, human resources and certainemployee-related expenses, such as employee benefits. These reclassificationswere determined on a headcount-based allocation. These amounts, which werepreviously included in general and administrative expenses, have been allocatedamong cost of revenues, selling and marketing expenses and research anddevelopment expenses. The Company believes that by allocating these costs inthis manner it better represents the expenses associated with each of theseactivities.

 

**Basis of Consolidation**

 

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

 

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

 

**ComprehensiveLoss**

 

Statement of FinancialAccounting Standards (SFAS) No. 130, *ReportingComprehensive Income*, establishes standards for reporting anddisplaying comprehensive income and comprehensive loss and its components inthe consolidated financial statements. Comprehensive income is defined as thechange in equity of a business enterprise during a period from transactions andother events and circumstances from non-owner sources. Comprehensive income(loss) is composed of net income (loss), unrealized gains and losses onmarketable securities and cumulative foreign currency translation adjustments.

 

Comprehensive loss forthe three and six months ended June 30, 2009 and 2008 was as follows:

 

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| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net loss                                            |       | $                                    | (5,729     | )                                  | $          | (10,436 | ) | $ | (18,263 | ) | $ | (21,437 | ) |
| Change in  unrealized gain on marketable securities |       | 4                                    |       | —                             |       | — |   | — |   |
| Foreign currency  translation adjustments           |       | (153                                 | )          | —                             |       | 151 |   | — |   |
| Total  comprehensive loss                           |       | $                                    | (5,878     | )                                  | $          | (10,436 | ) | $ | (18,112 | ) | $ | (21,437 | ) |

 

**Impairment of Long-Lived Assets**

 

Consistent with SFAS No. 144, *Accounting for the Impairment of Long-Lived Assetsand Long-Lived Assets to Be Disposed Of*, when impairment indicators exist,the Company evaluates its long-lived assets for potential impairment.  The Company reviews property and equipmentfor impairment whenever events or changes in circumstances indicate that thecarrying amount of assets may not be recoverable. Recoverability of theseassets is measured by comparison of their carrying amount to the futureundiscounted cash flows the assets are expected to generate over theirremaining economic lives. If such assets are considered to be impaired, theimpairment is recognized in earnings and equals the amount by which thecarrying value of the assets exceeds their fair market value determined byeither a quoted market price, if any, or a value determined by utilizing adiscounted cash flow technique. If such assets are not impaired, but theiruseful lives have decreased, the remaining net book value is amortized over therevised useful life. For the six months ended June 30, 2009, there were noindicators of impairment.

 

**2. Acquisitions**

 

**eQuilibrium Solutions Corporation**

 

InJune 2009, the Company acquired substantially all of the assets ofeQuilibrium Solutions Corporation (eQ), a software company specializing in the development of enterprisesustainability management products and services.  The total purchase pricepaid by the Company at closing was approximately $751, of which $250 was paidin cash and the remainder of which was paid by the issuance of 21,464 shares ofthe Company’s common stock that had a value of approximately $501.  These shares were measured as of the acquisitiondate using the closing price of the Company’s common stock, as reported on TheNASDAQ Global Market on June 11, 2009. The Company believes itsacquisition of eQ strengthens its position in a nascent yet growing marketcommitted to helping energy and sustainability leaders plan their own responseto reach energy efficiency and emissions goals.

 

TheeQ acquisition has been accounted for as a business combination under SFAS No. 141(R),*Business Combinations* (SFAS No. 141(R)). Under SFAS No. 141(R),all of the assets acquired in the transaction are recognized at theiracquisition-date fair values, which are preliminary at June 30, 2009.  Transaction costs related to the businesscombination have been expensed as incurred. The Company’s consolidated financialstatements reflect eQ’s results of operations from June 11, 2009 forward.

 

Forpurposes of the condensed consolidated balance sheets, the Company has madepreliminary allocations of the purchase price for eQ to the net tangible andintangible assets and goodwill.  However,the Company is in the process of completing its valuation of certain intangibleassets.  The difference between theaggregate purchase price and the fair value of assets acquired is allocated togoodwill.  The final allocation of thepurchase price to intangible assets and goodwill may differ materially from theinformation presented herein.

 

Thefollowing table summarizes the preliminary estimate of fair values of theassets acquired at the acquisition date:

 
| Property and equipment |   | $   | 26     |   |
|------------------------|--------|-----|--------|--------|
| Customer relationships |   | 480 |   |
| Trade name             |   | 50  |   |
| Non-compete agreements |   | 12  |   |
| Goodwill               |   | 183 |   |
| Total                  |   | $   | 751    |   |

 

Proforma information has not been provided for this acquisition since the impactto the financial statements was not material.

 

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**South River Consulting, LLC**

 

In May 2008, the Company acquired 100% of themembership interests of South River Consulting, LLC (SRC), an energyprocurement and risk management services provider, for a purchase price equalto $5,524, which consisted of $3,603 in cash, $174 in related expenses and120,000 shares of the Company’s common stock that had a value of approximately$1,747 as of the closing date. In addition to the amounts paid at closing, theCompany may be obligated to pay to the former holders of SRC membershipinterests an earnout amount equal to 50% to 60% of the revenues of SRC’sbusiness during each twelve-month period from May 1, 2008 through April 30,2010, which will be recognized as additional purchase price when earned. Theearnout payments have been and will be based on the achievement of certainminimum revenue-based milestones of SRC and have been and will be paid in acombination of cash and shares of the Company’s common stock. These additionalearnout payments have been and will be recorded as additional purchase price.The earnout payment related to the May 1, 2008 to April 30, 2009earnout period amounted to $1,468, of which $734 was paid in cash during thesecond quarter of 2009 and the remainder of which will be paid by the issuanceof 44,776 shares of the Company’s common stock. The earnout payment, if any, related to May 1, 2009 through April 30,2010 will be determined during the second quarter of 2010.

 

**Mdenergy, LLC**

 

In September 2007, the Company acquired 100% ofthe membership interests of Mdenergy, LLC (MDE), an energy procurement serviceprovider, pursuant to the terms of a merger agreement. The total purchase pricepaid by the Company at closing was approximately $7,900, of which $3,501 waspaid in cash and the remainder of which was paid by the issuance of 139,056shares of the Company’s common stock. In addition to the amounts paid at closing,the Company was obligated to pay to the former holders of MDE membershipinterests an earnout equal to two times the revenues of MDE’s business duringthe period from July 1, 2007 through December 31, 2007. Thecontingent consideration related to the earnout in the amount of approximately$3,357 was paid in January of 2008 and was recorded as additional purchaseprice.

 

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

 

**3. Goodwill and Other IntangibleAssets**

 

The Company accounts for goodwill and other intangibleassets under SFAS No. 141(R), *BusinessCombinations*, and SFAS No. 142, *Goodwill and Other Intangible Assets*(SFAS No. 142).SFAS No. 141(R) replaces SFAS No. 141, *BusinessCombinations*, but retains the requirement that the purchase methodof accounting for acquisitions be used for all business combinations.  Under SFAS No. 142, purchased goodwilland intangible assets with indefinite lives are not amortized, but insteadtested for impairment at least annually and whenever events or changes incircumstances indicate the carrying value may not be recoverable. Intangibleassets with finite lives continue to be amortized over their useful lives. TheCompany performs its annual impairment test during the fourth quarter. Thistest will include the two-step approach described in SFAS No. 142.  Step one of the goodwill impairment test,used to identify potential impairment, compares the fair value of the reportingunit with its carrying amount, including goodwill.  If the fair value of the reporting unit exceedsits carrying amount, goodwill of the reporting unit is considered not impaired,thus the second step of the impairment test is not required.  If the carrying amount of a reporting unitexceeds its fair value, the second step of the goodwill impairment test will beperformed to measure the amount of impairment loss, if any. Based on theCompany’s most recent analysis, there has been no impairment of goodwill orother intangible assets.

 

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

 
| Balance at  December 31, 2008 |   | $     | 13,395 |   |
|------------------------------------|--------|-------|--------|--------|
| Additions during  the period       |   | 1,651 |   |
| Balance at  June 30, 2009     |   | $     | 15,046 |   |

 

Theadditions of $1,651 during the period related to $183 for the eQ acquisitionand $1,468 for the SRC earnout payment.

 

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

 

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| ** **                                        | ** ** | **As of June 30, 2009**    | ** ** | **As of December 31, 2008**   | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer contracts                                |       | $                          | 4,217      |                          | $          | (974 | ) | $ | 4,217 |   | $ | (767 | ) |
| Employment agreements and non-compete  agreements |       | 182                        |       | (78                           | )          | 170 |   | (53 | ) |
| Software                                          |       | —                     |       | —                        |       | 33 |   | (31 | ) |
| Customer relationships                            |       | 2,200                      |       | (247                          | )          | 1,720 |   | (149 | ) |
| Trade name                                        |       | 50                         |       | —                        |       | — |   | — |   |
| Total                                             |       | $                          | 6,649      |                          | $          | (1,299 | ) | $ | 6,140 |   | $ | (1,000 | ) |

 

The decrease in softwarefrom December 31, 2008 to June 30, 2009 was due to the write-off offully amortized intangible assets.  Totalamortization expense was $163 and $129 for the three months ended June 30,2009 and 2008, respectively.  Totalamortization expense was $332 and $645 for the six months ended June 30,2009 and 2008, respectively.

 

**4.  Recent AccountingPronouncements**

 

***SFAS No. 165,Subsequent Events***

 

InMay 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 165,*Subsequent Events*.  Thestandard does not require significant changes regarding recognition ordisclosure of subsequent events, but does require disclosure of the datethrough which subsequent events have been evaluated for disclosure andrecognition.  The standard is effective for financial statementsissued after June 15, 2009.  The implementation of this standarddid not have a significant impact on the financial statements of theCompany.  Subsequent events through the filing date of this QuarterlyReport on Form 10-Q have been evaluated for disclosure and recognition.

 

**5. Net Loss Per Share**

 

Basic net loss per shareis computed by dividing net loss by the weighted average number of commonshares outstanding for the period adjusted for unvested restricted stock,shares held in escrow and contingently issuable shares. Diluted net loss pershare is computed using the weighted average number of common sharesoutstanding and, when dilutive, potential common shares from options andwarrants using the treasury stock method. The calculation of dilutive weighted averageshares outstanding does not include the following potentially dilutive sharesas their effect would be antidilutive.

 
| ** **                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Outstanding  options, restricted stock and warrants |       | 1,423,590                            |       | 1,548,039                          |       | 1,131,242 |   | 1,277,183 |   |
| Shares held in  escrow                              |       | 122,599                              |       | 95,111                             |       | 121,307 |   | 65,111 |   |
| Dilutive  weighted average shares outstanding       |       | 1,546,189                            |       | 1,643,150                          |       | 1,252,549 |   | 1,342,294 |   |

 

Included in the weightedaverage number of common shares outstanding at June 30, 2009 was 44,776contingently issuable shares of common stock issuable in connection with theacquisition of SRC.  These shares havebeen included in the calculation as there are no restrictions for issuanceexcept for the passage of time.

 

The weighted averagecommon shares outstanding at June 30, 2009 excludes 120,000 and 15,767shares issued in the SRC and eQ acquisitions, respectively, that are held inescrow.  The weighted average common shares outstanding at June 30,2008 excludes the 35,114 shares issued in the MDE acquisition that were held inescrow.  These shares have been excludedsince the escrow agreement contains restrictions on issuance.

 

**6. Fair Value Measurements**

 

SFAS No. 157*,Fair Value Measurements,* establishes a fair value hierarchy thatrequires the use of observable market data, when available, and prioritizes theinputs to valuation techniques used to measure fair value in the followingcategories:

 

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

 

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

 

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

 

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

 
| ** **              | ** ** | **Fair Value Measurement at June 30, 2009 Using** | ** ** |
|-------------------------|------------|--------------------------------------------------------|------------|
| ** **              | ** ** | **Totals**                                             | ** ** | **Quoted Prices in Active  Markets for Identical  Assets (Level 1)** | ** ** | **Significant Other  Observable Inputs (Level 2)** | ** ** | **Unobservable Inputs (Level 3)** | ** ** |
| Money market  funds (1) |       | $                                                      | 30,525     |   | $ | 30,525 |   | $ | — |   | $ | — |   |
| Total                   |       | $                                                      | 30,525     |   | $ | 30,525 |   | $ | — |   | $ | — |   |

 

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

 

At June 30, 2009,the Company had restricted cash of approximately $177 invested in certificatesof deposit. All certificates of deposit have contractual maturities of twelvemonths or less. The Company’s investments in certificates of deposit have afair value that approximates cost.

 

**7****. Financing Arrangements**

 

On August 5, 2008, the Company and one ofits subsidiaries entered into a $35,000 secured revolving credit and termloan facility with Silicon Valley Bank (SVB) pursuant to a loan andsecurity agreement, which was subsequently amended on May 29, 2009.  Pursuant to the terms of the SVB loan andsecurity agreement, as amended, SVB will, among other things, makerevolving credit and term loan advances and issue letters of credit forthe Company’s account.  The interest on loans under the Company’srevolving credit loan accrues at interest rates based upon either SVB’sprime rate or the 30, 60 or 90-day LIBOR plus 2.25%, at the Company’selection.  The interest on the Company’s term loan accrues at SVB’s primerate plus 0.50% or the 30, 60 or 90-day LIBOR plus 2.75%, at the Company’selection.  The term advance is payable in thirty-six consecutive equalmonthly installments of principal, calculated by SVB, based upon theamount of the term advance and an amortization schedule equal to thirty-sixmonths.  All unpaid principal and accrued interest is due and payable infull on August 5, 2010, which is the maturity date.  In connection with theissuance or renewal of letters of credit for the Company’s account, the Companyis charged a letter of credit fee of 1.25%. The Company expenses the interestand letter of credit fees, as applicable, in the period incurred.

 

The Company’s obligationsunder this credit facility are secured by all of the assets of the Company andits subsidiaries, excluding any intellectual property.  This creditfacility contains customary terms and conditions for credit facilities of thistype, including restrictions on the Company’s ability to incur additionalindebtedness, create liens, enter into transactions with affiliates, transferassets, pay dividends or make distributions on, or repurchase, the Company’sstock, consolidate or merge with other entities, or suffer a change incontrol.  In addition, the Company is required to meet certain financialcovenants customary with this type of agreement, including maintaining aminimum specified tangible net worth and a minimum specified ratio of currentassets to current liabilities.  This credit facility contains customaryevents of default, including payment defaults, breaches of representations,breaches of affirmative or negative covenants, cross defaults to other materialindebtedness, bankruptcy and failure to discharge certain judgments. If adefault occurs and is not cured within any applicable cure period or is notwaived, the Company’s obligations under the credit facility may beaccelerated.  The Company was in compliance with all financial covenantsunder the SVB credit facility at December 31, 2008 and June 30, 2009.

 

As of June 30, 2009,the SVB revolving credit and term loan facility was fully drawn. Unless earlierpayment is required by an event of default, all principal and unpaid interestwill be due and payable on August 5, 2010. The Company is also required topay an unused line fee on the daily unused amount of its facility at a perannum rate of 0.25%. The Company incurred financing costs of $120 in connectionwith the SVB credit facility, which was deferred and is being amortized tointerest expense over the life of the debt. At June 30, 2009, the Companyhad borrowings of $4,442 accruing interest at 4.0% and letters of credit of$30,539 outstanding under the SVB credit and term loan facility.

 

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**8. Commitments and Contingencies**

 

The Company is subject to certain performanceguarantee requirements under certain customer contracts and open market biddingprogram participation rules. The Company had deposits held by certain customersof $2,047 and $2,386, respectively, at June 30, 2009 and December 31,2008. These amounts primarily represent up-front payments required by customersto participate in certain programs and ensure that the Company will deliver itscommitted capacity amounts. If the Company fails to meet its minimum enrollmentrequirements, a portion or all of the deposit may be forfeited. The Companyassessed the probability of default under these agreements and has determinedit to be remote.

 

In connection with theCompany’s participation in an open market bidding program, the Company enteredinto an arrangement with a third party to bid capacity into the program andprovide the corresponding financial assurance required in connection with thebid. The arrangement included an up-front payment by the Company equal to $2,000,of which $1,200 is being expensed as interest expense and $800 is beingdeferred in accordance with FASB Technical Bulletin 90-1, *Accountingfor Separately Priced Extended Warranty and Product Maintenance Costs*.  In addition, the Company will be required topay the third party an additional contingent fee, up to a maximum of $3,000,based on the revenue that the Company expects to earn in 2012 in connectionwith the bid.  This additional fee willbe recognized as earned.

 

**9. Stock-Based Compensation**

 

*Stock Options*

 

The Company’sAmended and Restated 2003 Stock Option and Incentive Plan (2003 Plan) and the2007 Employee, Director and Consultant Stock Plan (the 2007 Plan, andcollectively with the 2003 Plan, the Plans) provide for the grant of incentivestock options, nonqualified stock options, restricted and unrestricted stockawards and other stock-based awards to eligible employees, directors andconsultants of the Company. Options granted under the Plans are exercisable fora period determined by the Company, but in no event longer than ten years fromthe date of the grant. Options generally vest ratably over four years. The 2003Plan expired upon the Company’s initial public offering in May 2007. Anyforfeitures after May 2007 under the 2003 Plan are available for futuregrant under the 2007 Plan.

 

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

 

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

 
| ** **                              | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Risk-free interest rate                 |       | 2.86                               | %          | 2.91 | % |
| Expected term of options,  in years (1) |       | —                             |       | 6.25 |   |
| Vesting term, in years  (1)             |       | 2.16                               |       | — |   |
| Expected annual  volatility             |       | 86                                 | %          | 87 | % |
| Expected dividend yield                 |       | —                             | %          | — | % |
| Exit rate pre-vesting                   |       | 4.88                               | %          | 4.88 | % |
| Exit rate post-vesting  (1)             |       | 10.89                              | %          | — | % |

 

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(1) Change in assumptions reflects theCompany’s use of a trinomial valuation model as of January 1, 2009.

 

If the Company had continuedusing the Black-Scholes option pricing model in 2009, stock-based compensationexpense would not have been materially different for the three and six monthsended June 30, 2009.

 

In December 2008,the Company’s board of directors approved a one-time offer to the Company’semployees, including its executive officers, and directors to exchange optiongrants that had an exercise price per share that was equal to or greater thanthe higher of $12.00 or the closing price of the Company’s common stock asreported on The NASDAQ Global Market on January 21, 2009 (the Exchange).The Exchange closed on January 21, 2009, and the Company exchanged optionsthat had exercise prices equal to or greater than $12.00 per share. As aresult, an aggregate of 744,401 options, with exercise prices ranging from$12.27 to $48.54 per share, were exchanged for 424,722 options with an exerciseprice per share of $8.63 for employees who are not also executive officers ofthe Company, 142,179 options with an exercise price per share of $11.47 forexecutive officers who are not also directors of the Company and 45,653 optionswith an exercise price per share of $12.94 for the Company’s directors. On thedate of the Exchange, the estimated fair value of the new options did notexceed the fair value of the exchanged stock options calculated immediatelyprior to the Exchange.  As such, there is no incremental fair value of thenew options, and the Company will not record additional compensation expenserelated to the Exchange.  The Company will continue to recognize theremaining compensation expense related to the exchanged options over theremaining vesting period of the original options.

 

The following is a summary of the Company’s stockoption activity as of June 30, 2009 and the stock option activity for allstock option plans during the six months ended June 30, 2009:

 

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| ** **                                | ** ** | **Six Months Ended June 30, 2009**  | ** ** |
|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                | ** ** | **Number of Shares  Underlying Options** | ** ** | **Exercise Price  Per Share** | ** ** | **Weighted-Average  Exercise Price Per  Share** | ** ** | **Aggregate  Intrinsic  Value(1)** | ** ** |
| Outstanding at  beginning of period       |       | 2,746,835                                |       | $0.11 - $48.54 |   | $ | 13.88 |   |   |   |
| Granted                                   |       | 915,354                                  |       |   |   | 11.10 |   |   |   |
| Exercised                                 |       | (207,002                                 | )          |   |   | 2.26 |   | $ | 1,308 |   |
| Cancelled                                 |       | (856,382                                 | )          |   |   | 28.39 |   | — |   |
| Outstanding at end of  period             |       | 2,598,805                                |       | $0.11 - $48.54 |   | 8.65 |   | 35,629 |   |
| Remaining contractual  life in years: 7.1 |       |                                     |       |   |   |   |   |   |   |
| Exercisable at end of  period             |       | 836,154                                  |       | $0.11 - $48.54 |   | $ | 7.19 |   | $ | 12,904 |   |
| Remaining contractual  life in years: 7.4 |       |                                     |       |   |   |   |   |   |   |

 

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(1)  The aggregate intrinsic value was calculatedbased on the positive difference between the estimated fair value of theCompany’s common stock on the date of exercise or June 30, 2009, asappropriate, and the exercise price of the underlying options.

 

The Companyrecognized stock-based compensation expense of $6,074 and $4,881 during the sixmonths ended June 30, 2009 and 2008, respectively.  The amount ofunrecognized stock-based compensation expense that may be recognized foroutstanding unvested options as of June 30, 2009 was $18,123, which is tobe recognized over a weighted average period of 2.3 years.  Forrestricted stock at June 30, 2009, the Company had $3,632 of unrecognizedstock-based compensation expense, which is expected to be recognized over aweighted average period of 2.7 years.

 

During the first quarter of 2009, certain of theCompany’s executives received their performance-based bonus awards in shares offully-vested common stock of the Company.  The shares issued totaled45,085 and had an approximate value of $500.

 

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

 

**10. Income Taxes**

 

No current provision for federal or state income taxeshas been recorded, as the Company has incurred cumulative net operating lossessince inception.  The Company has recorded a deferred tax provision for$182 and $73, respectively, related to tax deductible goodwill for the threemonths ended June 30, 2009 and 2008. The Company has recorded a deferredtax provision for $351 and $158, respectively, related to tax deductiblegoodwill for the six months ended June 30, 2009 and 2008. Amounts due to variousstates for excise taxes are included in general and administrative expenses,accrued expenses and other current liabilities as of June 30, 2009 and December 31,2008.

 

**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.

 

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During the three and six months ended June 30,2009 and 2008, the Company had certain customers whose revenue individuallyrepresented 10% or more of the Company’s total revenues as follows:

 
| ** ** | ** ** | **Three Months Ended June 30,** | ** ** |
|------------|------------|--------------------------------------|------------|
| ** ** | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| ** ** | ** ** | **Revenues**                         | ** ** | **% of Total Revenues** | ** ** | **Revenues** | ** ** | **% of Total Revenues** | ** ** |
| Customer 1 |       | $                                    | 23,125     |   | 54.5 | % | $ | 6,640 |   | 28.0 | % |
| Customer 2 |       | 12,441                               |       | 29.3 | % | 8,411 |   | 35.5 | % |
| Customer 3 |       | *                                    |       | * |   | 4,646 |   | 19.6 | % |
| Total      |       | $                                    | 35,566     |   | 83.8 | % | $ | 19,697 |   | 83.1 | % |

 
| ** ** | ** ** | **Six  Months Ended June 30,** | ** ** |
|------------|------------|-------------------------------------|------------|
| ** ** | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** ** | ** ** | **Revenues**                        | ** ** | **% of  Total Revenues** | ** ** | **Revenues** | ** ** | **% of  Total Revenues** | ** ** |
| Customer 1 |       | $                                   | 23,167     |   | 38.1 | % | $ | 19,495 |   | 46.1 | % |
| Customer 2 |       | 26,959                              |       | 44.3 | % | 7,514 |   | 17.8 | % |
| Customer 3 |       | *                                   |       | * |   | 8,632 |   | 20.4 | % |
| Total      |       | $                                   | 50,126     |   | 82.4 | % | $ | 35,641 |   | 84.3 | % |

 

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*Less than 10% of total revenues.

 

**12. Legal Proceedings**

 

The Company issubject to legal proceedings, claims and litigation arising in the ordinarycourse of business. The Company does not expect the ultimate costs to resolvethese matters to have a material adverse effect on its consolidated financial condition,results of operations or cash flows. In addition to ordinary-course litigation,the Company is a party to the litigation described below.

 

In March 2008,three purported class action lawsuits were filed in the United States DistrictCourt for the District of Massachusetts (the Court) against the Company,several of its officers and directors (the individual defendants), and certainof the underwriters of the Company’s November 2007 follow-on publicoffering of its common stock. The three class action complaints wereconsolidated by the Court into a single action and an amended consolidatedcomplaint was filed on September 24, 2008. The lead plaintiff in theconsolidated class action claimed to represent two purported classes: (i) an“Exchange Act Class” consisting of persons who purchased shares of the Company’scommon stock from November 1, 2007 through February 27, 2008 and (ii) a“Securities Act Class” consisting of persons who purchased shares of theCompany’s common stock pursuant or traceable to the follow-on public offering.The lead plaintiff alleged, among other things, that the defendants made falseand misleading statements and failed to disclose material information in variousSEC filings and other public statements. The amended consolidated class actioncomplaint asserted, on behalf of the purported Securities Act Class, variousclaims under the Securities Act of 1933, as amended (Securities Act), againstall defendants and, on behalf of the purported Exchange Act Class, variousclaims under the Securities Exchange Act of 1934, as amended, and Rule 10b-5against the Company and the individual defendants. The amended consolidatedclass action complaint sought, among other relief, class certification,unspecified damages, fees, and such other relief as the Court may have deemedjust and proper. The defendants filed a motion to dismiss the amendedconsolidated complaint on October 27, 2008 and a hearing on the motion washeld on January 8, 2009. The Court took defendants’ motion underadvisement following the hearing. On February 10, 2009, the lead plaintiffvoluntarily dismissed all claims against the underwriter defendants.  On May 13, 2009, the Court granted theCompany’s and the individual defendants’ motion to dismiss and dismissed thelead plaintiff’s remaining claims without leave to replead.  On June 9, 2009, the Court endorsed ajoint stipulation in which the lead plaintiff abandoned any right of appeal andthe parties agreed not to pursue sanctions in connection with the suit.

 

In addition, in May 2008,a complaint was filed derivatively on the Company’s behalf in the Court againstseveral of the Company’s officers and directors and certain of the underwritersof the Company’s follow-on public offering. The derivative complaint allegedvarious common law and equitable claims, including, among other things, breachof fiduciary duty, gross mismanagement, abuse of control, waste of corporateassets and unjust enrichment, in connection with purported false and misleadingstatements and failures to disclose material information in certain SEC filingsand other public statements from November 1, 2007 to May 14, 2008.The derivative plaintiff sought, among other relief, unspecified damages,injunctive relief, restitution, disgorgement, fees and such other relief as theCourt may have deemed proper. On August 12, 2008, the Court stayed theCompany’s obligation to respond to the derivative complaint pending a denial,if any, of the defendants’ motion to dismiss the amended consolidated classaction complaint. On June 25, 2009, following dismissal of the amendedconsolidated class action complaint, the derivative plaintiff voluntarilydismissed the action without prejudice.

 

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**Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

*The following discussion should beread in conjunction with our unaudited condensed consolidated financialstatements and related notes thereto included elsewhere in this QuarterlyReport on Form 10-Q, as well as our audited financial statements for thefiscal year ended December 31, 2008 and notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in our Annual Report on Form 10-K for the fiscal year ended December 31,2008, as filed with the Securities and Exchange Commission, or the SEC, on March 16,2009. This Quarterly Report on Form 10-Q contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, or the Securities Act, and Section 21E of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act. Without limiting theforegoing, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,”“anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “target”and variations of those terms or the negatives of those terms and similarexpressions are intended to identify forward-looking statements. Allforward-looking statements included in this Quarterly Report on Form 10-Qare based on current expectations, estimates, forecasts and projections and thebeliefs and assumptions of our management including, without limitation, ourexpectations regarding our results of operations, operating expenses and thesufficiency of our cash for future operations. We assume no obligation torevise or update any such forward-looking statements. Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of certain important factors, including those set forth below underthis Item 2 — “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” Part II, Item 1A — “Risk Factors” andelsewhere in this Quarterly Report on Form 10-Q, as well as in our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008. Youshould carefully review those factors and also carefully review the risksoutlined in other documents that we file from time to time with the SEC.*

 

**Overview**

 

We are a leadingprovider of clean and intelligent energy solutions. We use our NetworkOperations Center, or NOC, to remotely manage and reduce electricityconsumption across a network of commercial, institutional and industrialcustomer sites to enable a more information-based and responsive, orintelligent, electric power grid. Our customers are electric power gridoperators and utilities, as well as commercial, institutional and industrialend-users of electricity. Our demand response and energy management solutionshelp optimize the balance of electric supply and demand, provide cost-efficientalternatives to traditional generation resources and drive cost-savings for ourcustomers. Grid operators and utilities pay us a stream of recurring cash flowsfor managing demand response capacity that we share with participating end-usecustomers. To date, we have received substantially all of our revenues fromthese grid operators and utilities, and we make payments to end-users ofelectricity for both contracting to reduce electricity usage and actually doingso when called upon.

 

We build upon ourposition as a leading demand response solutions provider by using our NOC andscalable technology platform to also deliver a portfolio of additional energymanagement solutions to our customers, including our monitoring-basedcommissioning services, or MBCx solutions, energy procurement services, or EPSsolutions, and emissions tracking and trading support. Our MBCx solutionscombine advanced metering applications, energy analytics and control to provideour end-use customers with the ability to identify energy efficiency opportunitiesthrough the continuous analysis of those end-use customers’ real-time energydata. Our EPS solutions provide our commercial, institutional and industrialcustomers located in restructured or deregulated markets throughout the UnitedStates with the ability to more effectively manage the energy supplierselection process, including energy supply product procurement andimplementation.

 

Since inception,our business has grown substantially. With approximately 2,400 commercial,institutional and industrial customers across approximately 5,450 customersites in our demand response network and over 3,150 megawatts, or MW, of demandresponse capacity under our management as of June 30, 2009, we believethat we are the largest national demand response solutions provider focused onthe commercial, institutional and industrial market.

 

We continue todevote substantially all of our efforts toward the sale of our demand responseand energy management solutions. We have incurred cumulative net losses of $88.8million from inception to June 30, 2009. Our net losses were$5.7 million and $18.2 million, respectively, for the three and sixmonths ended June 30, 2009.

 

**Significant Recent Developments**

 

In May 2009, theUnited States District Court for the District of Massachusetts dismissedwithout leave to replead the consolidated securities class action lawsuit filedagainst us and certain of our officers and directors.  In June 2009, following dismissal of thesecurities class action lawsuit, the plaintiff in a derivative lawsuit filedagainst certain of our officers and directors and certain of the underwritersof our follow-on public offering voluntarily dismissed the lawsuit withoutprejudice.  Please refer to Part II,Item 1 of this Quarterly Report on Form 10-Q entitled “Legal Proceedings”for a detailed description of the dismissal of the consolidated securitiesclass action lawsuit.

 

In June 2009, weacquired substantially all of the assets of eQuilibrium Solutions Corporation,or eQ, a software company specializing in the development of enterprisesustainability management products and services, for a purchase price equal toapproximately $0.8 million consisting of both cash and shares of our commonstock.  We believe that the acquisitionof eQ strengthens our position in a nascent yet growing market committed tohelping energy and sustainability leaders plan their own response to reachenergy efficiency and emissions goals.

 

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**Revenues and Expense Components**

 

***Revenues***

 

We deriverecurring revenues from the sale of our demand response and energy managementsolutions. Our revenues from our demand response solutions primarily consist ofcapacity and energy payments. We derive revenues from demand response capacitythat we make available in open market programs, which are open market biddingopportunities established by grid operators or utilities. In these open market programs,grid operators and utilities generally seek bids from companies such as ours toprovide demand response capacity based on prices offered in competitivebidding. These opportunities are generally characterized by flexible capacitycommitments and prices that vary by hour, day, month, bidding period orsupplemental, new or modified programs. In certain markets, we enter intolong-term capacity contracts with grid operators and utilities, generallyranging from three to 10 years in duration, to deploy our demand responsesolutions.  Revenues have historicallyincreased in our second and third fiscal quarters compared to other quarters inour fiscal year due to seasonal demand related to the demand response market.

 

Where we operatein open markets, our revenues from demand response capacity payments generallyvary month-to-month based upon our enrolled capacity and the market paymentrate. Where we have a long-term contract, we receive periodic capacitypayments, which may vary monthly or seasonally, based upon enrolled capacityand predetermined payment rates. Under both long-term contracts and open marketprograms, we receive capacity payments regardless of whether we are called uponto reduce demand for electricity from the electric power grid and we recognizerevenue over the applicable delivery period, even where payments are made overa different period. At least once per year, we demonstrate our capacity eitherthrough a demand response event or a measurement and verification test. This demonstrated capacity is typically used to calculate the continuingperiodic capacity payments to be made to us until the next demand responseevent or test establishes a new demonstrated capacity amount. In most cases, wealso receive an additional payment for the amount of energy usage that weactually curtail from the grid; we call this an energy payment. The energypayment is based upon the amount of energy usage that we actually reduce fromthe electricity grid in kilowatt hours during a demand response event.

 

In accordance withStaff Accounting Bulletin No. 104, Revenue Recognition, or SAB No. 104,in all of our arrangements, we do not recognize any revenues until we candetermine that persuasive evidence of an arrangement exists, delivery hasoccurred, the fee is fixed or determinable, and we deem collection to beprobable. As program rules may differ for each contract and/or regionwhere we operate, we assess whether or not we have met the specific servicerequirements under the program rules and recognize or defer revenues asnecessary. In accordance with SAB No. 104, we recognize demand responserevenues when we have provided verification to the grid operator or utility ofour ability to deliver the committed capacity under the contract or open marketprogram. Committed capacity is verified through the results of an actual demandresponse event or a measurement and verification test. Once the capacity amounthas been verified, the revenues are recognized and future revenues become fixedor determinable and are recognized monthly until the next verificationevent.  In subsequent verification events, if our verified capacity isbelow the previously verified amount, the grid operator or utility customerwill reduce future payments based on the adjusted verified capacity amounts.The payments received from the grid operator or utility customer can bedecreased or increased, up to the committed capacity amounts under the contractor open market program, in connection with subsequent verification events. 

 

We account for incrementaldirect costs incurred related to the acquisition or origination of a contractin a transaction that results in the deferral or delay of revenue recognitionin accordance with paragraph 4 of Financial Accounting Standards BoardTechnical Bulletin 90-1, *Accounting for SeparatelyPriced Extended Warranty and Product Maintenance Costs*.  We had deferred contract origination costs ofapproximately $0.9 million as of June 30, 2009 and $0.0 million as of December 31,2008. These deferred expenses would not have been incurred without ourparticipation in an open market bidding program and will be expensed inproportion to the related revenue being recognized. We believe that thisaccounting treatment appropriately matches expenses with the associated revenue.

 

As of June 30, 2009, we had over 3,150 MW undermanagement in our demand response network, meaning that we had entered intodefinitive contracts with our commercial, institutional and industrialcustomers with respect to over 3,150 MW of demand response capacity. In most ofthe markets in which we originally focused our growth, we generally beginearning revenues from our MW under management within approximately one monthfrom the date on which we “enable” the MW, or the date on which we can reducethe MW from the electricity grid if called upon to do so. An exception is thePJM Interconnection, or PJM, forward capacity market, which is a market inwhich we materially increased our participation beginning in the first quarterof 2008 and in which we expect to continue to increase our participation andderive revenues for the foreseeable future. Because PJM operates on a June toMay program-year basis, a MW that we enable after June of each yearmay not begin earning revenue until June of the following year. Thisresults in a longer average revenue recognition lag time in our end-usecustomer portfolio from the point in time when we consider a MW to be undermanagement to when we earn revenues from the MW.

 

Our portfolio of additional energy managementsolutions includes our EPS and MBCx solutions and emissions tracking andtrading support.  Our EPS solutions provide our end-use customers locatedin restructured or deregulated markets throughout the United States with theability to more effectively manage the energy supplier selection process,including energy supply product procurement and implementation. We receive amonthly fee from the competitive electricity provider based upon the actualconsumption of electricity used by our end-use customers or a consulting feefrom the end-use customer directly. Our MBCx solutions combine advancedmetering applications and energy analytics and control to provide our end-usecustomers with the ability to identify energy efficiency opportunities throughthe continuous analysis of those end-use customers’ real-time energydata.   We also use our PowerTrak platform to deliver emissionstracking and trading support.  We generally receive either asubscription-based fee or a percentage savings fee for these energy managementsolutions.  Revenues derived from our energy management solutionsincreased from $2.8 million to $3.1 million, respectively, for the six monthsended June 30, 2008 and 2009.

 

Revenues generated fromopen market sales to PJM, a grid operator customer, accounted for 55% and 28%,respectively, of our total revenues in each of the three months ended June 30,2009 and 2008 and 38% and 46%, respectively, of our total revenues in each ofthe six months ended June 30, 2009 and 2008.

 

Revenues generatedfrom two fixed price contracts with, and open market sales to, ISO New EnglandInc., or ISO-NE, a grid operator customer, accounted for 29% and 36%,respectively, of our total revenues in each of the three months ended June 30,2009 and 2008 and 44% and 18%, respectively, of our total revenues in each ofthe six months ended June 30, 2009 and 2008. Our two fixed price contracts withISO-NE expired on May 31, 2008.  Inaddition, 0% and 20%, respectively, of our total revenues for each of the threemonths ended June 30, 2009 and 2008 and 0% and 20%, respectively, of ourtotal revenues for each of the six months ended June 30, 2009 and 2008 weregenerated under a fixed price contract with The Connecticut Light and PowerCompany, or CL&P, which expired on December 31, 2008.  We haveenrolled a significant portion of the MW represented by our expired fixed pricecontracts with ISO-NE and CL&P in other available demand responseprograms.  

 

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***Cost of Revenues***

 

Cost of revenues for our demand response solutionsconsists primarily of payments that we make to our commercial, institutionaland industrial customers for their participation in our demand responsenetwork. We generally enter into three to five year contracts with our end-usecustomers under which we deliver recurring cash payments to them for thecapacity they commit to make available on demand. We also generally make anadditional payment when a customer reduces consumption of energy from theelectric power grid. The equipment and installation costs for our devices atour commercial, institutional and industrial customer sites are capitalized anddepreciated over the lesser of the remaining term of the contract, for fixedcontracts, or the estimated useful life of the equipment, and this depreciationis reflected in cost of revenues. We also include in cost of revenues themonthly telecommunications and data costs we incur as a result of beingconnected to our commercial, institutional and industrial sites and ourinternal payroll and related costs specifically allocated to a customer site.Cost of revenues for energy management solutions include third party services,equipment depreciation and the wages and associated benefits that we pay to ourproject managers for the performance of their services.

 

***Gross Profit***

 

Gross profit consists ofour total revenues less our cost of revenues. Our gross profit has been, andwill be, affected by many factors, including (a) the demand for our demandresponse and energy management solutions, (b) the selling price of oursolutions, (c) our cost of revenues, (d) the introduction of newclean and intelligent energy solutions and (e) our ability to open andenter new markets and regions and expand deeper into markets we alreadyserve.  In addition, gross profit will be affected by the way in which wemanage our portfolio of demand response capacity in certain supplemental demandresponse programs and capacity arrangements in which we participate, in orderto maximize payments that we receive for that capacity.  These supplemental programs and capacityarrangements are administered by grid operators and utilities in certainregions to augment existing open market bidding programs and are designed tocreate higher incentives for participants to locate capacity in certaingeographic areas and to account for changes in supply or demand forecast withina specific region.

 

***Operating Expenses***

 

Operating expenses consist of selling and marketing,general and administrative, and research and development expenses.Personnel-related costs are the most significant component of each of theseexpense categories. We grew from 314 full-time employees at June 30, 2008to 358 full-time employees at June 30, 2009. We expect to continue to hireemployees to support our growth for the foreseeable future. In addition, weincur significant up-front costs associated with the expansion of the number ofMW under our management, which we expect to continue for the foreseeablefuture. Although we expect our overall operating expenses to increase inabsolute dollar terms for the foreseeable future as we grow our MW undermanagement and further increase our headcount, we expect our overall annualoperating expenses to decrease as a percentage of total annual revenues as weleverage our existing employee base and continue generating revenues from ourMW under management.

 

*Selling and Marketing*

 

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

 

*General and Administrative*

 

General and administrative expenses consist primarilyof (a) salaries and related personnel costs, including costs associatedwith share-based payment awards, related to our executive, finance, humanresource, information technology and operations organizations, (b) facilitiesexpenses, (c) accounting and legal professional fees, (d) depreciationand amortization and (e) other related overhead. We expect general andadministrative expenses to continue to increase in absolute dollar terms forthe foreseeable future as we invest in infrastructure to support our continuedgrowth. We expect general and administrative expenses to decrease as apercentage of total annual revenues as we leverage our current infrastructureand employee base.

 

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*Research and Development*

 

Research and development expenses consist primarily of(a) salaries and related personnel costs, including costs associated withshare-based payment awards, related to our engineering organization, (b) paymentsto suppliers for design and consulting services, (c) costs relating to thedesign and development of new solutions and enhancement of existing solutions, (d) qualityassurance and testing and (e) other related overhead. During the three andsix months ended June 30, 2009, we capitalized internal software anddevelopment costs of $0.6 million and $1.2 million, respectively, in accordancewith Statement of Position 98-1, *Accountingfor the Cost of Computer Software Developed or Obtained for Internal Use,*andthe amount is included as software in property and equipment at June 30,2009. During the three and six months ended June 30, 2008, we capitalizedinternal software and development costs of $0.7 million and $0.7 million,respectively. We expect research and development expenses to increase inabsolute dollar terms for the foreseeable future and to decrease as apercentage of total revenues in the long term.

 

***Stock-BasedCompensation***

 

Stock-based compensationis recognized in accordance with Statement of Financial Accounting Standards,or SFAS, No. 123(R), *Share BasedPayment,* or SFAS No. 123(R). SFAS No. 123(R) addressesall forms of share-based payment awards, including shares issued under employeestock purchase plans, stock options, restricted stock and stock appreciationrights. SFAS No. 123(R) requires us to expense share-based paymentawards with compensation cost for share-based payment transactions measured atfair value. For the three and six months ended June 30, 2009, we recordedexpenses of approximately $3.3 million and $6.1 million, respectively, inconnection with share-based payment awards to employees and non-employees. Withrespect to grants through June 30, 2009, a future expense of non-vestedoptions of approximately $18.1 million is expected to be recognized over aweighted average period of 2.3 years and a future expense of restricted stockawards of approximately $3.6 million is expected to be recognized over aweighted average period of 2.7 years. For stock options granted prior to January 1,2009, the fair value for these options was estimated at the date of grant usinga Black-Scholes option-pricing model and for stock options granted on or after January 1,2009, the fair value of each award is estimated on the date of grant using atrinomial valuation model. If we had continued using the Black-Scholes optionpricing model in 2009, stock-based compensation expense would not have beenmaterially different for the three and six months ended June 30, 2009.

 

In December 2008, ourboard of directors approved a one-time offer to our employees, including ourexecutive officers, and directors to exchange option grants that had an exerciseprice per share that was equal to or greater than the higher of $12.00 or theclosing price of our common stock as reported on The NASDAQ Global Market onJanuary 21, 2009, which we refer to as the exchange. The exchange closed onJanuary 21, 2009, and we exchanged options that had exercise prices equal to orgreater than $12.00 per share. As a result, an aggregate of 744,401 options,with exercise prices ranging from $12.27 to $48.54 per share, were exchangedfor 424,722 options with an exercise price per share of $8.63 foremployees who are not also our executive officers, 142,179 options with anexercise price per share of $11.47 for executive officers who are not also ourdirectors and 45,653 options with an exercise price per share of $12.94 for ourdirectors.  On the date of the exchange,the estimated fair value of the new options did not exceed the fair value ofthe exchanged options calculated immediately prior to the exchange.  As such, there is no incremental fair valueof the new options, and we will not record additional compensation expenserelated to the exchange.  We willcontinue to recognize the remaining compensation expense related to theexchanged options over the remaining vesting period of the original options.

 

***Other Income andExpense***

 

Other income and expense consist primarily of interestincome earned on cash balances, gain or loss on foreign currency transactionsand other non-operating income. We historically have invested our cash in moneymarket funds, treasury funds, commercial paper, municipal bonds and auctionrate securities. We do not currently hold any auction rate securities.

 

***Interest Expense***

 

Interest expense consists of interest on our debtfacilities and fees associated with issuing letters of credit.

 

**Consolidated Results of Operations**

 

***Three and SixMonths Ended June 30, 2009 Compared to the Three and Six Months Ended June 30,2008***

 

***Revenues***

 

The following table summarizes our revenues for thethree and six months ended June 30, 2009 and 2008 (dollars in thousands):

 
| ** **                   | ** ** | **Three Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|------------------------------|------------|--------------------------------------|------------|----------------|------------|
| ** **                   | ** ** | **2009**                             | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Revenues:                    |       |                                 |       |           |       |   |   |
| Demand response  solutions   |       | $                                    | 40,904     |           | $          | 21,868 |   | 87.0 | % |
| Energy management  solutions |       | 1,498                                |       | 1,818          |       | (17.6 | )% |
| Total revenues               |       | $                                    | 42,402     |           | $          | 23,686 |   | 79.0 | % |

 
|                         |       | **Six  Months Ended June 30,** |       | **Percentage** |       |
|------------------------------|------------|-------------------------------------|------------|----------------|------------|
|                         | ** ** | **2009**                            | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Revenues:                    | ** ** | ** **                          | ** ** | ** **     | ** ** | ** ** | ** ** |
| Demand response  solutions   |       | $                                   | 57,704     |           | $          | 39,476 |   | 46.2 | % |
| Energy management  solutions |       | 3,121                               |       | 2,822          |       | 10.6 | % |
| Total revenues               |       | $                                   | 60,825     |           | $          | 42,298 |   | 43.8 | % |

 

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During the threeand six months ended June 30, 2009, our demand response solutions revenuesincreased by $19.0 million and $18.2 million, respectively, from the sameperiods in 2008. The increase in our demand response solutions revenues wasprimarily attributable to an increase in our MW under management in thefollowing operating areas:

 
| ** **                  | ** ** | **June 30, 2009** | ** ** |
|-----------------------------|------------|------------------------|------------|
| ** **                  | ** ** | **3 months ended**     | ** ** | **6 months ended** | ** ** |
| PJM                         |       | $                      | 16,418     |   | $ | 15,619 |   |
| Tennessee Valley  Authority |       | 930                    |       | 1,185 |   |
| Tampa Electric Company      |       | 535                    |       | 1,351 |   |
| Other                       |       | 1,153                  |       | 73 |   |
| Total                       |       | $                      | 19,036     |   | $ | 18,228 |   |

 

During the three months ended June 30, 2009, ourenergy management solutions revenues decreasedby $0.3 million, or 18%, as compared to the threemonths ended June 30, 2008. The decrease was primarily due to a $0.2million reduction in energy efficiency audits performed during the period.During the six months ended June 30, 2009, our energy management solutionsrevenues increasedby $0.3 million, or 11%, as compared to the six months ended June 30,2008. The increase primarily resulted from our acquisition in May 2008 ofSouth River Consulting, LLC, or SRC, an energy procurement and risk managementservices provider. During the six months ended June 30, 2009, werecognized revenue of $1.5 million related to the SRC acquisition compared to$0.6 million during the six months ended June 30, 2008.  This increase was partially offset by areduction in energy efficiency audits performed during the period.

 

We currently expect our revenues to increase in 2009compared to 2008 as we seek to further increase our MW under management in alloperating regions, enroll new end-use customers in our demand responseprograms, continue to sell our energy management solutions to our new andexisting demand response customers and pursue more favorable pricingopportunities.

 

***Gross Profit andGross Margin***

 

The following tables summarize our gross profit andgross margin percentages for our demand response and energy managementsolutions for the three and six months ended June 30, 2009 and 2008(dollars in thousands):

 
| **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|
| **2009**                             | ** ** | **2008** | ** ** |
| **Gross Profit**                     | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                    | 18,135     |   | 42.8 | % | $ | 8,871 |   | 37.5 | % |
|                                      |            |  |  |  |  |  |  |  |  |

 
| **Six Months Ended June 30,** | ** ** |
|------------------------------------|------------|
| **2009**                           | ** ** | **2008** | ** ** |
| **Gross Profit**                   | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| $                                  | 26,033     |   | 42.8 | % | $ | 15,341 |   | 36.3 | % |
|                                    |            |  |  |  |  |  |  |  |  |

 

Our gross profit increased during the three and sixmonths ended June 30, 2009 when compared to the three and six months endedJune 30, 2008 primarily due to the increase in our MW under management inthe ELRP during the first half of 2009. The increase in gross profit was also attributable to an increase in ourMW under management in all of our operating regions, including PJM, from 1,643at June 30, 2008 to over 3,150 at June 30, 2009, as well as morefavorable contract terms with our commercial, institutional and industrialcustomers. 

 

Our gross margin increased during the three and sixmonths ended June 30, 2009 as compared to the three and six months ended June 30,2008 primarily due to the way in which we managed our portfolio of demandresponse capacity in certain supplemental demand response programs and capacityarrangements in which we participate, in order to maximize payments that wereceive for that capacity.  Thesesupplemental programs and capacity arrangements are administered by gridoperators and utilities in certain regions to augment existing open market biddingprograms and are designed to create higher incentives for participants tolocate capacity in certain geographic areas and to account for changes insupply or demand forecast within a specific region.  The increase in gross margin during the threeand six months ended June 30, 2009 as compared to the same periods in 2008 wasalso attributable to more favorable contract terms with our commercial,institutional and industrial customers. Overall, the percentage increase inrevenues was higher than the percentage increase in cost of revenues, andtherefore our gross margin percentage increased.

 

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***Operating Expenses***

 

The following tables summarize our operating expensesfor the three and six months ended June 30, 2009 and 2008 (dollars inthousands):

 
|                                 |       | **Three Months Ended June 30,** |       |       |       |
|--------------------------------------|------------|--------------------------------------|------------|------------|------------|
|                                 |       | **2009**                             | ** ** | **2008**   | ** ** | **Percentage Change** |   |
| Operating Expenses:                  |       |                                 |       |       |       |   |   |
| Selling and marketing  expenses      |       | $                                    | 9,212      |       | $          | 7,678 |   | 20.0 | % |
| General and  administrative expenses |       | 11,395                               |       | 10,558     |       | 7.9 | % |
| Research and  development expenses   |       | 1,876                                |       | 1,256      |       | 49.4 | % |
| Total                                |       | $                                    | 22,483     |       | $          | 19,492 |   | 15.3 | % |
| ** **                           | ** ** | ** **                           |       | ** ** |       |
| ** **                           | ** ** | **Six  Months Ended June 30,**  |       | ** ** |       |
| ** **                           | ** ** | **2009**                             | ** ** | **2008**   |       | **Percentage  Change** |   |
| Operating Expenses:                  |       |                                 |       |       |       |   |   |
| Selling and marketing  expenses      |       | $                                    | 17,879     |       | $          | 14,189 |   | 26.0 | % |
| General and  administrative expenses |       | 21,097                               |       | 20,478     |       | 3.0 | % |
| Research and  development expenses   |       | 3,413                                |       | 2,993      |       | 14.0 | % |
| Total                                |       | $                                    | 42,389     |       | $          | 37,660 |   | 12.6 | % |

 

Personnel-related costs are the most significant componentof each of these expense categories, including costs associated withshare-based payment awards. We grew from 314 full-time employees at June 30,2008 to 358 full-time employees at June 30, 2009. We expect to continue tohire employees to support our growth for the foreseeable future.  Inaddition, we incur significant up-front costs associated with the expansion ofthe number of MW under our management, which we expect to continue for theforeseeable future. Although we expect our overall operating expenses toincrease in absolute dollar terms for the foreseeable future as we grow our MWunder management and further increase our headcount, we expect our overalloperating expenses to decrease as a percentage of total annual revenues as weleverage our existing employee base and continue generating revenues from ourMW under management.

 

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

 

*Sellingand Marketing Expenses*

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|--------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                             | ** ** | **2008**   | ** ** | **Percentage Change** | ** ** |
| Payroll and related  costs |       | $                                    | 6,263      |       | $          | 5,259 |   | 19.1 | % |
| Stock-based  compensation  |       | 795                                  |       | 909        |       | (12.5 | )% |
| Other                      |       | 2,154                                |       | 1,510      |       | 42.6 | % |
| Total                      |       | $                                    | 9,212      |       | $          | 7,678 |   | 20.0 | % |
|                       |       |                                 |       |       |       |   |   |
|                       |       | **Six  Months Ended June 30,**  |       |       |       |
| ** **                 | ** ** | **2009**                             | ** ** | **2008**   |       | **Percentage  Change** |   |
| Payroll and related  costs |       | $                                    | 11,933     |       | $          | 9,930 |   | 20.2 | % |
| Stock-based  compensation  |       | 1,820                                |       | 1,711      |       | 6.4 | % |
| Other                      |       | 4,126                                |       | 2,548      |       | 61.9 | % |
| Total                      |       | $                                    | 17,879     |       | $          | 14,189 |   | 26.0 | % |

 

The increase in selling and marketing expenses for thethree and six months ended June 30, 2009 compared to the same periods in2008 was primarily driven by the costs associated with an increase in thenumber of selling and marketing full-time employees from 105 at June 30,2008 to 130 at June 30, 2009. Also contributing to the increase in sellingand marketing expenses for the three and six months ended June 30, 2009compared to the same periods in 2008 was an increase in sales commissionspayable to certain members of our sales force, which is reflective of theincrease in MW under management and increase in gross profit for the three andsix months ended June 30, 2009, as well as the timing associated with ourhiring new full-time employees during 2009 as compared to 2008. The increase inother selling and marketing expenses for the three months ended June 30,2009 as compared to the same period in 2008 was primarily due to increases inprofessional services of $0.2 million and allocated facility costs of $0.5 million.The increase in other selling and marketing expenses for the 

 

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six months ended June 30, 2009 as compared to thesame period in 2008 was primarily due to increases in professional services of$0.4 million, marketing expenses of $0.2 million and allocated facility costsof $0.9 million.

 

*Generaland Administrative Expenses*

 
| ** **                 | ** ** | **Three  Months Ended June 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Percentage  Change** |   |
| Payroll and related  costs |       | $                                     | 5,663      |       | $          | 5,412 |   | 4.6 | % |
| Stock-based  compensation  |       | 2,301                                 |       | 1,636      |       | 40.6 | % |
| Other                      |       | 3,431                                 |       | 3,510      |       | (2.3 | )% |
| Total                      |       | $                                     | 11,395     |       | $          | 10,558 |   | 7.9 | % |
|                       |       |                                  |       |       |       |   |   |
|                       |       | **Six  Months Ended June 30,**   |       |       |       |
| ** **                 | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Percentage  Change** |   |
| Payroll and related  costs |       | $                                     | 10,638     |       | $          | 10,451 |   | 1.8 | % |
| Stock-based  compensation  |       | 3,928                                 |       | 2,940      |       | 33.6 | % |
| Other                      |       | 6,531                                 |       | 7,087      |       | (7.8 | )% |
| Total                      |       | $                                     | 21,097     |       | $          | 20,478 |   | 3.0 | % |

 

The increase in general and administrative expensesfor the three and six months ended June 30, 2009 compared to the sameperiods in 2008 was primarily due to the grant of fully-vested options topurchase shares of our common stock and the grant of shares of our common stockto certain members of our board of directors. General and administrativefull-time employees increased from 170 at June 30, 2008 to 180 at June 30,2009, which also contributed to the increase in general and administrativeexpenses. The increase in wages associated with the increase in full-timeemployees was offset by the reallocation of certain employee-related expensesto selling and marketing expenses and research and development expenses and theallocation of internal payroll and related costs specifically related tocustomer sites to cost of goods sold.

 

*Researchand Development Expenses*

 
| ** **                 | ** ** | **Three  Months Ended June 30,** | ** ** | ** ** | ** ** |
|----------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                 | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Percentage  Change** |   |
| Payroll and related  costs |       | $                                     | 998        |       | $          | 755 |   | 32.2 | % |
| Stock-based  compensation  |       | 158                                   |       | 149        |       | 6.0 | % |
| Other                      |       | 720                                   |       | 352        |       | 104.5 | % |
| Total                      |       | $                                     | 1,876      |       | $          | 1,256 |   | 49.4 | % |
|                       |       |                                  |       |       |       |   |   |
|                       |       | **Six  Months Ended June 30,**   |       |       |       |
| ** **                 | ** ** | **2009**                              | ** ** | **2008**   | ** ** | **Percentage  Change** |   |
| Payroll and related  costs |       | $                                     | 1,846      |       | $          | 2,059 |   | (10.3 | )% |
| Stock-based  compensation  |       | 326                                   |       | 230        |       | 41.7 | % |
| Other                      |       | 1,241                                 |       | 704        |       | 76.3 | % |
| Total                      |       | $                                     | 3,413      |       | $          | 2,993 |   | 14.0 | % |

 

The increase in research and development expenses forthe three and six months ended June 30, 2009 compared to the same periodsin 2008 was primarily driven by the costs associated with an increase in thenumber of research and development full-time employees from 39 at June 30,2008 to 48 at June 30, 2009. This was partially offset by capitalizedinternal software and development costs of $0.6 million and $1.2 million,respectively, for the three and six months ended June 30, 2009 as comparedto $0.7 million and $0.7 million, respectively, for the same periods in 2008.The increase in other research and development expenses was primarily due to anincrease in facility, human resources and information technology expenses of$0.2 million and $0.3 million, respectively, as well as professional fees of$0.1 million and $0.1 million, respectively, for the three and six months endedJune 30, 2009.

 

***Other Income andExpense***

 

Other income for the three months ended June 30,2009 was $0.2 million as compared to $0.5 million for the three months ended June 30,2008. Other expense for the six months ended June 30, 2009 was $0.1million as compared to other income of $1.5 million for the six months ended June 30,2008.  The change in other income andexpense for the three and six months ended June 30, 2009 as compared tothe

 

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same periods in 2008 was primarily due to the globalchange in interest rates, which has affected the yields on our investments and,to a lesser extent, lower average investment balances and the recognition of anet foreign currency transaction loss.

 

***Interest Expense***

 

Interest expense for the three months ended June 30,2009 and 2008 was $1.4 million and $0.2 million, respectively. Interest expensefor the six months ended June 30, 2009 and 2008 was $1.5 million and $0.5million, respectively. Interest expense includes interest on our outstandingdebt, letters of credit origination fees, and amortization of deferredfinancing fees.  The increase in interestexpense for the three and six months ended June 30, 2009 as compared tothe same periods in 2008 was primarily due to an increase in outstandingletters of credit, which resulted in additional interest expense of $1.2million, which was related to the arrangement that we entered into with a thirdparty in May 2009 in connection with bidding capacity into a certain openmarket bidding program, and $1.0 million, respectively.

 

***Income Taxes***

 

We had a provision for income taxes of$0.2 million and $0.1 million, respectively, for the three months ended June 30,2009 and 2008.  We had a provision forincome taxes of $0.4 million and $0.2 million, respectively, for the sixmonths ended June 30, 2009 and 2008. The provision for income taxes relates to the amortization of taxdeductible goodwill, which generates a deferred tax liability that cannot beoffset by net operating losses or other deferred tax assets since its reversalis considered indefinite in nature. We provided a full valuation allowance forour deferred tax assets because the realization of any future tax benefitscould not be sufficiently assured as of June 30, 2009.

 

**Liquidity and Capital Resources**

 

***Overview***

 

Since inception, we havegenerated significant losses. As of June 30, 2009, we had an accumulated deficitof $88.8 million and our principal sources of liquidity were cash and cashequivalents totaling $43.5 million, a decrease of $17.3 million fromthe December 31, 2008 balance of $60.8 million. We are contingentlyliable for $30.5 million in connection with outstanding letters of creditunder the SVB credit facility.

 

Included in the June 30,2009 and December 31, 2008 restricted cash balances are amounts used tocollateralize outstanding letters of credit in the amount of $0.2 million and$1.4 million, respectively.

 

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

 

We believe our existingcash and cash equivalents at June 30, 2009 and our anticipated cash flowsfrom operating activities will be sufficient to meet our anticipated cashneeds, including investing activities, for at least the next 12 months. Ourfuture working capital requirements will depend on many factors, including,without limitation, the rate at which we sell our demand response solutions toutilities and grid operators and the increasing rate at which letters of creditor security deposits are required by those utilities and grid operators, theintroduction and market acceptance of new demand response and energy managementsolutions, the expansion of our sales and marketing and research anddevelopment activities, and the geographic expansion of our business operations. We also may raise additional funds inthe event we determine in the future to effect one or more acquisitions ofbusinesses, technologies or products, although we have no currentunderstandings, commitments or agreements with respect to any such acquisition.  To the extent that our cash and cashequivalents and our anticipated cash flows from operating activities, as wellas our $35.0 million credit facility with SVB, which was fully drawn as of June30, 2009, are insufficient to fund our future activities or planned futureacquisitions, we may be required to raise additional funds through bank creditarrangements or public or private equity or debt financings.  In addition, we may elect to raise additionalfunds even before we need them if the conditions for raising capital arefavorable. Accordingly, we intend to file a shelf registration statement withthe SEC to register shares of our common stock and other securities for sale,giving us the opportunity to raise funding when needed or otherwise consideredappropriate at prices and on terms to be determined at the time of any suchofferings.  Any equity or equity-linkedfinancing could be dilutive to existing stockholders.  In the event we require additional cashresources, we may not be able to obtain bank credit arrangements or effect anyequity or debt financing on terms acceptable to us or at all.

 

***Cash Flows***

 

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

 
| ** **                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                             | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Cash flows used in  operating activities               |       | $                                  | (10,219    | ) | $ | (10,629 | ) |
| Cash flows (used in)  provided by investing activities |       | (7,505                             | )          | 3,589 |   |
| Cash flows provided by  (used in) financing activities |       | 449                                |       | (871 | ) |
| Effects of exchange  rate changes on cash              |       | 19                                 |       | — |   |
| Net decrease in cash  and cash equivalents             |       | $                                  | (17,256    | ) | $ | (7,911 | ) |

 

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***Cash Flows Used inOperating Activities***

 

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

 

Cash used in operating activities for the six monthsended June 30, 2009 was $10.2 million and consisted of an $18.2 millionnet loss, $4.0 million of net cash used for working capital and otheractivities offset by $12.0 million of non-cash items, primarily consisting ofdepreciation and amortization, unrealized foreign exchange transaction loss,deferred taxprovision, stock-based compensation charges and other miscellaneousitems. Cash used for working capital and other activities consisted of anincrease of $4.8 million in unbilled revenues relating to the PJM demandresponse market, an increase in accounts receivable of $2.4 million due to thetiming of cash receipts under the demand response programs in which weparticipate, an increase in other assets of $2.8 million due to increases inprepaid expenses, and a decrease of $0.8 million in accounts payable and accruedexpenses due to the timing of payments. These amounts were partially offset bycash provided by working capital and other activities, which reflected a $1.3million increase in deferred revenue, a $4.6 million increase in accruedcapacity payments, the majority of which was related to the PJM demand responsemarket, a $0.8 million increase in accrued payroll and related expenses, and a$0.1 million increase in other noncurrent liabilities.

 

Cash used inoperating activities for the six months ended June 30, 2008 was $10.6million and consisted of a $21.4 million net loss offset by approximately $1.5million of net cash provided by working capital and other activities and by$9.3 million of non-cash items, consisting primarily of depreciation and amortization,deferred tax provision, stock-based compensation charges and other miscellaneousitems. Cash provided by working capital and other activities primarilyreflected a $4.0 million increase in accrued capacity payments, the majority ofwhich was related to the PJM demand response market, an increase of $2.5million in accounts payable and accrued expenses, an increase of $0.7 millionin payroll and related expenses, an increase of $0.1 million in othernoncurrent liabilities and a $0.3 million decrease in trade accountsreceivable. These amounts were partially offset by an increase of $3.8 millionin unbilled revenue relating to the PJM demand response market, a decrease of$1.5 million in deferred revenues, and an increase of $0.8 million in prepaid andother assets.

 

***Cash Flows (Usedin) Provided by Investing Activities***

 

Cash used in investing activities for the six monthsended June 30, 2009 was $7.5 million. Our principal cash investments duringthis period related to installation services used to build out and expand ourdemand response and energy management solutions and purchases of property andequipment. Cash provided by the sales of available-for-sale securities was $2.0million and we had a decrease in restricted cash of $1.2 million primarily as aresult of our financing arrangement with SVB, which allows for the issuance ofletters of credit in connection with demand response programs in which we mayparticipate. During the six months ended June 30, 2009, we also incurred $9.7million in capital expenditures primarily related to office equipment, demandresponse equipment and other miscellaneous expenditures. Additionally, our cashinvestments included the cash portion of the earnout payment due in connectionwith our acquisition of SRC of $0.7 million and $0.3 million of cash used forour acquisition of eQ.

 

Cash provided byinvesting activities for the six months ended June 30, 2008 was $3.6million. For the six months ended June 30, 2008, purchases ofavailable-for-sale securities were approximately $10.6 million and salesof available-for-sale maturities were $22.7 million.  Our principal cashinvestments during this period related to installation services used to buildout and expand our demand response programs, purchases of property and equipment,and the cash payments made for acquisitions of businesses totaling $7.5million. During the six months ended June 30, 2008, we decreased ourrestricted cash and deposits for customer programs by $7.1 million and incurred$8.1 million in capital expenditures primarily related to office equipment,demand response equipment and other miscellaneous expenditures.

 

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

 

Cash provided by financing activities was $0.4 millionfor the six months ended June 30, 2009. Cash used in financing activitieswas $0.9 million for the six months ended June 30, 2008. Cash provided byfinancing activities consisted of the following:

 

*Equity Financing Activities*

 

We received approximately $0.5 million and $0.3million, respectively, from exercises of options to purchase shares of ourcommon stock during the six months ended June 30, 2009 and June 30,2008.

 

*Credit Facility Borrowings*

 

In August 2008, we and one of our subsidiariesentered into a $35.0 million secured revolving credit and term loan facilitywith SVB pursuant to a loan and security agreement, which was subsequentlyamended in May 2009.  Pursuant tothe terms of the SVB loan and security agreement, as amended, SVB will, amongother things, make revolving credit and term loan advances and issue letters ofcredit for our account. This credit facility replaced our credit facility withBlueCrest Capital Finance, L.P.  Allunpaid principal and accrued interest is due and payable in full on August 5,2010, which is the maturity date. Our obligations under this credit facilityare secured by all of our assets and the assets of our subsidiaries, excludingany intellectual property. This credit facility contains customary terms andconditions for credit facilities of this type. In addition, we are required tomeet certain financial covenants customary with this type of facility,including maintaining a minimum specified tangible net worth and a minimummodified quick ratio. This credit facility contains customary events of default.If a default occurs and is not cured within any applicable cure period or isnot waived, our obligations under the credit facility may be accelerated. Wewere in compliance 

 

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with all financial covenants under this creditfacility at June 30, 2009. As of June 30, 2009, our SVB creditfacility was fully drawn, as we had borrowings of $4.4 million outstandingunder the SVB credit and term loan facility, in addition to an aggregate of$30.5 million in letters of credit issued for our account. For additionalinformation regarding the credit and term loan facility with SVB, see Note 7 toour unaudited consolidated financial statements contained herein.

 

During the six months ended June 30, 2009, wemade scheduled payments on our outstanding debt and capital lease obligationsof $0.1 million. During the six months ended June 30, 2008, we madescheduled payments on our outstanding debt and capital lease obligations of$1.2 million.

 

**Capital Spending**

 

We have made capitalexpenditures primarily for general corporate purposes to support our growth andfor equipment installation related to our demand response programs. Our capitalexpenditures totaled $9.8 million and $8.1 million, respectively, during thesix months ended June 30, 2009 and 2008. As we continue to grow, we expectour capital expenditures for 2009 to increase as compared to 2008.

 

**Contractual Obligations**

 

As of June 30, 2009, our contractual obligationsdisclosure contained in our Annual Report on Form 10-K for the fiscal yearended December 31, 2008, which we filed with the SEC on March 16,2009, has not materially changed.

 

**Off-Balance Sheet Arrangements**

 

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

 

**Critical Accounting Policies and Useof Estimates**

 

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

 

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

 

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

 

**Item 4.  Controls andProcedures.**

 

***Disclosure Controlsand Procedures***

 

Our management, with the participation of our chief executiveofficer and chief financial officer, evaluated the effectiveness of ourdisclosure controls and procedures as of June 30, 2009. The term “disclosurecontrols and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act, means controls and other procedures of a company that aredesigned to ensure that information required to be disclosed by a company inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms. Disclosure controls and procedures include, withoutlimitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate 

 

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to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  Our disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their desired controlobjectives. Based on the evaluation of our disclosure controls and proceduresas of June 30, 2009, our chief executive officer and chief financialofficer concluded that, as of such date, our disclosure controls and procedureswere effective at the reasonable assurance level.

 

***Internal Controlover Financial Reporting***

 

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

 

**PART II — OTHER INFORMATION**

 

**Item 1.    LegalProceedings.**

 

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

 

In March 2008,three purported class action lawsuits were filed in the United States DistrictCourt for the District of Massachusetts, or the Court, against us, several ofour officers and directors, whom we refer to as the individual defendants, andcertain of the underwriters of our November 2007 follow-on public offeringof our common stock. The three class action complaints were consolidated by theCourt into a single action and an amended consolidated complaint was filed on September 24,2008. The lead plaintiff in the consolidated class action claimed to representtwo purported classes: (i) an “Exchange Act Class” consisting of personswho purchased shares of our common stock from November 1, 2007 through February 27,2008 and (ii) a “Securities Act Class” consisting of persons who purchasedshares of our common stock pursuant or traceable to the follow-on publicoffering. The lead plaintiff alleged, among other things, that the defendantsmade false and misleading statements and failed to disclose materialinformation in various SEC filings and other public statements. The amendedconsolidated class action complaint asserted, on behalf of the purportedSecurities Act Class, various claims under the Securities Act against alldefendants and, on behalf of the purported Exchange Act Class, various claims underthe Exchange Act and Rule 10b-5 against us and the individual defendants.The amended consolidated class action complaint sought, among other relief,class certification, unspecified damages, fees, and such other relief as theCourt may have deemed just and proper. The defendants filed a motion to dismissthe amended consolidated complaint on October 27, 2008 and a hearing onthe motion was held on January 8, 2009. The Court took defendants’ motionunder advisement following the hearing. On February 10, 2009, the leadplaintiff voluntarily dismissed all claims against the underwriterdefendants.  On May 13, 2009, theCourt granted our motion and the motion of the individual defendants to dismissand dismissed the lead plaintiff’s remaining claims without leave toreplead.  On June 9, 2009, the Courtendorsed a joint stipulation in which the lead plaintiff abandoned any right ofappeal and the parties agreed not to pursue sanctions in connection with thesuit.

 

In addition, on May 14,2008, a complaint was filed derivatively on our behalf in the Court againstseveral of our officers and directors and certain of the underwriters of ourfollow-on public offering. The derivative complaint alleged various common lawand equitable claims, including, among other things, breach of fiduciary duty,gross mismanagement, abuse of control, waste of corporate assets and unjustenrichment, in connection with purported false and misleading statements andfailures to disclose material information in certain SEC filings and otherpublic statements from November 1, 2007 to May 14, 2008. Thederivative plaintiff sought, among other relief, unspecified damages,injunctive relief, restitution, disgorgement, fees and such other relief as theCourt may have deemed proper. On August 12, 2008, the Court stayed ourobligation to respond to the derivative complaint pending a denial, if any, ofthe defendants’ motion to dismiss the amended consolidated class actioncomplaint.  On June 25, 2009,following dismissal of the amended consolidated class action complaint, thederivative plaintiff voluntarily dismissed the action without prejudice.

 

**Item 1A.  Risk Factors.**

 

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

 

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

 

(a)           Unregistered Sales of EquitySecurities

 

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We offered, issuedand/or sold the following unregistered securities during the three months endedJune 30, 2009:

 

(i)          On June 11, 2009, with respect toour previous acquisition of 100% of the membership interests of SRC, we becameobligated to issue 44,776 shares of our common stock in connection with anearnout payment due to the former holders of SRC membership interests.

 

(ii)       On June 12, 2009, in connection with theacquisition of substantially all of the assets of eQ, we issued 21,464 sharesof our common stock.

 

The issuance ofthe securities described in (i) and (ii) above were deemed to beexempt from registration under the Securities Act in reliance on Section 4(2) ofthe Securities Act as transactions by an issuer not involving any publicoffering. The recipients of these securities in each such transactionrepresented their intention to acquire the securities for investment only andnot with a view to or for sale in connection with any distribution thereof.Such recipients received written disclosures that the securities have not beenregistered under the Securities Act and that any resale must be made pursuantto a registration or an available exemption from such registration. All ofthese securities are deemed restricted securities for the purposes of theSecurities Act. The sales of these securities were made without generalsolicitation or advertising.

 

(b)          Use of Proceeds

 

We registeredshares of our common stock in connection with our initial public offering, orIPO, under the Securities Act. The registration statement on Form S-1(File No. 333-140632) filed in connection with our IPO was declaredeffective by the SEC on May 17, 2007. Including shares sold pursuant tothe exercise by the underwriters of their over-allotment option, 4,087,500shares of our common stock were registered and sold in the IPO by us and an additional225,000 shares of common stock were registered and sold by the sellingstockholders named in the registration statement. All the shares were sold at aprice to the public of $26.00 per share. The net offering proceeds received byus, after deducting underwriting discounts and commissions and expensesincurred in connection with the offering, were approximately $95.2million.  Through June 30, 2009, approximately $29.4 million of theproceeds from our IPO has been used to fund the operations of our business andfor general corporate purposes, approximately $31.3 million has been used topurchase and install equipment, approximately $2.7 million has been used torepay indebtedness and approximately $13.4 million has been used to fundacquisitions and make payments outstanding on prior acquisitions. The remainderof the net proceeds from the IPO are invested in short-term investment gradesecurities and money market accounts. There has been no material change in theplanned use of proceeds from our IPO as described in our final prospectus filedwith the SEC on May 18, 2007 pursuant to Rule 424(b).

 

**Item 4.  Submission ofMatters to a Vote of Security Holders.**

 

Our annual meetingof stockholders was held on Wednesday, June 3, 2009, in Boston,Massachusetts, at which the following matters were submitted to a vote of thestockholders:

 

(a)                               Votes regarding the election of each ofthe persons named below as class II members to the board of directors for athree-year term and until his successor has been duly elected and qualified oruntil his earlier resignation or removal were as follows:

 
| ** **     | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------|------------|------------|------------|--------------|------------|
| Richard Dieter |       | 15,188,345 |       | 2,945,335    |       |
| TJ Glauthier   |       | 15,133,828 |       | 2,945,483    |       |

 

After the meeting,Timothy G. Healy and David B. Brewster continued to serve as our class IIIdirectors with terms that expire in 2010 and Adam Grosser, Arthur W. Coviello, Jr.and James L. Turner continued to serve as our class I directors with terms thatexpire in 2011.

 

(b)                              Votes regarding ratification of theappointment of the accounting firm of Ernst & Young LLP as ourindependent registered public accounting firm for the current fiscal year wereas follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstentions** | ** ** |
|------------|------------|-------------|------------|-----------------|------------|
| 18,047,157 |       | 25,691      |       | 60,979          |       |

 

**Item 6. Exhibits.**

 
| 10.1@ |   | Amended and Restated EnerNOC, Inc. Non-Employee  Director Compensation Policy. |
|-------|--------|-------------------------------------------------------------------------------------|

 

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| 10.2   |   | First Loan Modification  Agreement, dated as of May 29, 2009, by and among Silicon Valley Bank,  EnerNOC, Inc. and EnerNOC Securities Corporation.                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Certification of Chief Executive Officer of  EnerNOC, Inc. pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as  amended.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Certification of Chief Financial Officer of  EnerNOC, Inc. pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as  amended.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                               |
| 32.1   |   | Certification of Chief Executive Officer and Chief  Financial Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(b) promulgated under the Securities Exchange Act of  1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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@ Management contract,compensatory plan or arrangement.

 

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**SIGNATURES**

 

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

 

 
|                     | EnerNOC, Inc. |
|--------------------------|--------------------|
|                     |               |
| Date: July 27, 2009 | By:                | /s/ Timothy G. Healy |
|                     |               | Timothy G. Healy |
|                     |               | Chief Executive Officer |
|                     |               | (principal executive officer) |
|                     |               |   |
| Date: July 27, 2009 | By:                | /s/ Neal C. Isaacson |
|                     |               | Neal C. Isaacson |
|                     |               | Chief Financial Officer |
|                     |               | (principal financial and accounting officer) |

 

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**Exhibit Index**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                    |
|-------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 10.1@                   |       | Amended and Restated EnerNOC, Inc. Non-Employee  Director Compensation Policy.                                                                                                                                                                                                                                |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 10.2                    |       | First Loan Modification Agreement, dated as of May 29,  2009, by and among Silicon Valley Bank, EnerNOC, Inc. and EnerNOC  Securities Corporation.                                                                                                                                                       |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 31.1                    |       | Certification of Chief Executive Officer of  EnerNOC, Inc. pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as  amended.                                                                                                                   |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 31.2                    |       | Certification of Chief Financial Officer of  EnerNOC, Inc. pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as  amended.                                                                                                                   |
|                    |       |                                                                                                                                                                                                                                                                                                               |
| 32.1                    |       | Certification of Chief Executive Officer and Chief  Financial Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(b) promulgated under the Securities Exchange Act of  1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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@ Management contract,compensatory plan or arrangement.

 

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