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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| x                                                                                                                   | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
| ** **                                                                                                          | ** ** | ** **                                                                                              |
| **For the quarterly period ended March 31, 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** |

 

**Commission File Number: 001-33471**

 

**EnerNOC, Inc.**

(ExactName of Registrant as Specified in Its Charter)

 
| **Delaware**                              | ** ** | **87-0698303**       |
|-------------------------------------------|------------|----------------------|
| (State  or Other Jurisdiction of          |       | (IRS  Employer       |
|  Incorporation  or Organization)     |       | Identification  No.) |
|                                      |       |                 |
| **75 Federal Street**                     | ** ** | ** **           |
| **Suite 300**                        | ** ** | ** **           |
| **Boston, Massachusetts**                 | ** ** | **02110**            |
| (Address  of Principal Executive Offices) |       | (Zip  Code)          |

 

**(617) 224-9900**

(Registrant’sTelephone Number, Including Area Code)

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was 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 20,434,278 sharesof the registrant’s common stock, $.001 par value per share, outstanding as of May 6,2009.

 

 

 

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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 March 31, 2009 and December 31, 2008                  | 3          |
|                                       |                                                                                                                |       |
|                                       | Unaudited  Condensed Consolidated Statements of Operations for the three months ended March 31,  2009 and 2008 | 4          |
|                                       |                                                                                                                |       |
|                                       | Unaudited  Condensed Consolidated Statements of Cash Flows for the three months ended March 31,  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                         | 13         |
|                                       |                                                                                                                |       |
| Item 3.                               | Quantitative and Qualitative Disclosures  About Market Risk                                                         | 21         |
|                                       |                                                                                                                |       |
| Item 4.                               | Controls and  Procedures                                                                                            | 21         |
|                                       |                                                                                                                |       |
| **Part II - Other  Information** |                                                                                                                |
|                                       |                                                                                                                |       |
| Item 1.                               | Legal Proceedings                                                                                                   | 22         |
|                                       |                                                                                                                |       |
| Item 1A.                              | Risk Factors                                                                                                        | 22         |
|                                       |                                                                                                                |       |
| Item 2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        | 22         |
|                                       |                                                                                                                |       |
| Item 6.                               | Exhibits                                                                                                            | 22         |
|                                       | Signatures                                                                                                          | 23         |
|                                       | Exhibit Index                                                                                                  | 24         |

 

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**PART I— FINANCIAL INFORMATION**

 

**EnerNOC, INC.**

 

** UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

 

**(in thousands, except par value and share data)**

 
| ** **                                                                                                                                                                                    | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
|                                                                                                                                                                                          |       |                     |       |                        |       |
| **Assets**                                                                                                                                                                                    |       |                     |       |                        |       |
| Current assets                                                                                                                                                                                |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                     |       | $                        | 54,469     |                        | $          | 60,782 |   |
| Restricted cash                                                                                                                                                                               |       | 1,105                    |       | 1,419                       |       |
| Marketable securities                                                                                                                                                                         |       | 500                      |       | 2,000                       |       |
| Trade accounts receivable, net allowance  for doubtful accounts of $37                                                                                                                        |       | 9,882                    |       | 11,150                      |       |
| Unbilled revenue                                                                                                                                                                              |       | 4,680                    |       | 11,585                      |       |
| Prepaid expenses, deposits and other  current assets                                                                                                                                          |       | 4,469                    |       | 3,250                       |       |
| Total current assets                                                                                                                                                                          |       | 75,105                   |       | 90,186                      |       |
| Property and equipment, net                                                                                                                                                                   |       | 27,386                   |       | 26,975                      |       |
| Goodwill                                                                                                                                                                                      |       | 13,395                   |       | 13,395                      |       |
| Intangible assets, net                                                                                                                                                                        |       | 4,971                    |       | 5,140                       |       |
| Deposits and other assets                                                                                                                                                                     |       | 1,061                    |       | 998                         |       |
| Total assets                                                                                                                                                                                  |       | $                        | 121,918    |                        | $          | 136,694 |   |
| ** **                                                                                                                                                                                    |       |                     |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                 |       |                     |       |                        |       |
|                                                                                                                                                                                          |       |                     |       |                        |       |
| Current liabilities                                                                                                                                                                           |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                              |       | $                        | 1,087      |                        | $          | 1,171 |   |
| Accrued capacity payments                                                                                                                                                                     |       | 14,121                   |       | 18,643                      |       |
| Accrued payroll and related expenses                                                                                                                                                          |       | 4,974                    |       | 6,309                       |       |
| Accrued expenses and other current liabilities                                                                                                                                                |       | 3,159                    |       | 3,822                       |       |
| Deferred revenue                                                                                                                                                                              |       | 1,538                    |       | 1,057                       |       |
| Current portion of long-term debt                                                                                                                                                             |       | 44                       |       | 47                          |       |
| Total current liabilities                                                                                                                                                                     |       | 24,923                   |       | 31,049                      |       |
| Long-term liabilities                                                                                                                                                                         |       |                     |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                        |       | 4,508                    |       | 4,516                       |       |
| Deferred tax liability                                                                                                                                                                        |       | 531                      |       | 362                         |       |
| Other liabilities                                                                                                                                                                             |       | 1,582                    |       | 1,547                       |       |
| Total long-term liabilities                                                                                                                                                                   |       | 6,621                    |       | 6,425                       |       |
| Commitments and contingencies (Note 7 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, 20,427,683 and 20,254,548 shares issued  and outstanding at March 31, 2009 and December 31, 2008,  respectively |       | 20                       |       | 20                          |       |
| Additional paid-in capital                                                                                                                                                                    |       | 173,188                  |       | 169,800                     |       |
| Accumulated other comprehensive income  (loss)                                                                                                                                                |       | 214                      |       | (86                         | )          |
| Accumulated deficit                                                                                                                                                                           |       | (83,048                  | )          | (70,514                     | )          |
| Total stockholders’ equity                                                                                                                                                               |       | 90,374                   |       | 99,220                      |       |
| Total liabilities and stockholders’ equity                                                                                                                                               |       | $                        | 121,918    |                        | $          | 136,694 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**EnerNOC, INC.**

 

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 

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

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                           | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Revenues                                             |       | $                                                    | 18,423     |   | $ | 18,612 |   |
| Cost of revenues                                     |       | 10,525                                               |       | 12,141 |   |
| Gross profit                                         |       | 7,898                                                |       | 6,471 |   |
| Operating expenses:                                  |       |                                                 |       |   |   |
| Selling and marketing expenses                       |       | 8,667                                                |       | 6,474 |   |
| General and administrative expenses                  |       | 9,702                                                |       | 9,922 |   |
| Research and development expenses                    |       | 1,537                                                |       | 1,772 |   |
| Total operating expenses                             |       | 19,906                                               |       | 18,168 |   |
| Loss from operations                                 |       | (12,008                                              | )          | (11,697 | ) |
| Other (expense) income                               |       | (284                                                 | )          | 1,035 |   |
| Interest expense                                     |       | (61                                                  | )          | (253 | ) |
| Loss before income tax expense                       |       | (12,353                                              | )          | (10,915 | ) |
| Provision for income tax expense                     |       | (181                                                 | )          | (85 | ) |
| Net loss                                             |       | $                                                    | (12,534    | ) | $ | (11,000 | ) |
|                                                 |       |                                                 |       |   |   |
| Basic and diluted net loss per share                 |       | $                                                    | (0.63      | ) | $ | (0.57 | ) |
| Weighted average number of basic and  diluted shares |       | 19,993,981                                           |       | 19,170,399 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**EnerNOC, INC.**

 

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

 

**(in thousands)**

 
| ** **                                                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| **Cash flows from operating activities**                                                                       |       |                                            |       |   |   |
| Net loss                                                                                                       |       | $                                               | (12,534    | ) | $ | (11,000 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities:                                   |       |                                            |       |   |   |
| Depreciation and amortization                                                                                  |       | 2,443                                           |       | 1,645 |   |
| Amortization of acquired intangible assets                                                                     |       | 169                                             |       | 516 |   |
| Stock-based compensation expense                                                                               |       | 2,819                                           |       | 2,185 |   |
| Unrealized foreign exchange transaction  loss                                                                  |       | 304                                             |       | — |   |
| Deferred tax liability                                                                                         |       | 169                                             |       | 85 |   |
| Other, net                                                                                                     |       | 53                                              |       | 45 |   |
| Increase (decrease) in cash from changes in  operating assets and liabilities, net of effects of acquisitions: |       |                                            |       |   |   |
| Accounts receivable, trade                                                                                     |       | 1,267                                           |       | 1,995 |   |
| Unbilled revenue                                                                                               |       | 6,905                                           |       | — |   |
| Prepaid expenses and other current assets                                                                      |       | (1,219                                          | )          | 277 |   |
| Other noncurrent assets                                                                                        |       | (84                                             | )          | (45 | ) |
| Other noncurrent liabilities                                                                                   |       | —                                          |       | (4 | ) |
| Deferred revenue                                                                                               |       | 484                                             |       | (1,017 | ) |
| Accrued capacity payments                                                                                      |       | (4,521                                          | )          | 1,033 |   |
| Accrued payroll and related expenses                                                                           |       | (835                                            | )          | (609 | ) |
| Accounts payable and accrued expenses                                                                          |       | (746                                            | )          | (580 | ) |
| Net cash used in operating activities                                                                          |       | (5,326                                          | )          | (5,474 | ) |
|                                                                                                           |       |                                            |       |   |   |
| **Cash flows from investing activities**                                                                       |       |                                            |       |   |   |
| Purchase of marketable securities                                                                              |       | —                                          |       | (10,051 | ) |
| Sales and maturities of marketable  securities                                                                 |       | 1,500                                           |       | 11,600 |   |
| Payments made for acquisitions of  businesses, net of cash acquired                                            |       | —                                          |       | (3,462 | ) |
| Purchases of property and equipment                                                                            |       | (2,854                                          | )          | (4,006 | ) |
| Increase (decrease) in restricted cash and  deposits for customer programs                                     |       | 314                                             |       | (9,955 | ) |
| Net cash used in investing activities                                                                          |       | (1,040                                          | )          | (15,874 | ) |
|                                                                                                           |       |                                            |       |   |   |
| **Cash flows from financing activities**                                                                       |       |                                            |       |   |   |
| Proceeds from exercises of stock options                                                                       |       | 64                                              |       | 128 |   |
| Repayment of borrowings and payments under  capital leases                                                     |       | (11                                             | )          | (587 | ) |
| Net cash provided by (used in) financing  activities                                                           |       | 53                                              |       | (459 | ) |
| Net change in cash and cash equivalents                                                                        |       | (6,313                                          | )          | (21,807 | ) |
| Cash and cash equivalents at beginning of  period                                                              |       | 60,782                                          |       | 70,242 |   |
| Cash and cash equivalents at end of period                                                                     |       | $                                               | 54,469     |   | $ | 48,435 |   |
|                                                                                                           |       |                                            |       |   |   |
| **Supplemental disclosure of cash flow  information**                                                          |       |                                            |       |   |   |
| ** **                                                                                                     |       |                                            |       |   |   |
| Cash paid for interest                                                                                         |       | $                                               | 44         |   | $ | — |   |
|                                                                                                           |       |                                            |       |   |   |
| **Non-cash financing and investing activities**                                                                |       |                                            |       |   |   |
| ** **                                                                                                     |       |                                            |       |   |   |
| Issuance of common stock in satisfaction of  bonuses                                                           |       | $                                               | 500        |   | $ | 844 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

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**EnerNOC, INC.**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

 

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

 

**Descriptionof Business**

 

EnerNOC, Inc.(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.

 

Thepreparation of these condensed consolidated financial statements in conformitywith generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  The most significant estimate reflected inthese financial statements includes stock-based compensation.  Actualresults could differ from those estimates.

 

**Reclassifications**

 

Certainreclassifications have been made to the March 31, 2008 statements ofoperations to conform to the March 31, 2009 presentation. Thereclassifications primarily consist of costs related to facilities, informationtechnology, human resources and certain employee-related expenses such asemployee benefits. These reclassifications were determined on a headcount-basedallocation. These amounts, which were previously included in general andadministrative expenses, have been allocated among cost of revenues, sellingand marketing expenses and research and development expenses. The Companybelieves that by allocating these costs in this manner it better represents theexpenses associated with each of these activities.

 

**Basis ofConsolidation**

 

Theunaudited condensed consolidated financial statements of the Company includethe accounts of its wholly-owned subsidiaries and have been prepared inconformity with accounting principles generally accepted in the United States(GAAP). Intercompany transactions and balances are eliminated uponconsolidation. In the opinion of the Company’s management, the unauditedcondensed consolidated financial statements include all adjustments, consistingonly of normal recurring adjustments, necessary for a fair presentation of theresults of operations for the periods presented.

 

Theresults of operations for the three months ended March 31, 2009 are notnecessarily indicative 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.

 

**Comprehensive Loss**

** **

Statement of Financial Accounting Standards (SFAS) No. 130, *Reporting Comprehensive Income*, establishesstandards for reporting and displaying comprehensive income and comprehensiveloss and its components in the consolidated financial statements. Comprehensiveincome is defined as the change in equity of a business enterprise during aperiod from transactions and other events and circumstances from non-ownersources. Comprehensive income (loss) is composed of net income (loss),unrealized gains and losses on marketable securities and cumulative foreigncurrency translation adjustments.

 

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Othercomprehensive loss for the three months ended March 31, 2009 and 2008 wasas follows:

 
| ** **                                          | ** ** | **Three Months  Ended March 31.** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Net loss                                            |       | $                                                | (12,534    | ) | $ | (11,000 | ) |
| Change in unrealized gain on marketable  securities |       | (4                                               | )          | — |   |
| Foreign currency translation adjustments            |       | 304                                              |       | — |   |
| Total comprehensive loss                            |       | $                                                | (12,234    | ) | $ | (11,000 | ) |

 

**2.Acquisitions**

 

**South RiverConsulting, LLC**

 

InMay 2008, the Company acquired 100% of the membership interests of SouthRiver Consulting, LLC (SRC), an energy procurement and risk management servicesprovider, for a purchase price equal to $5,524, which consisted of $3,603 incash, $174 in related expenses and 120,000 shares of the Company’s common stockthat had a value of approximately $1,747 as of the closing date. In addition tothe amounts paid at closing, the Company may be obligated to pay to the formerholders of SRC membership interests an earnout amount equal to 50% to 60% ofthe revenues of SRC’s business during each twelve-month period from May 1,2008 through April 30, 2010. The earnout payments will be based on theachievement of certain minimum revenue-based milestones ofSRC and will be paid in a combination of cashand shares of the Company’s common stock. These additional earnout paymentswould be recorded as additional purchase price. The earnout payment, if any,related to the May 1, 2008 to April 30, 2009 earnout period will be determinedduring the second quarter of 2009. The acquisition of SRC strengthens theCompany’s position in a growing energy procurement services market and providesa local presence for the Company in the PJM Interconnection service region. SRC’soperations prior to the acquisition were not material to the Company.

 

**Mdenergy,LLC**

 

InSeptember 2007, the Company acquired all of the outstanding membershipinterests of Mdenergy, LLC (MDE), an energy procurement service provider,pursuant to the terms of a merger agreement. The total purchase price paid bythe Company at closing was approximately $7,900, of which $3,501 was paid incash and the remainder of which was paid by the issuance of 139,056 shares ofthe Company’s common stock. In addition to the amounts paid at closing, theCompany was obligated to pay to the former holders of MDE membership interestsan earnout equal to two times the revenues of MDE’s business during the periodfrom July 1, 2007 through December 31, 2007. The contingentconsideration related to the earnout in the amount of approximately $3,357 waspaid in January of 2008 and was recorded as additional purchase price.

 

Pursuantto the merger agreement, the Company was also obligated to pay to certainemployees of MDE a cash bonus payment of up to $300 in the first quarter of2008 and up to $600 in the first quarter of 2009 upon the achievement ofcertain revenue-based milestones during 2007 and 2008, respectively. Theamounts earned and paid in connection with the merger agreement related to 2007and 2008, and were $300 and $500, respectively.

 

**3. Recent Accounting Pronouncements**

 

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

 

InMay 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 162,*The Hierarchy of Generally AcceptedAccounting Principles* (SFAS No. 162). SFAS No. 162identifies the sources of accounting principles to be used in the preparationof financial statements of nongovernmental entities that are presented inconformity with GAAP in the United States (the GAAP hierarchy). SFAS No. 162is effective 60 days following the SEC’s approval of the Public CompanyAccounting Oversight Board amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity with Generally Accepted Accounting Principles”.The Company currently adheres to the hierarchy of GAAP as presented in SFAS No. 162and does not expect its adoption will have a material impact on itsconsolidated results of operations and financial condition.

 

**4. Net LossPer Share**

 

Basicnet loss per share is computed by dividing net loss by the weighted averagenumber of common shares outstanding for the period. Diluted net loss per shareis computed using the weighted average number of common shares outstanding and,when dilutive, potential common shares from options and warrants using thetreasury stock method. The calculation of dilutive weighted average sharesoutstanding does not include the following potentially dilutive shares as theireffect would be antidilutive.

 

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| ** **                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                          | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Outstanding options, restricted stock and  warrants |       | 794,797                                              |       | 1,772,868 |   |
| Shares held in escrow                               |       | 120,000                                              |       | 35,114 |   |
| Dilutive weighted average shares  outstanding       |       | 914,797                                              |       | 1,807,982 |   |

 

Includedin the calculation of the weighted average number of common shares outstandingat March 31, 2008 are 44,260 contingently issuable shares of common stock.These shares were issuable in connection with the Company’s acquisition ofPinpoint Power DR LLC (PPDR) in 2005. These shares have been included in thecalculation as there are no restrictions for issuance except for the passage oftime.

 

Theweighted average common shares outstanding at March 31, 2009 excludes the120,000 shares issued in the SRC acquisition that are held in escrow.  Theweighted average common shares outstanding at March 31, 2008 excludes the35,114 shares issued in the MDE acquisition that were held in escrow.  In September 2008,the 35,114 shares issued in the MDE acquisition were released from escrow.

** **

**5. FairValue Measurements**

 

SFASNo. 157*, Fair Value Measurements,* establishes afair value hierarchy that requires the use of observable market data, whenavailable, and prioritizes the inputs to valuation techniques used to measurefair value in the following categories:

 

·                         Level 1 - Valuation is based upon quotedprices for identical instruments traded in active markets. Level 1 instruments includesecurities traded on active exchange markets, such as the New York StockExchange.

 

·                         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 thebalances of assets and liabilities measured at fair value on a recurring basisat March 31, 2009:

 
| ** **             | ** ** | **Fair Value Measurements at March 31, 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) |       | $                                                                                      | 46,023     |   | $ | 46,023 |   | $ | — |   | $ | — |   |
| Government securities  |       | 500                                                                                    |       | 500 |   | — |   | — |   |
|                   |       | $                                                                                      | 46,523     |   | $ | 46,523 |   | $ | — |   | $ | — |   |

 

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(1)  Included in cashand cash equivalents in the accompanying condensed consolidated balance sheet.

 

At March 31, 2009, theCompany had restricted cash of approximately $1,105 invested in certificates ofdeposit. 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.

 

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 **6. Financing Arrangements**

 

On August 5, 2008,the Company and one of its subsidiaries entered into a $35,000 securedrevolving credit and term loan facility with Silicon Valley Bank(SVB), under which SVB will, among other things, make revolving credit andterm loan advances and issue letters of credit for the Company’saccount.  The interest on loans under the Company’s revolving creditloan accrues at interest rates based upon either SVB’s prime rate or the 30, 60 or 90-day LIBORplus 2.25%, at the Company’s election.  The interest on the Company’s termloan accrues at SVB’s prime rate plus 0.50% or the 30, 60 or 90-day LIBOR plus2.75%, at the Company’s election.  The term advance is payable inthirty-six consecutive equal monthly installments of principal, calculated bySVB, based upon the amount of the term advance and an amortizationschedule equal to thirty-six months.  All unpaid principal and accruedinterest is due and payable in full on August 5, 2010, which is thematurity date.

 

The Company’s obligations underthis credit facility are secured by all of the assets of the Company and itssubsidiaries, excluding any intellectual property.  This credit facilitycontains customary terms and conditions for credit facilities of this type,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 March 31, 2009.

 

As of March 31, 2009,unused availability under the SVB revolving credit and term loan facilitytotaled $13,304. Unless earlier payment is required by an event of default, allprincipal and unpaid interest will be due and payable on August 5, 2010.The Company is also required to pay an unused line fee on the daily unusedamount of its facility at a per annum rate of 0.25%. The Company incurredfinancing costs of $120 in connection with the SVB credit facility, which was deferredand is being amortized to interest expense over the life of the debt. At March 31,2009, the Company had borrowings of $4,442 accruing interest at 4.0% andletters of credit of $17,254 outstanding under the SVB credit and term loanfacility.

 

**7. Commitmentsand Contingencies**

 

The Company is subject tocertain performance guarantee requirements under certain customer contracts andopen market bidding program participation rules. The Company had deposits heldby certain customers of $2,137 and $2,386, respectively, at March 31, 2009and December 31, 2008. These amounts primarily represent up-front paymentsrequired by customers to participate in certain programs and ensure that theCompany will deliver its committed capacity amounts. If the Company fails tomeet its minimum enrollment requirements, a portion or all of the deposit maybe forfeited. The Company assessed the probability of default under theseagreements and has determined it to be remote. The Company expects the majorityof the outstanding deposits as of March 31, 2009 to be returned to it in2009.

 

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**8.Stock-Based Compensation**

 

*StockOptions*

 

TheCompany’s Amended and Restated 2003 Stock Option and Incentive Plan (2003 Plan)and the 2007 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.

** **

Forstock options granted prior to January 1, 2009, the fair value of eachoption was estimated at the date of grant using a Black-Scholes option-pricingmodel. For stock options granted on or after January 1, 2009, the fair valueof each option has been and will be estimated on the date of grant using atrinomial valuation model. The trinomial model considers characteristics offair value option pricing that are not available under the Black-Scholes model.Similar to the Black-Scholes model, the trinomial model takes into accountvariables such as expected volatility, dividend yield rate, and risk freeinterest rate. However, in addition, the trinomial model considers thecontractual term of the option, the probability that the option will beexercised prior to the end of its contractual life, and the probability oftermination or retirement of the option holder in computing the value of theoption. For these reasons, the Company believes that the trinomial modelprovides a fair value that is more representative of actual experience andfuture expected experience than that value calculated using the Black-Scholesmodel.

 
| ** **                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------|------------|------------------------------------------------------|------------|
| ** **                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Risk-free interest rate            |       | 2.73                                                 | %          | 2.79 | % |
| Expected term of options, in years |       | 2.16                                                 |       | 6.25 |   |
| Expected annual volatility         |       | 86                                                   | %          | 87 | % |
| Expected dividend yield            |       | —                                               | %          | — | % |
| Exit rate pre-vesting              |       | 4.88                                                 | %          | 4.88 | % |
| Exit rate post-vesting             |       | 10.89                                                | %          | — | % |

 

Had the Company continuedusing the Black-Scholes option pricing model in 2009, stock based compensationexpense would not have been materially different for the three months ended March 31,2009.

 

InDecember 2008, the Company’s board of directors approved a one-time offer(the Offer) to the Company’s employees, including its executive officers, anddirectors to exchange option grants that had an exercise price per share thatwas equal to or greater than the higher of $12.00 or the closing price of theCompany’s common stock as reported on The NASDAQ Global Market on January 21,2009. The Offer closed on January 21, 2009, and the Company exchangedoptions that had exercise prices equal to or greater than $12.00 per share. Asa result, 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. Onthe date of the exchange, the estimated fair value of the new options did notexceed the fair value of the exchanged stock options calculated immediately priorto the exchange.  As such, there is noincremental fair value of the new options, and the Company will not recordadditional compensation expense related 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.

 

Thefollowing is a summary of the Company’s stock option activity as of March 31,2009 and the stock option activity for all stock option plans during the threemonths ended March 31, 2009:

 
| ** **                           | ** ** | **Three Months Ended March 31, 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                              |       | 821,004                                                        |       |   |   | $ | 10.05 |   |   |   |
| Exercised                            |       | (128,800                                                       | )          |   |   | $ | 0.50 |   | $ | 1,100 |   |
| Cancelled                            |       | (807,212                                                       | )          |   |   | $ | 28.25 |   |   |   |
| Outstanding at end of period         |       | 2,631,827                                                      |       | $ | 0.11-$48.54 |   | $ | 8.37 |   | $ | 19,676 |   |
|                                 |       |                                                           |       |   |   |   |   |   |   |
| Remaining contractual life in years: |       | 7.2                                                            |       |   |   |   |   |   |   |
| Exercisable at end of period         |       | 753,071                                                        |       | $ | 0.11-$48.54 |   | $ | 7.6 |   | $ | 6,724 |   |
| Remaining contractual life in years: |       | 7.6                                                            |       |   |   |   |   |   |   |

 

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(1)  The aggregateintrinsic value was calculated based on the positive difference between theestimated fair value of the Company’s common stock on March 31, 2009 of$14.54 and the exercise price of the underlying options.

 

The Company recognized stock-basedcompensation expense of $2,819 and $2,185 during the three months ended March31, 2009 and 2008, respectively.  Theamount of unrecognized stock-based compensation expense that may be recognizedfor outstanding unvested options as of March 31, 2009 was $19,578, whichis to be recognized over a weighted average period of 2.5 years.  For restricted stock at March 31, 2009, theCompany had $3,932 of unrecognized stock-based compensation expense, which isexpected to be recognized over a weighted average period of 3.0 years.

 

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

 

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** **

**9. IncomeTaxes**

 

No current provision forfederal or state income taxes has been recorded, as the Company has incurredcumulative net operating losses since inception.  The Company has recordeda deferred tax provision for $169 and $85, respectively, related to taxdeductible goodwill for the three months ended March 31, 2009 and2008.  Amounts due to various states for excise taxes are included ingeneral and administrative expenses, accrued expenses and other currentliabilities as of March 31, 2009 and December 31, 2008.

 

**10. RelatedParty Transactions**

 

**DeferredAcquisition Payments**

 

On June 1, 2005, theCompany acquired all of the outstanding membership interests in PPDR from thesole member of PPDR (the Sole Member) in a purchase business combinationpursuant to a purchase agreement (the Purchase Agreement). Under the PurchaseAgreement, the Company was required to (i) make fixed payments of $5,925and (ii) issue 303,001 shares of the Company’scommon stock to the Sole Member. As part ofthe Purchase Agreement, the Company acquired a demand response contract thatcontained a one-year option to extend, as of May 31, 2008, at the solediscretion of a certain customer. If exercised, the Company would have beenobligated to make an additional payment of $2,366 and issue an additional28,287 shares of the Company’s common stock in connection with the PurchaseAgreement. In February 2008, the customer informed the Company that itelected not to exercise the one-year option to extend; therefore, no additionalpayments, including the contingent consideration of $2,247, or shares will bedue to the Sole Member. This amount had been recorded as a liability at December 31,2007 and was reversed, along with a corresponding reduction to intangibleassets during the first quarter of 2008.

 

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

** **

**11. IndustrySegment Information**

 

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

 

During the three monthsended March 31, 2009 and 2008, the Company had certain customers whoserevenue individually represented 10% or more of the Company’s total revenues asfollows:

** **
| ** ** | ** ** | **Three Months Ended March 31,** | ** ** |
|------------|------------|------------------------------------------------------|------------|
| ** ** | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** ** | ** ** | **Revenues**                                         | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| Customer 1 |       | $                                                    | 14,459     |   | 79 | % | $ | 11,112 |   | 60 | % |
| Customer 2 |       | —                                               |       | — |   | 3,986 |   | 21 | % |
| Total      |       | $                                                    | 14,459     |   | 79 | % | $ | 15,098 |   | 81 | % |

 

**12. LegalProceedings**

 

The Company is subject tolegal proceedings, claims and litigation arising in the ordinary course of business.The Company does not expect the ultimate costs to resolve these matters to havea material adverse effect on its consolidated financial position, results ofoperations or cash flows. In addition to ordinary-course litigation, theCompany is a party to the litigation described below.

 

In March 2008, threepurported class action lawsuits were filed in the United States District Courtfor the District of Massachusetts (the Court) against the Company, several ofits officers and directors, and certain of the underwriters of the Company’s November 2007follow-on public offering of its common stock. The three class actioncomplaints have been consolidated by the Court into a single action and anamended consolidated complaint was filed on September 24, 2008. The leadplaintiff in the consolidated class action claims to represent two purportedclasses: (i) an “Exchange Act Class” consisting of persons who purchasedshares of the Company’s common stock from November 1, 2007 through February 27,2008 and (ii) a “Securities Act Class” consisting of persons who purchasedshares of the Company’s common stock pursuant or traceable to the follow-onpublic offering. The lead plaintiff alleges, among other things, that thedefendants made false and misleading statements and failed to disclose materialinformation in various SEC filings and other public statements. The amendedconsolidated class action complaint asserts, on behalf of the purportedSecurities Act Class, various claims under the Securities Act of 1933, as amended(Securities Act), against all defendants and, on behalf of the purportedExchange Act Class, various claims under the Securities Exchange Act of 1934,as amended, and Rule 10b-5 against the Company and the individual officerand director defendants. The amended consolidated class action complaint seeks,among other relief, class certification, unspecified damages, fees, and suchother relief as the Court may deem just and proper. The defendants filed amotion to dismiss the amended consolidated complaint on October 27, 2008and a hearing on the motion was held on January 8, 2009. The Court tookdefendants’ motion under advisement following the hearing. During the hearingand thereafter, lead plaintiff expressed an intention to abandon his claimsagainst all defendants under the Securities Act. The lead plaintiff has since 

 

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voluntarilydismissed the underwriter defendants, against whom only Securities Act claimswere alleged, from the matter. The Court has not taken any action on thedefendants’ motion.

 

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 allegesvarious 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 seeks, among other relief, unspecified damages,injunctive relief, restitution, disgorgement, fees and such other relief as theCourt may deem proper. On August 12, 2008, the Court stayed the Company’sobligation to respond to the derivative complaint pending a denial, if any, ofthe defendants’ motion to dismiss the amended consolidated class actioncomplaint.

 

The Company believes that itand the other defendants have substantial legal and factual defenses to theclaims and allegations contained in the amended consolidated class action andderivative suit complaints, and the Company will pursue these defensesvigorously. There can be no assurance, however, that the Company will besuccessful, and an adverse resolution of any of the lawsuits could have amaterial effect on the Company’s consolidated financial position and results ofoperations in the period in which a lawsuit is resolved. In addition, althoughthe Company carries insurance for these types of claims, a judgmentsignificantly in excess of the Company’s insurance coverage could materiallyand adversely affect the Company’s financial condition, results of operationsand cash flows. The Company is not presently able to reasonably estimatepotential losses, if any, related to the lawsuits.

 

**13.****Subsequent****Events**

 

In May 2009,the Company paid a total of $16.0 million in cash deposits ascollateral in connection with certain open market bidding programs.  All,a portion or none of the deposits may be returned to the Company during thesecond quarter pending the completion of the open market bidding processes.

 

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

 

*Thefollowing discussion should be read in conjunction with our unaudited condensedconsolidated financial statements and related notes thereto included elsewherein this Quarterly Report on Form 10-Q, as well as our audited financialstatements for the fiscal year ended December 31, 2008 and notes theretoand Management’s Discussion and Analysis of Financial Condition and Results ofOperations included in our Annual Report on Form 10-K for the fiscal yearended December 31, 2008, as filed with the Securities and ExchangeCommission, or the SEC, on March 16, 2009. This Quarterly Report on Form 10-Qcontains forward-looking statements within the meaning of Section 27A ofthe Securities Act of 1933, as amended, or the Securities Act, and Section 21Eof the Securities Exchange Act of 1934, as amended, or the Exchange Act.Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expect,”“plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,”“target” and variations of those terms or the negatives of those terms andsimilar expressions are intended to identify forward-looking statements. Allforward-looking statements included in this Quarterly Report on Form 10-Qare based on current expectations, estimates, forecasts and projections and thebeliefs and assumptions of our management including, without limitation, ourexpectations regarding our results of operations, selling and marketingexpenses, general and administrative expenses, research and developmentexpenses, and the sufficiency of our cash for future operations. We assume noobligation to revise or update any such forward-looking statements. Our actual resultscould differ materially from those anticipated in these forward-lookingstatements as a result of certain important factors, including those set forthbelow under this Item 2 — “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” Part II, Item 1A — “RiskFactors” and elsewhere in this Quarterly Report on Form 10-Q, as well asin our Annual Report on Form 10-K for the fiscal year ended December 31,2008. You should carefully review those factors and also carefully review therisks outlined in other documents that we file from time to time with the SEC.*

 

**Overview**

 

We are a leading developer and provider of clean and intelligent energysolutions. We use our Network Operations Center, or NOC, to remotely manage andreduce electricity consumption across a network of commercial, institutionaland industrial customer sites to enable a more information-based andresponsive, or intelligent, electric power grid. Our customers are electricpower grid operators and utilities, as well as commercial, institutional andindustrial end-users of electricity. Our demand response and energy managementsolutions help optimize the balance of electric supply and demand and create alower risk and more environmentally sound alternative to building additionalpower plants and transmission lines.  Grid operators and utilities pay us a stream of recurring cash flows formanaging demand response capacity that we share with participating end-usecustomers. We receive substantially all of our revenues from these gridoperators and utilities, and we make payments to end-users of electricity forboth contracting to reduce electricity usage and actually doing so when calledupon.

 

We build upon our position as a leading demand response solutions providerby using our NOC and scalable technology platform to also deliver a portfolioof additional energy management solutions to our customers, including ourmonitoring-based commissioning services, or MBCx solutions, energy procurementservices, or EPS solutions, and emissions tracking and trading support. OurMBCx solutions combine advanced metering applications, energy analytics andcontrol to provide our end-use customers with the ability to identify energyefficiency opportunities through the continuous analysis of those end-usecustomers’ real-time energy data. Our EPS solutions provide our commercial,institutional and industrial customers located in restructured or deregulatedmarkets throughout the United States with the ability to more effectively managethe energy supplier selection process, including energy supply productprocurement and implementation.

 

Since inception, our business has grown substantially. Withapproximately 2,000 commercial, institutional and industrial customers acrossapproximately 4,800 customer sites in our demand response network andapproximately 2,700 megawatts, or MW, of demand response capacity under ourmanagement as of March 31, 2009, we believe that we are the largestnational demand response solutions provider focused on the commercial,institutional and industrial market.

 

We continue to devote substantially all of our efforts toward the saleof our demand response and energy management solutions. We have incurredcumulative net losses of $83.0 million from inception to March 31,2009. Our net losses were $12.5 million and $11.0 million,respectively, for the three months ended March 31, 2009 and 2008.

 

**SignificantRecent Developments**

 

In December 2008, ourboard of directors approved a one-time offer, which we refer to as the exchangeoffer, to our employees, including our executive officers, and directors toexchange option grants that had an exercise price per share that was equal toor greater than the higher of $12.00 or the closing price of our common stockas reported on The NASDAQ Global Market on January 21, 2009. The exchangeoffer closed on January 21, 2009, and we exchanged options that hadexercise prices equal to or greater than $12.00 per share. As a result, anaggregate of 744,401 options, with exercise prices ranging from $12.27 to$48.54 per share, were exchanged for 424,722 options with an exercise price pershare of $8.63 for our employees who are not also executive officers, 142,179options with an exercise price per share of $11.47 for our executive officerswho are not also directors and 45,653 options with an exercise price per share of$12.94 for our directors.

 

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** **

**Revenuesand Expense Components**

 

***Revenues***

 

We derive recurring revenuesfrom the sale of our demand response and energy management solutions. Ourrevenues from our demand response solutions primarily consist of capacity andenergy payments. We derive revenues from demand response capacity that we makeavailable in open market programs, which are open market bidding opportunitiesestablished by grid operators or utilities. In these open market programs, gridoperators and utilities generally seek bids from companies such as ours toprovide demand response capacity based on prices offered in competitivebidding. These opportunities are generally characterized by flexible capacitycommitments and prices that vary by hour, by day, by month, by bidding periodor by supplemental, 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.

 

Where we operate in openmarkets, our revenues from demand response capacity payments generally varymonth-to-month based upon our enrolled capacity and the market payment rate.Where we have a long-term contract, we receive periodic capacity payments,which may vary monthly or seasonally, based upon enrolled capacity andpredetermined 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 usedto calculate the continuing periodic capacity payments to be made to us untilthe next demand response event or test establishes a new demonstrated capacityamount. In most cases, we also receive an additional payment for the amount ofenergy usage that we actually curtail from the grid; we call this an energypayment. The energy payment is based upon the amount of energy usage that weactually reduce from the electricity grid in kilowatt hours during a demandresponse event.

 

In accordance with StaffAccounting Bulletin No. 104, Revenue Recognition, or SAB No. 104, inall 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 verificationevents, if our verified capacity is below the previously verified amount, thegrid operator or utility customer will reduce future payments based on theadjusted verified capacity amounts. The payments received from the gridoperator or utility customer can be decreased or increased, up to the committedcapacity amounts under the contract or open market program, in connection withsubsequent verification events. Revenues recognized between demand responseevents or tests are not subject to grid operator or utility customer refund.

 

As of March 31, 2009,we had approximately 2,700 MW under management in our demand response network,meaning that we had entered into definitive contracts with our commercial,institutional and industrial customers with respect to approximately 2,700 MWof demand response capacity. In most of the markets in which we originallyfocused our growth, we generally begin earning revenues from our MW undermanagement within approximately one month from the date on which we “enable”the MW, or the date on which we can reduce the MW from the electricity grid ifcalled upon to do so. An exception is the PJM Interconnection, or PJM, forwardcapacity market, which is a market in which we materially increased ourparticipation beginning in the first quarter of 2008 and in which we expect tocontinue to increase our participation and derive revenues for the foreseeablefuture. Because PJM operates on a June to May program-year basis, aMW that we enable after June of each year may not begin earning revenueuntil June of the following year. This results in a longer average lagtime in our 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 additionalenergy management solutions includes our EPS and MBCx solutions and emissionstracking and trading support.  Our EPSsolutions provide our end-use customers located in restructured or deregulatedmarkets throughout the United States with the ability to more effectivelymanage the energy supplier selection process, including energy supply productprocurement and implementation. We receive a monthly fee from the competitiveelectricity provider based upon the actual consumption of electricity used byour end-use customers or a consulting fee from the end-use customer directly.Our MBCx solutions combine advanced metering applications and energy analyticsand control to provide our end-use customers with the ability to identifyenergy efficiency opportunities through the continuous analysis of thoseend-use customers’ real-time energy data.  We also use our PowerTrak platform to deliver emissions tracking andtrading support.  We generally receiveeither a subscription-based fee or a percentage savings fee for these energymanagement solutions.  Revenues derivedfrom our energy management solutions increased from $1.0 million to $1.6million for the three months ended March 31, 2008 and 2009, respectively.

 

Revenues generated from twofixed price contracts with, and open market sales to, ISO New England Inc., orISO-NE, a grid operator customer, accounted for 79% and 60%, respectively, ofour total revenues in each of the three months ended March 31, 2009 and2008. Our two fixed price contracts with ISO-NE expired on May 31, 2008.In addition, 0% and 21%, respectively, of our total revenues for the threemonths ended March 31, 2009 and 2008 were generated under a fixed pricecontract with The Connecticut Light and Power Company, or 

 

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CL&P, which expired on December 31,2008.  We have enrolled a significantportion of the MW represented by our expired fixed price contracts with ISO-NEand CL&P in other available demand response programs.  These programs have provided, and couldcontinue to provide significantly lower capacity payments. For example,capacity payments currently available under ISO-NE’s Real-Time Demand Responseprogram are significantly lower than the capacity payments that were availableunder our expired fixed price contracts with ISO-NE and CL&P.

 

***Cost of Revenues***

 

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

 

***Gross Profit***

 

Gross profit consists of ourtotal revenues less our cost of revenues. Our gross profit has been, and willbe, affected by many factors, including (a) the demand for our demandresponse and energy management solutions, (b) the selling price of oursolutions, (c) our cost of revenues, (d) the introduction of newclean and intelligent energy solutions and (e) our ability to open andenter new markets and regions and expand deeper into markets we alreadyserve.  In addition, gross profit will beaffected by the way in which we manage our portfolio of demand responsecapacity in certain supplemental demand response programs in which weparticipate.

 

***Operating Expenses***

 

Operating expenses consistof selling and marketing, general and administrative, and research anddevelopment expenses. Personnel-related costs are the most significantcomponent of each of these expense categories. We grew from 286 full-timeemployees at March 31, 2008 to 357 full-time employees at March 31,2009. We expect to continue to hire employees to support our growth for theforeseeable future. In addition, we incur significant up-front costs associatedwith the expansion of the number of MW under our management, which we expect tocontinue for the foreseeable future. Although we expect our overall operatingexpenses to increase in absolute dollar terms for the foreseeable future as wegrow our MW under management and further increase our headcount, we expect ouroverall annual operating expenses to decrease as a percentage of total annualrevenues as we leverage our existing employee base and continue generatingrevenues from our MW under management.

 

*Sellingand Marketing*

 

Selling and marketingexpenses consist primarily of (a) salaries and related personnel costs,including costs associated with share-based payment awards, (b) commissions,(c) travel, lodging and other out-of-pocket expenses, (d) marketingprograms such as trade shows, and (e) other related overhead. Commissionsare recorded as an expense when earned by the employee. We expect increases inselling and marketing expenses in absolute dollar terms for the foreseeablefuture as we further increase the number of sales professionals and, to alesser extent, increase our marketing activities. We expect annual selling andmarketing expenses to decrease as a percentage of total annual revenues as weleverage our current sales and marketing personnel.

 

*Generaland Administrative*

 

General and administrativeexpenses consist primarily of (a) salaries and related personnel costs,including costs associated with share-based payment awards, related to ourexecutive, finance, human resource, information technology and operationsorganizations, (b) facilities expenses, (c) accounting and legalprofessional fees, (d) depreciation and amortization, and (e) otherrelated overhead. We expect general and administrative expenses to continue toincrease in absolute dollar terms for the foreseeable future as we invest ininfrastructure to support our continued growth and incur additional expensesrelated to being a public company, including increased audit and legalprofessional fees, costs of compliance with securities and other regulations,investor relations expenses, and higher insurance premiums.  We expectgeneral and administrative expenses to decrease as a percentage of total annualrevenues as we leverage our current infrastructure and employee base.

 

*Researchand Development*

 

Research and developmentexpenses 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

 

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overhead. During the three months ended March 31, 2009 and 2008,we capitalized internal software and development costs of $0.6 and$0.0 million, respectively, in accordance with Statement ofPosition 98-1, *Accounting for the Costof Computer Software Developed or Obtained for Internal Use,* and theamount is included as software in property and equipment at March 31,2009. We expect research and development expenses to increase in absolutedollar terms for the foreseeable future and to decrease as a percentage oftotal revenues in the long term.

 

***Stock-Based Compensation***

 

Effective as of January 1,2006, we adopted the requirements of Statement of Financial AccountingStandards, or SFAS, No. 123R, *ShareBased Payment,* or SFAS No. 123(R), using the modifiedprospective method. SFAS No. 123(R) addresses all forms ofshare-based payment awards, including shares issued under employee stockpurchase plans, stock options, restricted stock and stock appreciation rights.SFAS No. 123(R) requires us to expense share-based payment awardswith compensation cost for share-based payment transactions measured at fairvalue. For the three months ended March 31, 2009 and 2008, we recordedexpenses of approximately $2.8 million and $2.2 million, respectively, inconnection with share-based payment awards to employees and non-employees. Withrespect to grants through March 31, 2009, a future expense of non-vestedoptions of approximately $19.6 million is expected to be recognized over aweighted average period of 2.5 years and a future expense of restricted stockawards of approximately $3.9 million is expected to be recognized over aweighted average period of 3.0 years. For stock options granted prior to January 1,2009, the fair value of each option was estimated at the date of grant using aBlack-Scholes option-pricing model and for stock options granted on or after January 1,2009, the fair value of each option has been and will be estimated on the dateof grant using a trinomial valuation model. Had we continued using theBlack-Scholes option pricing model in 2009, stock-based compensation expensewould not have been materially different for the three months ended March 31,2009.

 

***Other Expense and Income***

 

Other expense and incomeconsist primarily of interest income earned on cash balances, gain or loss onforeign currency transactions and other non-operating income. We historicallyhave invested our cash in money market funds, municipal bonds and auction ratesecurities.

 

***Interest Expense***

 

Interest expense consists ofinterest on our debt facilities.

 

**ConsolidatedResults of Operations**

 

***Three Months Ended March 31, 2009 Compared to the Three MonthsEnded March 31, 2008***

 

***Revenues***

 

The following tablesummarizes our revenues for the three months ended March 31, 2009 and 2008(dollars in thousands):

 
| ** **                  | ** ** | **Three Months  Ended March 31.** | ** ** | **Percentage** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|----------------|------------|
| ** **                  | ** ** | **2009**                                         | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Revenues:                   |       |                                             |       |           |       |   |   |
| Demand response solutions   |       | $                                                | 16,800     |           | $          | 17,608 |   | (4.6 | )% |
| Energy management solutions |       | 1,623                                            |       | 1,004          |       | 61.7 | % |
| Total revenues              |       | $                                                | 18,423     |           | $          | 18,612 |   | (1.0 | )% |

 

 

Duringthe three months ended March 31, 2009, our demand response solutionsrevenues decreased by $0.8 million, or 4.6%, as compared to the three monthsended March 31, 2008.  The decreasewas primarily due to the expiration of our fixed price contracts with ISO-NEand CL&P and lower energy payments partially offset by an increase in ourMW under management in certain operating areas and our expansion into newmarkets.  In addition, we did notrecognize any revenues from our participation in the PJM Emergency LoadResponse Program, or the ELRP, during the three months ended March 31,2009 because we recognize capacity-based revenue from the ELRP over itsdelivery period of June through September.

 

During the three monthsended March 31, 2009, our energy management solutions revenues increasedby $0.6 million, or 61.7%, ascompared to the three months ended March 31, 2008.  The increaseprimarily resulted from our acquisition in May 2008 of South RiverConsulting, LLC, or SRC, an energy procurement and risk management servicesprovider.  During the three months ended March 31, 2009, werecognized revenue of $0.7 million related to the SRC acquisition compared to$0.0 million during the three months ended March 31, 2008.

 

We currently expect ourrevenues to increase in 2009 compared to 2008 as we seek to further increaseour MW under management in all operating regions, enroll new end-use customersin our demand response programs, continue to sell our energy managementsolutions to our new and existing demand response 

 

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customers and pursue more favorable pricing opportunities. We currentlyexpect that revenues for the second quarter of 2009 will increase compared tothe same period in 2008, primarily as a result of our increased participationin the PJM demand response market and our recognizing capacity-based revenuefrom the ELRP over its delivery period of June through September.  Wealso currently expect our revenues to trend higher in our second and thirdfiscal quarters compared to other quarters in our fiscal year due to seasonaldemand related to the demand response market.

 

***Gross Profit and Gross Margin***

 

The following tablessummarize our gross profit and gross margin percentages for our demand responseand energy management solutions for the three months ended March 31, 2009and 2008 (dollars in thousands):

 

| **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|
| **2009**                                             | ** ** | **2008** | ** ** |
| **Gross Profit**                                | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                                    | 7,898      |   | 42.9 | % | $ | 6,471 |   | 34.8 | % |
|                                                      |            |  |  |  |  |  |  |  |  |

 

Our gross profit increasedduring the three months ended March 31, 2009 as compared to the threemonths ended March 31, 2008 primarily due to the increase in our MW undermanagement in our operating regions and more favorable contract terms with ourcommercial, institutional and industrial customers. Our gross margin increasedduring the three months ended March 31, 2009 as compared to the threemonths ended March 31, 2008 due to more favorable contract terms with ourcommercial, institutional and industrial customers.

 

***Operating Expenses***

 

The following tables summarizeour operating expenses for the three months ended March 31, 2009 and 2008(dollars in thousands):

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2009**                                             | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Operating Expenses:                 |       |                                                 |       |           |       |   |   |
| Selling and marketing expenses      |       | $                                                    | 8,667      |           | $          | 6,474 |   | 33.9 | % |
| General and administrative expenses |       | 9,702                                                |       | 9,922          |       | (2.2 | )% |
| Research and development expenses   |       | 1,537                                                |       | 1,772          |       | (13.3 | )% |
| Total                               |       | $                                                    | 19,906     |           | $          | 18,168 |   | 9.6 | % |

 

Personnel-related costs arethe most significant component of each of these expense categories, includingcosts associated with share-based payment awards. We grew from 286 full-timeemployees at March 31, 2008 to 357 full-time employees at March 31,2009. We expect to continue to hire employees to support our growth for theforeseeable future.  In addition, we incur significant up-front costsassociated with the expansion of the number of MW under our management, whichwe expect to continue for the foreseeable future. Although we expect ouroverall operating expenses to increase in absolute dollar terms for theforeseeable future as we grow our MW under management and further increase ourheadcount, we expect our overall operating expenses to decrease as a percentageof total annual revenues as we leverage our existing employee base and continuegenerating revenues from our MW under management.

 

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

 

***Selling and Marketing Expenses***

 
| ** **                               | ** ** | **Three Months Ended March 31,** | ** ** | **Percentage** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|----------------|------------|
| ** **                               | ** ** | **2009**                                             | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                    | 5,670      |           | $          | 4,584 |   | 23.7 | % |
| Stock-based compensation                 |       | 1,025                                                |       | 802            |       | 27.8 | % |
| Other                                    |       | 1,972                                                |       | 1,088          |       | 81.3 | % |
| Total                                    |       | $                                                    | 8,667      |           | $          | 6,474 |   | 33.9 | % |

 

The increase in selling andmarketing expenses was primarily driven by the costs associated with anincrease in the number of selling and marketing full-time employees from 101 atMarch 31, 2008 to 130 at March 31, 2009. Also contributing to theincrease in selling and marketing expenses for the three months ended March 31,2009 as compared to the same period in 2008 was an increase in salescommissions 

 

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payable to certain of our selling and marketing employees, whichcommissions are reflective of the increase in MW under management for the threemonths ended March 31, 2009. The increase in other selling and marketingexpenses for the three months ended March 31, 2009 as compared to the sameperiod in 2008 was primarily due to increases in professional services of $0.2million, marketing costs of $0.3 million and allocated facility costs of $0.4million.

 

***General and Administrative Expenses***

 
| ** **                | ** ** | **Three Months Ended March 31,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2009**                                             | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                    | 4,975      |           | $          | 5,040 |   | (1.3 | )% |
| Stock-based compensation  |       | 1,626                                                |       | 1,303          |       | 24.8 | % |
| Other                     |       | 3,101                                                |       | 3,579          |       | (13.4 | )% |
| Total                     |       | $                                                    | 9,702      |           | $          | 9,922 |   | (2.2 | )% |

 

The decrease in general andadministrative expenses was primarily due to a reduction in professionalservice related expenses.  General andadministrative full-time employees increased from 144 at March 31, 2008 to180 at March 31, 2009.  The increasein wages associated with the increase in full-time employees was offset by thereallocation of certain employee-related expenses to selling and marketingexpenses and research and development expenses and an increase in theallocation of internal payroll and related costs specifically related tocustomer sites to cost of goods sold.

 

***Research and Development Expenses***

 
| ** **                | ** ** | **Three Months Ended March 31,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2009**                                             | ** ** | **2008**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                    | 848        |           | $          | 1,320 |   | (35.8 | )% |
| Stock-based compensation  |       | 168                                                  |       | 80             |       | 110.0 | % |
| Other                     |       | 521                                                  |       | 372            |       | 40.1 | % |
| Total                     |       | $                                                    | 1,537      |           | $          | 1,772 |   | (13.3 | )% |

 

Thedecrease in research and development expenses was primarily due to thecapitalization of $0.6 million of internal software development costs duringthe three months ended March 31, 2009 compared to $0.0 million capitalizedduring the three months ended March 31, 2008. Research and developmentfull-time employees increased from 41 at March 31, 2008 to 47 at March 31,2009.  The increase in other research anddevelopment expenses was primarily due to an increase in facility expenses.

 

***Other Expense and Income***

 

 Other expense and incomefor the three months ended March 31, 2009 was $0.3 million as compared to$1.0 million for the three months ended March 31, 2008.  The decreasein other expense and income for the three months ended March 31, 2009 ascompared to the three months ended March 31, 2008 was primarily due to theglobal decrease in interest rates, which has reduced the yields on ourinvestments and, to a lesser extent, lower average investment balances and therecognition of a net foreign currency transaction loss.

 

***Interest Expense***

 

Interest expense for thethree months ended March 31, 2009 and 2008 was $0.1 million and $0.3million, respectively. Interest expense includes interest on our outstandingdebt and amortization of deferred financing fees.  The decrease in interest expense for thethree months ended March 31, 2009 as compared to the three months ended March 31,2008 was primarily due to lower interest rates on our outstanding debtresulting from the replacement of our BlueCrest Capital Finance, L.P., orBlueCrest, debt facility with the revolving credit and term loan facility with SiliconValley Bank, or SVB, which occurred in August 2008.

 

***Income Taxes***

 

We had a provision forincome taxes of $0.2 million and $0.1 million, respectively, for the threemonths ended March 31, 2009 and March 31, 2008.  The provisionfor income taxes relates to the amortization of tax deductible goodwill, whichgenerates a deferred tax liability that cannot be offset by net operatinglosses or other deferred tax assets since its reversal is considered indefinitein nature. We provided a full valuation allowance for our deferred tax assetsbecause the realization of any future tax benefits could not be sufficientlyassured as of March 31, 2009.

 

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**Liquidityand Capital Resources**

 

***Overview***

 

Since inception, we havegenerated significant losses. As of March 31, 2009, we had an accumulateddeficit of $83.0 million. As of March 31, 2009, our principal sourcesof liquidity were cash, cash equivalents, and marketable securities totaling$55.0 million, a decrease of $7.8 million from the December 31,2008 balance of $62.8 million. In addition, we had $13.3 million availableunder our credit and term loan facility with SVB as of March 31, 2009. Weare contingently liable for $17.3 million in connection with unusedletters of credit under the SVB credit facility. Included in the March 31,2009 and December 31, 2008 restricted cash balances are amounts used tocollateralize unused letters of credit in the amount of $1.1 million and$1.4 million, respectively.

 

Ourinvestments in securities included state and municipal bonds at March 31,2009. They have been classified as available-for-sale and included inshort-term investments on our accompanying condensed consolidated balancesheet. Our holdings of marketable securities as of March 31, 2009 and December 31,2008 were $0.5 million and $2.0 million, respectively.

 

We believe our existingcash, cash equivalents and marketable securities at March 31, 2009, ouranticipated net cash flows from operating activities and amounts availableunder our credit and term loan facility with SVB will be sufficient to meet ouranticipated cash needs, including investing activities, for at least the next12 months. Our future working capital requirements will depend on many factors,including, without limitation, the rate at which we sell our demand responsesolutions to utilities and grid operators and any letters of credit or securitydeposits required by those utilities and grid operators, the introduction andmarket acceptance of new demand response and energy management solutions, andthe expansion of our sales and marketing and research and developmentactivities. To the extent that our cash, cash equivalents and marketablesecurities, our anticipated net cash flows from operating activities andamounts available under our credit and term loan facility with SVB areinsufficient to fund our future activities, we may be required to raiseadditional funds through bank credit arrangements or public or private equityor debt financings. We also may need to raise additional funds in the event wedetermine in the future to effect one or more acquisitions of businesses,technologies or products. In the event we require additional cash resources, wemay not be able to obtain bank credit arrangements or effect any equity or debtfinancing on terms acceptable to us or at all.

 

***Cash Flows***

 

The following tablesummarizes our cash flows for the three months ended March 31, 2009 and2008 (dollars in thousands):

 
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Cash flows used in operating activities               |       | $                                                    | (5,326     | ) | $ | (5,474 | ) |
| Cash flows used in investing activities               |       | (1,040                                               | )          | (15,874 | ) |
| Cash flow provided by (used in) financing  activities |       | 53                                                   |       | (459 | ) |
| Net decrease in cash and cash equivalents             |       | $                                                    | (6,313     | ) | $ | (21,807 | ) |

 

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

 

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

 

Cash used in operatingactivities for the three months ended March 31, 2009 was $5.3 million andconsisted of a $12.5 million net loss, which was offset by approximately $1.3million of net cash provided by working capital and other activities and by$6.0 million of non-cash items, primarily consisting of depreciation andamortization, interest expense, unrealized foreign exchange transaction loss,deferred taxliabilitiesand stock-based compensation charges. Cash provided by working capitalconsisted of a decrease of $6.9 million in unbilled revenues relating to thePJM demand response market, a decrease in accounts receivable of $1.0 milliondue to the timing of cash receipts under the demand response programs in whichwe participate, and an increase in deferred revenue of $0.5 million. Theseamounts were partially offset by cash used for working capital and otheractivities, which reflected a $4.5 million decrease in accrued capacitypayments, the majority of which was related to the PJM demand response market,a decrease of $0.6 million in payroll and related expenses, a decrease of $0.7million in accounts payable and accrued expenses and an increase of $1.2million in prepaid expenses and other current assets.

 

Cash used in operatingactivities for the three months ended March 31, 2008 was $5.5 million andconsisted of an $11.0 million net loss partially offset by $1.1 million of netcash provided by working capital and other activities and by $4.4 million ofnon-cash items, consisting primarily of depreciation and amortization andstock-based compensation charges. Cash provided by working capital and otheractivities consisted of a $2.0 million decrease in accounts receivable due tothe timing of cash receipts under the demand response programs in which weparticipate, a $1.0 million increase in accrued capacity payments and a $0.3million decrease in prepaid expenses and other current assets.  Theseamounts were partially offset by an increase of $0.6 million in accounts payableand accrued expenses, an increase of $1.0 million in deferred revenues as ouroperations continued to grow and a decrease of $0.6 million in accrued payrolland related expenses.

 

***Cash Flows Used in Investing Activities***

 

Cash used in investingactivities was $1.0 million for the three months ended March 31, 2009. Forthe three months ended March 31, 2009, our principal cash investmentsrelated to installation services used to build out and expand our demandresponse and energy management 

 

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solutions and purchases of property and equipment. For the three monthsended March 31, 2009, sales of available-for-sale securities were $1.5million.  Also, for the three monthsended March 31, 2009, we had a decrease in restricted cash of $0.3 millionprimarily as a result of our financing arrangement with SVB, which allows forthe issuance of letters of credit in connection with demand response programsin which we may participate.

 

For the three months ended March 31,2008, cash used in investing activities was $15.9 million. Our principal cashinvestments related to installation services used to build out and expand ourdemand response and energy management solutions, purchases of propertyand equipment, and the cash portion earnout for our acquisition ofMdenergy, LLC, or MDE. For the three months ended March 31, 2008,purchases of available-for-sale securities were approximately$10.1 million and sales of available-for-sale maturities were $11.7million.  During the three months ended March 31, 2008, we increasedour restricted cash and deposits for demand response programs in which weparticipated by $10.0 million.  During the three months ended March 31,2008, we incurred $4.0 million in capital expenditures, of which $2.8 millionwas related to office equipment, $0.8 million was related to demand responseequipment and $0.4 million was related to other miscellaneous expenditures. Inaddition, we paid $3.4 million related to the earnout obligation incurred inconnection with our acquisition of MDE.

 

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

 

Cash flows provided byfinancing activities were $0.1 million for the three months ended March 31,2009. Cash flows used in financing activities were $0.5 million for the threemonths ended March 31, 2008. Cash flows provided by (used in) financingactivities consisted of the following:

 

*EquityFinancing Activities*

 

We received approximately$0.1 million and $0.1 million, respectively, from exercises of options topurchase shares of our common stock during the three months ended March 31,2009 and March 31, 2008.

 

*CreditFacility Borrowings*

 

In August 2008, we andone of our subsidiaries entered into a $35.0 million secured revolving creditand term loan facility with SVB, under which SVB will, among other things, makerevolving credit and term loan advances and issue letters of credit for ouraccount. This credit facility replaced our credit facility with BlueCrest. 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 ofdefault. If a default occurs and is not cured within any applicable cure periodor is not waived, our obligations under the credit facility may be accelerated.We were in compliance with all financial covenants under this credit facilityat March 31, 2009. As of March 31, 2009, we had borrowings of $4.4outstanding under the SVB credit and term loan facility in addition to anaggregate of $17.3 million in letters of credit issued for our account. Foradditional information regarding the credit and term loan facility with SVB,see Note 6 to our unaudited condensed consolidated financial statementscontained herein.

 

During the three monthsended March 31, 2009, we made scheduled payments on our outstanding debtand capital lease obligations of $0.1 million. During the three months ended March 31,2008, we made scheduled payments on our outstanding debt and capital leaseobligations of $0.6 million.

 

**CapitalSpending**

 

We have made capitalexpenditures primarily for general corporate purposes to support our growth andfor equipment installation related to the demand response programs in which weparticipate. Our capital expenditures totaled $2.9 million and $4.0 millionduring the three months ended March 31, 2009 and 2008, respectively. As wecontinue to grow, we expect our capital expenditures for 2009 to increase ascompared to 2008. In the event that the California Public Utilities Commissionapproves our proposed Clean Gen contract with San Diego Gas & ElectricCompany, or SDG&E, to provide up to 25 additional MW of capacity inSDG&E’s service territory, we estimate that we will make capitalexpenditures of approximately $4.4 million related to environmental controlfacilities associated with this contract.

 

**ContractualObligations**

 

As of March 31, 2009,our contractual obligations disclosure contained in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008, which we filed with the SECon March 16, 2009, has not materially changed.

 

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**Off-BalanceSheet Arrangements**

 

As of March 31, 2009,we did not have any off-balance sheet arrangements, as defined inItem 303(a)(4)(ii) of Regulation S-K, that have or are reasonablylikely to have a current or future effect on our financial condition, changesin our financial condition, revenues or expenses, results of operations,liquidity, capital expenditures or capital resources that is material toinvestors. We have issued letters of credit in the ordinary course of ourbusiness in order to participate in certain demand response programs. As of March 31,2009, we had outstanding letters of credit totaling $17.3 million.

 

**CriticalAccounting Policies and Use of Estimates**

 

Our financial statements areprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires that wemake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. We base our estimates on historical experience andon various other assumptions that we believe to be reasonable under thecircumstances. We evaluate our estimates and assumptions on an ongoing basis.Our actual results may differ significantly from these estimates underdifferent assumptions or conditions.  There have been no material changesto these estimates during the three months ended March 31, 2009 except asfollows: for stock options granted prior to January 1, 2009, the fair value ofeach option was estimated at the date of grant using a Black-Scholesoption-pricing model and for stock options granted on or after January 1, 2009,the fair value of each option has been and will be estimated on the date ofgrant using a trinomial valuation model. Had we continued using theBlack-Scholes option pricing model in 2009, stock-based compensation expensewould not have been materially different for the three months ended March 31, 2009. For a detailed explanation of the other judgments made in these areas, refer to“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” within our Annual Report on Form 10-K for the fiscal yearended December 31, 2008, which we filed with the SEC on March 16,2009.

 

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

 

***Foreign Exchange Risk***

 

We face minimal exposure toadverse movements in foreign currency exchange rates.

 

***Interest Rate Risk***

 

As of March 31, 2009,we had $4.4 million of outstanding debt under our credit and term loan facilitywith SVB that is subject to floating interest rates.  Based on our outstanding floating rate debtas of March 31, 2009, an increase of 1% in SVB’s prime rate would resultin an increase in our interest expense of approximately $44,000.

 

The recent market eventshave not required us to materially modify or change our financial riskmanagement strategies with respect to our exposure to interest rate risk.

 

We manage our cash and cashequivalents and marketable securities portfolio considering investmentopportunities and risks, tax consequences and overall financing strategies. Ourinvestment portfolio consists primarily of cash and cash equivalents, moneymarket funds and commercial paper. We have, in the past, held municipal auctionrate securities that have since been redeemed. As our investments are made withhighly-rated securities, we are not anticipating any significant impact in theshort term from a change in interest rates.

 

**Item 4. Controls and Procedures.**

 

***Disclosure Controls and Procedures***

 

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures as of March 31,2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of acompany that are designed to ensure that information required to be disclosed bya company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures.  Our disclosure controls and procedures aredesigned to provide reasonable assurance of achieving their desired controlobjectives. Based on the evaluation of our disclosure controls and proceduresas of March 31, 2009, our chief executive officer and chief financial officerconcluded that, as of such date, our disclosure controls and procedures wereeffective at the reasonable assurance level.

 

***Internal Control over Financial Reporting***

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedMarch 31, 2009, which has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1.   Legal Proceedings.**

 

We are subjectto legal 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 position, 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, and certain of the underwriters of our November2007 follow-on public offering of our common stock. The three class action complaintshave been consolidated by the Court into a single action and an amendedconsolidated complaint was filed on September 24, 2008. The lead plaintiff inthe consolidated class action claims to represent two purported classes: (i) an“Exchange Act Class” consisting of persons who purchased shares of our commonstock from November 1, 2007 through February 27, 2008 and (ii) a “SecuritiesAct Class” consisting of persons who purchased shares of our common stockpursuant or traceable to the follow-on public offering. The lead plaintiffalleges, among other things, that the defendants made false and misleadingstatements and failed to disclose material information in various SEC filingsand other public statements. The amended consolidated class action complaintasserts, on behalf of the purported Securities Act Class, various claims underthe Securities Act against all defendants and, on behalf of the purportedExchange Act Class, various claims under the Exchange Act and Rule 10b-5against us and the individual officer and director defendants. The amendedconsolidated class action complaint seeks, among other relief, classcertification, unspecified damages, fees, and such other relief as the Courtmay deem just and proper. The defendants filed a motion to dismiss the amendedconsolidated complaint on October 27, 2008 and a hearing on the motion was heldon January 8, 2009. The Court took defendants’ motion under advisementfollowing the hearing. During the hearing and thereafter, lead plaintiffexpressed an intention to abandon his claims against all defendants under theSecurities Act. Lead plaintiff has since voluntarily dismissed the underwriterdefendants, against whom only Securities Act claims were alleged, from thematter. The Court has not taken any action on the defendants' motion.

 

In addition,on May 14, 2008, a complaint was filed derivatively on our behalf in the Courtagainst several of our officers and directors and certain of the underwritersof our follow-on public offering. The derivative complaint alleges variouscommon law and equitable claims, including, among other things, breach offiduciary duty, gross mismanagement, abuse of control, waste of corporateassets and unjust enrichment, in connection with purported false and misleadingstatements and failures to disclose material information in certain SEC filingsand other public statements from November 1, 2007 to May 14, 2008. Thederivative plaintiff seeks, among other relief, unspecified damages, injunctiverelief, restitution, disgorgement, fees and such other relief as the Court maydeem proper. On August 12, 2008, the Court stayed our obligation to respond tothe derivative complaint pending a denial, if any, of the defendants' motion todismiss the amended consolidated class action complaint.

 

We believethat we and the other defendants have substantial legal and factual defenses tothe claims and allegations contained in the amended consolidated class actionand derivative suit complaints, and we will pursue these defenses vigorously.There can be no assurance, however, that we will be successful, and an adverseresolution of any of the lawsuits could have a material effect on ourconsolidated financial position and results of operations in the period inwhich a lawsuit is resolved. In addition, although we carry insurance for thesetypes of claims, a judgment significantly in excess of our insurance coveragecould materially and adversely affect our financial condition, results ofoperations and cash flows. We are not presently able to reasonably estimatepotential losses, if any, related to the lawsuits.

 

**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 March 31,2009, 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 Equity Securities and Use of Proceeds.**

 

(b)      Useof Proceeds

 

We registered shares of ourcommon stock in connection with our initial public offering, or IPO, under theSecurities Act. The registration statement on Form S-1 (File No. 333-140632)filed in connection with our IPO was declared effective by the SEC on May 17,2007. Including shares sold pursuant to the exercise by the underwriters oftheir over-allotment option, 4,087,500 shares of our common stock wereregistered and sold in the IPO by us and an additional 225,000 shares of commonstock were registered and sold by the selling stockholders named in theregistration statement. All the shares were sold at a price to the public of$26.00 per share. The net offering proceeds received by us, after deductingunderwriting discounts and commissions and expenses incurred in connection withthe offering, were approximately $95.2 million.  Through March 31,2009, approximately $24.5 million of the proceeds from our IPO has been used tofund the operations of our business and for general corporate purposes,approximately $24.4 million has been used to purchase and install equipment,approximately $2.7 million has been used to repay indebtedness andapproximately $12.4 million has been used to fund acquisitions and makepayments outstanding on prior acquisitions. The remainder of the net proceedsfrom the IPO are invested in short-term investment grade securities and moneymarket accounts. There has been no material change in the planned use ofproceeds from our IPO as described in our final prospectus filed with the SECon May 18, 2007 pursuant to Rule 424(b).

 

**Item 6. Exhibits.**

 
| 31.1   |   | Certification of Chief  Executive Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                          |
| 31.2   |   | Certification of Chief Financial  Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of  1934, as amended.                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                          |
| 32.1   |   | Certification of Chief  Executive Officer and Chief Financial Officer of EnerNOC, Inc. pursuant  to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934,  as amended, and 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

 

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

 

 
|                   | EnerNOC, Inc. |
|------------------------|--------------------|
|                   |               |   |
| Date: May 8, 2009 | By:                | /s/ Timothy G. Healy |
|                   |               | Timothy G. Healy |
|                   |               | Chief Executive Officer |
|                   |               | (principal executive  officer) |
|                   |               |   |
| Date: May 8, 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**                                                                                                                                                                                                                                                                                               |
|-------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                                                          |
| 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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