Table of Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2010**

 

**or**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

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

 

**Commission File Number: 001-33471**

 

**EnerNOC, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

**(617) 224-9900**

(Registrant’s Telephone Number, Including Area Code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the 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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of 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) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).  Yes o  No x

 

Therewere 24,828,321 shares of the registrant’s common stock, $0.001 par value pershare, outstanding as of August 2, 2010.

 

 

 

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**EnerNOC, Inc.**

 

**Index to Form 10-Q**

 
| ** **                                 | ** **                                                                                                                | **Page**   |
|--------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** **                                                                                                                | ** ** |
| **Part I -  Financial Information**   |                                                                                                                      |       |
|                                       |                                                                                                                      |       |   |
| Item 1.                               | Financial Statements                                                                                                      |       |   |
|                                       |                                                                                                                      |       |   |
|                                       | Unaudited Condensed Consolidated Balance Sheets at  June 30, 2010 and December 31, 2009                         |       | 3 |
|                                       |                                                                                                                      |       |   |
|                                       | Unaudited Condensed Consolidated Statements of  Operations for the three and six months ended June 30, 2010 and 2009 |       | 4 |
|                                       |                                                                                                                      |       |   |
|                                       | Unaudited Condensed Consolidated Statements of Cash  Flows for the six months ended June 30, 2010 and 2009           |       | 5 |
|                                       |                                                                                                                      |       |   |
|                                       | Notes  to Unaudited Condensed Consolidated Financial Statements                                                           |       | 6 |
|                                       |                                                                                                                      |       |   |
| Item 2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |       | 23 |
|                                       |                                                                                                                      |       |   |
| Item 3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                                               |       | 38 |
|                                       |                                                                                                                      |       |   |
| Item 4.                               | Controls and  Procedures                                                                                                  |       | 38 |
|                                       |                                                                                                                      |       |   |
| Item 5.                                    | Other Information                                                                                                         |       | 40 |
|                                       |                                                                                                                      |       |   |
| **Part II -  Other Information** |                                                                                                                      |       |
|                                       |                                                                                                                      |       |   |
| Item 1.                               | Legal Proceedings                                                                                                         |       | 39 |
|                                       |                                                                                                                      |       |   |
| Item 1A.                              | Risk Factors                                                                                                              |       | 39 |
|                                       |                                                                                                                      |       |   |
| Item 2.                                    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              |       | 39 |
|                                       |                                                                                                                      |       |   |
| Item 6.                               | Exhibits                                                                                                                  |       | 41 |
|                                       | Signatures                                                                                                                |       | 42 |
|                                       | Exhibit Index                                                                                                        |       | 43 |

 

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**PART I — FINANCIAL INFORMATION**

 

**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATEDBALANCE SHEETS**

 

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

 
| ** **                                                                                                                                                                             | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                             |       |                   |       |                       |       |
| Current assets                                                                                                                                                                         |       |                   |       |                       |       |
| Cash and cash equivalents                                                                                                                                                              |       | $                      | 118,511    |                       | $          | 119,739 |   |
| Restricted cash                                                                                                                                                                        |       | 7,874                  |       | 177                        |       |
| Trade accounts receivable, net allowance for doubtful  accounts of $71 and $57 at June 30, 2010 and December 31, 2009,  respectively                                         |       | 23,489                 |       | 17,421                     |       |
| Unbilled revenue                                                                                                                                                                       |       | 29,799                 |       | 40,388                     |       |
| Prepaid expenses, deposits and other current  assets                                                                                                                                   |       | 10,056                 |       | 4,725                      |       |
| Total current assets                                                                                                                                                                   |       | 189,729                |       | 182,450                    |       |
| Property and equipment, net of accumulated  depreciation of $28,992 and $22,420 at June 30, 2010 and  December 31, 2009, respectively                                        |       | 36,043                 |       | 31,344                     |       |
| Goodwill                                                                                                                                                                               |       | 24,653                 |       | 22,553                     |       |
| Definite-life intangible assets, net                                                                                                                                                   |       | 6,519                  |       | 7,075                      |       |
| Indefinite-life intangible assets                                                                                                                                                      |       | 920                    |       | —                     |       |
| Deposits and other assets                                                                                                                                                              |       | 4,108                  |       | 3,903                      |       |
| Restricted cash                                                                                                                                                                        |       | —                 |       | 7,697                      |       |
| Total assets                                                                                                                                                                           |       | $                      | 261,972    |                       | $          | 255,022 |   |
|                                                                                                                                                                                   |       |                   |       |                       |       |
| **Liabilities and Stockholders’  Equity**                                                                                                                                         |       |                   |       |                       |       |
| Current liabilities                                                                                                                                                                    |       |                   |       |                       |       |
| Accounts payable                                                                                                                                                                       |       | $                      | 2,061      |                       | $          | 55 |   |
| Accrued capacity payments                                                                                                                                                              |       | 40,230                 |       | 40,534                     |       |
| Accrued payroll and related expenses                                                                                                                                                   |       | 9,276                  |       | 9,688                      |       |
| Accrued expenses and other current liabilities                                                                                                                                         |       | 6,362                  |       | 3,706                      |       |
| Accrued acquisition contingent consideration                                                                                                                                           |       | 1,478                  |       | 1,455                      |       |
| Deferred revenue                                                                                                                                                                       |       | 5,008                  |       | 2,119                      |       |
| Current portion of long-term debt                                                                                                                                                      |       | 38                     |       | 36                         |       |
| Total current liabilities                                                                                                                                                              |       | 64,453                 |       | 57,593                     |       |
| Long-term liabilities                                                                                                                                                                  |       |                   |       |                       |       |
| Long-term debt, net of current portion                                                                                                                                                 |       | 17                     |       | 37                         |       |
| Deferred tax liability                                                                                                                                                                 |       | 337                    |       | 654                        |       |
| Other liabilities                                                                                                                                                                      |       | 2,963                  |       | 1,763                      |       |
| Total long-term liabilities                                                                                                                                                            |       | 3,317                  |       | 2,454                      |       |
| Commitments and contingencies (Note 8 and Note 12)                                                                                                                                     |       | —                 |       | —                     |       |
| Stockholders’ equity                                                                                                                                                              |       |                   |       |                       |       |
| Undesignated preferred stock, $0.001 par value;  5,000,000 shares authorized; no shares issued                                                                                         |       | —                 |       | —                     |       |
| Common stock, $0.001 par value; 50,000,000 shares  authorized, 24,821,921 and 24,233,448 shares issued and outstanding at  June 30, 2010 and December 31, 2009, respectively |       | 25                     |       | 24                         |       |
| Additional paid-in capital                                                                                                                                                             |       | 284,666                |       | 272,350                    |       |
| Accumulated other comprehensive loss                                                                                                                                                   |       | (24                    | )          | (56                        | )          |
| Accumulated deficit                                                                                                                                                                    |       | (90,465                | )          | (77,343                    | )          |
| Total stockholders’ equity                                                                                                                                                        |       | 194,202                |       | 194,975                    |       |
| Total liabilities and stockholders’ equity                                                                                                                                        |       | $                      | 261,972    |                       | $          | 255,022 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 

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

 
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                              |       | $                                    | 66,548     |                               | $          | 42,402 |   | $ | 94,669 |   | $ | 60,825 |   |
| Cost of revenues                                      |       | 37,556                               |       | 24,267                             |       | 56,102 |   | 34,792 |   |
| Gross profit                                          |       | 28,992                               |       | 18,135                             |       | 38,567 |   | 26,033 |   |
| Operating expenses:                                   |       |                                 |       |                               |       |   |   |   |   |
| Selling and marketing                                 |       | 12,285                               |       | 9,212                              |       | 22,136 |   | 17,879 |   |
| General and administrative                            |       | 12,398                               |       | 11,395                             |       | 25,410 |   | 21,097 |   |
| Research and development                              |       | 2,494                                |       | 1,876                              |       | 4,551 |   | 3,413 |   |
| Total operating expenses                              |       | 27,177                               |       | 22,483                             |       | 52,097 |   | 42,389 |   |
| Income (loss) from operations                         |       | 1,815                                |       | (4,348                             | )          | (13,530 | ) | (16,356 | ) |
| Other (expense) income                                |       | (14                                  | )          | 189                                |       | (11 | ) | (95 | ) |
| Interest expense                                      |       | (466                                 | )          | (1,403                             | )          | (491 | ) | (1,464 | ) |
| Income (loss) before income tax                       |       | 1,335                                |       | (5,562                             | )          | (14,032 | ) | (17,915 | ) |
| (Provision for) benefit from income tax               |       | (257                                 | )          | (167                               | )          | 910 |   | (348 | ) |
| Net income (loss)                                     |       | $                                    | 1,078      |                               | $          | (5,729 | ) | $ | (13,122 | ) | $ | (18,263 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Earnings (loss) per share:                            |       |                                 |       |                               |       |   |   |   |   |
| Basic earnings (loss) per common share                |       | $                                    | 0.04       |                               | $          | (0.29 | ) | $ | (0.54 | ) | $ | (0.91 | ) |
| Diluted earnings (loss) per common share              |       | $                                    | 0.04       |                               | $          | (0.29 | ) | $ | (0.54 | ) | $ | (0.91 | ) |
|                                                  |       |                                 |       |                               |       |   |   |   |   |
| Weighted average number of common shares  outstanding |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                 |       | 24,371,125                           |       | 20,034,562                         |       | 24,212,004 |   | 19,983,803 |   |
| Diluted                                               |       | 25,861,957                           |       | 20,034,562                         |       | 24,212,004 |   | 19,983,803 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements.

 

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**EnerNOC, Inc.**

 

**UNAUDITED CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

**(in thousands)**

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                 | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                                  |       |                               |       |   |   |
| Net loss                                                                                   |       | $                                  | (13,122    | ) | $ | (18,263 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                               |       |   |   |
| Depreciation                                                                               |       | 6,574                              |       | 5,104 |   |
| Amortization of acquired intangible assets                                                 |       | 756                                |       | 332 |   |
| Stock-based compensation expense                                                           |       | 8,004                              |       | 6,074 |   |
| Impairment of property and equipment                                                       |       | 756                                |       | — |   |
| Unrealized foreign exchange transaction loss                                               |       | 30                                 |       | 132 |   |
| Deferred tax liability                                                                     |       | (317                               | )          | 351 |   |
| Non-cash interest expense                                                                  |       | 30                                 |       | — |   |
| Other, net                                                                                 |       | 43                                 |       | 46 |   |
| Changes in operating assets and liabilities, net  of effects of acquisitions:              |       |                               |       |   |   |
| Accounts receivable, trade                                                                 |       | (6,118                             | )          | (2,258 | ) |
| Unbilled revenue                                                                           |       | 10,589                             |       | (4,760 | ) |
| Prepaid expenses and other current assets                                                  |       | (5,055                             | )          | (117 | ) |
| Other assets                                                                               |       | (2                                 | )          | (2,765 | ) |
| Other noncurrent liabilities                                                               |       | 1,220                              |       | 60 |   |
| Deferred revenue                                                                           |       | 2,863                              |       | 1,309 |   |
| Accrued capacity payments                                                                  |       | (299                               | )          | 4,565 |   |
| Accrued payroll and related expenses                                                       |       | 365                                |       | 809 |   |
| Accounts payable and accrued expenses                                                      |       | 4,659                              |       | (838 | ) |
| Net cash provided by (used in) operating  activities                                       |       | 10,976                             |       | (10,219 | ) |
|                                                                                       |       |                               |       |   |   |
| **Cash flows from investing  activities**                                                  |       |                               |       |   |   |
| Sales and maturities of marketable securities                                              |       | —                             |       | 2,000 |   |
| Payments made for acquisitions of businesses, net  of cash acquired                        |       | (2,001                             | )          | (984 | ) |
| Purchases of property and equipment                                                        |       | (12,039                            | )          | (9,763 | ) |
| Change in restricted cash and deposits                                                     |       | (607                               | )          | 1,242 |   |
| Net cash used in investing activities                                                      |       | (14,647                            | )          | (7,505 | ) |
|                                                                                       |       |                               |       |   |   |
| **Cash flows from financing  activities**                                                  |       |                               |       |   |   |
| Proceeds from exercises of stock options                                                   |       | 2,473                              |       | 471 |   |
| Repayment of borrowings and payments under capital  leases                                 |       | (18                                | )          | (22 | ) |
| Net cash provided by financing activities                                                  |       | 2,455                              |       | 449 |   |
| Effects of exchange rate changes on cash                                                   |       | (12                                | )          | 19 |   |
| Net change in cash and cash equivalents                                                    |       | (1,228                             | )          | (17,256 | ) |
| Cash and cash equivalents at beginning of period                                           |       | 119,739                            |       | 60,782 |   |
| Cash and cash equivalents at end of period                                                 |       | $                                  | 118,511    |   | $ | 43,526 |   |
|                                                                                       |       |                               |       |   |   |
| **Non-cash financing and investing  activities**                                           |       |                               |       |   |   |
| Net issuance of common stock in connection with  acquisitions                              |       | $                                  | 1,066      |   | $ | 501 |   |
| Issuance of common stock in satisfaction of  bonuses                                       |       | $                                  | 775        |   | $ | 500 |   |
| Increase in accrued contingent consideration  related to acquisitions                      |       | —                             |       | $ | 734 |   |

 

The accompanying notes are an integral part of these condensed consolidatedfinancial statements.

 

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**EnerNOC, Inc.**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**(in thousands, except share and per share data, unless otherwise noted)**

 

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

 

**Description of Business**

 

EnerNOC, Inc. (the Company) is a service company that wasincorporated in Delaware on June 5, 2003. The Company operates in a singlesegment providing clean and intelligent energy management applications andservices, which include comprehensive demand response services, data-drivenenergy efficiency services, energy price and risk management services andenterprise carbon management services. During the three months ended March 31, 2010, the Company releasedan updated energy management application platform, which includes the latestrelease of the Company’s four energy management applications and enhancesprevious iterations of its PowerTrak and CarbonTrak enterprise softwareplatforms.  The Company uses its NetworkOperations Center (NOC) and comprehensive demand response application,DemandSMART, to remotely manage and reduce electricity consumption across agrowing network of commercial, institutional and industrial customer sites,making demand response capacity available to grid operators and utilities ondemand while helping commercial, institutional and industrial end-users ofelectricity (C&I customers) achieve energy savings, environmental benefitsand improved financial results.

 

The Company builds upon its position as a leading demand responseservices provider by using its NOC and energy management application platformto also deliver a portfolio of additional energy management applications to itscustomers, including the cross-selling of these energy management applicationsto existing customers.  These additionalenergy management applications include the Company’s SiteSMART, SupplySMART andCarbonSMART applications.  SiteSMART isthe Company’s data-driven energy efficiency application that has multiplefeatures, including monitoring-based commissioning tools, commissioning andretro-commissioning authority services, energy consulting and engineeringservices, distributed generation services, and owner-engineer services.  SupplySMART is the Company’s energy price andrisk management application that provides the Company’s C&I customerslocated in restructured or deregulated markets throughout the United Stateswith the ability to more effectively manage the energy supplier selectionprocess, including energy supply product procurement and implementation.  CarbonSMART is the Company’s enterprisecarbon management application that supports the measurement, tracking,analysis, reporting and management of greenhouse gas emissions.

 

The Company’s energy management applications and services deliverimmediate bottom-line benefits to C&I customers and energy suppliers whilehelping to create a more reliable and efficient electricity grid for systemoperators and utilities.

 

**Reclassifications**

 

Certain reclassifications have been made to the condensed consolidatedbalance sheet as of December 31, 2009 and the unaudited condensedconsolidated statement of cash flows for the six months ended June 30,2009 to conform to the June 30, 2010 presentation. The reclassificationsprimarily consist of certain receivables, which were previously included intrade accounts receivable, that are not trade in nature.  These certain receivables are now beingclassified in prepaid expenses, deposits and other current assets in theunaudited condensed consolidated balance sheets.

 

**Basis of Consolidation**

 

The unaudited condensed consolidated financial statements of theCompany include the accounts of its wholly-owned subsidiaries and have beenprepared in conformity with accounting principles generally accepted in theUnited States (GAAP). Intercompany transactions and balances are eliminatedupon consolidation.  In the opinion of theCompany’s management, the unaudited condensed consolidated financial statementsinclude all adjustments, consisting only of normal recurring adjustments,necessary for a fair presentation of the results of operations for the periodspresented.

 

**Subsequent Events Consideration**

 

The Company considers events or transactions that occur after thebalance sheet date, but prior to the issuance of the financial statements, toprovide additional evidence relative to certain estimates or to identifymatters that require additional disclosure. Subsequent events have beenevaluated as required.  The Companyconsiders all of its demand response event performance prior to the issuance ofthe financial statements in order to validate its estimate of fees potentiallysubject to refund.

 

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In July 2010, the Company and one of itssubsidiaries entered into a third loan modification agreement to its loan andsecurity agreement (as modified, the Credit Facility) with Silicon Valley Bank(SVB), which extended the revolving credit line maturity date of the CreditFacility from August 5, 2010 to February 4, 2011, as well as modifiedcertain of the Company’s financial covenant compliance requirements. Refer toNote 7 for further discussion of the Credit Facility.

 

Based on the Company’s demand response eventperformance in July 2010 under a certain open market demand response program inwhich the Company participates, approximately $7,697 of restricted cash as ofJune 30, 2010 that collateralized the Company’s performance obligations becameunrestricted in July 2010.

 

There were no other material disclosable or recognizablesubsequent events recorded in the June 30, 2010 unaudited condensedconsolidated financial statements.

 

**Use of Estimates in Preparation of Financial Statements**

 

The accompanying unaudited condensedconsolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (SEC). Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with GAAP have been condensed or omitted pursuant to SECrules and regulations. In the opinion of management, the unauditedcondensed consolidated financial statements and notes have been prepared on thesame basis as the audited consolidated financial statements contained in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2009, and include all adjustments (consisting of normal, recurring adjustments)necessary for the fair presentation of the Company’s financial position at June 30,2010, statements of operations for the three and six months ended June 30,2010 and 2009, and statements of cash flows for the six months ended June 30,2010, and 2009. Operating results for the three and six months endedJune 30, 2010 are not necessarily indicative of the results to be expectedfor any other interim period or the entire fiscal year ending December 31,2010.

 

The preparation of these unaudited condensedconsolidated financial statements requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, the Company evaluates its estimates, including those related torevenue recognition for multiple element arrangements, allowance for doubtfulaccounts, valuations and purchase price allocations related to businesscombinations, expected future cash flows including growth rates, discountrates, terminal values and other assumptions and estimates used to evaluate therecoverability of long-lived assets and goodwill, estimated fair values ofintangible assets and goodwill, amortization methods and periods, certainaccrued expenses and other related charges, stock-based compensation,contingent liabilities, tax reserves and recoverability of the Company’s netdeferred tax assets and related valuation allowance.

 

Although the Company regularly assesses theseestimates, actual results could differ materially from these estimates. Changesin estimates are recorded in the period in which they become known. The Companybases its estimates on historical experience and various other assumptions thatit believes to be reasonable under the circumstances. Actual results may differfrom management’s estimates if these results differ from historical experienceor other assumptions prove not to be substantially accurate, even if suchassumptions are reasonable when made.

 

The Company is subject to a number of riskssimilar to those of other companies of similar and different sizes both insideand outside its industry, including, but not limited to, rapid technologicalchanges, competition from substitute products and services from largercompanies, customer concentration, government regulations, protection ofproprietary rights and dependence on key individuals.

 

**Comprehensive Income (Loss)**

 

Comprehensive income (loss) is defined as the change in equity of abusiness enterprise during a period from transactions and other events andcircumstances from non-owner sources. Comprehensive income (loss) is composedof net income (loss), unrealized gains and losses on marketable securities andcumulative foreign currency translation adjustments.

 

Comprehensive income (loss) for the three and six months endedJune 30, 2010 and 2009 was as follows:

 

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| ** **                                         | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income (loss)                                  |       | $                                    | 1,078      |                               | $          | (5,729 | ) | $ | (13,122 | ) | $ | (18,263 | ) |
| Change in unrealized gain on marketable securities |       | —                               |       | 4                                  |       | — |   | — |   |
| Foreign currency translation adjustments           |       | 80                                   |       | (153                               | )          | 32 |   | 151 |   |
| Total comprehensive income (loss)                  |       | $                                    | 1,158      |                               | $          | (5,878 | ) | $ | (13,090 | ) | $ | (18,112 | ) |

 

**Internal Use Software Costs**

 

The Company applies theprovisions of Accounting Standard Codification (ASC) 350-40, *Internal Use Software*(ASC 350-40)*.*This accounting guidance requires computer software costs associated withinternal use software to be expensed as incurred until certain capitalizationcriteria are met, and it also defines which types of costs should becapitalized and which should be expensed. The Company capitalizes the payrolland payroll-related costs of employees who devote time to the development ofinternal use computer software. The Company amortizes these costs on astraight-line basis over the estimated useful life of the software, which isgenerally three years. The Company’s judgment is required in determining thepoint at which various projects enter the stages at which costs may becapitalized, in assessing the ongoing value and impairment of the capitalizedcosts, and in determining the estimated useful lives over which the costs areamortized.

 

Capitalized internal usesoftware costs were $2,774 and $1,156 for the three months ended June 30,2010 and 2009, respectively, and $4,018 and $1,895 for the six months ended June 30,2010 and 2009, respectively.  The Companycapitalized $390 and $968 during the three and six months ended June 30,2010, respectively, related to a company-wide enterprise resource planningsystems implementation project.  TheCompany did not have similar capitalized costs during the three and six monthsended June 30, 2009. These costs have been capitalized in accordance withASC 350-40. The capitalized amounts are included as software in property andequipment at June 30, 2010 and December 31, 2009.  Amortization of capitalized internal usesoftware costs was $676 and $549 for the three months ended June 30, 2010and 2009, respectively, and $1,374 and $1,048 for the six months ended June 30,2010 and 2009, respectively.  Accumulatedamortization of capitalized internal use software costs was $5,561 and $4,187as of June 30, 2010 and December 31, 2009, respectively.

 

**Impairment of Property and Equipment**

 

The Company reviews propertyand equipment for impairment whenever events or changes in circumstancesindicate that the carrying amount of assets may not be recoverable. If theseassets are considered to be impaired, the impairment is recognized in earningsand equals the amount by which the carrying value of the assets exceeds their fairmarket value determined by either a quoted market price, if any, or a valuedetermined by utilizing a discounted cash flow technique. If these assets arenot impaired, but their useful lives have decreased, the remaining net bookvalue is amortized over the revised useful life.  During the three months ended June 30,2010, the Company identified a potential impairment indicator related tocertain demand response and back-up generator equipment as a result of lowerthan estimated demand response event performance by these assets.  As a result of this potential indicator ofimpairment, the Company performed an impairment test during the three monthsended June 30, 2010.  The applicablelong-lived assets are measured for impairment at the lowest level for whichidentifiable cash flows are largely independent of the cash flows of otherassets or liabilities.  The Companydetermined that the undiscounted cash flows to be generated by the asset groupover its remaining estimated useful life would not be sufficient to recover thecarrying value of the asset group. The Company determined the fair value of theasset group using a discounted cash flow technique based on Level 3 inputs, asdefined by ASC 820, *Fair Value Measurementsand Disclosures*(ASC 820), and a discount rate of 11%, which theCompany determined represents a market rate of return for the assets beingevaluated for impairment. The Company determined that the fair value of theasset group was $1,543 compared to the carrying value of the asset group of $2,299,and as a result recorded an impairment charge of $756 during the three monthsended June 30, 2010, which is reflected in cost of revenues in theaccompanying unaudited condensed consolidated statements of operations.  The impairment charge was allocated to theindividual assets within the asset group on a pro-rata basis using the relativecarrying amounts of those assets.

 

**Industry Segment Information**

 

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

 

For the three and six monthsended June 30, 2010 and 2009, operations related to the Company’sinternational subsidiaries were not material to the accompanying unauditedcondensed consolidated financial statements taken as a whole. In addition, asof 

 

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June 30, 2010 and December 31, 2009, the long-lived assetsrelated to the Company’s international subsidiaries were not material to theaccompanying unaudited condensed consolidated financial statements taken as awhole.

 

**2.****             ****Acquisitions**

 

**SmallFoot LLC and ZOX, LLC**

 

InMarch 2010, the Company acquired substantially all of the assets andcertain liabilities of SmallFoot LLC (Smallfoot) and ZOX, LLC (Zox), which werecompanies unaffiliated with the Company but were entities under common control.  Smallfoot was in the process of developingwireless systems that manage and coordinate electricity demand for smallcommercial facilities and Zox was in the process of developing hardware andsoftware for automated utility meter reading. The total purchase price paid bythe Company at closing was approximately $1,360, of which $1,100 was paid incash and the remainder of which was paid by the issuance of 8,758 shares of theCompany’s common stock that had a fair value of approximately $260. Theseshares were measured as of the acquisition date using the closing price of theCompany’s common stock, as reported on The NASDAQ Global Market (NASDAQ) onMarch 15, 2010.  The Companybelieves that Smallfoot’s technology will reduce deployment costs andaccelerate deeper market penetration into C&I customers, specificallysmaller C&I customers.  The Companybelieves Zox’s smart grid communications and metering technology provides aplatform for transforming electric industry legacy meters into smart meters ata substantially lower cost as compared to traditional replacement methods.

 

AlthoughSmallfoot and Zox were development stage entities as of the acquisition closedate, these entities met the definition of a business as defined under ASC 805,*Business Combinations*(ASC 805)*,* as these entities had inputs and processes that have theability to provide a return to its owners. As a result, this acquisition was treated as a business combination inaccordance with ASC 805.

 

Transaction costs related to this business combination were notmaterial and have been expensed as incurred. The transaction costs are included in general and administrativeexpenses in the accompanying unaudited condensed consolidated statements ofoperations.

 

The allocation of the purchase price is based upon preliminary estimatesof the fair value of assets acquired and liabilities assumed as ofMarch 15, 2010. The Company is in the process of gathering information tofinalize its valuation of certain assets and liabilities. The purchase priceallocation is preliminary and will be finalized once the Company has allnecessary information to complete its estimate, but generally no later than oneyear from the date of acquisition. There were no net tangible assets acquiredin connection with this acquisition. The components and initial allocation ofthe purchase price consists of the following approximate amounts:

 
| In-process research and development |   | $   | 920    |   |
|-------------------------------------|--------|-----|--------|--------|
| Patents                             |   | 200 |   |
| Goodwill                            |   | 240 |   |
| Total                               |   | $   | 1,360  |   |

 

As part of the preliminary purchase price allocation, the Companydetermined that the identifiable intangible assets include two in-processresearch and development projects and certain acquired patents.

 

The Company used the cost approach to value the two acquired in-processresearch and development projects that related to the development of wirelesssystems that manage and coordinate electricity demand for small commercialfacilities and the development of hardware and software for automated utilitymeter reading, but had not yet reached technological feasibility and had no alternatefuture uses as of the acquisition date. The primary basis for determining the technological feasibility of theseprojects is the completion of a working model that performs all the major functionsplanned for the product and is ready for initial customer testing, usuallyidentified as beta testing. ASC 805 requires that purchased research anddevelopment acquired in a business combination be recognized as anindefinite-lived intangible asset until the completion or abandonment of theassociated research and development efforts. The cost approach calculates fairvalue by calculating the reproduction cost of an exact replica of the subjectintangible asset.  The Company calculatedthe replacement cost based on actual development costs incurred through thedate of acquisition.  In determining theappropriate valuation methodology, the Company considered, among other factors:the in-process projects’ stage of completion; the complexity of the workcompleted as of the acquisition date; the costs already incurred; the projectedcosts to complete; the expected introduction date; and the estimated usefullife of the technology. Given the stage of development as of the acquisitiondate and the current lack of sufficient information regarding future expected cashflows, the Company determined that the cost approach was the most reliablevaluation methodology to determine the fair value of the in-process researchand development projects acquired. The Company believes that the estimatedin-process research and development amounts so determined represent the fairvalue at the date of acquisition and do not exceed the amount a third partywould pay for the projects. However, if the projects are not successful orcompleted in a timely manner, the Company may not realize the financialbenefits expected for these projects or for the acquisition as a whole.

 

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The estimated cost to complete the in-process research and developmentprojects in the aggregate as of June 30, 2010 was approximately $1,050.

 

The Company used the income approach to value the acquiredpatents.  The discount rate in connectionwith this valuation was 25% and was based on the commercial and technical risksrelated to this asset and on estimated market participant discount rates for asimilar asset.

 

The factors contributing to the recognition of goodwill were based uponseveral strategic and synergistic benefits that were expected to be realizedfrom the combination.

 

**Cogent Energy, Inc.**

 

In December 2009, the Company acquired all of the outstandingcapital stock of Cogent Energy, Inc. (Cogent), a company specializing incomprehensive energy consulting, engineering and building commissioningsolutions to C&I customers. The total purchase price paid by the Company atclosing was approximately $11,172, of which $6,555 was paid in cash and theremainder of which was paid by the issuance of 114,281 shares of the Company’scommon stock that had a fair value of approximately $3,162.  These shares were measured as of theacquisition date using the closing price of the Company’s common stock, asreported on NASDAQ on December 4, 2009. As a result of gathering information to update the Company’s valuationof certain acquired assets and liabilities, the purchase price was reduced by$94 during the three months ended March 31, 2010.  This reduction in purchase price was settledin April 2010 through the release back to the Company of 3,592 shares ofthe Company’s common stock that were previously held in escrow in connectionwith the Cogent acquisition.  Upon therelease of these shares back to the Company, the Company’s board of directorsapproved the retirement of the applicable shares.  Therefore, the transaction was accounted foras a treasury stock transaction and related retirement of shares during thethree months ended June 30, 2010.

 

In addition to the amounts paid at closing, the Company may beobligated to pay an earn-out amount of $1,500 to the former stockholders ofCogent. The earn-out payment will be based on the achievement of a certainminimum revenue-based milestone and a certain earnings-based milestone ofCogent for the year ending December 31, 2010 and will be paid in cash.Both of these milestones need to be achieved in order for the earn-out paymentto occur, and there will be no partial payment if the milestones are not fullyachieved. The Company believes that it is remote that the earn-out payment willnot be made. The fair value of the earn-out payment of $1,455 was recorded asadditional purchase price as of the acquisition date. As the Company believesthat it is remote that the earn-out payment will not be made, the Companydetermined the fair value of the earn-out payment based on the present value ofthe $1,500, which will be paid in December 2010. The increase in fairvalue of the contingent consideration from December 31, 2009 toJune 30, 2010 was not material.

 

As discussed above, in connection with the gathering of additionalinformation to update the Company’s valuation of certain acquired assets andliabilities in connection with the Cogent acquisition, the Company recordedcertain adjustments to the purchase price, as well as its allocation of thepurchase price.  The purchase priceallocation adjustments related to changes in the valuation of certainreceivable and payable amounts.

 

The components and allocation of the purchase price consist of thefollowing approximate amounts:

 
| Net tangible assets acquired as of  December 4, 2009 |   | $     | 1,331  |   |
|-----------------------------------------------------------|--------|-------|--------|--------|
| Customer relationships                                    |   | 1,400 |   |
| Non-compete agreements                                    |   | 590   |   |
| Trade name                                                |   | 200   |   |
| Goodwill                                                  |   | 7,557 |   |
| Total                                                     |   | $     | 11,078 |   |

 

Net tangible assets acquired in the acquisition of Cogent primarilyrelated to the following:

 

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| Cash                      |   | $     | 336    |   |
|---------------------------|--------|-------|--------|--------|
| Accounts receivable       |   | 1,777 |   |
| Prepaids and other assets |   | 77    |   |
| Accounts payable          |   | (331  | )      |
| Accrued expenses          |   | (528  | )      |
| Total                     |   | $     | 1,331  |   |

 

**eQuilibriumSolutions Corporation**

 

InJune 2009, the Company acquired substantially all of the assets ofeQuilibrium Solutions Corporation (eQ), a software company specializing in thedevelopment of enterprise sustainability management products and services. Thetotal purchase price paid by the Company at closing was approximately $751, ofwhich $250 was paid in cash and the remainder of which was paid by the issuanceof 21,464 shares of the Company’s common stock that had a value ofapproximately $501. These shares were measured as of the acquisition date usingthe closing price of the Company’s common stock, as reported on NASDAQ onJune 11, 2009.

 

Transactioncosts related to this business combination were not material and were expensedas incurred.  The transaction costs areincluded in general and administrative expenses. The Company’s consolidatedfinancial statements reflect eQ’s results of operations from June 11, 2009forward.

 

**South River Consulting, LLC**

 

In May 2008, the Company acquired 100% of the membership interestsof South River Consulting, LLC (SRC), an energy procurement and risk managementservices provider, for a purchase price equal to $5,524, which consisted of$3,603 in cash, $174 in related expenses and 120,000 shares of the Company’scommon stock that had a value of approximately $1,747 as of the closing date.In addition to the amounts paid at closing, the Company incurred a contingentobligation to pay to the former holders of SRC membership interests an earn-outamount equal to 50% to 60% of the revenues of SRC’s business during eachtwelve-month period from May 1, 2008 through April 30, 2010, whichwould be recognized as additional purchase price when earned. The earn-outpayments were based on the achievement of certain minimum revenue-basedmilestones of SRC, paid in a combination of cash and shares of the Company’scommon stock and recorded as additional purchase price. The additional purchaseprice recorded in the three months ended June 30, 2009, which was relatedto the May 1, 2008 to April 30, 2009 earn-out period, totaled $1,468,of which $734 was paid in cash during the three months ended June 30, 2009and the remainder of which was paid by the issuance of 44,776 shares of theCompany’s common stock during the three months ended September 30,2009.  The additional purchase pricerecorded in the six months ended June 30, 2010, which was related to theMay 1, 2009 to April 30, 2010 earn-out period, totaled $1,840, ofwhich $901 was paid in cash during the three months ended June 30, 2010,$39 was settled through a reduction of a receivable due to the Company from theformer holders of SRC membership interests and the remainder of which was paidby the issuance of 30,879 shares of the Company’s common stock with a fairvalue of $900.

 

Pro forma information relating to the above acquisitions has not beenprovided since the impact to the consolidated financial statements was notmaterial.

 

**3.  Impairment of IntangibleAssets and Goodwill**

 

*Intangible Assets*

 

TheCompany amortizes its intangible assets that have finite lives using either thestraight-line method or, if reliably determinable, based on the pattern inwhich the economic benefit of the asset is expected to be consumed utilizingexpected undiscounted future cash flows. Amortization is recorded over theestimated useful lives ranging from one to ten years. The Company reviewsits intangible assets subject to amortization to determine if any adverseconditions exist or a change in circumstances has occurred that would indicateimpairment or a change in the remaining useful life. If the carrying value ofan asset exceeds its undiscounted cash flows, the Company will write-down thecarrying value of the intangible asset to its fair value in the periodidentified. In assessing recoverability, the Company must make assumptionsregarding estimated future cash flows and discount rates. If these estimates orrelated assumptions change in the future, the Company may be required to recordimpairment charges. The Company generally calculates fair value as the presentvalue of estimated future cash flows to be generated by the asset using arisk-adjusted discount rate. If the estimate of an intangible asset’s remaininguseful life is changed, the Company will amortize the remaining carrying valueof the intangible asset prospectively over the revised remaining useful life.There were no indicators of impairment identified during the three and sixmonths ended June 30, 2010 and 2009 that required an interim impairmenttest.

 

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The following table provides the gross carrying amount and relatedaccumulated amortization of the Company’s definite-life intangible assets as ofJune 30, 2010 and December 31, 2009:

 
| ** **                                       | ** ** | **Weighted  Average**                         | ** ** | **As of June 30, 2010** | ** ** | **As of December 31, 2009** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **Amortization  Period (in years)** | ** ** | **Gross Carrying  Amount**             | ** ** | **Accumulated  Amortization**                   | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer contracts                               |       | 6.78                                          |       | $                                           | 4,217      |                                            | $          | (1,387 | ) | $ | 4,217 |   | $ | (1,180 | ) |
| Employment agreements and non-compete agreements |       | 2.86                                          |       | 772                                         |       | (219                                            | )          | 772 |   | (118 | ) |
| Software                                         |       | 1.99                                          |       | 120                                         |       | (43                                             | )          | 120 |   | (23 | ) |
| Customer relationships                           |       | 6.59                                          |       | 3,510                                       |       | (674                                            | )          | 3,510 |   | (333 | ) |
| Trade name                                       |       | 0.24                                          |       | 115                                         |       | (88                                             | )          | 115 |   | (5 | ) |
| Patents                                          |       | 9.70                                          |       | 200                                         |       | (4                                              | )          | — |   | — |   |
| Total                                            |       |                                          |       | $                                           | 8,934      |                                            | $          | (2,415 | ) | $ | 8,734 |   | $ | (1,659 | ) |

 

The increase in patents from December 31, 2009 to June 30,2010 was due to the allocation of purchase price related to the Smallfoot andZox acquisition in the three months ended March 31, 2010.  Amortization expense related to intangibleassets amounted to $368 and $756, respectively, for the three and six monthsended June 30, 2010 and $163 and $332, respectively, for the three and sixmonths ended June 30, 2009. These costs are included in general andadministrative expenses in the accompanying unaudited condensed consolidatedstatements of operations. The definite-life intangible asset lives range from oneto ten years and the weighted average remaining life was 6.28 years atJune 30, 2010.

 

In addition to the definite-life intangible assets described above, theCompany also has two indefinite-life intangible assets related to in-processresearch and development projects acquired in connection with the Smallfoot andZox acquisition (refer to Note 2 for further discussion).  The indefinite-life in-process research anddevelopment intangible assets totaled $920 as of June 30, 2010.  There were no indefinite-life intangibleassets as of December 31, 2009.

 

*Goodwill*

 

In accordance with ASC 350, *Intangibles—Goodwill andOther* (ASC 350), the Company tests goodwill at the reporting unitlevel for impairment on an annual basis and between annual tests if events andcircumstances indicate it is more likely than not that the fair value of areporting unit is less than its carrying value. Events that would indicate impairment and trigger an interim impairmentassessment include, but are not limited to, current economic and marketconditions, including a decline in market capitalization, a significant adversechange in legal factors, business climate or operational performance of thebusiness, and an adverse action or assessment by a regulator. The Company’sannual impairment test date is November 30.

 

In performing the test, the Company utilizes the two-step approachprescribed under ASC 350. The first step requires a comparison of the carryingvalue of the reporting units, as defined, to the fair value of these units. TheCompany considers a number of factors to determine the fair value of areporting unit, including an independent valuation to conduct this test. Thevaluation is based upon expected future discounted operating cash flows of thereporting unit as well as analysis of recent sales or offerings of similarcompanies. The Company bases the discount rate used to arrive at a presentvalue as the date of the impairment test on its weighted average cost ofcapital. If the carrying value of its reporting unit exceeds its fair value,the Company will perform the second step of the goodwill impairment test tomeasure the amount of impairment loss, if any. The second step of the goodwillimpairment test compares the implied fair value of a reporting unit’s goodwillto its carrying value. To date, the Company has not been required to performthe second step of the impairment test.

 

The fair value of the entity is determined by use of a market approachbased on the quoted market price of its common stock and the number of sharesoutstanding and a discounted cash flow analysis (DCF) under the incomeapproach. The key assumptions that drive the fair value in the DCF model arethe discount rates (i.e., weighted average cost of capital (WACC)),terminal values, growth rates, and the amount and timing of expected futurecash flows. If the current worldwide financial markets and economic environmentwere to deteriorate, this would likely result in a higher WACC because marketparticipants would require a higher rate of 

 

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return.In the DCF, as the WACC increases, the fair value decreases. The othersignificant factor in the DCF is its projected financial information(i.e., amount and timing of expected future cash flows and growth rates)and if its assumptions were to be adversely impacted, it could result in areduction of the fair value of the entity. The Company believes that it is notat risk of failing the first step of the goodwill impairment test.

 

The estimate of fair value requires significant judgment. Any lossresulting from an impairment test would be reflected in operating loss in theCompany’s consolidated statements of operations. The annual impairment testingprocess is subjective and requires judgment at many points throughout theanalysis. If these estimates or their related assumptions change in the future,the Company may be required to record impairment charges for these assets notpreviously recorded.

 

The following table shows the change in the carrying amount of goodwillfrom December 31, 2009 to June 30, 2010:

 
| Balance at December 31, 2009            |   | $     | 22,553 |   |
|----------------------------------------------|--------|-------|--------|--------|
| Acquisition of Smallfoot and Zox             |   | 240   |   |
| Purchase price adjustments related to Cogent |   | 20    |   |
| SRC earn-out                                 |   | 1,840 |   |
| Balance at June 30, 2010                |   | $     | 24,653 |   |

 

**4. Net Income (Loss) Per Share**

 

A reconciliation of basic and diluted share amounts for the three andsix months ended June 30, 2010 and 2009 are as follows (shares in thousands):

 
| ** **                                         | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                         | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Numerator:                                         |       |                                 |       |                               |       |   |   |   |   |
| Net income (loss)                                  |       | $                                    | 1,078      |                               | $          | (5,729 | ) | $ | (13,122 | ) | $ | (18,263 | ) |
| Denominator:                                       |       |                                 |       |                               |       |   |   |   |   |
| Basic weighted average common shares outstanding   |       | 24,371                               |       | 20,035                             |       | 24,212 |   | 19,984 |   |
| Weighted average common stock equivalents          |       | 1,491                                |       | —                             |       | — |   | — |   |
| Diluted weighted average common shares outstanding |       | 25,862                               |       | 20,035                             |       | 24,212 |   | 19,984 |   |
|                                               |       |                                 |       |                               |       |   |   |   |   |
| Basic net income (loss) per common share           |       | $                                    | 0.04       |                               | $          | (0.29 | ) | $ | (0.54 | ) | $ | (0.91 | ) |
| Diluted net income (loss) per common share         |       | $                                    | 0.04       |                               | $          | (0.29 | ) | $ | (0.54 | ) | $ | (0.91 | ) |
| Weighted average anti-dilutive shares related to:  |       |                                 |       |                               |       |   |   |   |   |
| Stock options                                      |       | 986                                  |       | 3,294                              |       | 3,029 |   | 3,227 |   |
| Nonvested restricted stock                         |       | 86                                   |       | 200                                |       | 179 |   | 224 |   |
| Restricted stock units                             |       | 4                                    |       | 123                                |       | 304 |   | 94 |   |
| Escrow shares                                      |       | —                               |       | 123                                |       | 149 |   | 121 |   |

 

In the reporting period in which the Company has reported net income,anti-dilutive shares comprise those common stock equivalents that have eitheran exercise price above the average stock price for the quarter or the commonstock equivalent’s related average unrecognized stock compensation expense issufficient to “buy back” the entire amount of shares.  In those reporting periods in which theCompany has a net loss, anti-dilutive shares comprise the impact of thosenumber of shares that would have been dilutive had the Company had net incomeplus the number of common stock equivalents that would be anti-dilutive had theCompany had net income.

 

The Company excludes the shares issued in connection with restrictedstock awards from the calculation of basic weighted average common sharesoutstanding until such time as those shares vest, as the employee does not bearthe risks or rewards of ownership until those shares have vested.

 

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In connection with certain of the Company’s business combinations, theCompany has issued shares that were held in escrow upon closing of theapplicable business combination. The Company excludes shares held in escrowfrom the calculation of basic weighted average common shares outstanding wherethe release of such shares is contingent upon an event and not solely subjectto the passage of time.

 

**5. Disclosure of Fair Value of Financial Instruments**

 

The Company’s financial instruments mainly consist of cash and cashequivalents, restricted cash, accounts receivable, and accounts payable anddebt obligations. The carrying amounts of the Company’s cash equivalents, restrictedcash, accounts receivable and accounts payable approximate their fair value dueto the short-term nature of these instruments. At June 30, 2010 andDecember 31, 2009, there were no amounts outstanding under the CreditFacility.

 

**6. Fair Value Measurements**

 

ASC 820 establishes a fair value hierarchy that requires the use ofobservable market data, when available, and prioritizes the inputs to valuationtechniques used to measure fair value in the following categories:

 

·                  Level 1—Valuation isbased upon quoted prices for identical instruments traded in active markets.Level 1 instruments include securities traded on active exchange markets,such as the New York Stock Exchange.

 

·                  Level 2—Valuation isbased upon quoted prices for similar instruments in active markets, quotedprices for identical or similar instruments in markets that are not active andmodel-based valuation techniques for which all significant assumptions areobservable in the market.

 

·                  Level 3—Valuation isgenerated from model-based techniques that use significant assumptions notobservable in the market. These unobservable assumptions reflect the Company’sown estimates of assumptions market participants would use in pricing the assetor liability.

 

The table below presents the balances of assets and liabilitiesmeasured at fair value on a recurring basis at June 30, 2010:

 
| ** **             | ** ** | **Fair Value Measurement at June 30, 2010 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) |       | $                                                      | 108,202    |   | $ | 108,202 |   | $ | — |   | $ | — |   |
|                   |       | $                                                      | 108,202    |   | $ | 108,202 |   | $ | — |   | $ | — |   |

 

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(1)                                  $100,505 isincluded in cash and cash equivalents and $7,697 is included in restricted cashin the accompanying unaudited condensed consolidated balance sheets.

 

With respect to assets measured at fair value on a non-recurring basis,which would be impaired long-lived assets, as a result of an indicator ofimpairment related to certain production and back-up generator equipment, theCompany was required to perform an impairment test during the three monthsended June 30, 2010 and measure the fair value of these assets.  Refer to Note 1 for a discussion of themeasurement of fair value of these assets. There were no indicators of impairment related to any of the Company’sother long-lived assets during the three and six months ended June 30,2010 requiring a fair value measurement of these assets.  Accordingly, these other long-lived assetswere not measured at fair value.  Withrespect to liabilities measured at fair value on a non-recurring basis, whichwould be contingent consideration liability, refer to Note 2 for a discussionof the determination of fair value of this liability.

 

At June 30, 2010, the Company had restricted cash of approximately$7,874, of which $7,697 was invested in a money market fund and $177 wasinvested in certificates of deposit. The fair value measurement of the moneymarket fund is included in the above

 

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table.  All certificates of deposit have contractualmaturities of twelve months or less. The Company’s investments in certificatesof deposit have a fair value that approximates cost based on current marketrates for similar instruments.

 

**7. Financing Arrangements**

 

Pursuant to the terms of the Credit Facility, SVB will, among otherthings, make revolving credit and term loan advances and issue letters ofcredit for the Company’s account. The interest on loans under the Company’srevolving credit loan accrues at interest rates based upon either SVB’s primerate or the 30, 60 or 90-day LIBOR plus 2.25%, at the Company’s election. Theinterest on term loans accrues at SVB’s prime rate plus 0.50% or the 30, 60 or90-day LIBOR plus 2.75%, at the Company’s election. The term advance is payablein thirty-six consecutive equal monthly installments of principal, calculatedby SVB, based upon the amount of the term advance and an amortization scheduleequal to thirty-six months. All unpaid principal and accrued interest is dueand payable in full on February 4, 2011, which is the maturity date. Inconnection with the issuance or renewal of letters of credit for the Company’saccount, the Company is charged a letter of credit fee of 1.25%. The Companyexpenses the interest and letter of credit fees, as applicable, in the periodincurred.

 

The Company’s obligations under the Credit Facility are secured by allof the assets of the Company and its subsidiaries, excluding any intellectualproperty. The Credit Facility contains customary terms and conditions forcredit facilities of this type, including restrictions on the Company’s abilityto incur additional indebtedness, create liens, enter into transactions withaffiliates, transfer assets, pay dividends or make distributions on, orrepurchase, the Company’s stock, consolidate or merge with other entities, orsuffer a change in control. In addition, the Company is required to meetcertain financial covenants customary with this type of credit facility,including maintaining a minimum specified tangible net worth and a minimumspecified ratio of current assets to current liabilities. The Credit Facilitycontains customary events of default, including payment defaults, breaches ofrepresentations, breaches of affirmative or negative covenants, cross defaultsto other material indebtedness, bankruptcy and failure to discharge certainjudgments. If a default occurs and is not cured within any applicable cureperiod or is not waived, the Company’s obligations under the Credit Facilitymay be accelerated. The Company was in compliance with all financial covenantsunder the Credit Facility at June 30, 2010 and December 31, 2009.

 

In October 2009, the Company repaid the outstanding borrowings of$4,442 under the Credit Facility. The Company incurred financing costs of $120in connection with the Credit Facility, which were deferred and are beingamortized to interest expense over the life of the Credit Facility, whichmatures on February 4, 2011. At June 30, 2010, the Company had noborrowings and letters of credit of $37,856 outstanding under the CreditFacility.

 

InApril 2010, the Company and one of its subsidiaries entered into a secondloan modification agreement to the Credit Facility, which increased the Company’sborrowing limit from $35,000 to $50,000, as well as modified certain of theCompany’s financial covenant compliance requirements.  In July 2010,the Company and one of its subsidiaries entered into a third loan modificationagreement to the Credit Facility, which extended the revolving credit linematurity date of the Credit Facility from August 5, 2010 toFebruary 4, 2011, as well as modified certain of the Company’s financialcovenant compliance requirements.  Upon termination of the Credit Facility,if the Company still has letters of credit issued and outstanding under the CreditFacility, the Company would be required to post 105% of the value of theletters of credit in cash with SVB to collateralize those letters of credit.

 

**8. Commitments and Contingencies**

 

The Company is contingently liable under outstanding letters of credit.Restricted cash balances in the amount of $7,874 collateralize certainoutstanding letters of credit and cover financial assurance requirements incertain of the programs in which the Company participated at June 30, 2010and December 31, 2009.  Based on theCompany’s demand response event performance in July 2010 under a certainopen market demand response program in which the Company participates,approximately $7,697 of restricted cash that collateralized the Company’sperformance obligations became unrestricted in July 2010.

 

TheCompany is subject to performance guarantee requirements under certain utilityand grid operator customer contracts and open market bidding programparticipation rules. The Company had deposits held by certain utility and gridoperator customers of $3,638 and $3,024, respectively, at June 30, 2010and December 31, 2009. These amounts primarily represent up-front paymentsrequired by utility and grid operator customers as a condition of participationin certain demand response programs and to ensure that the Company will deliverits committed capacity amounts in those programs. If the Company fails to meetits minimum committed capacity requirements, a portion or all of the depositmay be forfeited. The Company assessed the probability of default under thesecustomer contracts and open market bidding programs and has determined thelikelihood of default and loss of deposits to be remote.  In addition,under certain utility and grid operator customer contracts, if the Company doesnot achieve the required performance guarantee requirements, the customer canterminate the arrangement and the Company would potentially be subject totermination penalties.  Under these arrangements, the Company defers allfees received up to the amount of the potential termination penalty until theCompany has concluded that it can reliably determine that the potentialtermination penalty will not be incurred or the termination penaltylapses.   As of June 30, 2010, the Company has deferred feestotaling approximately $3,600, of which $1,200 are included in deferredrevenues and $2,400 are included

 

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inother liabilities in the accompanying unaudited condensed consolidated balancesheets.  As of June 30, 2010, the maximum termination penalty thatthe Company is subject to under these arrangements, which the Company has notdeemed probable of incurring, is approximately $4,800.

 

In connection with the Company’s participation in an open market biddingprogram, the Company entered into an arrangement with a third party during thethree months ended June 30, 2009 to bid capacity into the program andprovide the corresponding financial assurance required in connection with thebid. The arrangement included an up-front payment by the Company equal to$2,000, of which $1,100 was expensed as interest expense during the threemonths ended June 30, 2009 and $900 was deferred and will be recognizedratably as a charge to cost of revenues as revenue is recognized over the2012/2013 delivery year. In addition, the Company will be required to pay thethird party an additional contingent fee, up to a maximum of $3,000, based onthe revenue that the Company expects to earn in 2012 in connection with thebid. This additional fee will be recognized as earned as a reduction ofrevenue.

 

The Company includes indemnification provisions in certain of itscontracts. These indemnification provisions include provisions indemnifying thecustomer against losses, expenses, and liabilities from damages that could beawarded against the customer in the event that the Company’s services andrelated enterprise software platforms are found to infringe upon a patent orcopyright of a third party. The Company believes that its internal businesspractices and policies and the ownership of information limits the Company’srisk in paying out any claims under these indemnification provisions.

 

**9. Stock-Based Compensation**

 

The Company’s Amended and Restated 2003 Stock Option and Incentive Plan(2003 Plan) and the Amended and Restated 2007 Employee, Director and ConsultantStock Plan (the 2007 Plan, and collectively with the 2003 Plan, the Plans)provide for the grant of incentive stock options, nonqualified stock options,restricted and unrestricted stock awards and other stock-based awards toeligible employees, directors and consultants of the Company. Options grantedunder the Plans are exercisable for a period determined by the Company, but inno event longer than ten years from the date of the grant. Option awards aregenerally granted with an exercise price equal to the market price of theCompany’s common stock on the date of grant. Options, restricted stock awards and restricted stock unit awardsgenerally vest ratably over four years, with certain exceptions. The 2003 Planexpired upon the Company’s initial public offering (IPO) in May 2007. Anyforfeitures under the 2003 Plan that occurred after the effective date of theIPO are available for future grant under the 2007 Plan up to a maximum of1,000,000 shares. During the six months ended June 30, 2010 and 2009, theCompany issued 24,681 shares of its common stock and 45,085 shares of itscommon stock, respectively, to certain executives to satisfy a portion of theCompany’s compensation obligations to those individuals. As of June 30,2010, 2,138,947 shares were available for future grant under the 2007 Plan.

 

For stock options granted prior to January 1, 2009, the fair valueof each option was estimated at the date of grant using a Black-Scholesoption-pricing model. 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. The trinomial model considerscharacteristics of fair value option pricing that are not available under theBlack-Scholes model. Similar to the Black-Scholes model, the trinomial modeltakes into account variables such as expected volatility, dividend yield rate,and risk free interest rate. However, in addition, the trinomial modelconsiders the probability that the option will be exercised prior to the end ofits contractual life and the probability of termination or retirement of theoption holder in computing the value of the option. For these reasons, theCompany believes that the trinomial model provides a fair value that is morerepresentative of actual experience and future expected experience than thatvalue calculated using the Black-Scholes model.

 

The fair value of options granted was estimated at the date of grantusing the following weighted average assumptions:

 
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|------------------------------------|------------|
| ** **                 | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| Risk-free interest rate    |       | 3.6                                | %          | 2.9 | % |
| Vesting term, in years     |       | 2.16                               |       | 2.16 |   |
| Expected annual volatility |       | 86                                 | %          | 86 | % |
| Expected dividend yield    |       | —                             | %          | — | % |
| Exit rate pre-vesting      |       | 5.94                               | %          | 4.88 | % |
| Exit rate post-vesting     |       | 10.89                              | %          | 10.89 | % |

 

Volatility measures the amount that a stock price has fluctuated or isexpected to fluctuate during a period. As there was no public market for theCompany’s common stock prior to the effective date of the IPO, the Companydetermined the volatility based on an analysis of reported data for a peergroup of companies that issued options with substantially similar terms. Theexpected volatility of options granted has been determined using an average ofthe historical volatility measures of this peer group of companies, as well asthe historical volatility of the Company’s common stock beginningJanuary 1, 2008. The risk-free interest rate is the rate available

 

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asof the option date on zero-coupon United States government issues with a termequal to the expected life of the option. The Company has not paid dividends onits common stock in the past and does not plan to pay any dividends in theforeseeable future. In addition, the terms of the Credit Facility preclude theCompany from paying dividends.  Duringthe three months ended June 30, 2010, the Company updated its estimatedexit rate pre-vesting applied to options, restricted stock and restricted stockunits based on an evaluation of demographics of its employee groups andhistorical forfeitures for these groups in order to determine its quarterlystock-based compensation expense.  Thechange in estimate of the exit rate pre-vesting did not have a material impacton the Company’s stock-based compensation expense recorded in the accompanyingunaudited condensed consolidated statements of operations for the three or sixmonths ended June 30, 2010, and the impact is not expected to be materialfor the fiscal year ending December 31, 2010.

 

The Company accounts for transactions in which services are receivedfrom non-employees in exchange for equity instruments based on the fair valueof such services received or of the equity instruments issued, whichever ismore reliably measured.

 

The components of stock-based compensation expense are disclosed below:

 
| ** **                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Stock option expense (employees)            |       | $                                    | 2,371      |                               | $          | 2,495 |   | $ | 4,676 |   | $ | 4,781 |   |
| Stock option expense (non-employees)        |       | —                               |       | 9                                  |       | — |   | 27 |   |
| Restricted stock and restricted stock units |       | 1,287                                |       | 751                                |       | 3,328 |   | 1,266 |   |
| Total                                       |       | $                                    | 3,658      |                               | $          | 3,255 |   | $ | 8,004 |   | $ | 6,074 |   |

 

Stock-based compensation is recorded in the accompanying unauditedcondensed consolidated statements of operations, as follows:

 
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Selling and marketing expenses      |       | $                                    | 1,141      |                               | $          | 796 |   | $ | 2,189 |   | $ | 1,820 |   |
| General and administrative expenses |       | 2,319                                |       | 2,301                              |       | 5,450 |   | 3,928 |   |
| Research and development expenses   |       | 198                                  |       | 158                                |       | 365 |   | 326 |   |
| Total                               |       | $                                    | 3,658      |                               | $          | 3,255 |   | $ | 8,004 |   | $ | 6,074 |   |

 

The Company recognized no income tax benefit from stock-basedcompensation arrangements during the three and six months ended June 30,2010 and 2009. In addition, no compensation cost was capitalized during thethree and six months ended June 30, 2010 and 2009.

 

The following is a summary of the Company’s stock option activity forall stock option plans during the six months ended June 30, 2010:

 

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| ** **                                                 | ** ** | **Six Months Ended June 30, 2010**    | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **Number of  Shares  Underlying  Options** | ** ** | **Exercise Price  Per Share** | ** ** | **Weighted-  Average Exercise  Price Per Share** | ** ** | **Aggregate  Intrinsic  Value(1)** | ** ** |
| Outstanding at beginning of period                         |       | 2,503,975                                  |       | $0.17 - $48.06 |   | $ | 10.84 |   | $ | 49,599 |   |
| Granted                                                    |       | 251,275                                    |       |   |   | 29.34 |   |   |   |
| Exercised                                                  |       | (412,691                                   | )          |   |   | 5.97 |   | $ | 9,961 |   |
| Cancelled                                                  |       | (78,447                                    | )          |   |   | 16.45 |   |   |   |
| Outstanding at end of period                               |       | 2,264,112                                  |       | $0.17 - $48.06 |   | 13.59 |   | $ | 40,913 |   |
| Weighted average remaining contractual life in  years: 6.4 |       |                                       |       |   |   |   |   |   |   |
| Exercisable at end of period                               |       | 1,172,447                                  |       | $0.17 - $48.06 |   | $ | 9.10 |   | $ | 26,491 |   |
| Weighted average remaining contractual life in  years: 6.1 |       |                                       |       |   |   |   |   |   |   |
| Vested or expected to vest at June 30, 2010  (2)      |       | 2,200,521                                  |       | $0.17 - $48.06 |   | $ | 13.29 |   | $ | 40,424 |   |

 

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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 June 30, 2010 of$31.44 and the exercise price of the underlying options.

 

(2)                                  This representsthe number of vested options as of June 30, 2010 plus the number ofunvested options expected to vest subsequent to June 30, 2010 based on theunvested options outstanding at June 30, 2010, adjusted for the estimatedforfeiture rate of 5.94%.

 

In December 2008, the Company’s board of directors approved aone-time offer to the Company’s employees, including its executive officers,and directors to exchange option grants that had an exercise price per sharethat was equal to or greater than the higher of $12.00 or the closing price ofthe Company’s common stock as reported on NASDAQ on January 21, 2009 (theExchange). The Exchange closed on January 21, 2009, and the Companyexchanged options that had exercise prices equal to or greater than $12.00 pershare. As a result, an aggregate of 744,401 options, with exercise pricesranging from $12.27 to $48.54 per share, were exchanged for 424,722 optionswith an exercise price per share of $8.63 for employees who were not alsoexecutive officers of the Company, 142,179 options with an exercise price pershare of $11.47 for executive officers who were not also directors of theCompany and 45,653 options with an exercise price per share of $12.94 for theCompany’s directors. On the date of the Exchange, the estimated fair value ofthe new options did not exceed the fair value of the exchanged stock optionscalculated immediately prior to the Exchange. As such, there was no incrementalfair value of the new options, and the Company will not record additionalcompensation expense related to the Exchange. The Company will continue torecognize the remaining compensation expense related to the exchanged optionsover the remaining vesting period of the original options.

 

*Additional Information About Stock Options*

 
| ** **                                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total number of options granted during the period         |       | 71,500                               |       | 94,350                             |       | 251,275 |   | 915,354 |   |
| Weighted-average fair value per share of options  granted |       | $                                    | 19.45      |                               | $          | 13.03 |   | $ | 18.66 |   | $ | 18.20 |   |
| Total intrinsic value of options exercised (1)            |       | $                                    | 4,108      |                               | $          | 1,338 |   | $ | 9,961 |   | $ | 2,438 |   |

 

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(1)   Represents the difference between the marketprice at exercise and the price paid to exercise the options.

 

Ofthe stock options outstanding as of June 30, 2010, 2,250,119 options wereheld by employees and directors and 13,993 options were held bynon-employees.  For outstanding unvestedoptions related to employees as of June 30, 2010, the Company had

 

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$15,000of unrecognized stock-based compensation expense, which is expected to berecognized over a weighted average period of 2.3 years. There were no remainingunvested non-employee options as of June 30, 2010.

 

*RestrictedStock and Restricted Stock Units*

 

Fornon-vested restricted stock and restricted stock units outstanding as ofJune 30, 2010, the Company had $11,949 of unrecognized stock-basedcompensation expense, which is expected to be recognized over a weightedaverage period of 3.1 years.

 

*RestrictedStock*

 

Thefollowing table summarizes the Company’s restricted stock activity during thesix months ended June 30, 2010:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted Grant  Date Fair Value  Per Share** | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------------------------------------------|------------|
| Nonvested at December 31, 2009 |       | 188,618               |       | $                                              | 23.42      |   |
| Granted                             |       | 84,792                |       | 29.59                                          |       |
| Vested                              |       | (87,327               | )          | 22.71                                          |       |
| Cancelled                           |       | (6,029                | )          | 26.93                                          |       |
| Nonvested at June 30, 2010     |       | 180,054               |       | $                                              | 26.55      |   |

 

All shares underlying awards of restricted stock are restricted in thatthey are not transferable until they vest. Restricted stock typically vestsratably over a four year period from the date of issuance, with certainexceptions. Included in the above table are 1,250 shares of restricted stockgranted to certain non-executive employees during the six months ended June 30,2010 that were immediately vested.  Thefair value of the restricted stock is expensed ratably over the vesting period.The shares of restricted stock have been issued at no cost to the recipients,except for 152,460 shares of restricted stock granted in 2006 that werepurchased for $0.51 per share. The Company records any proceeds received forunvested shares of restricted stock in accrued expenses and the amount isamortized into additional paid-in capital as the shares vest. If the employeewho received the restricted stock leaves the Company prior to the vesting datefor any reason, the shares of restricted stock will be forfeited and returnedto the Company.

 

*Additional Information About Restricted Stock*

 
| ** **                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                               | ** ** | **2010**                              | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** |
| Total number of shares of restricted stock granted  during the period    |       | 39,542                                |       | 18,000                              |       | 84,792 |   | 18,000 |   |
| Weighted average fair value per share of  restricted stock granted       |       | $                                     | 30.02      |                                | $          | 22.49 |   | $ | 29.59 |   | $ | 22.49 |   |
| Total number of shares of restricted stock vested  during the period     |       | 23,866                                |       | 40,369                              |       | 87,327 |   | 106,282 |   |
| Total fair value of shares of restricted stock  vested during the period |       | $                                     | 697        |                                | $          | 839 |   | $ | 2,551 |   | $ | 1,575 |   |

 

*Restricted Stock Units*

 

The following table summarizes the Company’s restricted stock unitactivity during the six months ended June 30, 2010:

 

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| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted Grant  Date Fair Value  Per Share** | ** ** |
|-------------------------------------|------------|-----------------------|------------|------------------------------------------------|------------|
| Nonvested at December 31, 2009 |       | 114,000               |       | $                                              | 11.55      |   |
| Granted                             |       | 297,500               |       | 28.60                                          |       |
| Vested                              |       | (36,293               | )          | 11.86                                          |       |
| Cancelled                           |       | —                |       | —                                         |       |
| Nonvested at June 30, 2010     |       | 375,207               |       | $                                              | 25.04      |   |

 

Prior to 2009, the Company had not granted any restricted stock unitsand there were no restricted stock units that vested in 2009.

 

Theweighted average grant date fair value of restricted stock units granted duringthe six months ended June 30, 2009 was $11.55 per share.  The total fair value of restricted stockunits that vested during the six months ended June 30, 2010 was $1,196.

 

**10.Income Taxes**

 

TheCompany accounts for income taxes in accordance with ASC 740, *Income Taxes* (ASC 740), which is the asset and liabilitymethod for accounting and reporting income taxes. Under ASC 740, deferred taxassets and liabilities are recognized based on temporary differences betweenthe financial reporting and income tax bases of assets and liabilities usingstatutory rates. In addition, ASC 740 requires a valuation allowance againstnet deferred tax assets if, based upon the available evidence, it is morelikely than not that some or all of the deferred tax assets will not berealized.

 

ASC740 also provides criteria for the recognition, measurement, presentation anddisclosures of uncertain tax positions. A tax benefit from an uncertain taxposition may be recognized if it is “more likely than not” that the position issustainable based solely on its technical merits. As of June 30, 2010 andDecember 31, 2009, the Company had no material unrecognized tax benefits.

 

Inaccordance with ASC 740, each interim period is considered an integral part ofthe annual period and tax expense is measured using an estimated annualeffective tax rate. The Company is required, at the end of each interimreporting period, to make its best estimate of the annual effective tax ratefor the full fiscal year and use that rate to provide for income taxes on acurrent year-to-date basis.  If anenterprise has an ordinary loss for the year to date at the end of an interimperiod and anticipates ordinary income for the fiscal year, which is the casewith the Company, the enterprise will record an interim period tax benefitbased on applying the estimated annual effective tax rate to the ordinary lossas long as the tax benefits are realized during the year or recognizable as adeferred tax asset as of the end of the year. As a result, the Company recorded an income tax provision of $257 forthe three months ended June 30, 2010 and an income tax benefit of $910 forthe six months ended June 30, 2010, which included consideration of thetax benefit recognized by the Company from stock option deductions generatedduring the three and six months ended June 30, 2010. The tax benefitrelates principally to losses incurred from operations in the United States,which the Company expects to realize in 2010 based on forecasted pre-tax incomefor the fiscal year ending December 31, 2010 (fiscal 2010), partially offsetby losses from foreign operations for which no tax benefit can be recognized,resulting in an effective tax rate for the three and six months endedJune 30, 2010 of 19.3% and 6.5%, respectively.  The Company’s estimated annual effective taxrate for fiscal 2010 is 12.1%.  However,the estimated annual effective tax rate could be reduced in future quarters offiscal 2010 as a result of tax benefit from stock options which are notrecognized in the determination of the estimated annual effective rate untilthey occur.  The Company’s estimatedannual effective tax rate is lower than the statutory rate as a result of theCompany’s federal and state net operating loss carryforwards to offset futurefederal and state taxable income.  Eventhough the Company’s federal and state net operating loss carryforwards exceedthe Company’s estimated taxable income for fiscal 2010, the Company’s estimatedannual effective tax rate is greater than zero due to federal alternativeminimum taxes for which the utilization of net operating loss carryforwards islimited, and certain state taxes for jurisdictions where the Company does nothave sufficient net operating loss carryforwards, as well as the amortizationof tax deductible goodwill, which generates a deferred tax liability thatcannot be offset by net operating losses or other deferred tax assets since itsreversal is considered indefinite in nature.

 

TheCompany recorded an income tax provision of $167 and $348 for the three and sixmonths ended June 30, 2009, respectively. This tax provision is primarily related to the amortization of taxdeductible goodwill, which generated a deferred tax liability that cannot beoffset by net operating losses or other deferred tax assets since its reversalis considered indefinite in nature.

 

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The Company reviews all available evidence to evaluate the recovery ofdeferred tax assets, including the recent history of accumulated losses in alltax jurisdictions over the last three years, as well as its ability to generateincome in future periods. As of June 30, 2010 and December 31, 2009,due to the uncertainty related to the ultimate use of the Company’s deferredincome tax assets, the Company has provided a full valuation allowance.

 

**11.  Concentrations of CreditRisk**

 

Financial instruments that potentially subject the Company tosignificant concentrations of credit risk principally consist of cash and cashequivalents, restricted cash and accounts receivable. The Company maintains itscash and cash equivalent balances with highly rated financial institutions and,consequently, such funds are subject to minimal credit risk.

 

The Company’s customers are principally located in the northeastern andPJM Interconnection (PJM) regions of the United States. The Company performsongoing credit evaluations of the financial condition of its customers andgenerally does not require collateral. Although the Company is directlyaffected by the overall financial condition of the energy industry, as well asglobal economic conditions, management does not believe significant credit riskexists as of June 30, 2010. The Company generally has not experienced anymaterial losses related to receivables from individual customers or groups ofcustomers in the energy industry. The Company maintains an allowance fordoubtful accounts based on accounts past due and historical collectionexperience. The Company’s losses related to collection of trade receivableshave consistently been within management’s expectations. Due to these factors,no additional credit risk beyond amounts provided for collection losses isbelieved by management to be probable.

 

The following table sets forth the Company’s significant customers. PJMand ISO-New England, Inc. (ISO-NE) are regional grid operator customerscomprised of multiple utilities and were formed to control the operation of aregional power system, coordinate the supply of electricity, and establish fairand efficient markets.

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|
| ** **                 | ** ** | **2010**                             | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **Revenues**                         | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| PJM Interconnection        |       | $                                    | 38,784     |   | 58 | % | $ | 23,125 |   | 55 | % |
| ISO-New England, Inc. |       | 14,830                               |       | 22 | % | 12,441 |   | 29 | % |
| Total                      |       | $                                    | 53,614     |   | 80 | % | $ | 35,566 |   | 84 | % |

 
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|------------------------------------|------------|
| ** **                 | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **Revenues**                       | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| PJM Interconnection        |       | $                                  | 39,100     |   | 41 | % | $ | 23,167 |   | 38 | % |
| ISO-New England, Inc. |       | 32,250                             |       | 34 | % | 26,959 |   | 44 | % |
| Total                      |       | $                                  | 71,350     |   | 75 | % | $ | 50,126 |   | 82 | % |

 

Accounts receivable from these customers was approximately $10,702 and$9,788 at June 30, 2010 and December 31, 2009, respectively. No othercustomers represented 10% or greater of accounts receivable at June 30,2010 and December 31, 2009. Unbilled revenue related to PJM was $29,799 and $40,388 at June 30,2010 and December 31, 2009, respectively. There was no unbilled revenue for any other customers at June 30,2010 and December 31, 2009.

 

Deposits and restricted cash consist of funds to secure performanceunder certain utility and grid operator customer contracts and open marketbidding programs. Deposits held by utility and grid operator customers were$3,638 and $3,024 at June 30, 2010 and December 31, 2009,respectively.

 

**12.Legal Proceedings**

 

The Company is subject to legal proceedings, claims and litigationarising in the ordinary course of business. The Company does not expect theultimate costs to resolve these matters to have a material adverse effect onthe Company’s consolidated financial condition, results of operations or cashflows.

 

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**13.  Recent AccountingPronouncements**

 

In September 2009, the Financial Accounting Standards Board (FASB)ratified ASC Update No. 2009-13, *Multiple-DeliverableRevenue Arrangements* (ASU 2009-13). ASU 2009-13 amends existing revenue recognition accountingpronouncements that are currently within the scope of FASB ASC Subtopic 605-25.ASU 2009-13 provides for two significant changes to the existing multipleelement revenue recognition guidance. First, ASU 2009-13 deletes therequirement to have objective and reliable evidence of fair value forundelivered elements in an arrangement and will result in more deliverablesbeing treated as separate units of accounting. The second change in ASU 2009-13modifies the manner in which the transaction consideration is allocated acrossthe separately identified deliverables. These changes may result in entitiesrecognizing more revenue up-front, and entities will no longer be able to applythe residual method and defer the fair value of undelivered elements. Uponadoption of ASU 2009-13, each separate unit of accounting must have a sellingprice, which can be based on management’s estimate when there is no other meansto determine the fair value of that undelivered item, and the arrangementconsideration is allocated based on the elements’ relative selling price. ASU2009-13 is effective no later than fiscal years beginning on or afterJune 15, 2010, but may be adopted early as of the first quarter of anentity’s fiscal year. Entities may elect to adopt ASU 2009-13 either throughprospective application to all revenue arrangements entered into or materiallymodified after the date of adoption or through a retrospective application toall revenue arrangements for all periods presented in the financial statements.The Company is currently evaluating the impact of ASU 2009-13, including theperiod in which the Company will adopt ASU 2009-13.

 

In January 2010, the FASB issued ASU 2010-06, *Improving Disclosure about Fair Value Measurements*(ASU2010-06).  ASU 2010-06 requiresadditional disclosures regarding fair value measurements, amends disclosuresabout post-retirement benefit plan assets and provides clarification regardingthe level of disaggregation of fair value disclosures by investment class. ASU2010-06 is effective for interim and annual reporting periods beginning afterDecember 15, 2009, except for certain Level 3 activity disclosurerequirements that will be effective for reporting periods beginning afterDecember 15, 2010. The adoption of ASU 2010-06 did not have a materialimpact on the Company’s consolidated financial position or results of operations.

 

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**Item 2.  Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

 

*The following discussion should be read in conjunction with ourunaudited condensed consolidated financial statements and related notes theretoincluded elsewhere in this Quarterly Report on Form 10-Q, as well as ouraudited financial statements and notes thereto and Management’s Discussion andAnalysis of Financial Condition and Results of Operations included in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2009, as filed with the Securities and Exchange Commission, or the SEC, onMarch 12, 2010. This Quarterly Report on Form 10-Q containsforward-looking statements within the meaning of Section 27A of theSecurities 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, operating expenses and thesufficiency of our cash for future operations. We assume no obligation torevise or update any such forward-looking statements. Our actual results coulddiffer materially from those anticipated in these forward-looking statements asa result of certain important factors, including those set forth below underthis Item 2 — “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” Part II, Item 1A — “Risk Factors”and elsewhere in this Quarterly Report on Form 10-Q, as well as in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2009. 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**

 

Weare a leading provider of clean and intelligent energy management applicationsand services, which include comprehensive demand response services, data-drivenenergy efficiency services, energy price and risk management services andenterprise carbon management services. During the three months ended March 31, 2010, we released anupdated energy management application platform, which includes the latestrelease of our four energy management applications and enhances previousiterations of our PowerTrak and CarbonTrak enterprise software platforms.  Our customers are commercial, institutionaland industrial end-users of energy, or C&I customers, as well as electricpower grid operators and utilities.

 

Webelieve that we are the largest demand response service provider to C&Icustomers in the United States. As of June 30, 2010, we managed over 4,800megawatts, or MW, of demand response capacity across a C&I customer base ofapproximately 3,300 accounts and 8,000 C&I customer sites throughoutmultiple electric power grids. Demand response is an alternative to traditionalpower generation and transmission infrastructure projects that enables gridoperators and utilities to reduce the likelihood of service disruptions, suchas brownouts and blackouts, during periods of peak electricity demand, andotherwise manage the electric power grid during short-term imbalances of supplyand demand. We use our Network Operations Center, or NOC, and comprehensivedemand response application, DemandSMART, to remotely manage and reduceelectricity consumption across a growing network of C&I customer sites,making demand response capacity available to grid operators and utilities ondemand while helping end-users of electricity achieve energy savings,environmental benefits and improved financial results. To date, we havereceived substantially all of our revenues from grid operators and utilities,who make recurring payments to us for managing demand response capacity that weshare with our C&I customers in exchange for those customers reducing theirpower consumption when called upon.

 

Inproviding our demand response services, we match obligation, in the form of MWthat we agree to deliver to our utility and grid operator customers, withsupply, in the form of MW that we are able to curtail from the electric powergrid through our C&I customers. We increase, and occasionally decrease, ourobligation through open market bidding programs, supplemental demand responseprograms, auctions or other similar capacity arrangements, open programregistrations and bilateral contracts to account for changes in supply anddemand forecasts in order to achieve more favorable pricing opportunities. Weincrease our ability to curtail demand from the electric power grid bydeploying a sales team to contract with our C&I customers and by installingour equipment at these customers’ sites to connect them to our network. When weare called upon by our utility or grid operator customers to deliver MW, we useour DemandSMART application to dispatch this network to meet the demands ofthese utility and grid operator customers. We refer to the above activities asmanaging our portfolio of demand response capacity.

 

Webuild upon our position as a leading demand response services provider by usingour NOC and energy management application platform to also deliver a portfolioof additional energy management applications to our customers, including thecross-selling of these energy management applications to existingcustomers.  These additional energymanagement applications include our SiteSMART, SupplySMART and CarbonSMARTapplications.  SiteSMART is ourdata-driven energy efficiency application that has multiple features, includingmonitoring-based commissioning tools, commissioning and retro-commissioningauthority services, energy consulting and engineering services, distributedgeneration services and owner-engineer services.  SupplySMART is our energy price and riskmanagement application that provides our C&I customers located inrestructured or deregulated markets throughout the United States with theability to more effectively manage the energy supplier selection process, includingenergy supply product procurement and implementation.  CarbonSMART is our enterprise carbonmanagement application that supports the measurement, tracking, analysis,reporting and management of greenhouse gas emissions.

 

Wecontinue to devote substantially all of our efforts toward the sale of ourenergy management applications and services. Our net income was $1.1 millionfor the three months ended June 30, 2010 and our net loss was $13.1million for the six months ended June 30, 2010.  Our net loss was $5.7 million for the threemonths ended June 30, 2009 and $18.3 million for the six months endedJune 30, 2009.  As of June 30,2010, our accumulated deficit was $90.5 million.

 

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**SignificantRecent Developments**

 

InApril 2010, we and one of our subsidiaries entered into a second loanmodification agreement to our loan and security agreement with Silicon ValleyBank, or SVB, which increased our borrowing limit from $35.0 million to $50.0million, as well as modified certain of our financial covenant compliancerequirements.  In July 2010, we and one of our subsidiaries enteredinto a third loan modification agreement to our loan and security agreementwith SVB, which extended the revolving credit line maturity date of the loanand security agreement from August 5, 2010 to February 4, 2011, aswell as modified certain of our financial covenant compliancerequirements.  We refer to our loan and security agreement with SVB, asmodified in May 2009, April 2010 and July 2010, as the SVBcredit facility.

 

In June 2010, Adam Grosser resigned from our board of directors as aresult of the commencement of a sabbatical from Foundation Capital.

 

**Revenues and Expense Components**

 

***Revenues***

 

Wederive recurring revenues from the sale of our energy management applicationsand services. Our revenues from our demand response services primarily consistof capacity and energy payments, including ancillary services payments. Wederive revenues from demand response capacity that we make available in openmarket programs and pursuant to contracts that we enter into with gridoperators and utilities. In the open market programs, grid operators and utilitiesgenerally seek bids from companies such as ours to provide demand responsecapacity based on prices offered in competitive bidding. These opportunitiesare generally characterized by flexible capacity commitments and prices thatvary by hour, day, month, bidding period or supplemental, new or modifiedprograms. In certain markets, we enter into contracts with grid operators andutilities, generally ranging from three to 10 years in duration, to deployour demand response services. We refer to these contracts as utility contracts.Our revenues have historically been higher in our second and third fiscalquarters compared to other quarters in our fiscal year due to seasonal demandrelated to the demand response market.

 

Wherewe operate in open market programs, our revenues from demand response capacitypayments may vary month-to-month based upon our enrolled capacity and themarket payment rate. Where we have a utility contract, we receive periodiccapacity payments, which may vary monthly or seasonally, based upon enrolledcapacity and predetermined payment rates. Under both open market programs and utilitycontracts, we receive capacity payments regardless of whether we are calledupon to reduce demand for electricity from the electric power grid, and werecognize revenue over the applicable delivery period, even where payments aremade over a different period. We generally demonstrate our capacity eitherthrough a demand response event or a measurement and verification test. Thisdemonstrated capacity is typically used to calculate the continuing periodiccapacity payments to be made to us until the next demand response event or testestablishes a new demonstrated capacity amount. In most cases, we also receivean additional payment for the amount of energy usage that we actually curtailfrom the grid during a demand response event; we call this an energy payment.

 

Wedo not recognize any revenues until we can determine that persuasive evidenceof an arrangement exists, delivery has occurred, the fee is fixed ordeterminable, and we deem collection to be reasonably assured. As programrules may differ for each region where we operate and/or utility contract,we assess whether or not we have met the specific service requirements underthe program rules and recognize or defer revenues as necessary. Werecognize demand response capacity revenues when we have provided verificationto the grid operator or utility of our ability to deliver the committedcapacity under the open market program or utility contract. Committed capacityis verified through the results of an actual demand response event or ameasurement and verification test. Once the capacity amount has been verified,the revenues are recognized and future revenues become fixed or determinableand are recognized monthly over the performance period until the nextverification event. In subsequent verification events, if our verified capacityis below the previously verified amount, the grid operator or utility customerwill reduce future payments based on the adjusted verified capacityamounts.  Under certain utility contractsand open market program participation rules, our performance and related feesare measured and determined over a period of time.  If we can reliablyestimate our performance for the applicable performance period, 

 

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wewill reserve the entire amount of estimated penalties that will be incurred, ifany, as a result of estimated underperformance prior to the commencement ofrevenue recognition.  If we are unable to reliably estimate theperformance and any related penalties, we will defer the recognition ofrevenues until the fee is fixed or determinable.

 

Wedefer incremental direct costs incurred related to the acquisition ororigination of a utility contract or open market program in a transaction thatresults in the deferral or delay of revenue recognition. As of June 30,2010 and December 31, 2009, the incremental direct costs deferred wereapproximately $0.9 million and $0.9 million, respectively. Thesedeferred expenses would not have been incurred without our participation in acertain open market program and will be expensed in proportion to the relatedrevenue being recognized. During the three and six months ended June 30,2010 and 2009, we did not defer any utility contract origination costs. Inaddition, we capitalize the costs of our production and generation equipmentutilized in the delivery of our demand response services and expense suchequipment over the lesser of its useful life or the term of the contractualarrangement. These capitalized costs are included in property and equipment inour consolidated balance sheets. We believe that this accounting treatmentappropriately matches expenses with the associated revenue.

 

Asof June 30, 2010, we had over 4,800 MW under management in our demandresponse network, meaning that we had entered into definitive contracts withour C&I customers representing over 4,800 MW of demand response capacity.We generally begin earning revenues from our MW under management withinapproximately one month from the date on which we “enable” the MW, or the dateon which we can reduce the MW from the electricity grid if called upon to doso. The most significant exception is the PJM Interconnection, or PJM, forwardcapacity market, which is a market in which we expect to continue toparticipate and derive revenues for the foreseeable future. Because PJMoperates on a June to May program-year basis, a MW that we enableafter June of each year may not begin earning revenue until June ofthe following year. This results in a longer average revenue recognition lagtime in our C&I customer portfolio from the point in time when we considera MW to be under management to when we earn revenues from the MW. Certain othermarkets in which we currently participate, such as ISO New England, Inc.,or ISO-NE, or choose to participate in the future operate or may operate in amanner that could create a delay in recognizing revenue from the MW that weenable in those markets. Additionally, not all of our MW under management maybe enrolled in a demand response program or may earn revenue in a given programperiod or year based on the way that we manage our portfolio of demand responsecapacity.

 

Revenuesgenerated from open market sales to PJM, a grid operator customer, accountedfor 58% and 55%, respectively, of our total revenues for the three months endedJune 30, 2010 and 2009 and 41% and 38%, respectively, of our totalrevenues for the six months ended June 30, 2010 and 2009. Under certain utilitycontracts and open market programs, such as PJM’s Emergency Load ResponseProgram, the period during which we are required to perform may be shorter thanthe period over which we receive payments under that contract or program. Inthese cases, we record revenue, net of estimated reserves for estimatedpenalties related to potential delivered capacity shortfalls, over the mandatoryperformance obligation period, and a portion of the revenues that have beenearned is recorded and accrued as unbilled revenue. Our unbilled revenue of$29.8 million at June 30, 2010 will be billed and collected throughMay 31, 2011.

 

Revenuesgenerated from open market sales to ISO-NE, a grid operator customer, accountedfor 22% and 29%, respectively, of our total revenues for the three months endedJune 30, 2010 and 2009 and 34% and 44%, respectively, of our totalrevenues for the six months ended June 30, 2010 and 2009.

 

Inaddition to demand response revenues, we generally receive either asubscription-based or consulting fee or a percentage savings fee forarrangements under which we provide our other energy management applicationsand services.  Revenues derived from ourother energy management applications and services were $3.1 million and$1.5 million, respectively, for the three months ended June 30, 2010and 2009 and $6.5 million and $3.1 million, respectively, for the six monthsended June 30, 2010 and 2009.

 

***Cost of Revenues***

 

Costof revenues for our demand response services consists primarily of amounts owedto our C&I customers for their participation in our demand response networkand are generally recognized over the same performance period as thecorresponding revenue. We enter into contracts with our C&I customers underwhich we deliver recurring cash payments to them for the capacity they committo make available on demand. We also generally make an additional payment whena C&I customer reduces consumption of energy from the electric power gridduring a demand response event. The equipment and installation costs for ourdevices, which monitor energy usage, communicate with C&I customer sitesand, in certain instances, remotely control energy usage to achieve committedcapacity, located at our C&I customer sites are capitalized and depreciatedover the lesser of the remaining estimated customer relationship period or theestimated useful life of the equipment, and this depreciation is reflected incost of revenues. We also include in cost of revenues our amortization ofcapitalized internal-use software costs related to our energy managementapplications, the monthly telecommunications and data costs we incur as aresult of being connected to C&I customer sites and our internal payrolland related costs allocated to a C&I customer site. Certain costs such asequipment depreciation and telecommunications and data costs are fixed and donot vary based on revenues recognized. These fixed costs could impact our gross margin trends described belowduring interim periods.  Cost of revenuesfor our other energy management applications and services include third 

 

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partyservices, equipment depreciation and the wages and associated benefits that wepay to our project managers for the performance of their services.

 

***Gross Profit and Gross Margin***

 

Gross profit consists of our total revenues less our cost of revenues.Our gross profit has been, and will be, affected by many factors, including(a) the demand for our energy management applications and services,(b) the selling price of our energy management applications and services,(c) our cost of revenues, (d) the way in which we manage ourportfolio of demand response capacity, (e) the introduction of new cleanand intelligent energy solutions, (f) our demand response eventperformance and (g) our ability to open and enter new markets and regionsand expand deeper into markets we already serve. Our outcomes in negotiatingfavorable contracts with our C&I customers, as well as with our utility andgrid operator customers, the effective management of our portfolio of demandresponse capacity and our demand response event performance are the primarydeterminants of our gross profit and gross margin.

 

***Operating Expenses***

 

Operating expenses consist of selling and marketing, general andadministrative, and research and development expenses. Personnel-related costsare the most significant component of each of these expense categories. We grewfrom 358 full-time employees at June 30, 2009 to 462 full-time employeesat June 30, 2010. We expect to continue to hire employees to support ourgrowth for the foreseeable future. In addition, we incur significant up-frontcosts associated with the expansion of the number of MW under our management,which we 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 annual operating expenses to decrease as apercentage of total annual revenues as we leverage our existing employee baseand continue generating revenues from our MW under management.

 

*Selling and Marketing*

 

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

 

*General and Administrative*

 

General and administrative expenses consist primarily of (a) salariesand related personnel costs, including costs associated with share-basedpayment awards, related to our executive, finance, human resource, informationtechnology and operations organizations, (b) facilities expenses,(c) accounting and legal professional fees, (d) depreciation andamortization and (e) other related overhead. We expect general andadministrative expenses to continue to increase in absolute dollar terms forthe foreseeable future as we invest in infrastructure to support our continued growth.We expect general and administrative expenses to decrease as a percentage oftotal annual revenues as we leverage our current infrastructure and employeebase.  However, amortization expense fromintangible assets acquired in future acquisitions could potentially increaseour general and administrative expenses in future periods.

 

*Research and Development*

 

Research and development expenses consist primarily of(a) salaries and related personnel costs, including costs associated withshare-based payment awards, related to our research and developmentorganization, (b) payments to suppliers for design and consultingservices, (c) costs relating to the design and development of new energymanagement applications and services, and enhancement of existing energymanagement applications and services, (d) quality assurance and testingand (e) other related overhead. During the three and six months endedJune 30, 2010, we capitalized internal use software costs of $2.8 millionand $4.0 million, respectively, and the amounts are included as software inproperty and equipment. We expect research and development expenses to increasein absolute dollar terms for the foreseeable future as we develop newtechnologies and to decrease as a percentage of total revenues in the long termas we leverage our existing technology.

 

***Stock-Based Compensation***

 

We account for stock-based compensation in accordance with AccountingStandards Codification, or ASC, 718, *Stock Compensation*.  As such, all share-based payments to employees,including grants of stock options, restricted stock and restricted stock units,are recognized in the statement of operations based on their fair values as ofthe date of grant. For stock options granted 

 

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priorto January 1, 2009, the fair value for these options was estimated at thedate of grant using a Black-Scholes option-pricing model, and for stock optionsgranted on or after January 1, 2009, the fair value of each award is andwill be estimated on the date of grant using a trinomial valuation model. Forthe three and six months ended June 30, 2010, we recorded expenses ofapproximately $3.7 million and $8.0 million, respectively, in connectionwith share-based payment awards to employees and non-employees.  For the three and six months endedJune 30, 2009, we recorded expenses of approximately $3.3 million and$6.1 million, respectively, in connection with share-based payment awards toemployees and non-employees.  Withrespect to grants through June 30, 2010, a future expense of non-vestedoptions of approximately $15.0 million is expected to be recognized over aweighted average period of 2.3 years and a future expense of restricted stockand restricted stock unit awards of approximately $11.9 million isexpected to be recognized over a weighted average period of 3.1 years.

 

***Other Income and Expense, Net***

 

Other income and expense consist primarily of interest income earned oncash balances, gain or loss on transactions designated in currencies other thanour or our subsidiaries’ functional currency and other non-operating income. Wehistorically have invested our cash in money market funds, treasury funds,commercial paper, municipal bonds and auction rate securities. We do notcurrently hold any auction rate securities.

 

***Interest Expense***

 

Interest expense consists of interest on our capital lease obligations,fees on the SVB credit facility and fees associated with issuing letters ofcredit and other financial assurances.

 

**Consolidated Results of Operations**

 

***Three and Six Months Ended June 30, 2010Compared to the Three and Six Months Ended June 30, 2009***

 

***Revenues***

 

The following table summarizes our revenues for the three and sixmonths ended June 30, 2010 and 2009 (dollars in thousands):

 
| ** **                       | ** ** | **Three Months Ended June 30,** | ** ** | **Dollar** | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|------------|------------|----------------|------------|
| ** **                       | ** ** | **2010**                             | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Revenues:                        |       |                                 |       |       |       |           |       |   |   |
| Demand response                  |       | $                                    | 63,420     |       | $          | 40,904         |       | $ | 22,516 |   | 55.0 | % |
| Other energy management services |       | 3,128                                |       | 1,498      |       | 1,630          |       | 108.8 | % |
| Total revenues                   |       | $                                    | 66,548     |       | $          | 42,402         |       | $ | 24,146 |   | 56.9 | % |

 
| ** **                       | ** ** | **Six Months Ended June 30,** | ** ** | **Dollar** | ** ** | **Percentage** | ** ** |
|----------------------------------|------------|------------------------------------|------------|------------|------------|----------------|------------|
| ** **                       | ** ** | **2010**                           | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Revenues:                        |       |                               |       |       |       |           |       |   |   |
| Demand response                  |       | $                                  | 88,147     |       | $          | 57,704         |       | $ | 30,443 |   | 52.8 | % |
| Other energy management services |       | 6,522                              |       | 3,121      |       | 3,401          |       | 109.0 | % |
| Total revenues                   |       | $                                  | 94,669     |       | $          | 60,825         |       | $ | 33,844 |   | 55.6 | % |

 

For the three and six months ended June 30, 2010, our demandresponse revenues increased by $22.5 million and $30.4 million, respectively,as compared to the same periods in 2009. The increase in our demand response revenues was primarily attributableto an increase in our MW under management in the following existing operatingareas (dollars in thousands):

 

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| ** **                               | ** ** | **Revenue Increase (Decrease):**                                 | ** ** | **Revenue Increase:**                                          | ** ** |
|------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                               | ** ** | **Three months ended  June 30, 2009 to June 30, 2010** | ** ** | **Six months ended  June 30, 2009 to June 30, 2010** | ** ** |
| PJM                                      |       | $                                                                | 15,659     |                                                           | $          | 15,933 |   |
| Tennessee Valley Authority               |       | 1,864                                                            |       | 4,235                                                          |       |
| New England                              |       | 2,389                                                            |       | 5,291                                                          |       |
| Other                                    |       | 2,604                                                            |       | 4,984                                                          |       |
| Total increased demand response revenues |       | $                                                                | 22,516     |                                                           | $          | 30,443 |   |

 

The increase in our demand response revenues for the three and sixmonths ended June 30, 2010 compared to the same periods in 2009 was alsoattributable to the effective management of our portfolio of demand responsecapacity and more favorable pricing in certain operating areas.  This increase was offset by the commencementof an ISO-NE program in which we currently participate, which started onJune 1, 2010, under which we enrolled fewer MW at lower pricing comparedto a prior, similar ISO-NE program in which we participated.

 

For the three months ended June 30, 2010, our other energymanagement services revenues increased by $1.6 million as compared to the threemonths ended June 30, 2009.  For thesix months ended June 30, 2010, our other energy management servicesrevenues increased by $3.4 million as compared to the six months endedJune 30, 2009.  These increases areprimarily due to a full quarter and six months of recognized revenue related toour acquisition of Cogent Energy, Inc., or Cogent, which occurred inDecember 2009.

 

We currently expect our revenues to continue to increase in 2010compared to 2009 as we seek to further increase our MW under management in alloperating regions, enroll new C&I customers in our demand responseprograms, continue to sell our other energy management services to our new andexisting C&I  customers and pursuemore favorable pricing opportunities.

 

***Gross Profit and Gross Margin***

 

The following table summarizes our gross profit and gross marginpercentages for our demand response and other energy management services forthe three and six months ended June 30, 2010 and 2009 (dollars inthousands):

 
| **Three Months Ended June 30,** | ** **   |
|-----------------------------------------------------|--------------|
| **2010**                                            | ** **   | **2009** | ** ** |
| **Gross Profit**                                    | ** **   | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                                   |  28,992 |   | 43.6 | % | $ | 18,135 |   | 42.8 | % |
|                                                     |              |  |  |  |  |  |  |  |  |

 
| **Six Months Ended June 30,** | ** **   |
|---------------------------------------------------|--------------|
| **2010**                                          | ** **   | **2009** | ** ** |
| **Gross Profit**                                  | ** **   | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                                 |  38,567 |   | 40.7 | % | $ | 26,033 |   | 42.8 | % |
|                                                   |              |  |  |  |  |  |  |  |  |

 

Our gross profit increased during the three and six months ended June 30,2010 as compared to the same periods in 2009 primarily due to the effectivemanagement of our portfolio of demand response capacity and strong demandresponse event performance, particularly in the PJM region from which we currentlyderive a substantial portion of our revenues.

 

Our gross margin increased during the three months ended June 30,2010 as compared to the same period in 2009 primarily due to the effectivemanagement of our portfolio of demand response capacity, as well as thesubstantial increase in revenues and strong demand response event performance,particularly in the PJM region.  Thisincrease was offset by an impairment charge of $0.8 million recognized duringthe three months ended June 30, 2010 related to certain demand responseand back-up generator equipment, which resulted in a reduction of 110 basispoints in gross margin for the three months ended June 30, 2010.  There was no impairment charge recordedduring the three and six months ended June 30, 2009.

 

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Our gross margin decreased during the six months ended June 30,2010 as compared to the same period in 2009 primarily due to increaseddepreciation and amortization of capitalized costs, increasedtelecommunications and data costs driven by the significant increase in thenumber of installed C&I customer sites, and an impairment charge of $0.8million recognized during the three months ended June 30, 2010 related tocertain demand response and back-up generator equipment, which resulted in areduction of 80 basis points in gross margin for the three months ended June30, 2010.

 

We currently expect that our gross margin for the year endingDecember 31, 2010 will be relatively flat as compared to the year endedDecember 31, 2009, and that our gross margin for the three months endedSeptember 30, 2010 will be the highest gross margin among our four quarterlyreporting periods in 2010, consistent with our gross margin pattern in2009.  Further, for the year endedDecember 31, 2009 and six months ended June 30, 2010, we were able toderive significant gross profits from managing our portfolio of demand responsecapacity in the PJM incremental auctions, which may not occur at similar levelsbeyond 2010.

 

***Operating Expenses***

 

The following table summarizes our operating expenses for the three andsix months ended June 30, 2010 and 2009 (dollars in thousands):

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|----------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **                 | ** ** | **2010**                        | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Operating Expenses:        |       |                            |       |           |       |   |   |
| Selling and marketing      |       | $                               | 12,285     |           | $          | 9,212 |   | 33.4 | % |
| General and administrative |       | 12,398                          |       | 11,395         |       | 8.8 | % |
| Research and development   |       | 2,494                           |       | 1,876          |       | 32.9 | % |
| Total                      |       | $                               | 27,177     |           | $          | 22,483 |   | 20.9 | % |

 
| ** **                 | ** ** | **Six Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|----------------------------|------------|-------------------------------|------------|----------------|------------|
| ** **                 | ** ** | **2010**                      | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Operating Expenses:        |       |                          |       |           |       |   |   |
| Selling and marketing      |       | $                             | 22,136     |           | $          | 17,879 |   | 23.8 | % |
| General and administrative |       | 25,410                        |       | 21,097         |       | 20.4 | % |
| Research and development   |       | 4,551                         |       | 3,413          |       | 33.3 | % |
| Total                      |       | $                             | 52,097     |           | $          | 42,389 |   | 22.9 | % |

 

In certain forward capacity markets in which we choose to participate,such as PJM, we may enable our C&I customers, meaning we may install ourequipment at a C&I customer site to allow for the curtailment of MW fromthe electric power grid, up to twelve months in advance of enrolling theC&I customer in a particular program. This market feature creates a longeraverage revenue recognition lag time across our C&I customer portfolio fromthe point in time when we consider MW to be under management to when we earnrevenues from those MW. Because we incur operational expenses, includingsalaries and related personnel costs, at the time of enablement, we believethere may be a trend of incurring operating expenses associated with enablingour C&I customers in advance of recognizing the corresponding revenues.

 

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*Selling and Marketing Expenses*

* *
| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                        | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                               | 8,273      |           | $          | 6,263 |   | 32.1 | % |
| Stock-based compensation  |       | 1,141                           |       | 796            |       | 43.3 | % |
| Other                     |       | 2,871                           |       | 2,153          |       | 33.3 | % |
| Total                     |       | $                               | 12,285     |           | $          | 9,212 |   | 33.4 | % |

 
| ** **                | ** ** | **Six Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|-------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                      | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                             | 14,281     |           | $          | 11,933 |   | 19.7 | % |
| Stock-based compensation  |       | 2,189                         |       | 1,820          |       | 20.3 | % |
| Other                     |       | 5,666                         |       | 4,126          |       | 37.3 | % |
| Total                     |       | $                             | 22,136     |           | $          | 17,879 |   | 23.8 | % |

 

The increase in selling and marketing expenses for the three months andsix months ended June 30, 2010 compared to the same periods in 2009 wasprimarily driven by the payroll and related costs associated with an increasein the number of selling and marketing full-time employees from 130 atJune 30, 2009 to 174 at June 30, 2010. The increase in payroll andrelated costs for the three and six months ended June 30, 2010 compared tothe same periods in 2009 was attributable to an increase in sales commissionspayable to certain members of our sales force of $1.2 million and $0.9million, respectively. These increases were partially offset by lower averagesalary rates per employee.  The increasein stock-based compensation for the three and six months ended June 30, 2010compared to the same periods in 2009 was primarily due to additionalstock-based awards to existing and new employees.  The increase in other selling and marketingexpenses for the three months ended June 30, 2010 as compared to the sameperiod in 2009 was primarily attributable to increases in professional servicesand marketing costs of $0.6 million due to our rebranding efforts andattendance at conferences and seminars, as well as an increase in facilitycosts of $0.1 million due to the expansion of our existing officespace.  The increase in other selling andmarketing expenses for the six months ended June 30, 2010 as compared tothe same period in 2009 was attributable to increases in professional servicesand marketing costs of $0.7 million due to our rebranding efforts andattendance at conferences and seminars, increases in facility costs of $0.5million due to the expansion of our existing office space, and technology andcommunication costs of $0.3 million due to the increased utilization inour data service centers.

 

*General and Administrative Expenses*

 
| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                        | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                               | 6,833      |           | $          | 5,663 |   | 20.7 | % |
| Stock-based compensation  |       | 2,319                           |       | 2,301          |       | 0.8 | % |
| Other                     |       | 3,246                           |       | 3,431          |       | (5.4 | )% |
| Total                     |       | $                               | 12,398     |           | $          | 11,395 |   | 8.8 | % |

 
| ** **                | ** ** | **Six Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|-------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                      | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                             | 13,623     |           | $          | 10,638 |   | 28.1 | % |
| Stock-based compensation  |       | 5,450                         |       | 3,928          |       | 38.7 | % |
| Other                     |       | 6,337                         |       | 6,531          |       | (3.0 | )% |
| Total                     |       | $                             | 25,410     |           | $          | 21,097 |   | 20.4 | % |

 

The increase in general andadministrative expenses for the three and six months ended June 30, 2010compared to the same periods in 2009 was primarily driven by an increase in thenumber of general and administrative full-time employees from 180 at June 30,2009 to 232 at June 30, 2010.  Theincrease in stock-based compensation for the six months ended June 30, 2010compared to the same period in 2009 was primarily due to annual stock-basedawards granted to our officers and directors.

 

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The decrease in other general andadministrative expenses for the three months ended June 30, 2010 comparedto the same period in 2009 was primarily attributable to a decrease in professionalservices.  The decrease in other generaland administrative expenses for the six months ended June 30, 2010compared to the same period in 2009 was attributable to a decrease intechnology and communication costs, offset by an increase in facility costs,professional services and marketing costs.

 

*Research and Development Expenses*

 
| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|---------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                        | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                               | 1,582      |           | $          | 998 |   | 58.5 | % |
| Stock-based compensation  |       | 198                             |       | 158            |       | 25.3 | % |
| Other                     |       | 714                             |       | 720            |       | (0.8 | )% |
| Total                     |       | $                               | 2,494      |           | $          | 1,876 |   | 32.9 | % |

 
| ** **                | ** ** | **Six Months Ended June 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                                          | ** ** | **2009**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                 | 2,773      |           | $          | 1,846 |   | 50.2 | % |
| Stock-based compensation  |       | 365                                               |       | 326            |       | 12.0 | % |
| Other                     |       | 1,413                                             |       | 1,241          |       | 13.9 | % |
| Total                     |       | $                                                 | 4,551      |           | $          | 3,413 |   | 33.3 | % |

 

The increase in research and development expenses for the three and sixmonths ended June 30, 2010 compared to the same periods in 2009 wasprimarily driven by the costs associated with an increase in the number ofresearch and development full-time employees from 48 at June 30, 2009 to56 at June 30, 2010, as well as higher average salary rates per employee.  This was partially offset by a decrease incapitalized payroll and benefits costs of $0.2 million for the threemonths ended June 30, 2010 and $0.4 million for the six months endedJune 30, 2010.  The increase instock-based compensation for the three and six months ended June 30, 2010compared to the same periods in 2009 was primarily attributable to stock-basedawards granted to certain employees in connection with our acquisition ofSmallFoot LLC, or Smallfoot, and ZOX, LLC, or Zox, in March 2010.  The increase in other research anddevelopment expenses for the six months ended June 30, 2010 as compared to thesame period in 2009 was primarily related to an increase in software licensesand fees used in the development of our various energy management applications.

 

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

 

Other expense, net for the three and six months ended June 30,2010 was primarily comprised of a nominal amount of interest income offset by anominal amount of foreign currency losses related to certain receivablesdenominated in foreign currencies.  Otherincome, net for the three months ended June 30, 2009 and other expense, net forthe six months ended June 30, 2009 was primarily comprised of a nominal amountof interest income, as well as a nominal amount of foreign currency gains, forthe three months ended June 30, 2009 and a nominal amount of foreign currencylosses for the six months ended June 30, 2009 related to certain receivablesdominated in foreign currencies.

 

***Interest Expense***

 

 Thedecrease in interest expense for the three and six months ended June 30,2010 compared to the same periods in 2009 was due to our repayment of outstandingborrowings under the SVB credit facility of $4.4 million during the threemonths ended December 31, 2009, resulting in no interest expense related to anyborrowings under the SVB credit facility in the three and six months ended June30, 2010.  Interest expense for the threeand six months ended June 30, 2010 includes interest on our outstanding capitalleases, letters of credit origination fees, and amortization of deferredfinancing fees.

 

***Income Taxes***

 

Werecorded a provision for income taxes of $0.3 million for the three monthsended June 30, 2010.  Our effective taxrate for the three months ended June 30, 2010 was 19.3%.  We recorded a benefit from income taxes of $0.9million for the six months ended June 30, 2010. Although we have a loss before income taxes for the six months endedJune 30, 2010, we anticipate that we will realize income before incometaxes for the fiscal year ending December 31, 2010, or fiscal 2010.  Therefore, we anticipate that we will recorda provision for income taxes for fiscal 2010 and will realize during fiscal2010 the benefit of the loss before income taxes incurred during the six monthsended June 30, 2010, a portion of which was realized during the threemonths ended June 30, 2010.  As a result,we recorded an income tax benefit of $0.9 million for the six months endedJune 30, 2010, inclusive of 

 

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considerationof the tax benefit from stock option deductions generated during the six monthsended June 30, 2010 on our estimated annual effective tax rate.  This tax benefit relates principally tolosses incurred from operations in the United States, which we expect to realizein fiscal 2010 based on forecasted pre-tax income for fiscal 2010, partiallyoffset by losses from foreign operations for which no tax benefit can berecognized, resulting in an effective tax rate of 6.5% for the six months endedJune 30, 2010.  Our estimated annualeffective tax rate for fiscal 2010 is 12.1%. However, the estimated annual effective tax rate could be reduced infuture quarters of fiscal 2010 as a result of any tax benefit from stockoptions which are not recognized in the determination of the estimated annualeffective rate until they occur.  Ourestimated annual effective tax rate is lower than the statutory rate as aresult of our federal and state net operating loss carryforwards to offsetfuture federal and state taxable income. Even though our federal and state net operating loss carryforwardsexceed our estimated taxable income for fiscal 2010, our estimated annualeffective tax rate is greater than zero due to federal alternative minimumtaxes for which the utilization of net operating loss carryforwards is limited,and certain state taxes for jurisdictions where we do not have sufficient netoperating loss carryforwards, as well as the amortization of tax deductiblegoodwill, which generates a deferred tax liability that cannot be offset by netoperating losses or other deferred tax assets since its reversal is consideredindefinite in nature.

 

Werecorded an income tax provision of $0.2 million and $0.3 million for the threeand six months ended June 30, 2009, respectively.  This tax provision was primarily related tothe amortization of tax deductible goodwill, which generated a deferred taxliability that cannot be offset by net operating losses or other deferred taxassets since its reversal is considered indefinite in nature.

 

Wereview all available evidence to evaluate the recovery of our deferred taxassets, including the recent history of accumulated losses in all taxjurisdictions over the last three years as well as our ability to generateincome in future periods. As of June 30, 2010 and December 31, 2009,due to the uncertainty related to the ultimate use of our deferred income taxassets, we have provided a full valuation allowance.

 

***Net Income (Loss)***

 

Net income for the three months ended June 30, 2010 was $1.1million, or $0.04 per basic and diluted share, compared to a net loss of$5.7 million, or $0.29 per basic and diluted share, for the three monthsended June 30, 2009.  Net loss forthe six months ended June 30, 2010 was $13.1 million, or $0.54 per basicand diluted share, compared to a net loss of $18.3 million, or $0.91 perbasic and diluted share, for the six months ended June 30, 2009. Excludingstock-based compensation charges and amortization of expenses related toacquisition-related assets, net of tax effects, non-GAAP net income for thethree months ended June 30, 2010 was $4.3 million, or $0.18 per basicshare and $0.17 per diluted share, compared to a non-GAAP net loss of$2.3 million, or $0.12 per basic and diluted share, for the three monthsended June 30, 2009. Excluding stock-based compensation charges andamortization of expenses related to acquisition-related assets, net of taxeffects, non-GAAP net loss for the six months ended June 30, 2010 was$4.9 million, or $0.20 per basic and diluted share, compared to a non-GAAPnet loss of $11.9 million, or $0.59 per basic and diluted share, for thesix months ended June 30, 2009. Please refer to the section below entitled“Use of Non-GAAP Financial Measures” for a reconciliation of non-GAAP measuresto the most directly comparable measure calculated and presented in accordancewith GAAP.

 

**Use of Non-GAAP Financial Measures**

 

In this Quarterly Report on Form 10-Q, we provide certain “non-GAAPfinancial measures.” A non-GAAP financial measure refers to a numericalfinancial measure that excludes (or includes) amounts that are included in (orexcluded from) the most directly comparable financial measure calculated andpresented in accordance with GAAP in our financial statements. In thisQuarterly Report on Form 10-Q, we provide non-GAAP net income (loss) andnon-GAAP net income (loss) per share data as additional information relating toour operating results. These non-GAAP measures exclude expenses related tostock-based compensation and amortization expense related toacquisition-related assets. Management uses these non-GAAP measures forinternal reporting and forecasting purposes. We have provided these non-GAAPfinancial measures in addition to GAAP financial results because we believethat these non-GAAP financial measures provide useful information to certaininvestors and financial analysts in assessing our operating performance due tothe following factors:

 

·                  we believe that thepresentation of non-GAAP measures that adjust for the impact of stock-basedcompensation expenses and amortization expense related to acquisition-relatedassets provides investors and financial analysts with a consistent basis forcomparison across accounting periods and, therefore, are useful to investorsand financial analysts in helping them to better understand our operatingresults and underlying operational trends;

 

·                  although stock-basedcompensation is an important aspect of the compensation of our employees andexecutives, stock-based compensation expense is generally fixed at the time ofgrant, then amortized over a period of several years after the grant of thestock-based instrument, and generally cannot be changed or influenced bymanagement after the grant; and

 

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·                  we do not acquire intangibleassets on a predictable cycle. Our intangible assets relate solely to businessacquisitions. Amortization costs are fixed at the time of an acquisition, arethen amortized over a period of several years after the acquisition andgenerally cannot be changed or influenced by management after the acquisition.

 

Pursuant to the requirements of the SEC, we have provided below areconciliation of each non-GAAP financial measure used to the most directlycomparable financial measure prepared in accordance with GAAP. These non-GAAPfinancial measures are not prepared in accordance with GAAP. These measures maydiffer from the non-GAAP information, even where similarly titled, used byother companies and therefore should not be used to compare our performance tothat of other companies. The presentation of this additional information is notmeant to be considered in isolation or as a substitute for net income (loss) ornet income (loss) per share prepared in accordance with GAAP.

 

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| ** **                                               | ** ** | **Three Months Ended June 30,**                     | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| ** **                                               | ** ** | **(In thousands, except share and per share data)** | ** ** |
| GAAP net income (loss)                                   |       | $                                                   | 1,078      |   | $ | (5,729 | ) |
| ADD: Stock-based compensation                            |       | 3,658                                               |       | 3,255 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 368                                                 |       | 163 |   |
| LESS: Income tax effect of Non-GAAP adjustments  (1)     |       | (775                                                | )          | — |   |
| Non-GAAP net income (loss)                               |       | $                                                   | 4,329      |   | $ | (2,311 | ) |
| GAAP net income (loss) per basic share                   |       | $                                                   | 0.04       |   | $ | (0.29 | ) |
| ADD: Stock-based compensation                            |       | 0.15                                                |       | 0.16 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 0.02                                                |       | 0.01 |   |
| LESS: Income tax effect of Non-GAAP adjustments  (1)     |       | (0.03                                               | )          | — |   |
| Non-GAAP net income (loss) per basic share               |       | $                                                   | 0.18       |   | $ | (0.12 | ) |
| GAAP net income (loss) per diluted share                 |       | 0.04                                                |       | $ | (0.29 | ) |
| ADD: Stock-based compensation                            |       | 0.14                                                |       | 0.16 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 0.02                                                |       | 0.01 |   |
| LESS: Income tax effect of Non-GAAP adjustments  (1)     |       | (0.03                                               | )          | — |   |
| Non-GAAP net income (loss) per diluted share             |       | $                                                   | 0.17       |   | $ | (0.12 | ) |
| Weighted average number of common shares  outstanding    |       |                                                |       |   |   |
| Basic                                                    |       | 24,371,125                                          |       | 20,034,562 |   |
| Diluted                                                  |       | 25,861,957                                          |       | 20,034,562 |   |

 
| ** **                                               | ** ** | **Six Months Ended June 30,**                       | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                               | ** ** | **2010**                                            | ** ** | **2009** | ** ** |
| ** **                                               | ** ** | **(In thousands, except share and per share data)** | ** ** |
| GAAP net loss                                            |       | $                                                   | (13,122    | ) | $ | (18,263 | ) |
| ADD: Stock-based compensation                            |       | 8,004                                               |       | 6,074 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 756                                                 |       | 332 |   |
| LESS: Income tax effect of Non-GAAP adjustments  (1)     |       | (568                                                | )          | — |   |
| Non-GAAP net loss                                        |       | $                                                   | (4,930     | ) | $ | (11,857 | ) |
| GAAP net loss per basic share                            |       | $                                                   | (0.54      | ) | $ | (0.91 | ) |
| ADD: Stock-based compensation                            |       | 0.33                                                |       | 0.30 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 0.03                                                |       | 0.02 |   |
| LESS: Income tax effect of Non-GAAP adjustments  (1)     |       | (0.02                                               | )          | — |   |
| Non-GAAP net loss per basic share                        |       | $                                                   | (0.20      | ) | $ | (0.59 | ) |
| GAAP net loss per diluted share                          |       | $                                                   | (0.54      | ) | $ | (0.91 | ) |
| ADD: Stock-based compensation                            |       | 0.33                                                |       | 0.30 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 0.03                                                |       | 0.02 |   |
| LESS: Income tax effect of Non-GAAP adjustments  (1)     |       | (0.02                                               | )          | — |   |
| Non-GAAP net loss per diluted share                      |       | $                                                   | (0.20      | ) | $ | (0.59 | ) |
| Weighted average number of common shares outstanding     |       |                                                |       |   |   |
| Basic                                                    |       | 24,212,004                                          |       | 19,983,803 |   |
| Diluted                                                  |       | 24,212,004                                          |       | 19,983,803 |   |

 

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(1)   Represents the increase in the income taxprovision recorded for the three months ended June 30, 2010 based on oureffective tax rate for the three months ended June 30, 2010.  Represents the reduction in the income taxbenefit recorded for the six months ended June 30, 2010 based on our effectivetax rate for the six months ended June 30, 2010.

 

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**Liquidity and Capital Resources**

 

**Overview**

 

Since inception, we have generated significant losses. As ofJune 30, 2010, we had an accumulated deficit of $90.5 million. As ofJune 30, 2010, our principal sources of liquidity were cash and cashequivalents totaling $118.5 million, a decrease of $1.2 million fromthe December 31, 2009 balance of $119.7 million. As of June 30,2010, we were contingently liable for $37.9 million in connection withoutstanding letters of credit under the SVB credit facility. As ofJune 30, 2010 and December 31, 2009, we had restricted cash balancesof $7.9 million, respectively, which relate to amounts to collateralizeunused outstanding letters of credit and cover financial assurance requirementsin certain of the programs in which we participate.

 

At June 30, 2010 and December 31, 2009, our excess cash wasprimarily invested in money market funds.

 

We believe our existing cash and cash equivalents at June 30, 2010and our anticipated net cash flows from operating activities will be sufficientto meet our anticipated cash needs, including investing activities, for atleast the next 12 months. Our future working capital requirements willdepend on many factors, including, without limitation, the rate at which wesell certain of our energy management applications and services to utilitiesand grid operators and the increasing rate at which letters of credit orsecurity deposits are required by those utilities and grid operators, theintroduction and market acceptance of new energy management applications andservices, the expansion of our sales and marketing and research and developmentactivities, and the geographic expansion of our business operations. To theextent that our cash and cash equivalents and our anticipated cash flows fromoperating activities are insufficient to fund our future activities or plannedfuture acquisitions, we may be required to raise additional funds through bankcredit arrangements, including the potential expansion or renewal of the SVBcredit facility, or public or private equity or debt financings. We also mayraise additional funds in the event we determine in the future to effect one ormore acquisitions of businesses, technologies or products. In addition, we mayelect to raise additional funds even before we need them if the conditions forraising capital are favorable. Accordingly, we have filed a shelf registrationstatement with the SEC to register shares of our common stock and othersecurities for sale, giving us the opportunity to raise funding when needed orotherwise considered appropriate at prices and on terms to be determined at thetime of any such offerings. We currently have the ability to sell approximately$62.1 million of our securities under the shelf registration statement.Any equity or equity-linked financing could be dilutive to existingstockholders. In the event we require additional cash resources, we may not beable to obtain bank credit arrangements or effect any equity or debt financingon terms acceptable to us or at all.

 

**Cash Flows**

 

The following table summarizes our cash flows for the six months endedJune 30, 2010 and 2009 (dollars in thousands):

 
| ** **                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                             | ** ** | **2010**                      | ** ** | **2009** | ** ** |
| Cash flows provided by (used in) operating  activities |       | $                             | 10,976     |   | $ | (10,219 | ) |
| Cash flows used in investing activities                |       | (14,647                       | )          | (7,505 | ) |
| Cash flows provided by financing activities            |       | 2,455                         |       | 449 |   |
| Effects of exchange rate changes on cash               |       | (12                           | )          | 19 |   |
| Net decrease in cash and cash equivalents              |       | $                             | (1,228     | ) | $ | (17,256 | ) |

 

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

 

Cash provided by (used in) operating activities primarily consists ofnet loss adjusted for certain non-cash items including depreciation andamortization, stock-based compensation expenses, and the effect of changes inworking capital and other activities.

 

Cash provided by operating activities for the six months endedJune 30, 2010 was $11.0 million and consisted of a net loss of$13.1 million offset by $8.2 million of net cash provided by workingcapital and other activities and $15.9 million of non-cash items, primarilyconsisting of depreciation and amortization, deferred taxes, stock-basedcompensation charges and impairment of property and equipment. Cash provided byworking capital and other activities consisted of a decrease of$10.6 million in unbilled revenues relating to the PJM demand responsemarket, a $2.9 million increase in deferred revenue, an increase in othernon-current liabilities of $1.2 million, an increase of $4.7 million inaccounts payable and accrued expenses due to the timing of C&I customer payments,and an increase of $0.3 million in accrued payroll and relatedexpenses.  These amounts were partiallyoffset by cash used in working capital and other activities, which reflected anincrease in prepaid expenses and other assets of $5.1 million, an increase inaccounts receivable of $6.1 million due to the timing of cash receiptsunder the demand response programs in which we participate and a $0.3 milliondecrease in accrued capacity payments, the majority of which was related to thePJM demand response market.

 

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Cash used in operating activities for the six months endedJune 30, 2009 was $10.2 million and consisted of an $18.2 million net lossand $4.0 million of net cash used for working capital and other activitiesoffset by $12.0 million of non-cash items, primarily consisting of depreciationand amortization, unrealized foreign exchange transaction loss, deferred taxprovision, stock-based compensation charges and other miscellaneous items. Cashused for working capital and other activities consisted of an increase of $4.8million in unbilled revenues relating to the PJM demand response market, anincrease in accounts receivable of $2.3 million due to the timing of cashreceipts under the demand response programs in which we participate, anincrease in other assets of $2.8 million due to increases in prepaid expenses,and a decrease of $0.8 million in accounts payable and accrued expenses due tothe timing of C&I customer payments. These amounts were partially offset bycash provided by working capital and other activities, which reflected a $1.3million increase in deferred revenue, a $4.5 million increase in accruedcapacity payments, the majority of which was related to the PJM demand responsemarket, a $0.8 million increase in accrued payroll and related expenses, and a$0.1 million increase in other noncurrent liabilities.

 

*Cash Flows Used in Investing Activities*

 

Cash used in investing activities was $14.6 million for the sixmonths ended June 30, 2010. Our principal cash investments during the sixmonths ended June 30, 2010 related to capitalizing internal use softwarecosts used to build out and expand our demand response and other energymanagement applications and services and purchases of property and equipment.During the six months ended June 30, 2010, we acquired Smallfoot and Zoxfor a purchase price of $1.4 million, of which $1.1 million was paid incash.  Additionally, our cash investmentsincluded the cash portion of the earn-out payment due in connection with ouracquisition of South River Consulting, LLC, or SRC, of $0.9 million.  We had an increase in restricted cash anddeposits resulting in a reduction of cash of $0.6 million primarily as a resultof our cash deposits made in connection with demand response programs in whichwe participate. During the six months ended June 30, 2010, we alsoincurred $12.0 million in capital expenditures primarily related to thepurchase of office equipment and demand response equipment and othermiscellaneous expenditures.

 

Cashused in investing activities for the six months ended June 30, 2009 was$7.5 million. Our principal cash investments during this period related toinstallation services used to build out and expand our demand response andenergy management applications and services and purchases of property andequipment. Cash provided by the sales of available-for-sale securities was $2.0million, and we had a decrease in restricted cash of $1.2 million primarily asa result of the SVB credit facility, which allows for the issuance of lettersof credit in connection with demand response programs in which we mayparticipate. During the six months ended June 30, 2009, we also incurred$9.7 million in capital expenditures primarily related to office equipment,demand response equipment and other miscellaneous expenditures. Additionally,our cash investments included the cash portion of the earn-out payment due inconnection with our acquisition of SRC of $0.7 million and $0.3 million of cashused for our acquisition of eQuilibrium Solutions Corporation, or eQ.

 

*Cash Flows Provided by Financing Activities*

 

Cash provided by financing activities was $2.5 million and $0.4million, respectively, for the six months ended June 30, 2010 and 2009primarily consisting of proceeds that we received from exercises of options topurchase shares of our common stock during the six months ended June 30,2010 and 2009.

 

*Credit Facility Borrowings*

 

Pursuant to the terms of the SVB credit facility, SVB will, among otherthings, make revolving credit and term loan advances and issue letters ofcredit for our account.  All unpaidprincipal and accrued interest is due and payable in full on February 4,2011, which is the maturity date. Our obligations under the SVB credit facilityare secured by all of our assets and the assets of our subsidiaries, excludingany intellectual property. The SVB credit facility contains customary terms andconditions for credit facilities of this type. In addition, we are required tomeet certain financial covenants customary with this type of facility,including maintaining a minimum specified tangible net worth and a minimummodified quick ratio. The SVB credit facility contains customary events ofdefault. If a default occurs and is not cured within any applicable cure periodor is not waived, our obligations under the SVB credit facility may beaccelerated. We were in compliance with all financial covenants under the SVBcredit facility at June 30, 2010 and, as of that date, we had repaid theoutstanding borrowings thereunder of $4.4 million. As of June 30,2010, we continue to have an aggregate of $37.9 million in letters ofcredit issued for our account under the SVB credit facility.

 

InApril 2010, we and one of our subsidiaries entered into a second loanmodification agreement to the SVB credit facility, which increased ourborrowing limit from $35.0 million to $50.0 million, as well as modifiedcertain of our financial covenant compliance requirements.  In July 2010,we and one of our subsidiaries entered into a third loan modification agreementto the SVB credit facility, which extended the revolving credit line maturitydate of the SVB credit facility from August 5, 2010 to February 4, 2011, aswell as modified certain of our financial covenant compliance requirements.

 

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In July 2010, based on our performance inconnection with an open market demand response program, approximately $7.7 millionof restricted cash that collateralized our performance obligations becameunrestricted.

 

**Contingent Earn-Out Payments**

 

In connection with our acquisition of Cogent, we agreed to make asingle contingent earn-out payment of $1.5 million in cash, to be paidbased on the achievement of a certain minimum revenue-based milestone and acertain earnings-based milestone of Cogent for the year endingDecember 31, 2010. Both of these milestones need to be achieved in orderfor the earn-out payment to occur, and there will be no partial payment if themilestones are not fully achieved. As we believe that it is remote that theearn-out payment will not be made, we determined the fair value of the earn-outpayment based on the present value of the $1.5 million, which will be paid inDecember 2010.

 

In connection with our acquisition of SRC, in addition to the amountspaid at closing, we incurred a contingent obligation to pay to the formerholders of SRC membership interests an earn-out amount equal to 50% to 60% of therevenues of SRC’s business during each twelve-month period from May 1,2008 through April 30, 2010, which would be recognized as additionalpurchase price when earned. The earn-out payments were based on the achievementof certain minimum revenue-based milestones of SRC and paid in a combination ofcash and shares of our common stock.  Theadditional purchase price recorded in the three months ended June 30, 2009,which was related to the May 1, 2008 to April 30, 2009 earn-outperiod, totaled $1.5 million, of which $0.7 million was paid in cash during thethree months ended June 30, 2009 and the remainder of which was paid by theissuance of 44,776 shares of our common stock during the three months endedSeptember 30, 2009.  The additionalpurchase price recorded in the six months ended June 30, 2010, which was relatedto the May 1, 2009 to April 30, 2010 earn-out period, totaled $1.8million, of which $0.9 million was paid in cash during the three months endedJune 30, 2010, $39,000 was settled through a reduction of a receivable due tous from the former holders of SRC membership interests and the remainder ofwhich was paid by the issuance of 30,879 shares of our common stock with a fairvalue of $0.9 million.

 

**CapitalSpending**

 

We have made capital expenditures primarily for general corporatepurposes to support our growth and for equipment installation related to ourbusiness. Our capital expenditures totaled $12.0 million and$9.8 million during the six months ended June 30, 2010 and 2009,respectively. As we continue to grow, we expect our capital expenditures for2010 to increase as compared to 2009.

 

**Contractual Obligations**

 

As of June 30, 2010, the contractual obligations disclosurecontained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2009, which we filed with the SEC on March 12, 2010, hasnot materially changed.

 

**Off-Balance Sheet Arrangements**

 

As of June 30, 2010, we did not have any off-balance sheetarrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K, that have or are reasonably likely to have a current orfuture effect on our financial condition, changes in our financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that is material to investors. We have issued letters ofcredit in the ordinary course of our business in order to participate incertain demand response programs. As of June 30, 2010, we had outstandingletters of credit totaling $37.9 million. For information on thesecommitments and contingent obligations, see Note 8 to our unauditedcondensed consolidated financial statements contained herein.

 

**Critical Accounting Policies and Use of Estimates**

 

The discussion and analysis of our financial condition and results ofoperations are based upon our interim condensed consolidated financialstatements, which have been prepared in accordance with GAAP. The preparationof these consolidated financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anon-going basis, we evaluate our estimates, including those related to revenuerecognition for multiple element arrangements, allowance for doubtful accounts,valuations and purchase price allocations related to business combinations,expected future cash flows including growth rates, discount rates, terminalvalues and other assumptions and estimates used to evaluate the recoverabilityof long-lived assets and goodwill, estimated fair values of intangible assetsand goodwill, amortization methods and periods, certain accrued expenses andother related charges, stock-based compensation, contingent liabilities, taxreserves and recoverability of our net deferred tax assets and relatedvaluation allowance. We 

 

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baseour estimates on historical experience and various other assumptions that arebelieved to be reasonable under the circumstances. Actual results could differfrom these estimates if past experience or other assumptions do not turn out tobe substantially accurate. Any differences may have a material impact on ourfinancial condition and results of operations.

 

The critical accounting estimates used in the preparation of ourfinancial statements that we believe affect our more significant judgments andestimates used in the preparation of our interim condensed consolidatedfinancial statements presented in this Quarterly Report on Form 10-Q aredescribed in “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and in the notes to the consolidated financialstatements included in our Annual Report on Form 10-K for the year endedDecember 31, 2009, which we filed with the SEC on March 12,2010.  Except as disclosed herein, therehave been no material changes to our critical accounting policies or estimatesduring the three and six months ended June 30, 2010.

 

**Recent Accounting Pronouncements**

 

In September 2009, the FASB ratified ASC Update No. 2009-13, *Multiple-Deliverable Revenue Arrangements*, or ASU2009-13.  ASU 2009-13 amends existingrevenue recognition accounting pronouncements that are currently within thescope of FASB ASC Subtopic 605-25. ASU 2009-13 provides for two significantchanges to the existing multiple element revenue recognition guidance. First, ASU2009-13 deletes the requirement to have objective and reliable evidence of fairvalue for undelivered elements in an arrangement and will result in moredeliverables being treated as separate units of accounting. The second change inASU 2009-13 modifies the manner in which the transaction consideration is allocatedacross the separately identified deliverables. These changes may result inentities recognizing more revenue up-front, and entities will no longer be ableto apply the residual method and defer the fair value of undelivered elements.Upon adoption of ASU 2009-13, each separate unit of accounting must have aselling price, which can be based on management’s estimate when there is noother means to determine the fair value of that undelivered item, and thearrangement consideration is allocated based on the elements’ relative sellingprice. ASU 2009-13 is effective no later than fiscal years beginning on orafter June 15, 2010 but may be adopted early as of the first quarter of anentity’s fiscal year. Entities may elect to adopt ASU 2009-13 either throughprospective application to all revenue arrangements entered into or materiallymodified after the date of adoption or through a retrospective application toall revenue arrangements for all periods presented in the financial statements.We are currently evaluating the impact of ASU 2009-13, including the period inwhich we will adopt ASU 2009-13.

 

In January 2010, the FASB issued ASU 2010-06, *ImprovingDisclosure about Fair Value Measurements*, or ASU 2010-06.  ASU 2010-06 requires additional disclosuresregarding fair value measurements, amends disclosures about post-retirementbenefit plan assets and provides clarification regarding the level ofdisaggregation of fair value disclosures by investment class. ASU 2010-06 iseffective for interim and annual reporting periods beginning afterDecember 15, 2009, except for certain Level 3 activity disclosurerequirements that will be effective for reporting periods beginning afterDecember 15, 2010. The adoption of ASU 2010-06 did not have a materialimpact on our consolidated financial position or results of operations.

 

**Item 3.  Quantitative and Qualitative Disclosures About MarketRisk.**

 

At June 30, 2010, there had not been a material change in theinterest rate risk information and foreign exchange risk information disclosedin the “Quantitative and Qualitative Disclosures about Market Risk” subsectionof the section entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2009, which we filed with the SEC onMarch 12, 2010.

 

**Item 4.  Controls and Procedures.**

 

***Disclosure Controls and Procedures***

 

Our principal executive officer and principal financial officer, afterevaluating the effectiveness of our disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the endof the period covered by this Quarterly Report on Form 10-Q, haveconcluded that, based on such evaluation, our disclosure controls andprocedures were effective to ensure that information required to be disclosedby us in the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms, and is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

 

***Internal Control over Financial Reporting***

 

No change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the fiscal quarter ended June 30, 2010 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**Item 1.    Legal Proceedings.**

 

We are subject to legal proceedings, claims and litigation arising inthe ordinary course of business. We do not expect the ultimate costs to resolvethese matters to have a material adverse effect on our consolidated financialcondition, results of operations or cash flows.

 

**Item 1A.  Risk Factors.**

 

We operate in a rapidly changing environment that involves a number ofrisks that could materially affect our business, financial condition or futureresults, some of which are beyond our control.  In addition to the otherinformation set forth in this Quarterly Report on Form 10-Q, the risks anduncertainties that we believe are most important for you to consider arediscussed in Part I — Item 1A under the heading “Risk Factors” in ourAnnual Report on Form 10-K for the fiscal year ended December 31,2009, which we filed with the SEC on March 12, 2010.   During thethree months ended June 30, 2010, there were no material changes to therisk factors that were disclosed in Part I — Item 1A under the heading “RiskFactors” in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2009.

 

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

 

(a)           Unregistered Salesof Equity Securities

 

We offered, issued and/or sold the following unregistered securitiesduring the three months ended June 30, 2010: on May 1, 2010, withrespect to our previous acquisition of 100% of the membership interests of SRC,we became obligated to issue 30,879 shares of our common stock in connectionwith an earn-out payment due to the former holders of SRC membership interests.

 

The issuance of the securities described above was deemed to be exemptfrom registration under the Securities Act in reliance onSection 4(2) of the Securities Act as transactions by an issuer notinvolving any public offering. The recipients of these securities in suchtransaction represented their intention to acquire the securities forinvestment only and not with a view to or for sale in connection with anydistribution thereof. Such recipients received written disclosures that thesecurities have not been registered under the Securities Act and that anyresale must be made pursuant to a registration or an available exemption fromsuch registration. All of these securities are deemed restricted securities forthe purposes of the Securities Act. The sales of these securities were made withoutgeneral solicitation or advertising.

 

(c)           Issuer Purchases of Equity Securities

 

Thefollowing table provides information about our purchases of our common stockduring the three months ended June 30, 2010.

 

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| **Period**                                | ** ** | **Total Number of  Shares Purchased (1)** | ** ** | **Average Price Paid  per Share (2)** | ** ** | **Total Number of Shares  Purchased As Part of  Publicly Announced Plans or  Programs** | ** ** | **Maximum Number (or  Approximate Dollar Value) of  Shares that May Yet Be  Purchased Under the Plans or  Programs** | ** ** |
|-------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1,  2010 - April 30, 2010 |       | 3,592                                                         |       | $                                                    | 26.25      |                                                                                                                                 | —     |                                                                                                                                                                                  | —     |   |
| May 1,  2010 - May 31, 2010     |       | —                                                        |       | —                                               |       | —                                                                                                                               |       | —                                                                                                                                                                                |       |
| June 1,  2010 - June 30, 2010   |       | —                                                        |       | —                                               |       | —                                                                                                                               |       | —                                                                                                                                                                                |       |
| Total                                     |       | 3,592                                                         |       | $                                                    | 26.25      |                                                                                                                                 | —     |                                                                                                                                                                                  | —     |   |

 

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(1)                                  Consists ofshares of our common stock that were released back to us in April 2010, whichwere previously held in escrow in connection with our acquisition of Cogent.These shares reflect the settlement of a receivable from the formerstockholders of Cogent that was recorded in connection with a purchase pricereduction that resulted from our gathering of information to update ourvaluation of certain acquired assets and liabilities related to the Cogentacquisition. Please refer to Note 2 in the accompanying unauditedcondensed consolidated financial statements contained herein for furtherdiscussion.

 

(2)                                  Represents theaverage of the closing price of a share of our common stock, as reported on TheNASDAQ Global Market for the ten trading days ending two days prior to theclosing date of the Cogent acquisition, or December 4, 2010.

 

**Item 5.  Other Information.**

 

OnJuly 30, 2010, we and one of our subsidiaries entered into a third loanmodification agreement to the SVB credit facility. The third loan modificationagreement provides for, among other things, an extension of the revolving linematurity date from August 5, 2010 to February 4, 2011 and amendmentsto certain of our financial covenants.

 

Theforegoing summary of the third loan modification agreement does not purport tobe complete and is qualified in its entirety by reference to the third loanmodification agreement, a copy of which is attached as Exhibit 10.3 tothis Quarterly Report on Form 10-Q and is incorporated herein byreference.

 

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**Item 6.  Exhibits.**

 
| 10.1@ |   | Amended  and Restated 2007 Employee, Director and Consultant Stock Plan, filed as  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 4,  2010 (File No. 001-33471), is hereby incorporated by reference herein as  Exhibit 10.1.                                                                               |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  |   | Second  Loan Modification Agreement by and among EnerNOC, Inc., EnerNOC Securities  Corporation and Silicon Valley Bank, dated as of April 23, 2010, filed as  Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed April 29,  2010 (File No. 001-33471), is hereby incorporated by reference herein as  Exhibit 10.2. |
| 10.3* |   | Third  Loan Modification Agreement by and among EnerNOC, Inc., EnerNOC Securities  Corporation and Silicon Valley Bank, dated as of July 30, 2010.                                                                                                                                                                                       |
| 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 the Chief Executive Officer and Chief Financial Officer of EnerNOC, Inc.  pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of  1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                            |

 

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| @ |   | Management  contract, compensatory plan or arrangement. |
|---|--------|---------------------------------------------------------|
| * |   | Filed  herewith.                                        |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                       | EnerNOC, Inc. |
|----------------------------|--------------------|
|                       |               |
| Date:  August 5, 2010 | By:                | /s/  Timothy G. Healy |
|                       |               | Timothy  G. Healy |
|                       |               | Chief  Executive Officer |
|                       |               | (principal  executive officer) |
|                       |               |   |
| Date:  August 5, 2010 | By:                | /s/  Timothy Weller |
|                       |               | Timothy  Weller |
|                       |               | Chief  Financial Officer and Treasurer |
|                       |               | (principal  financial officer) |

 

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**Exhibit Index**

 
| **Number** | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                      |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                        |
| 10.1@      |       | Amended  and Restated 2007 Employee, Director and Consultant Stock Plan, filed as Exhibit 10.1  to the Registrant’s Current Report on Form 8-K filed June 4, 2010  (File No. 001-33471), is hereby incorporated by reference herein as  Exhibit 10.1.                                                                                         |
| 10.2       |       | Second  Loan Modification Agreement by and among EnerNOC, Inc., EnerNOC  Securities Corporation and Silicon Valley Bank, dated as of April 23,  2010, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K  filed April 29, 2010 (File No. 001-33471), is hereby incorporated  by reference herein as Exhibit 10.2. |
| 10.3*      |       | Third  Loan Modification Agreement by and among EnerNOC, Inc., EnerNOC  Securities Corporation and Silicon Valley Bank, dated as of July 30,  2010.                                                                                                                                                                                                               |
| 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 the Chief Executive Officer and Chief Financial Officer of  EnerNOC, Inc. pursuant to Rule 13a-14(b) promulgated under the  Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                      |

 

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| @ |   | Management  contract, compensatory plan or arrangement. |
|---|--------|---------------------------------------------------------|
| * |   | Filed  herewith.                                        |

 

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