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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                    |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                 |
| ** ** | ** ** | **For the quarterly period ended  September 30, 2008**                                                                                                                                |
| ** ** | ** ** | ** **                                                                                                                                                                                 |
| **or**     |
| ** ** | ** ** | ** **                                                                                                                                                                                 |
| **o**      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                 |
| ** ** | ** ** | **For the transition period from**              **to**             |

 

**Commission File Number: 001-33471**

 

**EnerNOC, Inc.**

(Exact Name of Registrant as Specified in ItsCharter)

 

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

 

**(617) 224-9900**

(Registrant’s Telephone Number, IncludingArea Code)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes   x    No   o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See the definitions of “large accelerated filer,” “accelerated filer”and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).

 

Yes      o   No      x

 

There were 20,250,743 shares of the registrant’s common stock, $.001par value per share, outstanding as of November 10, 2008.

 

 

 

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**EnerNOC, Inc.**

** **

**Index to Form 10-Q**

 
| ** **                                | ** **                                                                                                                       | **Page**   |
|-------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                | ** **                                                                                                                       | ** ** |
| **Part I - Financial Information**   |                                                                                                                             |
|                                      |                                                                                                                             |       |
| Item 1.                              | Financial Statements                                                                                                             |       |
|                                      |                                                                                                                             |       |
|                                      | Condensed Consolidated Balance Sheets at  September 30, 2008 (unaudited) and December 31, 2007                         | 3          |
|                                      |                                                                                                                             |       |
|                                      | Unaudited  Condensed Consolidated Statements of Operations for the three and nine months  ended September 30, 2008 and 2007 | 4          |
|                                      |                                                                                                                             |       |
|                                      | Unaudited  Condensed Consolidated Statements of Cash Flows for the nine months ended  September 30, 2008 and 2007           | 5          |
|                                      |                                                                                                                             |       |
|                                      | Notes to Unaudited Condensed Consolidated  Financial Statements                                                                  | 6          |
|                                      |                                                                                                                             |       |
| Item 2.                              | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                      | 16         |
|                                      |                                                                                                                             |       |
| Item 3.                              | Quantitative and Qualitative Disclosures  About Market Risk                                                                      | 25         |
|                                      |                                                                                                                             |       |
| Item 4T.                             | Controls and Procedures                                                                                                          | 26         |
|                                      |                                                                                                                             |       |
| **Part II - Other Information** |                                                                                                                             |
|                                      |                                                                                                                             |       |
| Item 1.                              | Legal Proceedings                                                                                                                | 26         |
|                                      |                                                                                                                             |       |
| Item 1A.                             | Risk Factors                                                                                                                     | 27         |
|                                      |                                                                                                                             |       |
| Item 2.                              | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                     | 29         |
|                                      |                                                                                                                             |       |
| Item 6.                              | Exhibits                                                                                                                         | 29         |
|                                      | Signatures                                                                                                                       | 30         |
|                                      | Exhibit Index                                                                                                               | 31         |

 

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**PART I — FINANCIAL INFORMATION**

 

**EnerNOC, INC.**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**(in thousands, except par value and sharedata)**

 
| ** **                                                                                                                                                                                        | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                        |       |                         |       |                        |       |
| Current assets                                                                                                                                                                                    |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                         |       | $                            | 53,268     |                        | $          | 70,242 |   |
| Restricted cash                                                                                                                                                                                   |       | —                       |       | 1,248                       |       |
| Marketable securities                                                                                                                                                                             |       | 4,900                        |       | 15,500                      |       |
| Trade accounts receivable, net allowance  for doubtful accounts of $55 and $368                                                                                                                   |       | 15,536                       |       | 10,134                      |       |
| Unbilled revenue                                                                                                                                                                                  |       | 18,643                       |       | —                      |       |
| Deposits, current                                                                                                                                                                                 |       | 617                          |       | 1,955                       |       |
| Prepaid expenses and other current assets                                                                                                                                                         |       | 1,861                        |       | 2,315                       |       |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| Total current assets                                                                                                                                                                              |       | 94,825                       |       | 101,394                     |       |
| Property and equipment, net                                                                                                                                                                       |       | 28,451                       |       | 23,195                      |       |
| Goodwill and other intangible assets, net                                                                                                                                                         |       | 18,701                       |       | 16,421                      |       |
| Restricted cash-non current                                                                                                                                                                       |       | 1,894                        |       | 1,770                       |       |
| Deposits, non-current                                                                                                                                                                             |       | 8,293                        |       | 12,496                      |       |
| Other assets                                                                                                                                                                                      |       | 121                          |       | 308                         |       |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| Total assets                                                                                                                                                                                      |       | $                            | 152,285    |                        | $          | 155,584 |   |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                     |       |                         |       |                        |       |
| Current liabilities                                                                                                                                                                               |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                  |       | $                            | 1,530      |                        | $          | 2,112 |   |
| Accrued capacity payments                                                                                                                                                                         |       | 24,678                       |       | 9,069                       |       |
| Deferred related-party acquisition payments                                                                                                                                                       |       | —                       |       | 431                         |       |
| Accrued payroll and related expenses                                                                                                                                                              |       | 8,010                        |       | 4,902                       |       |
| Accrued Mdenergy, LLC earn-out                                                                                                                                                                    |       | —                       |       | 3,357                       |       |
| Accrued expenses and other current  liabilities                                                                                                                                                   |       | 3,331                        |       | 1,586                       |       |
| Deferred revenue                                                                                                                                                                                  |       | 234                          |       | 2,403                       |       |
| Contingent consideration payable                                                                                                                                                                  |       | —                       |       | 2,247                       |       |
| Current portion of long-term debt                                                                                                                                                                 |       | 45                           |       | 2,451                       |       |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| Total current liabilities                                                                                                                                                                         |       | 37,828                       |       | 28,558                      |       |
| Long-term liabilities                                                                                                                                                                             |       |                         |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                            |       | 4,529                        |       | 3,640                       |       |
| Deferred tax liability                                                                                                                                                                            |       | 280                          |       | 100                         |       |
| Other liabilities                                                                                                                                                                                 |       | 1,318                        |       | 869                         |       |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| Total long-term liabilities                                                                                                                                                                       |       | 6,127                        |       | 4,609                       |       |
| Commitments and contingencies (Note 8 and  Note 13)                                                                                                                                               |       | —                       |       | —                      |       |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| Stockholders’ equity                                                                                                                                                                         |       |                         |       |                        |       |
| Common stock, $0.001 par value;  50,000,000 shares authorized, 20,073,232 and 19,180,504 shares issued  and outstanding at September 30, 2008 and December 31, 2007,  respectively |       | 20                           |       | 19                          |       |
| Additional paid-in capital                                                                                                                                                                        |       | 166,658                      |       | 156,250                     |       |
| Accumulated deficit                                                                                                                                                                               |       | (58,348                      | )          | (33,852                     | )          |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| Total stockholders’ equity                                                                                                                                                                   |       | 108,330                      |       | 122,417                     |       |
|                                                                                                                                                                                              |       |                         |       |                        |       |
| Total liabilities and stockholders’ equity                                                                                                                                                   |       | $                            | 152,285    |                        | $          | 155,584 |   |

 

See accompanying notes.

 

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**EnerNOC, INC.**

** **

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

** **

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

 
| ** **                                                  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                                    |       | $                                                        | 44,152     |                                                    | $          | 19,139 |   | $ | 86,450 |   | $ | 41,126 |   |
| Cost of revenues                                            |       | 25,792                                                   |       | 11,258                                                  |       | 52,748 |   | 26,232 |   |
| Gross profit                                                |       | 18,360                                                   |       | 7,881                                                   |       | 33,702 |   | 14,894 |   |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses:                                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Selling and marketing expenses                              |       | 8,202                                                    |       | 4,362                                                   |       | 20,949 |   | 11,840 |   |
| General and administrative expenses                         |       | 11,736                                                   |       | 6,699                                                   |       | 34,217 |   | 18,036 |   |
| Research and development expenses                           |       | 1,195                                                    |       | 985                                                     |       | 3,627 |   | 1,824 |   |
| Total operating expenses                                    |       | 21,133                                                   |       | 12,046                                                  |       | 58,793 |   | 31,700 |   |
| Loss from operations                                        |       | (2,773                                                   | )          | (4,165                                                  | )          | (25,091 | ) | (16,806 | ) |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest and other income                                   |       | 319                                                      |       | 1,709                                                   |       | 1,843 |   | 2,537 |   |
| Interest expense                                            |       | (584                                                     | )          | (69                                                     | )          | (1,068 | ) | (276 | ) |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Loss before income tax expense                              |       | (3,038                                                   | )          | (2,525                                                  | )          | (24,316 | ) | (14,545 | ) |
| Provision for income tax expense                            |       | (22                                                      | )          | —                                                  |       | (180 | ) | — |   |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss                                                    |       | $                                                        | (3,060     | )                                                       | $          | (2,525 | ) | $ | (24,496 | ) | $ | (14,545 | ) |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic and diluted net loss per share                        |       | $                                                        | (0.16      | )                                                       | $          | (0.14 | ) | $ | (1.26 | ) | $ | (1.30 | ) |
|                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
|   Weighted average number of  basic and diluted shares |       | 19,606,287                                               |       | 18,153,491                                              |       | 19,406,811 |   | 11,214,704 |   |

 

See accompanying notes.

 

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**EnerNOC, INC.**

 

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(in thousands)**

 
| ** **                                                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                     | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **Cash flows from operating activities**                                                                       |       |                                                |       |   |   |
| Net loss                                                                                                       |       | $                                                   | (24,496    | ) | $ | (14,545 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities:                                   |       |                                                |       |   |   |
| Depreciation                                                                                                   |       | 5,601                                               |       | 1,880 |   |
| Amortization of intangibles                                                                                    |       | 853                                                 |       | 1,658 |   |
| Stock-based compensation expense                                                                               |       | 7,390                                               |       | 5,759 |   |
| Impairment of equipment                                                                                        |       | 288                                                 |       | — |   |
| Deferred tax liability                                                                                         |       | 180                                                 |       | — |   |
| Non-cash interest expense                                                                                      |       | 505                                                 |       | 131 |   |
| Increase (decrease) in cash from changes in operating assets and  liabilities, net of effects of acquisitions: |       |                                                |       |   |   |
| Accounts receivable, trade                                                                                     |       | (5,270                                              | )          | (7,576 | ) |
| Deferred revenue                                                                                               |       | (2,169                                              | )          | 1,722 |   |
| Unbilled revenue                                                                                               |       | (18,643                                             | )          | — |   |
| Prepaid expenses and other current assets                                                                      |       | 507                                                 |       | (530 | ) |
| Other noncurrent assets                                                                                        |       | (318                                                | )          | (1,174 | ) |
| Other noncurrent liabilities                                                                                   |       | 449                                                 |       | (1,295 | ) |
| Accrued capacity payments                                                                                      |       | 15,609                                              |       | 4,543 |   |
| Accrued payroll and related expenses                                                                           |       | 3,969                                               |       | 1,338 |   |
| Accounts payable and accrued expenses                                                                          |       | 1,063                                               |       | 1,498 |   |
|                                                                                                           |       |                                                |       |   |   |
| Net cash used in operating activities                                                                          |       | (14,482                                             | )          | (6,591 | ) |
|                                                                                                           |       |                                                |       |   |   |
| **Cash flows from investing activities**                                                                       |       |                                                |       |   |   |
| Purchase of marketable securities                                                                              |       | (12,142                                             | )          | (15,000 | ) |
| Sales and maturities of marketable securities                                                                  |       | 22,742                                              |       | 2,400 |   |
| Purchase of South River Consulting, LLC                                                                        |       | (3,777                                              | )          | — |   |
| Purchase of Mdenergy, LLC                                                                                 |       | (3,357                                              | )          | (3,362 | ) |
| Purchase of Pinpoint Power DR LLC                                                                         |       | (389                                                | )          | (1,470 | ) |
| Purchases of property and equipment                                                                            |       | (11,086                                             | )          | (15,656 | ) |
| Increase (decrease) in restricted cash and deposits for customer  programs                                     |       | 6,665                                               |       | (2,033 | ) |
|                                                                                                           |       |                                                |       |   |   |
| Net cash used in investing activities                                                                          |       | (1,344                                              | )          | (35,121 | ) |
|                                                                                                           |       |                                                |       |   |   |
| **Cash flows from financing activities**                                                                       |       |                                                |       |   |   |
| Proceeds from the issuance of common stock, net of issuance costs                                              |       | —                                              |       | 95,159 |   |
| Proceeds from exercises of stock options                                                                       |       | 368                                                 |       | 105 |   |
| Proceeds from borrowing                                                                                        |       | 4,352                                               |       | 2,500 |   |
| Repayment of borrowings and payments under capital leases                                                      |       | (5,868                                              | )          | (1,041 | ) |
| Proceeds from the issuance of preferred stock, net of issuance costs                                           |       | —                                              |       | 9,990 |   |
| Repurchase of treasury stock                                                                                   |       | —                                              |       | (395 | ) |
|                                                                                                           |       |                                                |       |   |   |
| Net cash (used in) provided by financing activities                                                            |       | (1,148                                              | )          | 106,318 |   |
|                                                                                                           |       |                                                |       |   |   |
| Net change in cash and cash equivalents                                                                        |       | (16,974                                             | )          | 64,606 |   |
| Cash and cash equivalents at beginning of period                                                               |       | 70,242                                              |       | 9,184 |   |
|                                                                                                           |       |                                                |       |   |   |
| Cash and cash equivalents at end of period                                                                     |       | $                                                   | 53,268     |   | $ | 73,790 |   |
|                                                                                                           |       |                                                |       |   |   |
| **Supplemental disclosure of cash flow information**                                                           |       |                                                |       |   |   |
| ** **                                                                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Non-cash financing and investing activities**                                                                |       |                                                |       |   |   |
|                                                                                                           |       |                                                |       |   |   |
| Issuance of common stock in connection with the acquisition of South  River Consulting, LLC                    |       | $                                                   | 1,747      |   | $ | — |   |
|                                                                                                           |       |                                                |       |   |   |
| Deferred related party stock issuance for Pinpoint Power DR LLC                                                |       | $                                                   | 44         |   | $ | 66 |   |
|                                                                                                           |       |                                                |       |   |   |
| Conversion and net exercise into common stock of preferred stock  warrant                                      |       | $                                                   | —     |   | $ | 606 |   |
|                                                                                                           |       |                                                |       |   |   |
| Issuance of common stock as bonus payments                                                                     |       | $                                                   | 844        |   | $ | — |   |
|                                                                                                           |       |                                                |       |   |   |
| Issuance of common stock to a related party                                                                    |       | $                                                   | —     |   | $ | 395 |   |
|                                                                                                           |       |                                                |       |   |   |
| Accretion of preferred stock issuance costs                                                                    |       | $                                                   | —     |   | $ | 216 |   |
|                                                                                                                |            |                                                     |            |  |  |  |  |  |

 

See accompanying notes.

 

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**EnerNOC, INC.**

** **

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

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

** **

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

** **

**Description of Business**

** **

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

 

InMay 2007, the Company completed its initial public offering (IPO) of4,312,500 shares of common stock at a price of $26.00 per share, which includedthe exercise of the underwriters’ over-allotment option to purchase 562,500shares and the sale of 225,000 shares by certain of the Company’s stockholders.Net proceeds to the Company from the IPO were approximately $95,200. In November 2007,the Company completed a follow-on public offering of 2,500,000 shares of itscommon stock at a price of $43.00 per share. Of the 2,500,000 shares, theCompany sold 500,000 shares and selling stockholders sold 2,000,000 shares.This transaction resulted in net proceeds to the Company of $19,446.

 

**Reclassifications**

** **

Certainamounts in prior periods have been reclassified to conform to the 2008presentation. These reclassifications have no material impact on previouslyreported results of operations or stockholders’ equity.

 

**Basis of Consolidation**

** **

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

 

Theresults of operations for the three and nine months ended September 30,2008 are not necessarily indicative of the results expected for the full fiscalyear ending December 31, 2008 or for any other fiscal period. Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with the audited consolidated financial statements for theyear ended December 31, 2007 and the footnotes thereto included in theCompany’s annual report on Form 10-K for the fiscal year ended December 31,2007, as filed with the Securities and Exchange Commission (SEC) on March 28,2008.

 

**Unbilled Revenue**

** **

Asignificant portion of the Company’s revenue is derived from long-termcontracts and open market bidding programs with grid operators and utilitiespursuant to which a monthly capacity payment is made to the Company foragreeing to provide relief in the form of curtailment of energy usage duringtimes of high energy demand.  The Company records these payments asrevenue over the period during which the Company is required to perform underthese contracts and programs.  Under certain contracts and programs,the period during which the Company is obligated to perform may be shorter thanthe period over which it receives payments under that contract orprogram.  In these cases, the Company records revenue over themandatory performance obligation period, and a portion of the revenue that hasbeen earned is recorded and accrued as unbilled revenue.  As of September 30,2008, the Company had unbilled revenue of $18,643.

 

**2. Acquisitions**

** **

**South River Consulting, LLC**

** **

In May 2008, theCompany acquired 100% of the membership interests of South River Consulting,LLC (SRC), an energy procurement and risk management services provider, for apurchase price equal to $5,524, which consisted of $3,603 in cash, $174 inrelated expenses and 120,000 shares of the Company’s common stock that had avalue of approximately $1,747 as of the closing date.  In addition tothe amounts paid at closing, the Company may be obligated to pay to the formerholders of SRC membership interests an earnout amount equal to 50% to 60% ofthe revenues of SRC’s business during each twelve-month period from May 1,2008 through April 30, 2010. The earnout payments will be based on theachievement of certain minimum revenue-based milestones of 

 

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SRCand will be paid in a combination of cash and shares of the Company’s commonstock. The acquisition of SRC strengthens the Company’s position in a growingenergy procurement services market and provides a local presence for theCompany in the PJM Interconnection service region.

 

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

 

Theaggregate purchase price of $5,524 consists of the following:

 
| Cash                         |   | $     | 3,603  |   |
|------------------------------|--------|-------|--------|--------|
| Common stock                 |   | 1,747 |   |
| Acquisition related expenses |   | 174   |   |
| Total purchase price         |   | $     | 5,524  |   |

 

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

 
| Total purchase price                                         |   | $     | 5,524  |   |
|--------------------------------------------------------------|--------|-------|--------|--------|
| Accounts receivable                                          |   | 132   |   |
| Prepaids and other current assets                            |   | 53    |   |
| Customer contracts                                           |   | 2,230 |   |
| Property and equipment                                       |   | 59    |   |
| Employment agreements                                        |   | 80    |   |
| Accrued expenses                                             |   | (40   | )      |
| Accounts payable                                             |   | (60   | )      |
| Net assets acquired                                          |   | 2,454 |   |
| Excess purchase price over the fair value of assets acquired |   | $     | 3,070  |   |

 

Thefinancial information above reflects the preliminary allocation of the purchaseprice.  During the three months ended September 30,2008, the Company allocated an additional $1,520 to customer contracts whichhad previously been recorded as goodwill as of June 30, 2008.  In addition to the amounts paid at closing,the Company may be obligated to pay the former holders of SRC membershipinterests an earnout payment, as described above. These amounts will beassessed if additional purchase price is deemed probable. The customercontracts will be amortized over a period of ten years, and the employmentagreements will be amortized over a period of three years.

 

**Mdenergy, LLC**

** **

In September 2007, theCompany acquired all of the outstanding membership interests of Mdenergy, LLC(MDE), an energy procurement service provider, pursuant to the terms of amerger agreement. The total purchase price paid by the Company at closing wasapproximately $7,900, of which $3,501 was paid in cash and the remainder ofwhich was paid by the issuance of 139,056 shares of the Company’s common stock.

 

Inaddition to the amounts paid at closing, the Company was obligated to pay tothe former holders of MDE membership interests an earnout equal to two timesthe revenues of MDE’s business during the period from July 1, 2007 throughDecember 31, 2007. The contingent consideration related to the earnout inthe amount of approximately $3,357 was paid in January of 2008 and wasrecorded as additional purchase price.

 

**Supplemental Information**

** **

Thefollowing unaudited pro forma combined financial information is presented forcomparative purposes for the three and nine months ended September 30,2008 and September 30, 2007 and gives effect to certain adjustments,including amortization of the definite life intangible assets as if theacquisitions occurred on January 1, 2007. The information below is notnecessarily indicative of the results of operations that would have actuallybeen reported had the purchase occurred at the beginning of the periodpresented, nor is it necessarily indicative of future financial position orresults of operations:

 
| ** **                                            | ** ** | **Three months  ended**       | ** ** | **Nine months  ended**      | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **September 30,   2008** | ** ** | **September 30, 2007** | ** ** | **September 30,   2008** | ** ** | **September 30, 2007** | ** ** |
| Revenues                                              |       | $                                  | 44,152     |                             | $          | 20,342 |   | $ | 87,312 |   | $ | 44,880 |   |
| Net loss                                              |       | $                                  | (3,060     | )                                | $          | (2,424 | ) | $ | (24,567 | ) | $ | (14,009 | ) |
| Pro forma net loss per share – basic and diluted |       | $                                  | (0.16      | )                                | $          | (0.13 | ) | $ | (1.26 | ) | $ | (1.22 | ) |

 

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**3.  Recent Accounting Pronouncements**

** **

***SFAS No. 162, The Hierarchy ofGenerally Accepted Accounting Principles***

*** ***

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

 

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

*** ***

InDecember 2007, the FASB issued SFAS No. 141(R),*Business Combinations* (SFAS No. 141R).SFAS No. 141R will significantly change the accounting for and reportingof business combination transactions in consolidated financial statements.SFAS No. 141R retains the fundamental requirements in SFAS No. 141,*Business Combinations,* while providingadditional definitions, such as the definition of the acquirer in a purchaseand improvements in the application of how the acquisition method is applied.SFAS No. 141R becomes effective January 1, 2009. Early adoption isnot permitted. The Company is currently evaluating the impact this guidancewill have on its consolidated financial statements.

 

**4. Net Loss Per Share**

** **

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

 
| ** **                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **September  30, 2008**     | ** ** | **September  30, 2007**    | ** ** | **September  30, 2008** | ** ** | **September  30, 2007** | ** ** |
| Redeemable Convertible Preferred Stock             |       | —                           |       | —                          |       | — |   | 4,688,231 |   |
| Outstanding options, restricted stock and warrants |       | 1,790,816                        |       | 2,179,211                       |       | 2,015,936 |   | 2,380,476 |   |
| Shares held in escrow                              |       | 149,389                          |       | 5,725                           |       | 93,411 |   | 1,929 |   |
| Dilutive weighted average shares outstanding       |       | 1,940,205                        |       | 2,184,936                       |       | 2,109,347 |   | 7,070,636 |   |

 

Includedin the calculation of the weighted average number of common shares outstandingat September 30, 2007 are 44,260 contingently issuable shares of commonstock. These shares were issuable in connection with the Company’s acquisitionof Pinpoint Power DR LLC (PPDR) in 2005. These shares have been included in thecalculation as there are no restrictions for issuance except for the passage oftime.

 

Theweighted average common shares outstanding at September 30, 2008 did notinclude 120,000 shares issued in the SRC acquisition that are held inescrow.  The weighted average commonshares outstanding at September 30, 2007 did not include 35,114 sharesissued in the MDE acquisition that were held in escrow.  These shares are included in the calculationof diluted shares outstanding as if the contingency period ended on September 30,2008.  These shares contain restrictions which require the holder toreturn all or a portion of the shares if specific conditions are not met. In September 2008,the 35,114 shares issued in the MDE acquisition were released from escrow.

 

**5. Marketable Securities**

** **

Cashequivalents principally consist of money market funds, commercial paper andmunicipal bonds with original maturities of three months or less at the date ofpurchase. Marketable securities at September 30, 2008 are classified as “available-for-sale.”The Company’s investments in securities include auction-rate securities (ARS)and state and municipal bonds. The securities the Company typically invests inare AAA-rated government-backed securities with interest rates typicallyranging from 6.5% to 6.8% that have approximate contractual maturities of atleast 26 years.

 

Asof September 30, 2008, all of the Company’s $2,900 par value ARS weresubject to failed auctions, and none of the ARS succeeded in an auction duringthe nine months ended September 30, 2008 or subsequent to September 30,2008.  As a result of these failed auctions, the Company has had thepotential to benefit from a penalty feature in its interest rates, which allowsit to earn an additional 5.1% to 14.0% of interest on these securities untilthe next auction, or until the Company sells the ARS, if it is able to do 

 

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so.  TheCompany will not be able to liquidate the investments until a successfulauction occurs, a buyer is found outside the auction process, the securities arecalled or refinanced by the issuer, or the securities mature.  The Companybelieves that the issuers of the securities are currently able and willcontinue to make interest payments at the maximum rate.  The Company’s ARS are managed by MorganStanley & Co. Incorporated (Morgan). In November 2008, the Company agreed to tender its $2,900 of ARS toMorgan pursuant to an agreement dated September 30, 2008.  The agreement permits the Company to sell itsARS to Morgan at par value, plus accrued interest, any time prior to theacceptance of the tender by Morgan. Morgan will begin accepting the tender of eligible securities onNovember 1, 2008 and the acceptance date will be the business day immediatelyprior to the next interest payment date, subsequent to the date the ARS areactually tendered.  The investments wereclassified as a current asset on the accompanying condensed consolidatedbalance sheet as of September 30, 2008 as the Company believes that itwill be able to liquidate these securities at par value within one year.

 

Ifin the future the Company no longer believes that it will be able to liquidatethese securities within one year, the investments may need to be reclassifiedas long-term assets or the Company may be required to write down these securitiesto fair value based on future market conditions. The Company has not made anyadditional investments in ARS since December 31, 2007.

 

Thefollowing is a summary of the Company’s available-for-sale marketablesecurities as of September 30, 2008 and December 31, 2007:

 
| ** **                                       | ** ** | **Gross unrealized** | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|
| **As of September 30, 2008** | ** ** | **Cost**                  | ** ** | **Gains** | ** ** | **Losses** | ** ** | **Fair value** | ** ** |
| Auction rate securities                          |       | $                         | 2,900      |   | $ | — |   | $ | — |   | $ | 2,900 |   |
| Fixed income securities                          |       | 500                       |       | — |   | — |   | 500 |   |
| Commercial paper                                 |       | 1,500                     |       | — |   | — |   | 1,500 |   |
| Total                                            |       | $                         | 4,900      |   | $ | — |   | $ | — |   | $ | 4,900 |   |

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

 

Thefollowing is a summary of the cost and fair value of current available-for-salemarketable securities at September 30, 2008, by contractual maturity:

 
| ** **          | ** ** | **Cost** | ** ** | **Fair value** | ** ** |
|---------------------|------------|----------|------------|---------------------|------------|
| Due within one year |       | $        | 2,000      |                | $          | 2,000 |   |
| Due after ten years |       | 2,900    |       | 2,900               |       |
| Total               |       | $        | 4,900      |                | $          | 4,900 |   |

 

AtSeptember 30, 2008, the Company had restricted cash of approximately$1,894 invested in certificates of deposit with original maturities greaterthan 90 days at acquisition.  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.

 

**Fair Value Measurements**

** **

InSeptember 2006, the FASB issued SFAS No. 157,*Fair Value Measurements* (SFAS No. 157),which defines fair value, establishes a framework for measuring fair value inaccordance with GAAP and expands disclosures about fair valuemeasurements.  SFAS No. 157 does not require any new fair valuemeasurements, but its provisions apply to all other accounting pronouncementsthat require or permit fair value measurement.  SFAS No. 157 iseffective for the Company’s fiscal year beginning January 1, 2008 and forinterim periods within that year.  In February 2008, the FASB issuedFASB Staff Position (FSP) No 157-2,*  Effective date of FASB Statement No. 157,*  which delayed for one year the effective dateof SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually).  As required, theCompany adopted SFAS No. 157 for its financial assets on January 1,2008.  The Company does not believe that adoption has a material impact onthe Company’s financial position or results of operations at this time. TheCompany has not yet determined the impact on its financial statements of the January 1,2009 adoption of SFAS No. 157 as it pertains to non-financial assets andliabilities.

 

SFASNo. 157 establishes a fair value hierarchy that requires the use ofobservable market data, when available, and prioritizes the inputs to valuationtechniques used to measure fair value in the following categories:

 

·                         Level 1 -Valuation is based upon quoted prices for identical instruments traded inactive markets. Level 1 instruments 

 

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include securities traded on active exchangemarkets, such as the New York Stock Exchange.

 

·                         Level 2 -Valuation is based upon quoted prices for similar instruments in activemarkets, quoted prices for identical or similar instruments in markets that arenot active and model-based valuation techniques for which all significantassumptions are observable in the market.

 

·                         Level 3 -Valuation is generated from model-based techniques that use significantassumptions not observable in the market. These unobservable assumptionsreflect the Company’s own estimates of assumptions market participants woulduse in pricing the asset or liability.

 

Thetable below presents the balances of assets and liabilities measured at fairvalue on a recurring basis at September 30, 2008:

 
| ** **              | ** ** | ** ** | ** ** | **Fair Value Measurements at September 30, 2008 Using**                        | ** ** |
|-------------------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **Totals** | ** ** | **Quoted   Prices in Active   Markets for   Identical Assets  (Level 1)** | ** ** | **Significant  Other  Observable  Inputs  (Level 2)** | ** ** | **Unobservable  Inputs  (Level 3)** | ** ** |
| Auction rate securities |       | $          | 2,900      |                                                                                                              | $          | — |   | $ | 2,900 |   | — |   |
| Fixed income securities |       | 500        |       | 500                                                                                                               |       | — |   | — |   |
| Money market funds (1)  |       | 15,168     |       | 15,168                                                                                                            |       | — |   | — |   |
| Commercial paper        |       | 1,500      |       | 1,500                                                                                                             |       | — |   | — |   |
|                    |       | $          | 20,068     |                                                                                                              | $          | 17,168 |   | $ | 2,900 |   | — |   |

 

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(1) Included in cash and cash equivalents in the accompanying condensedconsolidated balance sheet.

 

**6. Property and Equipment**

** **

Propertyand equipment as of September 30, 2008 and December 31, 2007consisted of the following:

 
| ** **                     | ** ** | **Estimated Useful  Life (Years)** | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                           |       |                                         |       |                         |       |                        |       |
| Computers and office equipment |       | 3                                            |       | $                            | 8,974      |                        | $          | 3,870 |   |
| Software                       |       | 3                                            |       | 5,125                        |       | 2,499                       |       |
| Demand response equipment      |       | Lesser  of useful life or contract term      |       | 9,210                        |       | 4,523                       |       |
| Back-up generators             |       | 5-10                                         |       | 11,037                       |       | 13,976                      |       |
| Furniture and fixtures         |       | 5                                            |       | 844                          |       | 777                         |       |
| Leasehold improvements         |       | Lesser  of the useful life or lease term     |       | 1,271                        |       | 902                         |       |
| Assets under capital lease     |       | Lesser  of the useful life or lease term     |       | 222                          |       | 200                         |       |
| Construction-in-progress       |       |                                         |       | 1,754                        |       | 833                         |       |
|                           |       |                                         |       |                         |       |                        |       |
|                           |       |                                         |       | 38,437                       |       | 27,580                      |       |
| Accumulated depreciation       |       |                                         |       | (9,986                       | )          | (4,385                      | )          |
|                           |       |                                         |       |                         |       |                        |       |
| Property and equipment, net    |       |                                         |       | $                            | 28,451     |                        | $          | 23,195 |   |

 

Depreciationexpense was $2,033 and $962, respectively, for the three months ended September 30,2008 and 2007.  Depreciation expense was $5,601 and $1,880, respectively,for the nine months ended September 30, 2008 and 2007.  For the threemonths ended September 30, 2008 and 2007, $797 and $468, respectively, wereincluded in cost of revenues and $1,236 and $494, respectively, were includedin general and administrative expenses.  For the nine months ended September 30,2008 and 2007, $2,352 and $978, respectively, were included in cost of revenuesand $3,249 and $902, respectively, were included in general and administrativeexpenses.

 

During the third quarterof 2008, the Company determined that specific generation equipment was impairedin accordance with the provisions of FASB Statement No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(FAS144). FAS 144 requires long-lived assets to be reviewed for impairment whencircumstances indicate the carrying amount of an asset may not be recoverablebased on the undiscounted future cash flows of the asset. If the carryingamount of the asset is determined not to be recoverable, a write-down to fairmarket value is recorded. For a portion of the Company’s generation equipment,the carrying value 

 

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exceeded the undiscounted future cash flows based uponits anticipated retirement dates. As a result, the Company recognized animpairment charge of $288 representing the difference between the generationequipments’ carrying value and fair market value.

 

Softwaredevelopment costs of $440 and $1,103, respectively, for the three and ninemonths ended September 30, 2008 have been capitalized in accordance withStatement of Position No. 98-1,*Accounting for the Cost of Computer Software Developed or Obtained for InternalUse*.  Capitalized software development costs for the three andnine months ended September 30, 2007 were $0 and $677,respectively.  The capitalized amounts are included as software inproperty and equipment at September 30, 2008 and December 31, 2007.Construction-in-progress consists principally of demand response equipment andback-up generators that have not been placed in service.Construction-in-progress at September 30, 2008 and December 31, 2007consisted of the following:

 
| ** **                | ** ** | **September 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Demand response equipment |       | $                            | 1,754      |                        | $          | 778 |   |
| Capitalized interest      |       | —                       |       | 55                          |       |
| Total                     |       | $                            | 1,754      |                        | $          | 833 |   |

 

**7.  FinancingArrangements**

** **

On August 5,2008, the Company and one of its subsidiaries entered into a $35,000 securedrevolving credit and term loan facility with Silicon Valley Bank(SVB), under which SVB will, among other things, make revolving credit andterm loan advances and issue letters of credit for the Company’saccount.  The interest on loans under the Company’s revolving creditloan will accrue at interest rates based upon either SVB’s prime rate orthe 30, 60 or 90-day LIBOR plus 2.25%, at the Company’s election.  The interest on the Company’s term loan willaccrue at SVB’S prime rate plus 0.50% or the 30, 60 or 90-day LIBOR plus 2.75%,at the Company’s election.  The term advance is payable in thirty-six consecutiveequal monthly installments of principal, calculated by SVB, based upon theamount of the term advance and an amortization schedule equal to thirty-sixmonths.  All unpaid principal and accruedinterest is due and payable in full on August 5, 2010, which is thematurity date.

 

TheCompany’s obligations under this credit facility are secured by all of theassets of the Company and its subsidiaries, excluding any intellectualproperty.  This 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,or suffer a changein control.  In addition, the Company isrequired to meet certain financial covenants customary with this type ofagreement, including maintaining a minimum specified tangible net worth and aminimum specified ratio of current assets to current liabilities.  Thiscredit facility contains customary events of default, including for paymentdefaults, breaches of representations, breaches of affirmative or negativecovenants, cross defaults to other material indebtedness, bankruptcy andfailure to discharge certain judgments. If a default occurs and is not curedwithin any applicable cure period or is not waived, the Company’s obligationsunder the credit facility may be accelerated. The Company was in compliance with all financial covenants at September30, 2008.

 

Asof September 30, 2008, unused availability under the revolving credit andterm loan facility totaled $30,558. Unless earlier payment is required by anevent of default, all principal and unpaid interest will be due and payable on August 5,2010. The Company is also required to pay an unused line fee on the dailyunused amount of its facility at a per annum rate of 0.25%. This creditfacility replaced the Company’s credit facility with BluecrestCapital, L.P. At September 30, 2008, the Company had borrowings of $4,442outstanding under the SVB credit and term loan facility.  Subsequent to September 30, 2008, the Companyborrowed $6,850 under the SVB credit facility to fund a letter of credit undera customer program, at which point the customer returned a cash deposit back tothe Company in the amount of $6,850.

 

**8. Commitments and Contingencies**

** **

TheCompany is subject to certain performance guarantee requirements under certaincustomer contracts and open market bidding program participation rules. TheCompany had deposits held by certain customers of $8,910 and $14,451, respectively atSeptember 30, 2008 and December 31, 2007. These amounts primarilyrepresent up-front payments required by customers to participate in certainprograms and ensure that the Company will deliver its committed capacityamounts. If the Company fails to meet its minimum enrollment requirements, aportion or all of the deposit may be forfeited. The Company assessed theprobability of default under these agreements and has determined it to beremote. Subsequent to September 30, 2008, the Company issued a letter of creditin the amount of $6,850 to replace a previous cash deposit in the same amount.

 

TheCompany is contingently liable under unused letters of credit. Restricted cashbalances in the amount of $1,894 and $3,018, respectively, collateralizecertain unused letters of credit at September 30, 2008 and December 31,2007.

 

InJune 2008, the Company entered into a sublease agreement pursuant to whichthe Company leased approximately 8,766 square feet of space located in SanFrancisco, California.  The Company will incur operating lease obligationsof approximately $83, $338, $346, $355 and $59, respectively, in 2008, 2009,2010, 2011 and 2012 under this sublease agreement.

 

InAugust 2008, the Company entered into an amended and restated leaseagreement for approximately 57,000 square feet of space for its corporateheadquarters located at 75-101 Federal Street, Boston, Massachusetts.  The Company will incur operating lease 

 

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obligationsof approximately $116, $1,803, $2,579, $2,636, $2,693, $2,750, and $1,389,respectively, in 2008, 2009, 2010, 2011, 2012, 2013 and 2014 under this leaseagreement.

 

InSeptember 2008, the Company entered into a lease agreement forapproximately 6,600 square feet of office space located in New York, New York.The Company will incur operating lease obligations of approximately $289, $304and $314, respectively, in 2009, 2010 and 2011 under this lease agreement.

 

**9. Stock-Based Compensation**

** **

*Stock Options*

* *

TheCompany’s Amended and Restated 2003 Stock Option and Incentive Plan and the2007 Employee, Director and Consultant Stock Plan (the Plans) provide for thegrant of incentive stock options, nonqualified stock options, restricted andunrestricted stock awards and other stock-based awards to eligible employees,directors and consultants of the Company. Options granted under the Plans areexercisable for a period determined by the Company, but in no event longer thanten years from the date of the grant. Options generally vest ratably over fouryears.

 

Inorder to estimate the fair value of options granted during the nine monthsended September 30, 2008 and September 30, 2007, the Company utilizedthe Black-Scholes option pricing model, utilizing the following assumptions(weighted averages based on grants during the period):

 
| ** **                         | ** ** | **Nine months ended** | ** ** |
|------------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **September  30, 2008**    | ** ** | **September  30, 2007** | ** ** |
| Risk-free interest rate            |       | 2.3-3.6                         | %          | 4.1-5.0 | % |
| Expected term of options, in years |       | 6.25                            |       | 6.25 |   |
| Expected annual volatility         |       | 87                              | %          | 87 | % |
| Expected dividend yield            |       | 0                               | %          | 0 | % |

 

Thecomponents of stock-based compensation expense are disclosed below:

 
| ** **                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September  30, 2008**     | ** ** | **September  30, 2007**    | ** ** | **September  30, 2008** | ** ** | **September  30, 2007** | ** ** |
| Stock option expense (employees)     |       | $                                | 2,207      |                            | $          | 1,247 |   | $ | 6,511 |   | $ | 3,044 |   |
| Stock option expense (non-employees) |       | 5                                |       | 82                              |       | 139 |   | 198 |   |
| Restricted stock                     |       | 296                              |       | 110                             |       | 740 |   | 217 |   |
| Executive common stock               |       | —                           |       | —                          |       | — |   | 2,300 |   |
| Total                                |       | $                                | 2,508      |                            | $          | 1,439 |   | $ | 7,390 |   | $ | 5,759 |   |

 

Thefollowing is a summary of the Company’s stock option activity as of September 30,2008 and the stock option activity for all stock option plans during the ninemonths ended September 30, 2008:

 
| ** **                          | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Number of  Shares  Underlying  Options**                   | ** ** | **Exercise Price  Per Share** | ** ** | **Weighted-Average  Exercise Price  Per Share** | ** ** | **Aggregate  Intrinsic  Value(1)** | ** ** |
|                                |       |                                                              |       |   |   |   |   |   |   |
| Outstanding at beginning of period  |       | 2,882,445                                                         |       | $ | 0.11-$48.54 |   | $ | 9.18 |   |   |   |
| Granted                             |       | 479,502                                                           |       |   |   | $ | 16.06 |   |   |   |
| Exercised                           |       | (524,007                                                          | )          |   |   | $ | 3.21 |   |   |   |
| Cancelled                           |       | (84,394                                                           | )          |   |   | $ | 14.33 |   |   |   |
|                                |       |                                                              |       |   |   |   |   |   |   |
| Outstanding at end of period        |       | 2,753,546                                                         |       | $ | 0.11-$48.54 |   | $ | 12.56 |   | $ | 12,692 |   |
| Remaining contractual life in years |       | 8.36                                                              |       |   |   |   |   |   |   |
| Exercisable at end of period        |       | 822,583                                                           |       | $ | 0.11-$48.54 |   | $ | 11.76 |   | $ | 4,805 |   |
| Remaining contractual life in years |       | 8.05                                                              |       |   |   |   |   |   |   |

 

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(1)  The aggregate intrinsicvalue was calculated based on the positive difference between the estimatedfair value of the Company’s common stock on September 30, 2008 of $10.34and the exercise price of the underlying options.

 

Ofthe stock options outstanding as of September 30, 2008, 33,971 optionswere held by non-employees and 2,719,575 options were held by employees. Theamount of unrecognized stock-based compensation expense that may be recognizedfor outstanding unvested options as of September 30, 2008 was $21,266,which is to be recognized over a weighted average period of 2.8 years. Theamount that may be recognized into expense over the next four years is asfollows:

 
| 2008   |   | $     | 2,052  |   |
|--------|--------|-------|--------|--------|
| 2009   |   | 8,020 |   |
| 2010   |   | 7,393 |   |
| 2011   |   | 3,502 |   |
| 2012   |   | 299   |   |
|   |   | $     | 21,266 |   |

 

Duringthe first quarter of 2008, certain of the Company’s executives elected to taketheir bonuses in shares of fully vested common stock.  The shares issuedtotaled 26,961 and had an approximate value of $844.

 

Duringthe second and third quarter of 2008, the Company granted fully vested optionsto certain members of its Board of Directors to purchase an aggregate of 46,451shares of its common stock, which had an estimated fair value of $597.

 

*Restricted Stock*

* *

Thefollowing table summarizes restricted stock activity during the three monthsended September 30, 2008:

 
| ** **                          | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** |
|-------------------------------------|------------|----------------------------|------------|-------------------------------------------------------------------------|------------|
| Unvested at December 31, 2007  |       | 152,460                    |       | $                                                                       | 0.51       |   |
| Granted                             |       | 177,500                    |       | $                                                                       | 15.52      |   |
| Vested                              |       | (41,084                    | )          | $                                                                       | 12.67      |   |
| Cancelled                           |       | (1,500                     | )          | $                                                                       | 13.76      |   |
|                                |       |                       |       |                                                                    |       |
| Unvested at September 30, 2008 |       | 287,376                    |       | $                                                                       | 14.04      |   |

 

Allshares underlying awards of restricted stock are restricted in that they arenot transferable until they vest. The shares typically vest ratably over a fouryear period from the date of issuance, with certain exceptions. The fair valueof the restricted stock is expensed ratably over the vesting period. The sharesof restricted stock have been issued at no cost to the recipients, except for152,460 shares of restricted stock granted in 2006 that were purchased for$0.51 per share. The Company records the proceeds received for unvested sharesin accrued expenses. The amount is amortized into additional paid-in capital asthe shares vest. If the employee who received the restricted stock leaves the Companyprior to the vesting date for any reason, the shares of restricted stock willbe forfeited and returned to the Company. For restricted stock at September 30,2008, the Company had $3,310 of stock-based compensation expense, which isexpected to be recognized over a weighted average period of 3.2 years.

 

**10. Income Taxes**

** **

Nocurrent provision for federal or state income taxes has been recorded, as theCompany has incurred cumulative net operating losses since inception.  TheCompany has recorded a deferred tax provision for $22 and $180, respectively, related to taxdeductible goodwill for the three and nine months ended September 30,2008.  Amounts due to various states for excise taxes are included ingeneral and administrative expenses, accrued expenses and other currentliabilities as of September 30, 2008 and December 31, 2007.

 

**11. Related Party Transactions**

** **

**Deferred Acquisition Payments**

** **

OnJune 1, 2005, the Company acquired all of the outstanding membershipinterests in PPDR from the sole member of PPDR (the Sole Member) in a purchasebusiness combination pursuant to a purchase agreement (the Purchase Agreement).Under the Purchase Agreement, the Company was required to (i) make fixedpayments of $5,925 and (ii) issue 303,001 shares of the Company’s 

 

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commonstock to the Sole Member. As part of the Purchase Agreement, the Companyacquired a demand response contract that contained a one-year option to extend,as of May 31, 2008, at the sole discretion of a certain customer. Ifexercised, the Company would have been obligated to make an additional paymentof $2,366 and issue an additional 28,287 shares of the Company’s common stockin connection with the Purchase Agreement. In February 2008, the customerinformed the Company that it elected not to exercise the one-year option toextend; therefore, no additional payments, including the contingentconsideration of $2,247, or shares will be due to the Sole Member. This amounthad been recorded as a liability at December 31, 2007 and was reversed,along with a corresponding reduction to intangible assets during the firstquarter of 2008.

 

InJune 2008, the Company made a final payment of $348 and issued 44,260shares of common stock to the Sole Member, which reduced the liability to zero.

 

**12. Industry Segment Information**

** **

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

 

Duringthe three and nine months ended September 30, 2008 and 2007, respectively,the Company had certain customers whose revenue individually represented 10% ormore of the Company’s total revenues as follows:

 
| ** ** | ** ** | **Three Months Ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** ** | ** ** | **Revenues**                                             | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| ** ** | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer 1 |       | $                                                        | 22,067     |   | 50.0 | % | $ | * |   | * |   |
| Customer 2 |       | 7,999                                                    |       | 18.1 | % | 12,717 |   | 66.4 | % |
| Customer 3 |       | *                                                        |       | * |   | 2,980 |   | 15.6 | % |
|       |       |                                                     |       |   |   |   |   |   |   |
| Total      |       | $                                                        | 30,066     |   | 68.1 | % | $ | 15,697 |   | 82.0 | % |

 
| ** ** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** ** | ** ** | **Revenues**                                            | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| ** ** | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Customer 1 |       | $                                                       | 29,580     |   | 34.2 | % | $ | * |   | * |   |
| Customer 2 |       | 27,490                                                  |       | 31.8 | % | 24,906 |   | 60.6 | % |
| Customer 3 |       | 12,036                                                  |       | 14.0 | % | 9,879 |   | 24.0 | % |
|       |       |                                                    |       |   |   |   |   |   |   |
| Total      |       | $                                                       | 69,106     |   | 80.0 | % | $ | 34,785 |   | 84.6 | % |

 

----

*Less than 10% of total revenues

 

**13. Legal Proceedings**

 

TheCompany is subject to legal proceedings, claims and litigation arising in theordinary course of business. The Company does not expect the ultimate costs toresolve these matters to have a material adverse effect on its consolidatedfinancial position, results of operations or cash flows. In addition toordinary-course litigation, the Company is a party to the litigation describedbelow.

 

InMarch 2008, three purported class action lawsuits were filed in the UnitedStates District Court for the District of Massachusetts (the Court) against theCompany, several of its officers and directors, and certain of the underwritersof the Company’s November 2007 follow-on public offering of its commonstock.  The three class action complaintshave been consolidated by the Court into a single action and an amendedconsolidated complaint was filed on September 24, 2008.  The defendants filed a motion to dismiss theamended consolidated complaint on October 27, 2008.  The motion to dismiss is expected to be fullybriefed by December 17, 2008, and a hearing on the motion is currentlyscheduled for January 6, 2009. The lead plaintiff in the consolidatedclass action claims to represent two purported classes: (i) an “ExchangeAct Class” consisting of persons who purchased shares of the Company’s commonstock from November 1, 2007 through February 27, 2008 and (ii) a“Securities Act Class” consisting of persons who purchased shares of theCompany’s common stock pursuant or traceable to the follow-on public offering.The lead plaintiff alleges, among other things, that the defendants made falseand misleading statements and failed to disclose material information invarious SEC filings and other public statements. The amended consolidated classaction complaint asserts, on behalf of the purported Securities Act Class,various claims under the Securities Act of 1933, as amended, against alldefendants and, on behalf of the purported Exchange Act Class, various claimsunder the Securities Exchange Act of 1934, as amended, and Rule 10b-5against the Company and the individual officer and director defendants. Theamended consolidated class action complaint seeks, among other relief, classcertification, unspecified damages, fees, and such other relief as the Courtmay deem just and proper.

 

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In addition, on May 14, 2008, a complaint was filed derivativelyon behalf of the Company in the United States District Court for the Districtof Massachusetts against several of the Company’s officers and directors andcertain of the underwriters of the Company’s follow-on public offering. The derivative complaint alleges various common law and equitable claims,including, among other things, breach of fiduciary duty, gross mismanagement,abuse of control, waste of corporate assets and unjust enrichment, inconnection with purported false and misleading statements and failures todisclose material information in certain SEC filings and other publicstatements from November 1, 2007 to May 14, 2008.  Thederivative plaintiff seeks, among other relief, unspecified damages, injunctiverelief, restitution, disgorgement, fees and such other relief as the Court maydeem proper.  On August 12, 2008, the Court stayed the Company’sobligation to respond to the derivative complaint pending a denial, if any, ofthe defendants’ motion to dismiss the amended consolidated class actioncomplaint.

 

The Company believes that it and the other defendants have substantiallegal and factual defenses to the claims and allegations contained in theamended consolidated class action and derivative suit complaints, and theCompany intends to pursue these defenses vigorously. There can be no assurance,however, that the Company will be successful, and an adverse resolution of anyof the lawsuits could have a material adverse effect on the Company’sconsolidated financial position and results of operations in the period inwhich a lawsuit is resolved. In addition, although the Company carries insurancefor these types of claims, a judgment significantly in excess of the Company’sinsurance coverage could materially and adversely affect the Company’sfinancial condition, results of operations and cash flows. The Company is notpresently able to reasonably estimate potential losses, if any, related to thelawsuits.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

 

*The following discussion should be read inconjunction with our unaudited financial statements and related notes theretoincluded elsewhere in this Quarterly Report on Form 10-Q, as well as theaudited financial statements and notes thereto and Management’s Discussion andAnalysis of Financial Condition and Results of Operations for the fiscal yearended December 31, 2007, included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, as filed with the Securitiesand Exchange Commission, or the SEC, on March 28, 2008. This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. Without limiting theforegoing, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,”“anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “target”and variations of these terms or the negatives of those terms and similarexpressions are intended to identify forward-looking statements. Allforward-looking statements included in this Quarterly Report on Form 10-Qare based on current expectations, estimates, forecasts and projections and thebeliefs and assumptions of our management including, without limitation, ourexpectations regarding our results of operations, selling and marketingexpenses, general and administrative expenses, research and development expenses,and the sufficiency of our cash for future operations. We assume no obligationto revise or update any such forward-looking statements. Our actual resultscould differ materially from those anticipated in these forward-lookingstatements as a result of certain important factors, including those set forthbelow under this Item 2 — “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations,” Part II, Item 1A — “RiskFactors” and elsewhere in this Quarterly Report on Form 10-Q, as well asin our Annual Report on Form 10-K for the fiscal year ended December 31,2007. You should carefully review those factors and also carefully review therisks outlined in other documents that we file from time to time with the SEC.*

 

**Overview**

 

We are a leading developer and provider of clean and intelligent energysolutions. We use our Network Operations Center, or NOC, to remotely manage andreduce electricity consumption across a network of commercial, institutionaland industrial customer sites to enable a more information-based andresponsive, or intelligent, electric power grid. Our customers are electricpower grid operators and utilities, as well as commercial, institutional andindustrial end-users of electricity. Our demand response and energy managementsolutions help optimize the balance of electric supply and demand and create alower risk and more environmentally sound alternative to building additionalpower plants and transmission lines.  Wereceive most of our revenues from grid operators and utilities that pay us astream of recurring cash flows for managing demand response capacity, whichrevenues we share with participating end-users of electricity for bothcontracting to reduce electricity usage and actually doing so when called upon.In doing so, we establish a base of installed users for an expanding portfolioof our technology-enabled energy management solutions.

 

Our customer base has grown from 19 commercial, institutional andindustrial customers with 70 sites in our network as of December 31, 2004to over 1,400 end-use customers for our demand response solutions with 3,400sites in our demand response network as of September 30, 2008. The demandresponse capacity we manage through our network has grown from 10 megawatts, orMW, as of December 31, 2004 to over 1,760 MW as of September 30,2008.    We continue to devote substantially all ofour efforts toward the sale of our demand response and energy managementsolutions. We have incurred cumulative net losses of $58.3 million frominception to September 30, 2008. Our net losses were $3.1 million and$24.5 million, respectively, for the three and nine months ended September 30,2008.

 

**Significant Recent Developments**

 

 In August 2008,we and a subsidiary of ours entered into a $35.0 million secured revolvingcredit and term loan facility with Silicon Valley Bank, whichprovides for, among other things, revolving credit and term loan advancesand letters of credit for our account. Our obligations under this creditfacility are secured by all of our assets and the assets of our subsidiaries,excluding any intellectual property. This credit facility replaced our creditfacility with Bluecrest Capital, L.P.

 

In October 2008,James L. Turner was elected to serve as a member of our board of directors.  In addition, Mr. Turner was appointed tothe nominating and governance committee of our board of directors.

 

**Revenues and Expense Components**

 

***Revenues***

 

We derive recurring revenues from the sale of our demand response andenergy management solutions. Our revenues from our demand response solutionsprimarily consist of capacity and energy payments. In certain markets, we enterinto long-term capacity contracts with grid operators and utilities, generallyranging from three to 10 years in duration, to deploy our demand responsesolutions. In addition, we derive revenues from demand response capacity thatwe make available in open market programs, which are open market biddingopportunities established by grid operators or utilities. In these open marketprograms, grid operators and utilities generally seek bids from companies suchas ours to provide demand response capacity based on prices offered incompetitive bidding. These opportunities are generally characterized byflexible capacity commitments and prices that vary by month.

 

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Where we have a long-term contract, we receive periodic capacitypayments, which may vary monthly or seasonally, based upon enrolled capacityand predetermined payment rates. Where we operate in open markets, our revenuesfrom demand response capacity payments generally vary month-to-month based uponour enrolled capacity and the market payment rate. Under both long-termcontracts and open market programs, we receive capacity payments regardless ofwhether we are called upon to reduce demand for electricity from the electricpower grid. We demonstrate our capacity either through a demand response event,a demand response test or an initial acceptance test. This demonstratedcapacity is typically used to calculate the continuing periodic capacitypayments 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; we call this an energy payment. The energy payment is based uponthe amount of energy usage that we actually reduce from the electricity grid inkilowatt hours during the demand response event.

 

Our energy management solutions include energy procurement serviceswhere we evaluate our end-use customers’ energy purchasing needs and assistthem in procuring more cost effective electricity. We receive a monthly feefrom the competitive electricity provider based upon the actual consumption ofelectricity used by our end-use customers. Demand response audits are serviceswhere we evaluate end-use customers’ energy utilization and operatingflexibility to determine potential savings opportunities from implementingdemand response, conserving energy and limiting peak demand. We receive a feefrom our electric grid operator and utility customers for each audit typicallybased upon a contractually specified rate times the amount of kilowatts, or kW,we identify that can be reduced from the electric power grid. We also use ourPowerTrak platform to deliver energy analytics and control and emissionstracking and trading support. We generally receive either a subscription-basedfee or a percentage savings fee for these energy management solutions.

 

In accordance with Staff Accounting Bulletin No. 104, RevenueRecognition, or SAB No. 104, in all of our arrangements, we do notrecognize any revenues until we can determine that persuasive evidence of anarrangement exists, services have been provided, the fee is fixed ordeterminable, and we deem collection to be probable. As program rules maydiffer for each contract and/or region where we operate, we assess whether ornot we have met the specific service requirements under the program rules andrecognize or defer revenues as necessary. In accordance with SAB No. 104,we recognize demand response revenues when we have provided verification to thegrid operator or utility of our ability to deliver the committed capacity underthe agreement or at the end of the service delivery period. Committed capacityis verified through the results of an actual demand response event, a demandresponse test or an initial acceptance test. Once the capacity amount has beenverified, revenues become fixed or determinable and are recognized over thedelivery service period. Under certain contracts and programs rules, if ourverified capacity is below the previously verified amount, the customer willreduce future payments based on the adjusted verified capacity amounts.Revenues recognized between demand response events or tests are not subject tocustomer refund.  Under certain contracts and programs, the period duringwhich we are required to perform may be shorter than the period over which wereceive payments under that contract or program.  In these cases, werecord revenue over the mandatory performance obligation period, and a portionof the revenue that has been earned is recorded and accrued as unbilledrevenue.

 

As of September 30, 2008, we had over 1,760 MW under management inour demand response network, meaning that we had entered into definitivecontracts with our commercial, institutional and industrial customers withrespect to over 1,760 MW of demand response capacity. In most of the markets inwhich we originally focused our growth, we generally begin earning revenuesfrom our MW under management within approximately one month from the date onwhich we “enable” the MW, or the date on which we can reduce the MW from theelectricity grid if called upon to do so. An exception is the PJMInterconnection, or PJM, forward capacity market, which is a market in which wematerially increased our participation during the first quarter of 2008 and inwhich we expect to continue to increase our participation and derive revenuesfor the foreseeable future. Because PJM operates on a June to May fiscalyear basis, a MW that we enable after June of each year may not beginearning revenue until June of the following year. This results in a longeraverage lag time in our portfolio from the point in time when we consider a MWto be under management to when we earn revenues from the MW.

 

Revenuesgenerated from two fixed price contracts with, and open market sales to, ISONew England Inc., or ISO-NE, a grid operator customer, accounted for 18.1% and31.8%, respectively, of our total revenues in each of the three and nine monthsended September 30, 2008. Specifically, an aggregate of 18.1% and 29.1%,respectively, of our total revenues for the three and nine months ended September 30,2008 were generated from open market sales to ISO-NE. For the three and ninemonths ended September 30, 2007, ISO-NE accounted for 66.4% and 60.6%,respectively, of our total revenues.  Ourtwo fixed price contracts with ISO-NE expired on May 31, 2008.  Inaddition, 7.7% and 14.0%, respectively, of our total revenuesfor the three and nine months ended September 30, 2008 were generatedunder a fixed price contract with The Connecticut Light and Power Company, orCL&P, which expires on December 31, 2008.  For the three and ninemonths ended September 30, 2007, CL&P accounted for 15.6% and 24.0%,

 

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respectively, of our total revenues.  Although we entered into anew 170 MW fixed price contract with CL&P in February 2008, which weexpected to partially offset the impact of the expiration of our fixed pricecontracts with ISO-NE and CL&P on our revenues, this new contract wasdenied regulatory approval by the Connecticut Department of Public UtilityControl, or the DPUC, in April 2008. We have enrolled a significantportion of the MW represented by our expired fixed price contracts with ISO-NE,and intend to enroll a significant portion of the MW represented by ourexpiring fixed price contract with CL&P, in other available demand responseprograms. These programs have provided, and could continue to providesignificantly lower capacity payments. For example, capacity payments currentlyavailable under ISO-NE’s Real-Time Demand Response program are significantlylower than the capacity payments available under our expired or expiring fixedprice contracts with ISO-NE and CL&P.

 

During the three and nine months ended September 30, 2008,revenues generated from open market sales to PJM, a grid operator customer,accounted for 50.0% and 34.2%, respectively, of our totalrevenues.

 

***Cost of Revenues***

 

Cost of revenues for our demand response solutions consists primarilyof payments that we make to our commercial, institutional and industrialcustomers for their participation in our demand response network. We generallyenter into one to five year contracts with our end-use customers under which wedeliver recurring cash payments to them for the capacity they commit to makeavailable on demand. We also generally make an additional payment when acustomer reduces consumption of energy from the electric power grid. Theequipment and installation costs for our devices at our commercial,institutional and industrial customer sites are capitalized and depreciatedover the lesser of the remaining term of the contract, for fixed contracts, orthe estimated useful life of the equipment and this depreciation is alsoreflected in cost of revenues. We also include the monthlytelecommunications/data costs we incur as a result of being connected to ourcommercial, institutional and industrial sites and our internal payroll andrelated costs specifically allocated to a customer site. Cost of revenues forenergy management solutions include the wages and associated benefits that wepay to our project managers for the performance of those services.

 

***Gross Profit***

 

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) thedemand for our demand response and energy management solutions, (b) theselling price of our solutions, (c) our cost of revenues, (d) theintroduction of new clean and intelligent energy solutions and (e) ourability to open and enter new markets/regions and expand deeper into markets wealready serve.

 

***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 eight employees at December 31, 2003 to 335 employeesat September 30, 2008. We expect to continue to hire employees to supportour growth for the foreseeable future. In addition, we incur significantup-front costs associated with the expansion of the number of MW under ourmanagement, which we expect to continue for the foreseeable future. Although weexpect our overall operating expenses to increase in absolute dollar terms forthe foreseeable future as we grow our MW under management and further increaseour headcount, 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, (b) commissions, (c) travel, lodging and otherout-of-pocket expenses, (d) marketing programs such as trade shows, and (e) otherrelated overhead. Commissions are recorded as an expense when earned by theemployee. We expect increases in selling and marketing expenses in absolutedollar terms for the foreseeable future as we further increase the number ofsales professionals and, to a lesser extent, increase our marketing activities.We expect annual selling and marketing expenses to decrease as a percentage oftotal annual revenues as we leverage our current sales and marketing personnel.

 

*General and Administrative*

 

General andadministrative expenses consist primarily of (a) salaries and relatedpersonnel costs, including costs associated with share-based payment awards,related to our executive, finance, human resource, information technology andoperations organizations, (b) facilities expenses, (c) accounting andlegal professional fees, and (d) other related overhead. We expect generaland administrative expenses to continue to increase in absolute dollar termsfor the foreseeable future as we invest in infrastructure to support continued growth and incuradditional expenses related to being a public company, including increasedaudit and legal professional fees, costs of compliance with securities andother regulations, investor relations expenses, and higher insurance premiums.  We expect general and administrative expensesto decrease as a percentage of total annual revenues as we leverage our currentinfrastructure and employee base.

 

*Research and Development*

 

Research and development expenses consist primarily of (a) salariesand related personnel costs, including costs associated with

 

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share-based payment awards, related to our engineering organization, (b) paymentsto suppliers for design and consulting services, (c) costs relating to thedesign and development of new solutions and enhancement of existing solutions, (d) qualityassurance and testing, and (e) other related overhead. During the threeand nine months ended September 30, 2008, we capitalized $0.4 million and$1.1 million, respectively, of software and development costs in accordancewith Statement of Position 98-1,*  Accounting for the Cost of Computer SoftwareDeveloped or Obtained for Internal Use,* and the amount is includedas software in property and equipment at September 30, 2008. During thenine months ended September 30, 2007, we capitalized software anddevelopment costs of $0.7 million. We intend to continue to invest in ourresearch and development efforts. We expect research and development expensesto increase in absolute dollar terms for the foreseeable future and to decreaseas a percentage of total revenues in the long term.

 

***Stock-BasedCompensation***

 

Effective as of January 1, 2006, we adopted the requirements ofStatement of Financial Accounting Standards (SFAS) No. 123R,*  Share BasedPayment* (SFAS No. 123(R)) using the modified prospectivemethod. SFAS No. 123(R) addresses all forms of share-based payment awards,including shares issued under employee stock purchase plans, stock options,restricted stock and stock appreciation rights. SFAS No. 123(R) requiresus to expense share-based payment awards with compensation cost for share-basedpayment transactions measured at fair value. For the three and nine monthsended September 30, 2008, we recorded expenses of approximately $2.5million and $7.4 million, respectively, in connection with share-based paymentawards to employees and non-employees. With respect to grants through September 30,2008, a future expense of non-vested options of approximately $21.3 million isexpected to be recognized over a weighted average period of 2.8 years and afuture expense of restricted stock awards of approximately $3.3 million isexpected to be recognized over a weighted average period of 3.2 years.

 

***Interest and OtherIncome***

 

Interest and other income consist primarily of interest income earnedon cash balances and other non-operating income. We historically have investedour cash in money market funds, municipal bonds and auction rate securities.

 

***Interest Expense***

 

Interest expense consists of interest on our debt facilities.

 

**Consolidated Results of Operations**

 

***Three and NineMonths Ended September 30, 2008 Compared to the Three and Nine MonthsEnded September 30, 2007***

 

***Revenues***

 

The following table summarizes our revenues for the three and ninemonths ended September 30, 2008 and 2007 (dollars in thousands):

 
| ** **                  | ** ** | **Three Months  Ended  September 30, 2008** | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Percentage  Change** | ** ** |
|-----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------|------------|
| Revenues:                   |       |                                                       |       |                                                       |       |                   |       |
| Demand response solutions   |       | $                                                          | 42,167     |                                                       | $          | 18,871                 |       | 123.5 | % |
| Energy management solutions |       | 1,985                                                      |       | 268                                                        |       | 640.7                  | %          |
| Total revenues              |       | $                                                          | 44,152     |                                                       | $          | 19,139                 |       | 130.7 | % |

 
| ** **                  | ** ** | **Nine Months  Ended  September 30, 2008** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** | **Percentage  Change** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------|------------|
| Revenues:                   |       |                                                      |       |                                                      |       |                   |       |
| Demand response solutions   |       | $                                                         | 81,643     |                                                      | $          | 40,502                 |       | 101.6 | % |
| Energy management solutions |       | 4,807                                                     |       | 624                                                       |       | 670.4                  | %          |
| Total revenues              |       | $                                                         | 86,450     |                                                      | $          | 41,126                 |       | 110.2 | % |

 

During thethree and nine months ended September 30, 2008, our demand responsesolutions revenues increased by $23.3 million and $41.1 million, respectively, fromthe same periods in 2007, of which $21.1 million and $28.1 million,respectively, resulted from our participation in PJM’s Emergency Load ResponseProgram, or ELRP. During the three and nine months ended September 30, 2007, werecognized revenues of $0.8 million and $1.1 million, respectively, from ourparticipation in the ELRP.  We had over500 megawatts enrolled in the ELRP during the three and nine months ended September 30,2008 and recognize capacity-based revenue from the ELRP over its deliveryperiod of June through September.  Theremainder of the increase in our demand response solutions revenues during thethree and nine months ended September 30, 2008 resulted from an increase in ourMW under management in certain other operating areas, our expansion into newmarkets and programs, and energy payments in connection with a certain demandresponse event, offset by the expiration of our fixed price contracts withISO-NE and a reduction in energy payments due to fewer demand response eventsbeing called as compared to the same periods in 2007.

 

During the three and nine months ended September 30, 2008, ourenergy management solutions revenues

 

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increased by $1.7 million and $4.2 million, respectively, from the sameperiods in 2007.  Approximately $1.5million and $3.6 million, respectively, of this increase resulted from ouracquisitions of Mdenergy, LLC, or MDE, an energy procurement services provider,and South River Consulting, LLC, or SRC, an energy procurement and risk managementservices provider.  The remainder of theincrease in our energy management solutions revenues during the three and ninemonths ended September 30, 2008 resulted from end-use customers continuing toutilize our energy procurement services offering, under which offering weevaluate our end-use customers’ energy purchasing needs and assist them inprocuring more cost effective electricity, and from revenues we received fromour demand response audits, pursuant to which we evaluate end-use customers’ energyutilization and operating flexibility to determine potential savingsopportunities from implementing demand response, conserving energy and limitingpeak demand.

 

We currently expect our revenues to increase in 2008 compared to 2007as we seek to further increase our MW under management in all operatingregions, including PJM where we currently have over 500 MW enrolled in theELRP, enroll new end-use customers in our demand response programs, continue tosell our energy management solutions to our new and existing demand responsecustomers and pursue more favorable pricing opportunities. Although we expectour annual revenues to increase in 2008 as compared to 2007, we currentlyexpect that revenues for the fourth quarter of 2008 will be comparable to thesame period in 2007 and will be significantly lower than the third quarter of2008, primarily as a result of our recognizing capacity-based revenue from theELRP over its delivery period of June through September.  We currently see a trend of increasedrevenues in our second and third fiscal quarters compared to other quarters inour fiscal year due to seasonal demand related to the demand response market.

 

***Gross Profit andGross Margin***

 

The following tables summarize our gross profit and gross margin percentagesfor our demand response and energy management solutions for the three and ninemonths ended September 30, 2008 and 2007 (dollars in thousands):

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                                 | ** ** | **2007** | ** ** |
| ** **                  | ** ** | **Gross Profit**                                    | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| Demand response solutions   |       | $                                                        | 16,755     |   | 39.7 | % | $ | 7,614 |   | 40.3 | % |
| Energy management solutions |       | 1,605                                                    |       | 80.9 | % | 267 |   | 99.9 | % |
|                        |       |                                                     |       |   |   |   |   |   |   |
| Total                       |       | $                                                        | 18,360     |   | 41.6 | % | $ | 7,881 |   | 41.2 | % |

 
| ** **                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| ** **                  | ** ** | **Gross Profit**                                   | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| Demand response solutions   |       | $                                                       | 29,799     |   | 36.5 | % | $ | 14,396 |   | 35.5 | % |
| Energy management solutions |       | 3,903                                                   |       | 81.2 | % | 498 |   | 79.7 | % |
|                        |       |                                                    |       |   |   |   |   |   |   |
| Total                       |       | $                                                       | 33,702     |   | 39.0 | % | $ | 14,894 |   | 36.2 | % |

 

Our gross profit increased during the three and nine months ended September 30,2008 when compared to the same periods in 2007 primarily due to our increasedparticipation in the ELRP, under which we recognize capacity-based revenue overthe four-month delivery period of June through September, as well as tothe increase in our MW under management in other operating regions and morefavorable contract terms with our commercial, institutional and industrialcustomers. Our gross margin increased during the three and nine months endedSeptember 30, 2008 when compared to the same periods in 2007 due to our highergross margin energy management services business comprising a greaterpercentage of our overall revenues. In 2008, we expect our gross marginpercentage to increase as we seek to sell higher gross margin energy managementsolutions to our existing demand response customers and seek to achieve morefavorable contract terms with our commercial, institutional and industrialcustomers.

 

***Operating Expenses***

 

The following tables summarize our operating expenses for the three andnine months ended September 30, 2008 and 2007 (dollars in thousands):

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2008**                                                 | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Operating Expenses:                 |       |                                                     |       |           |       |   |   |
| Selling and marketing expenses      |       | $                                                        | 8,202      |           | $          | 4,362 |   | 88.0 | % |
| General and administrative expenses |       | 11,736                                                   |       | 6,699          |       | 75.2 | % |
| Research and development expenses   |       | 1,195                                                    |       | 985            |       | 21.3 | % |
| Total                               |       | $                                                        | 21,133     |           | $          | 12,046 |   | 75.4 | % |

 
| ** **                          | ** ** | **Nine Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2008**                                                | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Operating Expenses:                 |       |                                                    |       |           |       |   |   |
| Selling and marketing expenses      |       | $                                                       | 20,949     |           | $          | 11,840 |   | 76.9 | % |
| General and administrative expenses |       | 34,217                                                  |       | 18,036         |       | 89.7 | % |
| Research and development expenses   |       | 3,627                                                   |       | 1,824          |       | 98.8 | % |
| Total                               |       | $                                                       | 58,793     |           | $          | 31,700 |   | 85.5 | % |

 

 

 

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Personnel-related costs are the most significant component of each ofthese expense categories, including costs associated with share-based paymentawards. We grew from 207 employees at September 30, 2007 to 335 employeesat September 30, 2008. By the end of 2008, we expect to increase ourheadcount by approximately 35% to 45% over headcount at the end of 2007, whenwe had 253 employees, and we expect to continue to hire employees to supportour growth for the foreseeable future. In addition, we incur significant up-front costs associated with theexpansion of the number of MW under our management, which we expect to continuefor the foreseeable future. Although we expect our overall operating expensesto increase in absolute dollar terms for the foreseeable future as we grow ourMW under management and further increase our headcount, we expect our overalloperating expenses to decrease as a percentage of total annual revenues as weleverage our existing employee base and continue generating revenues from ourMW under management.

 

In certain forward capacity markets in which we choose to participate,such as PJM, we may enable our commercial, institutional and industrialcustomers up to twelve months in advance of enrolling them in a particularprogram. This market feature creates a longer average lag time across ourportfolio from the point in time when we consider a MW to be under managementto when we earn revenues from such MW. Because we incur selling and marketingand operational expenses, including salaries and related personnel costs, atthe time of enrollment, we believe there may be a trend of higher up-frontcosts than we have incurred historically.

 

***Selling andMarketing Expenses***

 
| ** **                | ** ** | **Three Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2008**                                                 | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                        | 6,053      |           | $          | 2,638 |   | 129.5 | % |
| Stock-based compensation  |       | 946                                                      |       | 559            |       | 69.2 | % |
| Other                     |       | 1,203                                                    |       | 1,165          |       | 3.3 | % |
| Total                     |       | $                                                        | 8,202      |           | $          | 4,362 |   | 88.0 | % |

 
| ** **                | ** ** | **Nine Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2008**                                                | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                       | 15,221     |           | $          | 7,957 |   | 91.3 | % |
| Stock-based compensation  |       | 2,656                                                   |       | 1,250          |       | 112.5 | % |
| Other                     |       | 3,072                                                   |       | 2,633          |       | 16.7 | % |
| Total                     |       | $                                                       | 20,949     |           | $          | 11,840 |   | 76.9 | % |

 

The increasein selling and marketing expenses primarily related to an increase in thenumber of selling and marketing employees from 70 at September 30, 2007 to108 at September 30, 2008.  Duringthe three and nine months ended September 30, 2008 and in connection withour revised sales commission policy, selling and marketing expenses related tothe payment of up-front commission fees to certain of our selling and marketingemployees decreased as compared to the same periods in 2007, which decrease wasoffset by an increase in the number of selling and marketing employees and anincrease in the base salaries of certain of these employees.

 

***General andAdministrative Expenses***

 
| ** **                | ** ** | **Three Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2008**                                                 | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                        | 5,805      |           | $          | 3,005 |   | 93.2 | % |
| Stock-based compensation  |       | 1,406                                                    |       | 772            |       | 82.1 | % |
| Other                     |       | 4,525                                                    |       | 2,922          |       | 54.9 | % |
| Total                     |       | $                                                        | 11,736     |           | $          | 6,699 |   | 75.2 | % |

 
| ** **                | ** ** | **Nine Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2008**                                                | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                       | 15,162     |           | $          | 6,510 |   | 132.9 | % |
| Stock-based compensation  |       | 4,348                                                   |       | 4,295          |       | 1.2 | % |
| Other                     |       | 14,707                                                  |       | 7,231          |       | 103.4 | % |
| Total                     |       | $                                                       | 34,217     |           | $          | 18,036 |   | 89.7 | % |

 

The increase in general and administrative expenses primarily relatedto an increase in general and administrative employees, including employees inour operations group, from 106 at September 30, 2007 to 183 at September 30,2008.  A portion of the increase ingeneral and administrative expenses was also attributable

 

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to greater costs associated with being a public company.  Included within the 2007 stock-basedcompensation amounts is $2.3 million in compensation expense associated with agrant that we made to certain of our executives which was recognized in full ascompensation expense during these respective periods.  The increase in other of $7.5 million for thenine months ended September 30, 2008 was the result of increases in severalareas, the most significant of which are depreciation of $2.3 million,occupancy of $0.8 million, telecommunication services of $0.7 million, travelof $0.8 million, professional services of $1.7 million and $1.2 million ofmiscellaneous items.

 

***Research andDevelopment Expenses***

 
| ** **                | ** ** | **Three Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2008**                                                 | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                        | 939        |           | $          | 757 |   | 24.0 | % |
| Stock-based compensation  |       | 156                                                      |       | 108            |       | 44.4 | % |
| Other                     |       | 100                                                      |       | 120            |       | (16.7 | )% |
| Total                     |       | $                                                        | 1,195      |           | $          | 985 |   | 21.3 | % |

 
| ** **                | ** ** | **Nine Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|---------------------------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2008**                                                | ** ** | **2007**       | ** ** | **Change** | ** ** |
| Payroll and related costs |       | $                                                       | 2,944      |           | $          | 1,320 |   | 123.0 | % |
| Stock-based compensation  |       | 386                                                     |       | 214            |       | 80.4 | % |
| Other                     |       | 297                                                     |       | 290            |       | 2.4 | % |
| Total                     |       | $                                                       | 3,627      |           | $          | 1,824 |   | 98.8 | % |

 

The increase in research and development expenses primarily related toan increase in the number of research and development employees from 31 at September 30,2007 to 44 at September 30, 2008.

 

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

 

Net interest and other expense was $0.3 million for the three monthsended September 30, 2008, compared to net interest and other income of$1.6 million for the three months ended September 30, 2007.  Netinterest and other income was $0.8 million for the nine months ended September 30,2008, compared to net interest and other income of $2.3 million for the ninemonths ended September 30, 2007.

 

Interest and other income in the three months ended September 30,2008 was $0.3 million as compared to $1.7 million as of September 30,2007.  The decrease was primarily due to a downturn in overall marketconditions, which has reduced the yields on our investments.  For the ninemonths ended September 30, 2008, interest and other income was $1.9million compared to $2.5 million for the nine months ended September 30,2007.

 

Interest expense for the three months ended September 30, 2008 was$0.6 million compared to $0.1 million for the same period in 2007.  Forthe nine months ended September 30, 2008, interest expense was $1.1million compared to $0.3 million for the nine months ended September 30,2007.  The increases were primarily due to the write off of $0.4 millionin deferred financing fees associated with our Bluecrest Capital, L.P. debt,which was replaced in August 2008 with our revolving credit and term loanfacility with SVB, and amounts incurred in conjunction with the debtarrangement with SVB that we entered into in August 2008.

 

***Income Taxes***

 

We had a provision for income taxes of $0.1 million and $0.2million, respectively, for the three and nine months ended September 30,2008.  There was no provision for the three and nine months ended September 30,2007. The provision for the three and nine months ended September 30, 2008relates to the amortization of tax deductible goodwill, which generates adeferred tax liability that cannot be offset by net operating losses or otherdeferred tax assets since its reversal is considered indefinite in nature. Weprovided a full valuation allowance for our deferred tax assets because therealization of any future tax benefits could not be sufficiently assured as of September 30,2008.

 

**Liquidity and Capital Resources**

 

***Overview***

 

Revenues generated from two fixed price contracts with, and open marketsales to, ISO-NE accounted for 18.1% and 31.8%, respectively, of our totalrevenues for the three and nine months ended September 30, 2008.  Forthe three and nine months ended September 30, 2007, ISO-NE accounted for66.4% and 60.6%, respectively, of our total revenues. Specifically, anaggregate of 18.1% and 29.1%, respectively, of our total revenues for the threeand nine months ended September 30, 2008 were generated from open marketsales to ISO-NE.  Our two fixed pricecontracts with ISO-NE expired on May 31, 2008.  In addition, 7.7% and14.0%, respectively, of our total revenues for the three and nine months ended September 30,2008 were generated under a fixed price contract with CL&P, which expireson December 31, 2008. For the three and nine months ended September 30,2007, CL&P accounted for 15.6% and 24.0%, respectively, of our totalrevenues. We do not currently expect the expiration of our fixed pricecontracts with ISO-NE and CL&P to have a material impact on our liquidity.

 

During the three and nine months ended September 30, 2008, revenuesgenerated from open market sales to PJM, a grid operator customer, accountedfor 50.0% and 34.2%, respectively, of our total revenues.  Under certain contracts and programs, such asPJM’s ELRP, the period during which we are required to perform may be shorterthan the period over which we receive payments under that contract orprogram.  In these cases, we recordrevenue over the mandatory performance obligation period, and a portion of therevenues that has been earned is recorded and accrued as unbilled revenue.  Our unbilled revenues of $18.6 million atSeptember 30, 2008 will be collected through May 31, 2009.

 

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As of September 30, 2008, we had cash, cash equivalents, andmarketable securities totaling $58.2 million, of which $53.3 millionrepresented cash and cash equivalents, a decrease of $27.5 million from the December 31,2007 balance of $85.7 million.  This decrease includes the effect ofposting $8.9 million of financial assurances to satisfy certain demand responsemarket requirements.  As of September 30, 2008, we had restrictedcash of $1.9 million and financial assurance deposits of $8.9 million, totaling$10.8 million compared to $17.5 million as of December 31, 2007, adecrease of $6.7 million primarily due to the release of deposits during thesecond quarter of 2008.  As we fulfill our obligations and enroll capacityin certain markets, a portion or all of these deposits will be released. We believe that our existing cash and cash equivalents and marketablesecurities at September 30, 2008, our anticipated net cash flows fromoperating activities and amounts available under our credit and term loanfacility with SVB will be sufficient to meet our anticipated cash needs,including investing activities, for at least the next 24 months.

 

Our investments in securities include auction-rate securities, or ARS,and state and municipal bonds. The securities we typically invest in areAAA-rated government-backed securities with interest rates typically rangingfrom 6.5% to 6.8% that have approximate contractual maturities of at least26 years. However, because of the short-term nature of our investment inthese ARS, they have been classified as available-for-sale and included inshort-term investments on our accompanying condensed consolidated balancesheet. Our holdings of ARS as of September 30, 2008 and December 31,2007 were $2.9 million and $5.6 million, respectively.  As of September 30, 2008, we had $2.9million par value ARS that were subject to failed auctions, and none of the ARSsucceeded in an auction during the nine months ended September 30, 2008 orsubsequent to September 30, 2008.  As a result of these failedauctions, we have had the potential to benefit from a penalty feature in ourinterest rates, which allows us to earn an additional 5.1% to 14.0% of intereston these securities until the next auction, or until we sell the ARS, if we areable to do so.  We will not be able to liquidate the investments until asuccessful auction occurs, a buyer is found outside the auction process, thesecurities are called or refinanced by the issuer, or the securitiesmature.  We believe that the issuers of the securities are currently ableand will continue to make interest payments at the maximum rate.  Our ARS are managed by Morgan Stanley &Co. Incorporated, or Morgan. In November 2008, we agreed to tender our $2.9million of ARS to Morgan pursuant to an agreement dated September 30,2008.  The agreement permits us to sellour ARS to Morgan at par value, plus accrued interest, any time prior to theacceptance of the tender by Morgan. Morgan will begin accepting the tender of eligible securities onNovember 1, 2008 and the acceptance date will be the business day immediatelyprior to the next interest payment date, subsequent to the date the ARS areactually tendered.  The investments wereclassified as current assets in our accompanying condensed consolidated balancesheet as of September 30, 2008 as we believe that we will be able toliquidate these securities at par value within one year.

 

We are contingently liable under unused letters of credit. Included inthe September 30, 2008 and December 31, 2007 restricted cash balancesare amounts used to collateralize unused letters of credit in the amount of$1.9 million and $3.0 million, respectively.

 

***Cash Flows***

 

The following table summarizes our cash flows for the nine months endedSeptember 30, 2008 and 2007 (dollars in thousands):

 
| ** **                                             | ** ** | **Nine Months   Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Cash flows used in operating activities                |       | $                                                    | (14,482    | ) | $ | (6,591 | ) |
| Cash flows used in investing activities                |       | (1,344                                               | )          | (35,121 | ) |
| Cash flows (used in) provided by financing  activities |       | (1,148                                               | )          | 106,318 |   |
| Net (decrease) increase in cash and cash  equivalents  |       | $                                                    | (16,974    | ) | $ | 64,606 |   |

 

***Cash Flows Used inOperating Activities***

 

Cash used in operating activities primarily consists of net income(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 used in operating activities in the nine months ended September 30,2008 was $14.5 million and consisted of a $24.5 million net loss and $4.8million of net cash used for working capital purposes and other activitiespartially offset by $14.8 million of non-cash items, consisting primarily ofdepreciation and amortization, impairment of fixed assets, interest expense, adeferred tax

 

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liability and stock-based compensation charges. Cash used for workingcapital and other activities primarily reflected a $18.6 million increase inunbilled revenues relating to the PJM demand response market, a $5.3 millionincrease in trade accounts receivable and a $2.2 million decrease in deferredrevenues. These amounts were partially offset by a $15.6 million increase inaccrued capacity payments, the majority of which was related to the PJM demandresponse market, an increase of $4.1 million in payroll and related expenses,an increase of $1.1 million in accounts payable and accrued expenses, and anincrease of $0.5 million in other noncurrent liabilities.

 

Cash used in operating activities in the nine months ended September 30,2007 was $6.6 million and consisted of a $14.5 million net loss and $1.5million of net cash used for working capital and other activities partiallyoffset by $9.4 million of non-cash items, consisting primarily of depreciation,amortization, interest expense and stock-based compensation charges. Cash usedfor working capital and other activities primarily reflected a $7.6 millionincrease in accounts receivable, a $1.3 million increase in other noncurrentliabilities, a decrease of $1.2 million in other noncurrent assets, and a $0.5million increase in prepaid and other current assets. These amounts werepartially offset by an increase in accrued capacity payments of $4.5 million,an increase of $1.4 million in accrued payroll and related expenses, a $1.5million increase in accounts payable and accrued expenses and an increase of$1.7 million in deferred revenues.

 

***Cash Flows Used inInvesting Activities***

 

Cash used ininvesting activities was $1.3 million for the nine months ended September 30,2008. For the nine months ended September 30, 2008, purchases ofavailable-for-sale securities were approximately $12.1 million and salesof available-for-sale maturities were $22.7 million.  Our principal cashinvestments related to installation services used to build out and expand ourdemand response programs, purchases of property and equipment, the cashportion earn-out for our acquisition of MDE of $3.4 million, and $3.8 millionof the cash used for our acquisition of SRC. During the nine months ended September 30, 2008, we decreased ourrestricted cash and deposits for customer programs by $6.7 million. During the nine months ended September 30, 2008, we incurred $11.1 million incapital expenditures primarily related to office equipment, demand responseequipment and other miscellaneous expenditures.

 

For the nine months ended September 30, 2007, cash used ininvesting activities was $35.1 million. Our principal cash investments during this period related to purchasesof equipment of $15.7 million, the cash portion of the purchase price for ouracquisition of all the membership interests of Pinpoint Power DR LLC of $1.5million, and the cash portion of our acquisition of all the membershipinterests of MDE of $3.4 million.  Forthe nine months ended September 30, 2007, purchases of available-for-salesecurities were approximately $15.0 million and sales ofavailable-for-sale securities were $2.4 million.

 

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

 

Cash flows used in financing activities were $1.1 million for the ninemonths ended September 30, 2008. Cash flows provided by financingactivities were $106.3 million for the nine months ended September 30,2007. Cash flows (used in) provided by financing activities consisted of thefollowing:

 

*Equity Financing Activities*

 

In January 2007, we raised $10.0 million of proceeds through salesof our Series C Convertible Preferred Stock.

 

In February 2007, we repurchased 104,393 shares of our commonstock for $0.4 million.

 

In May 2007, we completed an IPO of 4,312,500 shares of commonstock at a price of $26.00 per share, which included the exercise of theunderwriters’ over-allotment option to purchase 562,500 shares and the sale of225,000 shares by certain of our stockholders. Net proceeds to us from theoffering were approximately $95.2 million.

 

In addition, we received approximately $0.4 million and $0.1 million,respectively, from exercises of common stock options during the nine monthsended September 30, 2008 and September 30, 2007.

 

*Credit Facility Borrowings*

 

During the nine months ended September 30, 2008, we made scheduledpayments on our outstanding debt and capital lease obligations of $1.5 millionand refinanced $4.4 million of our debt through borrowings of $4.4 millionunder our new credit and term loan facility with SVB.   During the nine months ended September 30, 2007, we borrowed $2.5million under our then effective loan and security agreement with BluecrestCapital Partners L.P. and made scheduled payments on our outstanding debt andcapital lease obligations of $1.0 million. Subsequent to September 30,2008, we borrowed approximately $6.9 million under the SVB credit facility tofund a letter of credit under a customer program, at which point the customerreturned a cash deposit back to us in the amount of approximately $6.9 million.

 

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**Capital Spending**

 

We have made capital expenditures primarily for general corporatepurposes to support our growth and for equipment installation related to ourdemand response programs. Our capital expenditures totaled $11.1 million and$15.7 million, respectively, for the nine months ended September 30, 2008and 2007.  We expect our capitalexpenditures for the remainder of the year to remain consistent with amountsspent during the first nine months of 2008.

 

**Contractual Obligations**

 

In June 2008, we entered into a sublease agreement pursuant towhich we leased approximately 8,766 square feet of space located in SanFrancisco, California.  We will incur operating lease obligations ofapproximately $0.1 million, $0.3 million, $0.3 million, $0.4 million and $0.1million, respectively, in 2008, 2009, 2010, 2011 and 2012 under this subleaseagreement.

 

In August 2008, we and one of our subsidiaries entered into a $35.0million secured revolving credit and term loan facility with SVB, under whichSVB will, among other things, make revolving credit and term loan advances andissue letters of credit for our account. The SVB credit facility replaced our credit facility with BluecrestCapital, L.P.  As of September 30, 2008,we had borrowings of approximately $4.4 million outstanding under the SVBcredit and term loan facility.

 

In August 2008, we entered into an amended and restated leaseagreement for approximately 57,000 square feet of space for our corporateheadquarters located at 75-101 Federal Street, Boston, Massachusetts.  We will incur operating lease obligations ofapproximately $0.1 million, $1.8 million, $2.6 million, $2.7 million, $2.7million, $2.8 million and $1.4 million, respectively, in 2008, 2009, 2010,2011, 2012, 2013 and 2014 under this lease agreement.

 

In September 2008, we entered into a lease agreement for approximately6,600 square feet of office space located in New York, New York. We will incuroperating lease obligations of approximately $0.3 million, $0.3 million and$0.3 million, respectively, in 2009, 2010 and 2011 under this lease agreement.

 

Other than as set forth above, as of September 30, 2008, ourcontractual obligations disclosure contained in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, which we filed with the SECon March 28, 2008, has not materially changed.

 

**Off-Balance Sheet Arrangements**

 

We have no off-balance sheet arrangements other than letters of creditissued in the ordinary course of business.

 

**Critical Accounting Policies and Use ofEstimates**

 

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

 

**Item 3.  Quantitative and QualitativeDisclosures About Market Risk.**

 

***Foreign ExchangeRisk***

 

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

 

***Interest Rate Risk***

 

As of September 30, 2008, all of our $4.6 million of outstandingdebt was at fixed interest rates; therefore, there was no significant impactfrom changes in interest rates.

 

The recent market events have not required us to materially modify orchange our financial risk management strategies with respect to our exposure tointerest rate risk.

 

We manage our cash and cash equivalents and marketable securitiesportfolio considering investment opportunities and risks, tax consequences andoverall financing strategies. Our investment portfolio consists primarily ofcash and cash equivalents, money market funds, commercial paper and municipalauction rate securities with carrying amounts approximating market value. Asour investments are made with highly rated municipal auction rate securitiesand short-term securities, we are not anticipating any significant impact inthe short term from a change in interest rates.

 

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

 

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As of September 30, 2008, we had $2.9 million par value ARS thatwere subject to failed auctions, and none of the ARS succeeded in an auctionduring the nine months ended September 30, 2008 or subsequent to September 30,2008.  As a result of these failed auctions, we have had the potential tobenefit from a penalty feature in our interest rates, which allows us to earnan additional 5.1% to 14.0% of interest on these securities until the nextauction, or until we sell the ARS, if we are able to do so.  We will notbe able to liquidate the investments until a successful auction occurs, a buyeris found outside the auction process, the securities are called or refinancedby the issuer, or the securities mature. We believe that the issuers of the securities are currently able andwill continue to make interest payments at the maximum rate.  Our ARS are managed by Morgan.  In November 2008, we agreed to tender our$2.9 million of ARS to Morgan pursuant to an agreement dated September 30,2008.  The agreement permits us to sellour ARS to Morgan at par value, plus accrued interest, any time prior to theacceptance of the tender by Morgan. Morgan will begin accepting the tender of eligible securities onNovember 1, 2008 and the acceptance date will be the business day immediatelyprior to the next interest payment date, subsequent to the date the ARS areactually tendered.  The investments wereclassified as current assets in our accompanying condensed consolidated balancesheet as of September 30, 2008 as we believe that we will be able toliquidate these securities at par value within one year.

 

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

 

***Evaluation ofDisclosure Controls and Procedures***

 

Our management, with the participation of our chief executive officerand chief financial officer, evaluated the effectiveness of our disclosurecontrols and procedures as of September 30, 2008. The term “disclosurecontrols and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, or the Exchange Act, meanscontrols and other procedures of a company that are designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is recorded, processed, summarized and reported, withinthe time periods specified in the SEC’s rules and forms. Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by a company inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the company’s management, including its principal executive andprincipal financial officers as appropriate to allow timely decisions regardingrequired disclosure. Our management recognizes that any controls andprocedures, no matter how well designed and operated, can provide only reasonableassurance of achieving their objectives and management necessarily applies itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures. Based on the evaluation of our disclosure controls and proceduresas of September 30, 2008, our chief executive officer and chief financialofficer concluded that, as of such date, our disclosure controls and procedureswere effective at the reasonable assurance level.

 

***Internal Controlover Financial Reporting***

 

No change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act)occurred during the fiscal quarter ended September 30, 2008, which hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**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 financialposition, results of operations or cash flows. In addition to ordinary-courselitigation, we are a party to the litigation described below.

 

In March 2008, three purported class action lawsuits were filed inthe United States District Court for the District of Massachusetts, or theCourt, against us, several of our officers and directors, and certain of theunderwriters of our November 2007 follow-on public offering of our commonstock.  The three class action complaintshave been consolidated by the Court into a single action and an amendedconsolidated complaint was filed on September 24, 2008.  The defendants filed a motion to dismiss theamended consolidated complaint on October 27, 2008.  The motion to dismiss is expected to be fullybriefed by December 17, 2008, and a hearing on the motion is currentlyscheduled for January 6, 2009. The lead plaintiff in the consolidatedclass action claims to represent two purported classes: (i) an “ExchangeAct Class” consisting of persons who purchased shares of our common stock from November 1,2007 through February 27, 2008 and (ii) a “Securities Act Class”consisting of persons who purchased shares of the Company’s common stockpursuant or traceable to the follow-on public offering. The lead plaintiffalleges, among other things, that the defendants made false and misleadingstatements and failed to disclose material information in various SEC filingsand other public statements. The amended consolidated class action complaintasserts, on behalf of the purported Securities Act Class, various claims underthe Securities Act of 1933, as amended, or the Securities Act, against alldefendants and, on behalf of the purported Exchange Act Class, various claimsunder the Exchange Act and Rule 10b-5 against us and the individualofficer and director defendants. The amended consolidated class actioncomplaint seeks, among other relief, class certification, unspecified damages,fees, and such other relief as the Court may deem just and proper.

 

In addition, on May 14, 2008, a complaint was filed derivativelyon our behalf in the United States District Court for the District ofMassachusetts against several of the our officers and directors and certain ofthe underwriters of our follow-on public

 

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offering.  The derivative complaint alleges various common law andequitable claims, including, among other things, breach of fiduciary duty,gross mismanagement, abuse of control, waste of corporate assets and unjustenrichment, in connection with purported false and misleading statements andfailures to disclose material information in certain SEC filings and otherpublic statements from November 1, 2007 to May 14, 2008.  Thederivative plaintiff seeks, among other relief, unspecified damages, injunctiverelief, restitution, disgorgement, fees and such other relief as the Court maydeem proper.  On August 12, 2008, the Court stayed our obligation torespond to the derivative complaint pending a denial, if any, of the defendants’motion to dismiss the amended consolidated class action complaint.

 

We believe that we and the other defendants have substantial legal andfactual defenses to the claims and allegations contained in the amendedconsolidated class action and derivative suit complaints, and we will pursuethese defenses vigorously. There can be no assurance, however, that we will besuccessful, and an adverse resolution of any of the lawsuits could have amaterial adverse effect on our consolidated financial position and results ofoperations in the period in which a lawsuit is resolved. In addition, althoughwe carry insurance for these types of claims, a judgment significantly inexcess of our insurance coverage could materially and adversely affect ourfinancial condition, results of operations and cash flows. We are not presentlyable to reasonably estimate potential losses, if any, related to the lawsuits.

 

**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. Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007.  There are no materialchanges to the risk factors described in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007, other than changes set forthin our Quarterly Report on Form 10-Q for the quarterly period ended March 31,2008, Quarterly Report on Form 10-Q for the quarterly period ended June 30,2008, and the risk factors listed below. The risk factors listed below have been updated to reflect our expandedpresence in the PJM market, the seasonality of our business and our loan andsecurity agreement with SVB. Additional risks and uncertainties not presentlyknown to us, which we currently deem immaterial or which are similar to thosefaced by other companies in our industry or business in general, may alsoimpair our business operations.

 

***A substantialmajority of our revenues are generated from contracts with, and open marketsales to, a small number of grid operator and utility customers, and themodification or termination of these contracts or sales relationships couldmaterially adversely affect our business.***

 

During the three and nine months ended September 30, 2008,revenues generated from open market sales to PJM, a grid operator customer,accounted for 50.0% and 34.2%, respectively, of our totalrevenues.  The PJM forward capacitymarket is a market in which we materially increased our participation duringthe first quarter of 2008 and in which we expect to continue to increase ourparticipation and derive revenues for the foreseeable future.  The modification or termination of our salesrelationship with PJM could significantly reduce our future revenues and have amaterial adverse effect on our results of operations and financial position anddelay or prevent our future profitability.

 

Revenues generated from two fixed price contracts with, and open marketsales to ISO-NE, a grid operator customer, accounted for 18.1% and 31.8%,respectively, of our total revenues for the three and nine months ended September 30,2008.  Specifically, an aggregate of 18.1% and29.1%,respectively, of our total revenues for the three and nine months ended September 30,2008 were generated from open market sales to ISO-NE.  Our fixed price contracts with ISO-NE expiredon May 31, 2008.  We have enrolled a significant portion of theMW represented by our expired fixed price contracts with ISO-NE in ISO-NE’sReal-Time Demand Response program, however capacity payments currentlyavailable under this program are significantly lower than the capacity paymentswe received under our expired fixed price contracts with ISO-NE.  Additionally, other available demand responseprograms may provide lower capacity payments than ISO-NE’s Real-Time DemandResponse program.  The modification ortermination of our sales relationship with ISO-NE could therefore significantlyreduce our future revenues and have a material adverse effect on our results ofoperations and financial position and delay or prevent our futureprofitability.

 

In addition, 7.7% and 14.0%, respectively, of our total revenuesfor the three and nine months ended September 30, 2008 were generatedunder a fixed price contract with CL&P, a grid operator customer, whichexpires on December 31, 2008. Although we intend to enroll asignificant portion of the MW represented by this fixed price contract in otheravailable demand response programs, these other programs, including ISO-NE’sReal-Time Demand Response program, could provide significantly lower capacitypayments. Therefore, the expiration of our fixed price contract with CL&Pcould significantly reduce our future revenues and have a material adverseeffect on our results of operations and financial position and delay or preventour future profitability.

 

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***We depend on theelectric power industry for revenues and, as a result, our operating resultshave experienced, and may continue to experience, significant variability dueto volatility in electric power industry spending and other factors affectingthe electric utility industry, such as seasonality of peak demand.***

 

We currently derive substantially all of our revenues from the sale ofdemand response solutions, directly or indirectly, to the electric powerindustry. Purchases of our demand response solutions by grid operators orelectric utilities may be deferred or cancelled as a result of many factors,including mergers and acquisitions involving electric utilities, changingregulations or program rules, fluctuations in interest rates and increasedelectric utility capital spending on traditional supply-side resources. Inaddition, sales of capacity in open markets are particularly susceptible tovariability based on changes in the spending patterns of our grid operator andutility customers and on associated fluctuating market prices for capacity. Forexample, in February 2008, ISO-NE implemented a market rule change toits Day-Ahead Load Response program, a program in which we have historicallybeen an active participant. The change, which was approved by the FederalEnergy Regulatory Commission, or the FERC, in April 2008, would result inless opportunity for demand response to participate in this program and maynegatively impact our revenues and could delay or prevent our profitability.

 

In addition, peak demand for electricity and other capacity constraintstend to be seasonal. Peak demand in the United States tends to be most extremein warmer months, which may lead some capacity markets to yield higher pricesfor capacity or contract for the availability of a greater amount of capacityduring these warmer months. As a result, our demand response revenues may beseasonal. For example, in the PJM forward capacity market, which is a market inwhich we materially increased our participation during the first quarter of2008 and in which we expect to continue to increase our participation andderive revenues for the foreseeable future, we recognize capacity-based revenuefrom PJM over the four month delivery period of June throughSeptember.  This typically results inhigher revenues in our second and third quarter as compared to our first andfourth quarters.  As a result of thisseasonality, we believe that quarter to quarter comparisons of our operatingresults are not necessarily meaningful and that these comparisons cannot berelied upon as indicators of future performance.  Further, occasional events, such as a spike innatural gas prices, can lead grid operators and utilities to implementshort-term calls for demand response capacity to respond to these events, butwe cannot be sure that such calls will continue or that we will be in aposition to generate revenues when they do occur. We have experienced, and mayin the future experience, significant variability in our revenues, on both anannual and a quarterly basis, as a result of these and other factors.Pronounced variability or an extended period of reduction in spending by gridoperators and utilities, or continued requests from grid operators andutilities to pay for demand response capacity at prices that are not equal on amonthly or quarterly basis over the course of a contract year, could negativelyimpact our business and make it difficult for us to accurately forecast ourfuture sales, which could lead to increased spending by us that does not resultin increases in revenues.

 

***Our loan andsecurity agreement contains financial and operating restrictions that may limitour access to credit. If we fail to comply with covenants in our loan andsecurity agreement, we may be required to repay our indebtedness thereunder,which may have an adverse effect on our liquidity.***

 

Provisions in the loan and security agreementthat we and one of our subsidiaries entered into with SVB impose restrictionson our ability to, among other things:

 

·                  incuradditional indebtedness;

 

·                  createliens;

 

·                  enterinto transactions with affiliates;

 

·                  transferassets;

 

·                  paydividends or make distributions on, or repurchase, EnerNOC stock; or

 

·                  mergeor consolidate.

 

In addition, we are required to meet certain financial covenantscustomary with this type of agreement, including maintaining a minimumspecified tangible net worth and a minimum specified ratio of current assets tocurrent liabilities.  Our loan and securityagreement also contains other customary covenants. We may not be able to complywith these covenants in the future. Our failure to comply with these covenantsmay result in the declaration of an event of default and could cause us to beunable to borrow under our loan and security agreement with SVB. In addition topreventing additional borrowings under our loan and security agreement, anevent of default, if not cured or waived, may result in the acceleration of thematurity of indebtedness outstanding under the agreement, which would requireus to pay all amounts outstanding. If an event of default occurs, we may not beable to cure it within any applicable cure period, if at all. If the maturityof our indebtedness is accelerated, we may not have sufficient funds availablefor repayment or we may not have the ability to borrow or obtain sufficientfunds to replace the accelerated indebtedness on terms acceptable to us, or atall.

 

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

 

(b)      Use of Proceeds

 

We registered shares of our common stock in connection with our IPOunder the Securities Act. The registration statement on Form S-1 (File No. 333-140632)filed in connection with our IPO was declared effective by the SEC on May 17,2007. Including shares sold pursuant to the exercise by the underwriters oftheir over-allotment option, 4,087,500 shares of our common stock were registeredand sold in the IPO by us and an additional 225,000 shares of common stock wereregistered and sold by the selling stockholders named in the registrationstatement. All the shares were sold at a price to the public of $26.00 pershare. The net offering proceeds received by us, after deducting underwritingdiscounts and commissions and expenses incurred in connection with theoffering, were approximately $95.2 million.  Through September 30,2008, approximately $15.7 million of the proceeds from our IPO has been used tofund the operations of our business and for general corporate purposes,approximately $16.8 million has been used to purchase and install equipment,approximately $1.9 million has been used to repay indebtedness andapproximately $8.5 million has been used to fund acquisitions and make paymentsoutstanding on prior acquisitions. As of September 30, 2008, $8.9 millionwas posted as financial assurance deposits and letter of creditcollateral.  The remainder of the net proceeds from the IPO are investedin short-term investment grade securities and money market accounts. There hasbeen no material change in the planned use of proceeds from our IPO asdescribed in our final prospectus filed with the SEC on May 18, 2007pursuant to Rule 424(b).

 

**Item 6.  Exhibits.**

** **
| 10.1   |   | Loan  and Security Agreement by and among EnerNOC, Inc., EnerNOC Securities  Corporation and Silicon Valley Bank, dated as of August 5, 2008  (incorporated by reference to Exhibit 10.1 to EnerNOC, Inc.’s  Current Report on Form 8-K filed on August 8, 2008 (File  No. 001-33471)). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.2   |   | Amended and Restated Office Lease by and between Transwestern  Federal, L.L.C. and EnerNOC, Inc., dated as of August 15, 2008  (incorporated by reference to Exhibit 10.1 to EnerNOC, Inc.’s  Current Report on Form 8-K filed on August 20, 2008 (File  No. 001-33471)).               |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.3   |   | Agreement  of Lease by and between CRP/Capstone 14W Property Owner, L.L.C. and  EnerNOC, Inc. , dated as of September 9, 2008 (incorporated by  reference to Exhibit 10.1 to EnerNOC, Inc.’s Current Report on  Form 8-K filed on September 12, 2008 (File No. 001-33471)).             |

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

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

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

 

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**Exhibit Index**

 
| 10.1   |   | Loan  and Security Agreement by and among EnerNOC, Inc., EnerNOC Securities  Corporation and Silicon Valley Bank, dated as of August 5, 2008  (incorporated by reference to Exhibit 10.1 to EnerNOC, Inc.’s  Current Report on Form 8-K filed on August 8, 2008 (File  No. 001-33471)). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.2   |   | Amended and Restated Office Lease by and between Transwestern  Federal, L.L.C. and EnerNOC, Inc., dated as of August 15, 2008  (incorporated by reference to Exhibit 10.1 to EnerNOC, Inc.’s  Current Report on Form 8-K filed on August 20, 2008 (File  No. 001-33471)).               |
|   |   |                                                                                                                                                                                                                                                                                                                            |
| 10.3   |   | Agreement  of Lease by and between CRP/Capstone 14W Property Owner, L.L.C. and  EnerNOC, Inc. , dated as of September 9, 2008 (incorporated by  reference to Exhibit 10.1 to EnerNOC, Inc.’s Current Report on  Form 8-K filed on September 12, 2008 (File No. 001-33471)).             |

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

 

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