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** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

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

 

**For the quarterly period ended March 31,2010**

 

**or**

 

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

 

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

 

**Commission File Number: 001-33471**

 

**EnerNOC, Inc.**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Delaware**                     | ** ** | **87-0698303**      |
|----------------------------------|------------|---------------------|
| (State or Other  Jurisdiction of |       | (IRS Employer       |
| Incorporation or  Organization)  |       | Identification No.) |

 

| **101  Federal Street**                   |       |       |
|-------------------------------------------|------------|------------|
| **Suite 1100**                       |       |       |
| **Boston,  Massachusetts**                | ** ** | **02110**  |
| (Address of Principal  Executive Offices) |       | (Zip Code) |

 

**(617) 224-9900**

(Registrant’s TelephoneNumber, Including Area Code)

 

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

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes  o  No o

 

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

 

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

 

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

 

There were 24,619,771 shares of the registrant’scommon stock, $0.001 par value per share, outstanding as of April 30, 2010.

 

 

 

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**EnerNOC, Inc.**

 

**Index to Form 10-Q**

 
| ** **                                 | ** ** | ** **                                                                                                          | ** ** | **Page**   |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                 | ** ** | ** **                                                                                                          | ** ** | ** ** |
| **Part I - Financial Information**    |       |                                                                                                                |
|                                       |       |                                                                                                                |       |       |
| Item 1.                               |       | Financial Statements                                                                                                |       |       |
|                                       |       |                                                                                                                |       |       |
|                                       |       | Unaudited Condensed Consolidated Balance Sheets at  March 31, 2010 and December 31, 2009                  |       | 3          |
|                                       |       |                                                                                                                |       |       |
|                                       |       | Unaudited Condensed  Consolidated Statements of Operations for the three months ended  March 31, 2010 and 2009 |       | 4          |
|                                       |       |                                                                                                                |       |       |
|                                       |       | Unaudited Condensed  Consolidated Statements of Cash Flows for the three months ended  March 31, 2010 and 2009 |       | 5          |
|                                       |       |                                                                                                                |       |       |
|                                       |       | Notes to  Unaudited Condensed Consolidated Financial Statements                                                     |       | 6          |
|                                       |       |                                                                                                                |       |       |
| Item 2.                               |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 23         |
|                                       |       |                                                                                                                |       |       |
| Item 3.                               |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       | 37         |
|                                       |       |                                                                                                                |       |       |
| Item 4.                               |       | Controls and Procedures                                                                                             |       | 37         |
|                                       |       |                                                                                                                |       |       |
| **Part II -  Other Information** |       |                                                                                                                |
|                                       |       |                                                                                                                |       |       |
| Item 1.                               |       | Legal Proceedings                                                                                                   |       | 38         |
|                                       |       |                                                                                                                |       |       |
| Item 1A.                              |       | Risk  Factors                                                                                                       |       | 38         |
|                                       |       |                                                                                                                |       |       |
| Item 2.                                    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                        |       | 38         |
|                                       |       |                                                                                                                |       |       |
| Item 6.                               |       | Exhibits                                                                                                            |       | 38         |
|                                       |       | Signatures                                                                                                          |       | 39         |
|                                       |       | Exhibit Index                                                                                                  |       | 40         |

 

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**PART I — FINANCIALINFORMATION**

 

**EnerNOC, Inc.**

 

**UNAUDITEDCONDENSED CONSOLIDATED BALANCE SHEETS**

 

**(in thousands, except par valueand share data)**

** **
| ** **                                                                                                                                                                               | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **Assets**                                                                                                                                                                               |       |                    |       |                       |       |
| Current assets                                                                                                                                                                           |       |                    |       |                       |       |
| Cash and cash  equivalents                                                                                                                                                               |       | $                       | 117,384    |                       | $          | 119,739 |   |
| Restricted cash                                                                                                                                                                          |       | 177                     |       | 177                        |       |
| Trade accounts  receivable, net allowance for doubtful accounts of $16 and $57 at  March 31, 2010 and December 31, 2009, respectively                                          |       | 16,211                  |       | 17,421                     |       |
| Unbilled revenue                                                                                                                                                                         |       | 16,374                  |       | 40,388                     |       |
| Prepaid  expenses, deposits and other current assets                                                                                                                                     |       | 5,282                   |       | 4,725                      |       |
| Total current  assets                                                                                                                                                                    |       | 155,428                 |       | 182,450                    |       |
| Property and  equipment, net of accumulated depreciation of $25,649 and $22,420 at  March 31, 2010 and December 31, 2009, respectively                                         |       | 33,706                  |       | 31,344                     |       |
| Goodwill                                                                                                                                                                                 |       | 24,480                  |       | 22,553                     |       |
| Definite-life  intangible assets, net                                                                                                                                                    |       | 6,887                   |       | 7,075                      |       |
| Indefinite-life  intangible assets                                                                                                                                                       |       | 920                     |       | —                     |       |
| Deposits and  other assets                                                                                                                                                               |       | 4,236                   |       | 3,903                      |       |
| Restricted cash                                                                                                                                                                          |       | 7,697                   |       | 7,697                      |       |
| Total assets                                                                                                                                                                             |       | $                       | 233,354    |                       | $          | 255,022 |   |
|                                                                                                                                                                                     |       |                    |       |                       |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                           |       |                    |       |                       |       |
| Current  liabilities                                                                                                                                                                     |       |                    |       |                       |       |
| Accounts payable                                                                                                                                                                         |       | $                       | 290        |                       | $          | 55 |   |
| Accrued capacity  payments                                                                                                                                                               |       | 27,540                  |       | 40,534                     |       |
| Accrued payroll  and related expenses                                                                                                                                                    |       | 6,610                   |       | 9,688                      |       |
| Accrued expenses  and other current liabilities                                                                                                                                          |       | 3,348                   |       | 3,706                      |       |
| Accrued  acquisition contingent consideration                                                                                                                                            |       | 3,133                   |       | 1,455                      |       |
| Deferred revenue                                                                                                                                                                         |       | 2,773                   |       | 2,119                      |       |
| Current portion  of long-term debt                                                                                                                                                       |       | 37                      |       | 36                         |       |
| Total current liabilities                                                                                                                                                                |       | 43,731                  |       | 57,593                     |       |
| Long-term  liabilities                                                                                                                                                                   |       |                    |       |                       |       |
| Long-term debt,  net of current portion                                                                                                                                                  |       | 27                      |       | 37                         |       |
| Deferred tax  liability                                                                                                                                                                  |       | 213                     |       | 654                        |       |
| Other  liabilities                                                                                                                                                                       |       | 1,761                   |       | 1,763                      |       |
| Total long-term  liabilities                                                                                                                                                             |       | 2,001                   |       | 2,454                      |       |
| Commitments and  contingencies (Note 8 and Note 12)                                                                                                                                      |       | —                  |       | —                     |       |
| Stockholders’  equity                                                                                                                                                               |       |                    |       |                       |       |
| Undesignated  preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares  issued                                                                                          |       | —                  |       | —                     |       |
| Common stock,  $0.001 par value; 50,000,000 shares authorized, 24,576,539 and 24,233,448  shares issued and outstanding at March 31, 2010 and December 31,  2009, respectively |       | 24                      |       | 24                         |       |
| Additional  paid-in capital                                                                                                                                                              |       | 279,245                 |       | 272,350                    |       |
| Accumulated  other comprehensive loss                                                                                                                                                    |       | (104                    | )          | (56                        | )          |
| Accumulated  deficit                                                                                                                                                                     |       | (91,543                 | )          | (77,343                    | )          |
| Total  stockholders’ equity                                                                                                                                                         |       | 187,622                 |       | 194,975                    |       |
| Total  liabilities and stockholders’ equity                                                                                                                                         |       | $                       | 233,354    |                       | $          | 255,022 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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**EnerNOC, Inc.**

 

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**(in thousands, except share andper share data)**

 
| ** **                                           | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Revenue                                              |       | $                                     | 28,121     |   | $ | 18,423 |   |
| Cost of revenues                                     |       | 18,546                                |       | 10,525 |   |
| Gross profit                                         |       | 9,575                                 |       | 7,898 |   |
| Operating  expenses:                                 |       |                                  |       |   |   |
| Selling and  marketing                               |       | 9,851                                 |       | 8,667 |   |
| General and  administrative                          |       | 13,012                                |       | 9,702 |   |
| Research and  development                            |       | 2,057                                 |       | 1,537 |   |
| Total operating  expenses                            |       | 24,920                                |       | 19,906 |   |
| Loss from  operations                                |       | (15,345                               | )          | (12,008 | ) |
| Other income  (expense)                              |       | 3                                     |       | (284 | ) |
| Interest expense                                     |       | (25                                   | )          | (61 | ) |
| Loss before  income tax                              |       | (15,367                               | )          | (12,353 | ) |
| Benefit from  (provision for) income tax             |       | 1,167                                 |       | (181 | ) |
| Net loss                                             |       | $                                     | (14,200    | ) | $ | (12,534 | ) |
|                                                 |       |                                  |       |   |   |
| Basic and  diluted net loss per share                |       | $                                     | (0.59      | ) | $ | (0.63 | ) |
| Weighted average  number of basic and diluted shares |       | 24,051,114                            |       | 19,993,981 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

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**EnerNOC, Inc.**

 

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(in thousands)**

** **
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                 | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| **Cash  flow from operating activities**                                                   |       |                                  |       |   |   |
| Net loss                                                                                   |       | $                                     | (14,200    | ) | $ | (12,534 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                  |       |   |   |
| Depreciation                                                                               |       | 3,231                                 |       | 2,443 |   |
| Amortization of  acquired intangible assets                                                |       | 388                                   |       | 169 |   |
| Stock-based  compensation expense                                                          |       | 4,346                                 |       | 2,819 |   |
| Unrealized  foreign exchange transaction (gain) loss                                       |       | (13                                   | )          | 304 |   |
| Deferred tax  liability                                                                    |       | (441                                  | )          | 169 |   |
| Non-cash  interest expense                                                                 |       | 15                                    |       | — |   |
| Other, net                                                                                 |       | (21                                   | )          | 53 |   |
| Changes in  operating assets and liabilities, net of effects of acquisitions:              |       |                                  |       |   |   |
| Accounts  receivable, trade                                                                |       | 1,253                                 |       | 1,372 |   |
| Unbilled revenue                                                                           |       | 24,014                                |       | 6,905 |   |
| Prepaid expenses  and other current assets                                                 |       | (624                                  | )          | (1,324 | ) |
| Other assets                                                                               |       | 12                                    |       | (84 | ) |
| Other noncurrent  liabilities                                                              |       | (16                                   | )          | — |   |
| Deferred revenue                                                                           |       | 614                                   |       | 484 |   |
| Accrued capacity  payments                                                                 |       | (13,008                               | )          | (4,521 | ) |
| Accrued payroll  and related expenses                                                      |       | (2,324                                | )          | (835 | ) |
| Accounts payable  and accrued expenses                                                     |       | (104                                  | )          | (746 | ) |
| Net cash  provided by (used in) operating activities                                       |       | 3,122                                 |       | (5,326 | ) |
|                                                                                       |       |                                  |       |   |   |
| **Cash  flows from investing activities**                                                  |       |                                  |       |   |   |
| Maturities of  marketable securities                                                       |       | —                                |       | 1,500 |   |
| Payments made  for acquisitions of businesses, net of cash acquired                        |       | (1,100                                | )          | — |   |
| Purchases of  property and equipment                                                       |       | (5,596                                | )          | (2,854 | ) |
| Change in  restricted cash and deposits                                                    |       | (282                                  | )          | 314 |   |
| Net cash used in  investing activities                                                     |       | (6,978                                | )          | (1,040 | ) |
|                                                                                       |       |                                  |       |   |   |
| **Cash  flows from financing activities**                                                  |       |                                  |       |   |   |
| Proceeds from  exercises of stock options                                                  |       | 1,515                                 |       | 64 |   |
| Repayment of  borrowings and payments under capital leases                                 |       | (9                                    | )          | (11 | ) |
| Net cash  provided by financing activities                                                 |       | 1,506                                 |       | 53 |   |
| Effects of  exchange rate changes on cash                                                  |       | (5                                    | )          | — |   |
| Net change in  cash and cash equivalents                                                   |       | (2,355                                | )          | (6,313 | ) |
| Cash and cash  equivalents at beginning of period                                          |       | 119,739                               |       | 60,782 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                     | 117,384    |   | $ | 54,469 |   |
|                                                                                       |       |                                  |       |   |   |
| **Non-cash  financing and investing activities**                                           |       |                                  |       |   |   |
| Issuance of  common stock in connection with acquisitions                                  |       | $                                     | 260        |   | $ | — |   |
| Issuance of  common stock in satisfaction of bonuses                                       |       | $                                     | 775        |   | $ | 500 |   |
| Increase in  accrued contingent consideration related to acquisitions                      |       | $                                     | 1,667      |   | $ | — |   |

 

 The accompanying notes are an integral part ofthese condensed consolidated financial statements.

 

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**EnerNOC, Inc.**

 

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(in thousands, except share andper share data)**

 

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

 

**Description of Business**

 

EnerNOC, Inc. (theCompany) is a service company that was incorporated in Delaware on June 5,2003. The Company operates in a single segment providing clean and intelligentenergy management applications and services, which include comprehensive demandresponse services, data-driven energy efficiency services, energy price andrisk management services and enterprise carbon management services.  During the first quarter of 2010, the Companyreleased an updated energy management application platform, which includes thelatest release of the Company’s four energy management applications andenhances previous iterations of its PowerTrak and CarbonTrak enterprisesoftware platforms and monitoring-based commissioning services.  The Company uses its Network OperationsCenter (NOC) and comprehensive demand response application, DemandSMART, toremotely manage and reduce electricity consumption across a growing network ofcommercial, institutional and industrial customer sites, making demand responsecapacity available to grid operators and utilities on demand while helpingend-users of electricity achieve energy savings, environmental benefits andimproved financial results.

 

The Company builds uponits position as a leading demand response services provider by using its NOCand energy management application platform to also deliver a portfolio ofadditional energy management applications to its customers, including thecross-selling of these energy management applications to existing end-usecustomers.  These additional energymanagement applications include the Company’s SiteSMART, SupplySMART andCarbonSMART applications.  SiteSMART isthe Company’s data-driven energy efficiency application that has multiplefeatures, including monitoring-based commissioning tools, commissioning andretro-commissioning authority services, energy consulting and engineeringservices, distributed generation services, and owner-engineer services.  SupplySMART is the Company’s energy price andrisk management application and service that provides the Company’s end-usecustomers located in restructured or deregulated markets throughout the UnitedStates with the ability to more effectively manage the energy supplierselection process, including energy supply product procurement andimplementation.  CarbonSMART is theCompany’s enterprise carbon management application that supports themeasurement, tracking, analysis, and reporting and management of greenhouse gasemissions.

 

The Company’s energy managementapplications deliver immediate bottom-line benefits to end-use customers andenergy suppliers while helping to create a more reliable and efficientelectricity grid for system operators and utilities.

 

**Reclassifications**

 

Certain reclassificationshave been made to the condensed consolidated balance sheet as of December 31,2009 and the unaudited condensed consolidated statement of cash flows for thethree months ended March 31, 2009 to conform to the March 31, 2010presentation. The reclassifications primarily consist of certain receivables,which were previously included in trade accounts receivable, that are not tradein nature.  These certain receivables arenow being classified in prepaid expenses, deposits and other current assets inthe unaudited condensed consolidated balance sheets.

 

**Basis of Consolidation**

 

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

 

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**SubsequentEvents Consideration**

 

The Companyconsiders events or transactions that occur after the balance sheet date, butprior to the issuance of the financial statements, to provide additionalevidence relative to certain estimates or to identify matters that requireadditional disclosure. Subsequent events have been evaluated and there were nomaterial recognizable subsequent events recorded in the March 31, 2010unaudited condensed consolidated financial statements.  In April 2010, the Company and one ofits subsidiaries entered into a second loan modification agreement to its loanand security agreement (Credit Facility) with Silicon Valley Bank (SVB), whichincreased the Company’s borrowing limit from $35,000 to $50,000, as well asmodified certain of the Company’s financial covenant debt compliancerequirements. See Note 7 for additional information regarding the April 2010 modificationto the Credit Facility.  Also in April 2010,the Company was required to provide financial assurance in connection with itscapacity bid in a certain open market bidding program.  The Company provided this financial assuranceutilizing approximately $30,000 of its available cash on hand, a $19,000 letterof credit issued under the Credit Facility and a $50,000 letter of creditissued by SVB, which is collateralized by the Company’s cash. Based on theCompany’s prior experience with this certain open market bidding program, theCompany currently expects that it will recover all or substantially all of thiscash and a majority of these letters of credit during the second quarter of2010.

 

**Use of Estimates in Preparationof Financial Statements**

 

The preparation ofthese unaudited condensed consolidated financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, the Company evaluates its estimates,including those related to revenue recognition for multiple elementarrangements, allowance for doubtful accounts, valuations and purchase priceallocations related to business combinations, expected future cash flowsincluding growth rates, discount rates, terminal values and other assumptionsand estimates used to evaluate the recoverability of long-lived assets andgoodwill, estimated fair values of intangible assets and goodwill, amortizationmethods and periods, certain accrued expenses and other related charges,stock-based compensation, contingent liabilities, tax reserves andrecoverability of the Company’s net deferred tax assets and related valuationallowance.

 

Although theCompany regularly assesses these estimates, actual results could differmaterially from these estimates. Changes in estimates are recorded in theperiod in which they become known. The Company bases its estimates onhistorical experience and various other assumptions that it believes to bereasonable under the circumstances. Actual results may differ from management’sestimates if these results differ from historical experience or otherassumptions prove not to be substantially accurate, even if such assumptionsare reasonable when made.  Operatingresults for the three months ended March 31, 2010 are not necessarilyindicative of the results to be expected for any other interim period or theentire fiscal year ending December 31, 2010.

 

The Company issubject to a number of risks similar to those of other companies of similarsize in its industry, including, but not limited to, rapid technologicalchanges, competition from substitute products and services from largercompanies, customer concentration, government regulations, protection ofproprietary rights and dependence on key individuals.

 

**Comprehensive Loss**

 

Comprehensive loss isdefined as the change in equity of a business enterprise during a period fromtransactions and other events and circumstances from non-owner sources.Comprehensive loss is composed of net loss, unrealized gains and losses onmarketable securities and cumulative foreign currency translation adjustments.

 

Comprehensive loss forthe three months ended March 31, 2010 and 2009 was as follows:

 
| ** **                                          | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Net  loss                                           |       | $                                     | (14,200    | ) | $ | (12,534 | ) |
| Change  in unrealized gain on marketable securities |       | —                                |       | (4 | ) |
| Foreign  currency translation adjustments           |       | (48                                   | )          | 304 |   |
| Total  comprehensive loss                           |       | $                                     | (14,248    | ) | $ | (12,234 | ) |

 

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**InternalUse Software Costs**

 

The Company applies the provisions of Accounting Standard Codification(ASC) 350-40, *Internal Use Software*(ASC350-40)*.* This accounting guidance requirescomputer software costs associated with internal use software to be expensed asincurred until certain capitalization criteria are met, and it also defineswhich types of costs should be capitalized and which should be expensed. TheCompany capitalizes the payroll and payroll-related costs of employees whodevote time to the development of internal use computer software. The Companyamortizes these costs on a straight-line basis over the estimated useful lifeof the software, which is generally two to three years. The Company’s judgmentis required in determining the point at which various projects enter the stagesat which costs may be capitalized, in assessing the ongoing value andimpairment of the capitalized costs, and in determining the estimated usefullives over which the costs are amortized.

 

Internal use software costs of $1,244 and $620 for the three monthsended March 31, 2010 and 2009, respectively, have been capitalized inaccordance with ASC 350-40. The capitalized amount is included as software inproperty and equipment at March 31, 2010 and December 31, 2009.Amortization of capitalized internal use software costs was $698 and $499 forthe three months ended March 31, 2010 and 2009, respectively.  Accumulated amortization of capitalizedinternal use software costs was $4,885 and $4,187 as of March 31, 2010 andDecember 31, 2009, respectively.

 

**Impairmentof Property and Equipment**

 

The Company reviews property and equipment for impairment wheneverevents or changes in circumstances indicate that the carrying amount of assetsmay not be recoverable. If these assets are considered to be impaired, theimpairment is recognized in earnings and equals the amount by which thecarrying value of the assets exceeds their fair market value determined byeither a quoted market price, if any, or a value determined by utilizing adiscounted cash flow technique. If these assets are not impaired, but theiruseful lives have decreased, the remaining net book value is amortized over therevised useful life. For the three months ended March 31, 2010, there wereno indicators of impairment that would require an impairment test.  As of March 31, 2010, approximately$3,452 of the Company’s generation equipment is enrolled in open market demandresponse programs. The recoverability of this generation equipments’ carryingvalue is largely dependent on the rates that the Company is compensated for itscommitted capacity within these programs. These rates represent market ratesand can fluctuate based on the supply and demand of capacity. Although thesemarket rates are established up to three years in advance of the servicedelivery, these market rates have not yet been established for the entireremaining useful life of this generation equipment. In performing itsimpairment analysis, the Company estimates the expected future market ratesbased on current existing market rates and trends. A decline in the expectedfuture market rates of greater than 10% could result in an impairment chargerelated to this generation equipment.

** **

**IndustrySegment Information**

 

The Company is required to disclose the standards for reportinginformation about operating segments in annual financial statements andrequired selected information of these segments being presented in interimfinancial reports issued to stockholders. Operating segments are defined ascomponents of an enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision maker, ordecision making group, in making decisions on how to allocate resources andassess performance. The Company’s decision making group is considered to be theteam comprised of the chief executive officer and the executive managementteam. The Company views its operations and manages its business as oneoperating segment.

 

For the three months ended March 31, 2010 and 2009, operationsrelated to the Company’s international subsidiaries were not material to theaccompanying unaudited condensed consolidated financial statements taken as awhole. In addition, as of March 31, 2010 and December 31, 2009, thelong-lived assets related to the Company’s international subsidiaries were notmaterial to the accompanying unaudited condensed consolidated financialstatements taken as a whole.

 

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

 

**SmallFoot LLC and ZOX, LLC**

 

In March 2010, the Company acquired substantiallyall of the assets and certain liabilities of SmallFoot LLC (Smallfoot) and ZOX,LLC (Zox), which were companies unaffiliated with the Company but were entitiesunder common control.  Smallfoot was inthe process of developing wireless systems that manage and coordinateelectricity demand for small commercial facilities and Zox was in the processof developing hardware and software for automated utility meter reading. Thetotal purchase price paid by the Company at closing was approximately $1,360,of which $1,100 was paid in cash and the remainder of which was paid by theissuance of 8,758 shares of the Company’s common stock that had a fair

 

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value of approximately $260. These shares were measured as of theacquisition date using the closing price of the Company’s common stock, asreported on The NASDAQ Global Market on March 15, 2010.  The Company believes that Smallfoot’stechnology will cut deployment costs and accelerate deeper market penetrationinto small commercial, institutional and industrial customers.  The Company believes Zox’s smart gridcommunications and metering technology provides an ideal platform fortransforming electric industry legacy meters into smart meters at asubstantially lower cost as compared to traditional replacement methods.

 

Although Smallfoot and Zox were development stageentities as of the acquisition close date, these entities met the definition ofa business as defined under ASC 805, *Business Combinations*(ASC805)*,* as these entities had inputs andprocesses that have the ability to provide a return to its owners.  As a result, this acquisition was treated asa business combination in accordance with ASC 805.

 

Transaction costs relatedto this business combination were not material and have been expensed asincurred.  The transaction costs areincluded in general and administrative expenses in the accompanying unauditedcondensed consolidated statements of operations.

 

The allocation of thepurchase price is based upon preliminary estimates of the fair value of assetsacquired and liabilities assumed as of March 15, 2010. The Company is in theprocess of gathering information to finalize its valuation of certain assetsand liabilities. The purchase price allocation is preliminary and will befinalized once the Company has all necessary information to complete itsestimate, but generally no later than one year from the date of acquisition.There were no net tangible assets acquired in connection with this acquisition.The components and initial allocation of the purchase price consists of thefollowing approximate amounts:

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

 

Aspart of the preliminary purchase price allocation, the Company determined thatthe identifiable intangible assets include two in-process research anddevelopment projects and certain acquired patents.

 

TheCompany used the cost approach to value the two acquired in-process researchand development projects that had not yet reached technological feasibility andhave no alternate future uses as of the acquisition date, which related to thedevelopment of wireless systems that manage and coordinate electricity demandfor small commercial facilities and the development of hardware and softwarefor automated utility meter reading.  Theprimary basis for determining the technological feasibility of these projectsis the completion of a working model which performs all the major functionsplanned for the product, and is ready for initial customer testing (usuallyidentified as beta testing). ASC 805 requires that purchased research and developmentacquired in a business combination be recognized as an indefinite-livedintangible asset until the completion or abandonment of the associated researchand development efforts. The cost approach calculates fair value by calculatingthe reproduction cost of an exact replica of the subject intangible asset.  The Company calculated the replacement costbased on actual development costs incurred through the date ofacquisition.  In determining theappropriate valuation methodology, the Company considered, among other factors:the in-process projects’ stage of completion; the complexity of the workcompleted as of the acquisition date; the costs already incurred; the projectedcosts to complete; the expected introduction date; and the estimated useful lifeof the technology. Given the stage of development as of the acquisition dateand the current lack of sufficient information regarding future expected cashflows, the Company determined that the cost approach was the most reliablevaluation methodology to determine the fair value of the in-process researchand development projects acquired. The Company believes that the estimatedin-process research and development amounts so determined represent the fairvalue at the date of acquisition and do not exceed the amount a third partywould pay for the projects. However, if the projects are not successful orcompleted in a timely manner, the Company may not realize the financialbenefits expected for these projects or for the acquisition as a whole.

 

Theestimated cost to complete the in-process research and development projects inthe aggregate as of March 31, 2010 was approximately $1.4 million.

 

TheCompany used the income approach to value the acquired patents.  The discount rate in connection with thisvaluation was 25% and was based on the commercial and technical risks relatedto this asset and on estimated market participant discount rates for a similarasset.

 

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Thefactors contributing to the recognition of goodwill were based upon severalstrategic and synergistic benefits that were expected to be realized from thecombination.

 

**Cogent Energy, Inc.**

 

In December 2009,the Company acquired all of the outstanding capital stock of Cogent Energy,Inc. (Cogent), a company specializing in comprehensive energy consulting,engineering and building commissioning solutions to commercial, institutionaland industrial customers. The total purchase price paid by the Company atclosing was approximately $11,172, of which $6,555 was paid in cash and theremainder of which was paid by the issuance of 114,281 shares of the Company’scommon stock that had a fair value of approximately $3,162.  These shares were measured as of theacquisition date using the closing price of the Company’s common stock, asreported on The NASDAQ Global Market on December 4, 2009.  As a result of gathering information toupdate its valuation of certain acquired assets and liabilities, the purchaseprice was reduced by $94 during the three months ended March 31,2010.  This reduction in purchase priceis recorded as a receivable from the former stockholders of Cogent and isincluded in prepaid expenses, deposits and other current assets in theaccompanying unaudited condensed consolidated balance sheets as of March 31,2010.   This receivable was settled in April 2010through the release of 3,592 shares of the Company’s common stock back to theCompany that were previously issued into escrow in connection with the Cogentacquisition.  Upon the release of theseshares back to the Company, the shares were retired.

 

In addition to theamounts paid at closing, the Company may be obligated to pay an earn-out amountof $1,500 to the former stockholders of Cogent. The earn-out payment, if any,will be based on the achievement of a certain minimum revenue-based milestoneand a certain earnings-based milestone of Cogent for the year ending December 31,2010 and will be paid in cash. Both of these milestones need to be achieved inorder for the earn-out payment to occur and there will be no partial payment ifthe milestones are not fully achieved. The Company believes that it is remotethat the earn-out payment will not be made. The fair value of the earn-outpayment of $1,455 was recorded as additional purchase price as of theacquisition date. As the Company believes that it is remote that the earn-outpayment will not be made, the Company determined the fair value of the earn-outpayment based on the present value of the $1,500, which will be paid in December 2010.The increase in fair value of the contingent consideration from December 31,2009 to March 31, 2010 was not material and was recorded as a charge togeneral and administrative expenses in the accompanying condensed consolidatedstatements of operations for the three months ended March 31, 2010.

 

As discussed above, inconnection with the gathering of additional information to update its valuationof certain acquired assets and liabilities, the Company recorded certainadjustments to the purchase price, as well as its allocation of the purchaseprice.  The purchase price allocationadjustments related to changes in the valuation of certain receivable andpayable amounts.

 

The components andallocation of the purchase price consist of the following approximate amounts:

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

 

Net tangible assetsacquired in the acquisition of Cogent primarily related to the following:

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

 

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**eQuilibrium Solutions Corporation**

 

In June 2009, the Company acquired substantiallyall of the assets of eQuilibrium Solutions Corporation (eQ), a software companyspecializing in the development of enterprise sustainability managementproducts and services. The total purchase price paid by the Company at closingwas approximately $751, of which $250 was paid in cash and the remainder ofwhich was paid by the issuance of 21,464 shares of the Company’s common stockthat had a value of approximately $501. These shares were measured as of theacquisition date using the closing price of the Company’s common stock, asreported on The NASDAQ Global Market on June 11, 2009.

 

Transaction costs related to this business combinationwere not material and were expensed as incurred.  The transaction costs are included in generaland administrative expenses. The Company’s consolidated financial statementsreflect eQ’s results of operations from June 11, 2009 forward.

 

**SouthRiver Consulting, LLC**

 

In May 2008, the Company acquired 100% of themembership interests of South River Consulting, LLC (SRC), an energyprocurement and risk management services provider, for a purchase price equalto $5,524, which consisted of $3,603 in cash, $174 in related expenses and120,000 shares of the Company’s common stock that had a value of approximately$1,747 as of the closing date. In addition to the amounts paid at closing, theCompany incurred a contingent obligation to pay to the former holders of SRCmembership interests an earn-out amount equal to 50% to 60% of the revenues ofSRC’s business during each twelve-month period from May 1, 2008 throughApril 30, 2010, which would be recognized as additional purchase pricewhen earned. The earn-out payments, if any, are based on the achievement ofcertain minimum revenue-based milestones of SRC, are paid in a combination ofcash and shares of the Company’s common stock and are recorded as additional purchaseprice. The additional purchase price recorded in the second quarter of 2009,which was related to the May 1, 2008 to April 30, 2009 earn-outperiod, totaled $1,468, of which $734 was paid in cash during the secondquarter of 2009 and the remainder of which was paid by the issuance of 44,776shares of the Company’s common stock during the third quarter of 2009. Duringthe first quarter of 2010, the Company determined that beyond a reasonabledoubt the potential earn-out related to the period of May 1, 2009 to April 30,2010 will occur.  As such, the Companyaccrued 60% of the revenues for SRC’s business from May 1, 2009 through March 31,2010 related to the earn-out payment achieved through March 31, 2010totaling $1,667 in the accompanying unaudited condensed consolidated balancesheets as of March 31, 2010.  Thefinal earn-out payment related to the May 1, 2009 through April 30,2010 earn-out period will be determined and settled during the second quarterof 2010.

 

Pro formainformation relating to the above acquisitions has not been provided since theimpact to the consolidated financial statements was not material.

 

**3.  Impairment of Intangible Assets and Goodwill**

 

*IntangibleAssets*

 

The Company amortizes its intangible assets that havefinite lives using either the straight-line method or, if reliablydeterminable, based on the pattern in which the economic benefit of the assetis expected to be consumed utilizing expected undiscounted future cash flows.Amortization is recorded over the estimated useful lives ranging from one toten years. The Company reviews its intangible assets subject toamortization to determine if any adverse conditions exist or a change in 

 

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circumstances has occurred that would indicate impairment or a changein the remaining useful life. If the carrying value of an asset exceeds itsundiscounted cash flows, the Company will write-down the carrying value of theintangible asset to its fair value in the period identified. In assessingrecoverability, the Company must make assumptions regarding estimated futurecash flows and discount rates. If these estimates or related assumptions changein the future, the Company may be required to record impairment charges. TheCompany generally calculates fair value as the present value of estimatedfuture cash flows to be generated by the asset using a risk-adjusted discountrate. If the estimate of an intangible asset’s remaining useful life ischanged, the Company will amortize the remaining carrying value of theintangible asset prospectively over the revised remaining useful life. Therewere no indicators of impairment identified during the three months endedMarch 31, 2010 and 2009 that required an interim impairment test.

 

The following table provides the gross carrying amountand related accumulated amortization of the Company’s definite-life intangibleassets as of March 31, 2010 and December 31, 2009:

 
| ** **                                       | ** ** | ** **                                                           | ** ** | **As of March 31, 2010** | ** ** | **As of December 31, 2009** | ** ** |
|--------------------------------------------------|------------|----------------------------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                       | ** ** | **Weighted Average  Amortization  Period (in years)** | ** ** | **Gross  Carrying  Amount**                  | ** ** | **Accumulated  Amortization**                   | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** |
| Customer contracts                               |       | 7.04                                                                 |       | $                                            | 4,217      |                                            | $          | (1,284 | ) | $ | 4,217 |   | $ | (1,180 | ) |
| Employment agreements and non-compete agreements |       | 3.11                                                                 |       | 772                                          |       | (168                                            | )          | 772 |   | (118 | ) |
| Software                                         |       | 2.24                                                                 |       | 120                                          |       | (33                                             | )          | 120 |   | (23 | ) |
| Customer relationships                           |       | 6.84                                                                 |       | 3,510                                        |       | (503                                            | )          | 3,510 |   | (333 | ) |
| Trade name                                       |       | 0.49                                                                 |       | 115                                          |       | (59                                             | )          | 115 |   | (5 | ) |
| Patents                                          |       | 10.00                                                                |       | 200                                          |       | —                                          |       | — |   | — |   |
| Total                                            |       |                                                                 |       | $                                            | 8,934      |                                            | $          | (2,047 | ) | $ | 8,734 |   | $ | (1,659 | ) |

 

The increase in patents from December 31, 2009 toMarch 31, 2010 was due to the allocation of purchase price related to theSmallfoot and Zox acquisition. Amortization expense related to intangible assets amounted to $388 and$169 for the three months ended March 31, 2010 and 2009, respectively, andis included in general and administrative expenses in the accompanyingunaudited condensed consolidated statements of operations. The finite-lifeintangible asset lives range from one to ten years and the weighted averageremaining life was 6.54 years at March 31, 2010.

 

In addition to the definite-life intangible assetsdescribed above, the Company also has two indefinite-life intangible assetsrelated to in-process research and development projects acquired in connectionwith the Smallfoot and Zox acquisition (refer to Note 2 for furtherdiscussion).  The indefinite-lifein-process research and development intangible assets totaled $920 as of March 31,2010.  There were no indefinite-lifeintangible assets as of December 31, 2009.

* *

*Goodwill*

 

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

 

In performing the test, the Company utilizes thetwo-step approach prescribed under ASC 350. The first step requires acomparison of the carrying value of the reporting units, as defined, to thefair value of these units. The Company considers a number of factors todetermine the fair value of a reporting unit, including an independentvaluation to conduct this test. The valuation is based upon expected futurediscounted operating cash flows of the reporting unit as well as analysis ofrecent sales or offerings of similar companies. The Company bases the discountrate used to arrive at a present value as the date of the impairment test onits weighted average cost of capital. If the carrying value of its reportingunit exceeds its fair value, the Company will perform the second step of thegoodwill impairment test to measure the amount of impairment loss, 

 

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if any. The second step of the goodwill impairment test compares theimplied fair value of a reporting unit’s goodwill to its carrying value. Todate, the Company has not been required to perform the second step of theimpairment test.

 

The fair value of the entity is determined by use of amarket approach based on the quoted market price of its common stock and thenumber of shares outstanding and a discounted cash flow analysis (DCF) underthe income approach. The key assumptions that drive the fair value in the DCFmodel are the discount rates (i.e., weighted average cost of capital(WACC)), terminal values, growth rates, and the amount and timing of expectedfuture cash flows. If the current worldwide financial markets and economicenvironment were to deteriorate, this would likely result in a higher WACCbecause market participants would require a higher rate of return. In the DCF,as the WACC increases, the fair value decreases. The other significant factorin the DCF is its projected financial information (i.e., amount and timingof expected future cash flows and growth rates) and if its assumptions were tobe adversely impacted, this could result in a reduction of the fair value ofthe entity. The Company believes that it is not at risk of failing the firststep of the goodwill impairment test.

 

The estimate of fair value requires significantjudgment. Any loss resulting from an impairment test would be reflected inoperating loss in the Company’s consolidated statements of operations. Theannual impairment testing process is subjective and requires judgment at manypoints throughout the analysis. If these estimates or their related assumptionschange in the future, the Company may be required to record impairment chargesfor these assets not previously recorded.

 

The following table shows the change in the carryingamount of goodwill from December 31, 2009 to March 31, 2010:

 
| Balance at December 31, 2009            |   | $     | 22,553 |   |
|----------------------------------------------|--------|-------|--------|--------|
| Acquisition of Smallfoot and Zox             |   | 240   |   |
| Purchase price adjustments related to Cogent |   | 20    |   |
| SRC earnout                                  |   | 1,667 |   |
| Balance at March 31, 2010               |   | $     | 24,480 |   |

 

**4. NetLoss Per Share**

 

A reconciliation of basic and diluted share amountsfor the three months ended March 31, 2010 and 2009 are as follows:

 
| ** **                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Numerator:                                         |       |                                   |       |   |   |
| Net loss                                           |       | $                                      | (14,200    | ) | $ | (12,534 | ) |
| Denominator:                                       |       |                                   |       |   |   |
|                                               |       |                                   |       |   |   |
| Basic weighted average common shares outstanding   |       | 24,051                                 |       | 19,994 |   |
| Weighted average common stock equivalents          |       | —                                 |       | — |   |
|                                               |       |                                   |       |   |   |
| Diluted weighted average common shares outstanding |       | 24,051                                 |       | 19,994 |   |
|                                               |       |                                   |       |   |   |
| Basic net loss per common share                    |       | $                                      | (0.59      | ) | $ | (0.63 | ) |
| Diluted net loss per common share                  |       | $                                      | (0.59      | ) | $ | (0.63 | ) |
| Weighted average anti-dilutive shares related to:  |       |                                   |       |   |   |
| Stock options                                      |       | 3,113                                  |       | 3,160 |   |
| Nonvested restricted shares                        |       | 178                                    |       | 247 |   |
| Restricted stock units                             |       | 236                                    |       | 66 |   |
| Escrow shares                                      |       | 150                                    |       | 120 |   |

 

For the three months ended March 31, 2010 and2009, anti-dilutive shares comprise the impact of those number of shares thatwould have been dilutive had the Company had net income plus the number ofshares that would have been anti-dilutive had the Company had net income.

 

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The Company excludes the shares issued in connectionwith restricted stock awards from the calculation of basic weighted averagecommon shares outstanding until such time as those shares vest, as the employeedoes not bear the risks or rewards of ownership until those shares have vested.

 

In connection with certain of the Company’s businesscombinations, the Company has issued shares that were held in escrow uponclosing of the applicable business combination. The Company excludes sharesheld in escrow from the calculation of basic weighted average common sharesoutstanding where the release of such shares is contingent upon an event andnot solely subject to the passage of time.

 

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

 

The Company’sfinancial instruments mainly consist of cash and cash equivalents, restrictedcash, accounts receivable, and accounts payable and debt obligations. Thecarrying amounts of the Company’s cash equivalents, restricted cash, accountsreceivable and accounts payable approximate their fair value due to theshort-term nature of these instruments. At March 31, 2010 and December 31,2009, there were no amounts outstanding under the Credit Facility.

 

**6. Fair Value Measurements**

 

ASC 820, *Fair Value Measurementsand Disclosures* (ASC 820), establishes a fair value hierarchy thatrequires the use of observable market data, when available, and prioritizes theinputs to valuation techniques used to measure fair value in the followingcategories:

 

·                  Level 1—Valuation is based upon quoted prices foridentical instruments traded in active markets. Level 1 instrumentsinclude securities traded on active exchange markets, such as the New YorkStock Exchange.

 

·                  Level 2—Valuation is based upon quoted prices forsimilar instruments in active markets, quoted prices for identical or similarinstruments in markets that are not active and model-based valuation techniquesfor which all significant assumptions are observable in the market.

 

·                  Level 3—Valuation is generated from model-basedtechniques that use significant assumptions not observable in the market. Theseunobservable assumptions reflect the Company’s own estimates of assumptionsmarket participants would use in pricing the asset or liability.

 

The table below presents the balances of assets andliabilities measured at fair value on a recurring basis at March 31, 2010:

 
| ** **             | ** ** | **Fair Value Measurement at  March 31, 2010 Using** | ** ** |
|------------------------|------------|----------------------------------------------------------|------------|
| ** **             | ** ** | **Totals**                                               | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets (Level 1)** | ** ** | **Significant  Other  Observable  Inputs (Level 2)** | ** ** | **Significant  Unobservable  Inputs (Level 3)** | ** ** |
| Money market funds (1) |       | $                                                        | 100,510    |   | $ | 100,510 |   | $ | — |   | $ | — |   |
|                   |       | $                                                        | 100,510    |   | $ | 100,510 |   | $ | — |   | $ | — |   |

 

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(1)                                  Included in cash and cash equivalents inthe accompanying unaudited condensed consolidated balance sheets.

 

With respect to assets measured at fair value on anon-recurring basis, which would be impaired long-lived assets, there were noindicators of impairment during the three months ended March 31, 2010requiring a fair value measurement of these assets.  Accordingly, these assets were not measuredat fair value.  With respect toliabilities measured at fair value on a non-recurring basis, which would becontingent consideration liability, refer to Note 2 for discussion of thedetermination of fair value of this liability.

 

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At March 31, 2010, the Company had restrictedcash of approximately $7,874 invested in certificates of deposit. Allcertificates of deposit have contractual maturities of twelve months or less.The Company’s investments in certificates of deposit have a fair value thatapproximates cost based on current market rates for similar instruments.

** **

**7.Financing Arrangements**

 

Pursuant to the terms of the Credit Facility, SVBwill, among other things, make revolving credit and term loan advances andissue letters of credit for the Company’s account. The interest on loans underthe Company’s revolving credit loan accrues at interest rates based upon eitherSVB’s prime rate or the 30, 60 or 90-day LIBOR plus 2.25%, at the Company’selection. The interest on term loans accrues at SVB’s prime rate plus 0.50% orthe 30, 60 or 90-day LIBOR plus 2.75%, at the Company’s election. The termadvance is payable in thirty-six consecutive equal monthly installments ofprincipal, calculated by SVB, based upon the amount of the term advance and anamortization schedule equal to thirty-six months. All unpaid principal andaccrued interest is due and payable in full on August 5, 2010, which isthe maturity date. In connection with the issuance or renewal of letters ofcredit for the Company’s account, the Company is charged a letter of credit feeof 1.25%. The Company expenses the interest and letter of credit fees, asapplicable, in the period incurred.

 

The Company’s obligations under the Credit Facilityare secured by all of the assets of the Company and its subsidiaries, excludingany intellectual property. The Credit Facility contains customary terms andconditions for credit facilities of this type, including restrictions on theCompany’s ability to incur additional indebtedness, create liens, enter intotransactions with affiliates, transfer assets, pay dividends or makedistributions on, or repurchase, the Company’s stock, consolidate or merge withother entities, or suffer a change in control. In addition, the Company isrequired to meet certain financial covenants customary with this type of creditfacility, including maintaining a minimum specified tangible net worth and aminimum specified ratio of current assets to current liabilities. The CreditFacility contains customary events of default, including payment defaults,breaches of representations, breaches of affirmative or negative covenants,cross defaults to other material indebtedness, bankruptcy and failure todischarge certain judgments. If a default occurs and is not cured within anyapplicable cure period or is not waived, the Company’s obligations under theCredit Facility may be accelerated. The Company was in compliance with allfinancial covenants under the Credit Facility at March 31, 2010 andDecember 31, 2009.

 

In October 2009, the Company repaid theoutstanding borrowings of $4,442 under the Credit Facility. The Companyincurred financing costs of $120 in connection with the Credit Facility, whichwere deferred and are being amortized to interest expense over the life of theCredit Facility, which matures on August 5, 2010. At March 31, 2010,the Company had no borrowings and letters of credit of $29,383 outstandingunder the Credit Facility.

 

In April 2010, the Company and one of itssubsidiaries entered into a second loan modification agreement to its CreditFacility with SVB, which increased the Company’s borrowing limit from $35,000to $50,000, as well as modified certain of the Company’s financial covenantdebt compliance requirements.  Also in April 2010,the Company was required to provide financial assurance in connection with itscapacity bid in a certain open market bidding program.  The Company provided this financial assuranceutilizing approximately $30,000 of its available cash on hand, a $19,000 letterof credit issued under the Credit Facility and a $50,000 letter of creditissued by SVB, which is collateralized by the Company’s cash.  Based on the Company’s prior experience withthis certain open market bidding program, the Company currently expects that itwill recover all or substantially all of this cash and a majority of theseletters of credit during the second quarter of 2010.

** **

**8.Commitments and Contingencies**

 

The Company is contingently liable under outstandingletters of credit. Restricted cash balances in the amount of $7,874collateralize certain outstanding letters of credit and cover financialassurance requirements in certain of the programs in which the Companyparticipated at March 31, 2010 and December 31, 2009.

 

The Company is subject to certain performanceguarantee requirements under certain customer contracts and open market biddingprogram participation rules. The Company had deposits held by certain customersof $3,314 and $3,024, respectively, at March 31, 2010 andDecember 31, 2009. These amounts primarily represent up-front paymentsrequired by utility and grid operator customers as a condition of participationin certain demand response programs and to ensure that the Company will deliverits committed capacity amounts in those programs. If the Company fails to meetits minimum enrollment requirements, a portion or all of the deposit may beforfeited. The Company assessed the probability of default under these customercontracts and open market bidding programs and has determined the likelihood ofdefault to be remote.

 

In connection with the Company’s participation in anopen market bidding program, the Company entered into an arrangement with athird party during the second quarter of 2009 to bid capacity into the programand provide the corresponding financial assurance required in connection withthe bid. The arrangement included an up-front payment by the

 

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Company equal to $2,000, of which $1,100 was expensed as interestexpense during the second quarter of 2009 and $900 was deferred and will berecognized ratably as a charge to cost of revenues as revenue is recognizedover the 2012/2013 delivery year. In addition, the Company will be required topay the third party an additional contingent fee, up to a maximum of $3,000,based on the revenue that the Company expects to earn in 2012 in connectionwith the bid. This additional fee will be recognized as earned as a reductionof revenue.

 

The Company includes indemnification provisions incertain of its contracts. These indemnification provisions include provisionsindemnifying the customer against losses, expenses, and liabilities fromdamages that could be awarded against the customer in the event that theCompany’s service and related products are found to infringe upon a patent orcopyright of a third party. The Company believes that its internal businesspractices and policies and the ownership of information limits the Company’srisk in paying out any claims under these indemnification provisions.

 

**9.Stock-Based Compensation**

 

The Company’s Amended and Restated 2003 Stock Optionand Incentive Plan (2003 Plan) and the 2007 Employee, Director and ConsultantStock Plan (the 2007 Plan, and collectively with the 2003 Plan, the Plans)provide for the grant of incentive stock options, nonqualified stock options,restricted and unrestricted stock awards and other stock-based awards toeligible employees, directors and consultants of the Company. Options grantedunder the Plans are exercisable for a period determined by the Company, but inno event longer than ten years from the date of the grant. Option awards aregenerally granted with an exercise price equal to the market price of theCompany’s common stock at the date of grant. Options, restricted stock awardsand restricted stock unit awards generally vest ratably over four years, withcertain exceptions. The 2003 Plan expired upon the Company’s initial publicoffering (IPO) in May 2007. Any forfeitures after May 2007 under the2003 Plan are available for future grant under the 2007 Plan up to a maximum of1,000,000 shares. During the three months ended March 31, 2010 and 2009,the Company issued 24,681 shares of its common stock and 45,085 shares of itscommon stock, respectively, to certain executives in lieu of cash to satisfy aportion of the Company’s compensation obligations to those individuals. As ofMarch 31, 2010, 2,232,619 shares were available for future grant under the2007 Plan.

 

For stock options granted prior to January 1,2009, the fair value of each option was estimated at the date of grant using aBlack-Scholes option-pricing model. For stock options granted on or afterJanuary 1, 2009, the fair value of each option has been and will beestimated on the date of grant using a trinomial valuation model. The trinomialmodel considers characteristics of fair value option pricing that are notavailable under the Black-Scholes model. Similar to the Black-Scholes model,the trinomial model takes into account variables such as expected volatility,dividend yield rate, and risk free interest rate. However, in addition, thetrinomial model considers the probability that the option will be exercisedprior to the end of its contractual life and the probability of termination orretirement of the option holder in computing the value of the option. For thesereasons, the Company believes that the trinomial model provides a fair valuethat is more representative of actual experience and future expected experiencethan that value calculated using the Black-Scholes model.

 

The fair value of options granted was estimated at thedate of grant using the following weighted average assumptions:

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Risk-free interest rate    |       | 3.7                                    | %          | 2.7 | % |
| Vesting term, in years     |       | 2.16                                   |       | 2.16 |   |
| Expected annual volatility |       | 86                                     | %          | 86 | % |
| Expected dividend yield    |       | —                                 | %          | — | % |
| Exit rate pre-vesting      |       | 4.88                                   | %          | 4.88 | % |
| Exit rate post-vesting     |       | 10.89                                  | %          | 10.89 | % |

 

Volatility measures the amount that a stock price hasfluctuated or is expected to fluctuate during a period. As there was no publicmarket for the Company’s common stock prior to the effective date of the IPO,the Company determined the volatility based on an analysis of reported data fora peer group of companies that issued options with substantially similar terms.The expected volatility of options granted has been determined using an averageof the historical volatility measures of this peer group of companies, as wellas the historical volatility of the Company’s common stock beginningJanuary 1, 2008. The risk-free interest rate is the rate available as ofthe option date on zero-coupon United States government issues with a termequal to the expected life of the option. The Company has not paid dividends onits common stock in the past and does not plan to pay any dividends in theforeseeable future. In addition, the terms of the Credit Facility preclude theCompany from paying dividends.

 

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The Company accounts for transactions in whichservices are received from non-employees in exchange for equity instrumentsbased on the fair value of such services received or of the equity instrumentsissued, whichever is more reliably measured.

 

The components of stock-based compensation expense aredisclosed below:

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Stock option expense (employees)            |       | $                                      | 2,305      |   | $ | 2,286 |   |
| Stock option expense (non-employees)        |       | —                                 |       | 18 |   |
| Restricted stock and restricted stock units |       | 2,041                                  |       | 515 |   |
| Total                                       |       | $                                      | 4,346      |   | $ | 2,819 |   |

 

Stock-based compensation is recorded in theaccompanying statements of operations, as follows:

 
| ** **                          | ** ** | **Three Months Ended  March 31,** |       |
|-------------------------------------|------------|----------------------------------------|------------|
| ** **                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Selling and marketing expenses      |       | $                                      | 1,048      |   | $ | 1,025 |   |
| General and administrative expenses |       | 3,131                                  |       | 1,626 |   |
| Research and development expenses   |       | 167                                    |       | 168 |   |
| Total                               |       | $                                      | 4,346      |   | $ | 2,819 |   |

 

The Company recognized no income tax benefit fromstock-based compensation arrangements during the three months endedMarch 31, 2010 and 2009. In addition, no compensation cost was capitalizedduring the three months ended March 31, 2010 and 2009.

 

The following is a summary of the Company’s stockoption activity as of March 31, 2010 and the stock option activity for allstock option plans during the three months ended March 31, 2010:

 

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| ** **                                                 | ** ** | **Three Months Ended  March 31, 2010** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                 | ** ** | **Number of   Shares  Underlying  Options** | ** ** | **Exercise  Price Per   Share** | ** ** | **Weighted-  Average  Exercise Price  Per Share** | ** ** | **Aggregate  Intrinsic  Value(2)** | ** ** |
| Outstanding at beginning of period                         |       | 2,503,975                                   |       | $0.11 - $48.54 |   | $ | 10.84 |   | $ | 49,599 |   |
| Granted                                                    |       | 179,775                                     |       |   |   | 29.04 |   |   |   |
| Exercised                                                  |       | (241,631                                    | )          |   |   | 6.25 |   | $ | 5,769 |   |
| Cancelled                                                  |       | (50,877                                     | )          |   |   | 15.59 |   |   |   |
| Outstanding at end of period                               |       | 2,391,242                                   |       | $0.11 - $48.54 |   | 12.58 |   | $ | 41,749 |   |
| Weighted average remaining contractual life in  years: 6.7 |       |                                        |       |   |   |   |   |   |   |
| Exercisable at end of period                               |       | 1,184,820                                   |       | $0.11 - $48.54 |   | $ | 8.66 |   | $ | 25,319 |   |
| Weighted average remaining contractual life in  years: 6.3 |       |                                        |       |   |   |   |   |   |   |
| Vested or expected to vest at March 31, 2010  (1)     |       | 2,329,930                                   |       | $0.11 - $48.54 |   | $ | 12.33 |   | $ | 41,246 |   |

 

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(1)                                  This represents the number of vestedoptions as of March 31, 2010 plus the number of unvested options expectedto vest as of March 31, 2010 based on the unvested options outstanding atMarch 31, 2010, adjusted for the estimated forfeiture rate of 4.88%.

 

(2)                                  The aggregate intrinsic value wascalculated based on the positive difference between the estimated fair value ofthe Company’s common stock on March 31, 2010 of $29.68 and the exerciseprice of the underlying options.

 

In December 2008, the Company’s board ofdirectors approved a one-time offer to the Company’s employees, including itsexecutive officers, and directors to exchange option grants that had anexercise price per share that was equal to or greater than the higher of $12.00or the closing price of the Company’s common stock as reported on The NASDAQGlobal Market on January 21, 2009 (the Exchange). The Exchange closed onJanuary 21, 2009, and the Company exchanged options that had exerciseprices equal to or greater than $12.00 per share. As a result, an aggregate of744,401 options, with exercise prices ranging from $12.27 to $48.54 per share,were exchanged for 424,722 options with an exercise price per share of $8.63for employees who were not also executive officers of the Company, 142,179options with an exercise price per share of $11.47 for executive officers whowere not also directors of the Company and 45,653 options with an exerciseprice per share of $12.94 for the Company’s directors. On the date of theExchange, the estimated fair value of the new options did not exceed the fairvalue of the exchanged stock options calculated immediately prior to the Exchange.As such, there was no incremental fair value of the new options, and theCompany will not record additional compensation expense related to theExchange. The Company will continue to recognize the remaining compensationexpense related to the exchanged options over the remaining vesting period ofthe original options.

* *

*Additional Information About Stock Options*

 
| ** **                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Total number of options granted during the period         |       | 179,775                                |       | 821,004 |   |
| Weighted-average fair value per share of options  granted |       | $                                      | 18.35      |   | $ | 18.80 |   |
| Total intrinsic value of options exercised(1)             |       | $                                      | 5,769      |   | $ | 1,100 |   |

 

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(1)          Difference between the market price atexercise and the price paid to exercise the options.

 

Of the stock options outstanding as of March 31, 2010, 2,376,249options were held by employees and directors and 14,993 options were held bynon-employees. Subsequent to the $2,305 of stock-based compensation 

 

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expense recognizedfor the three months ended March 31, 2010 related to stock options held byemployees, the amount of stock-based compensation expense that may berecognized for outstanding, unvested options as of March 31, 2010 was$16,431, which is to be recognized over a weighted average period of2.3 years. There were no remaining unvested non-employee options as of March 31,2010.

 

*RestrictedStock and Restricted Stock Units*

 

For non-vested restricted stock and restricted stock units outstandingas of March 31, 2010, the Company had $11,338 of unrecognized stock-basedcompensation expense, which is expected to be recognized over a weightedaverage period of 3.3 years.

 

*RestrictedStock*

 

The following table summarizes the Company’s restricted stock activityduring the three months ended March 31, 2010:

 
| ** **                          | ** ** | ** **    | ** ** | **Weighted Average** | ** ** |
|-------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                          | ** ** | **Number of** | ** ** | **Grant Date Fair**  | ** ** |
| ** **                          | ** ** | **Shares**    | ** ** | **Value Per Share**  | ** ** |
| Nonvested at December 31, 2009 |       | 188,618       |       | $                    | 23.42      |   |
| Granted                             |       | 45,250        |       | 29.20                |       |
| Vested                              |       | (63,461       | )          | 24.54                |       |
| Cancelled                           |       | (5,729        | )          | 26.67                |       |
| Nonvested at March 31, 2010    |       | 164,678       |       | $                    | 24.46      |   |

 

All shares underlying awards of restricted stock arerestricted in that they are not transferable until they vest. The shares typicallyvest ratably over a four year period from the date of issuance, with certainexceptions. The fair value of the restricted stock is expensed ratably over thevesting period. The shares of restricted stock have been issued at no cost tothe recipients, except for 152,460 shares of restricted stock granted in 2006that were purchased for $0.51 per share. The Company records the proceedsreceived for unvested shares in accrued expenses. The amount is amortized intoadditional paid-in capital as the shares vest. If the employee who received therestricted stock leaves the Company prior to the vesting date for any reason,the shares of restricted stock will be forfeited and returned to the Company.

* *

*Additional Information about Restricted Stock*

 
| ** **                                                               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                               | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Total number of shares of restricted stock granted  during the period    |       | 45,250                                |       | — |   |
| Weighted average fair value per share of restricted  stock granted       |       | $                                     | 29.20      |   | $ | — |   |
| Total number of shares of restricted stock vested  during the period     |       | 63,461                                |       | 65,913 |   |
| Total fair value of shares of restricted stock  vested during the period |       | $                                     | 1,854      |   | $ | 736 |   |

 

*Restricted Stock Units*

 

The following table summarizes the Company’srestricted stock unit activity during the quarter ended March 31, 2010:

 

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| ** **                          | ** ** | ** **    | ** ** | **Weighted Average** | ** ** |
|-------------------------------------|------------|---------------|------------|----------------------|------------|
| ** **                          | ** ** | **Number of** | ** ** | **Grant Date Fair**  | ** ** |
| ** **                          | ** ** | **Shares**    | ** ** | **Value Per Share**  | ** ** |
| Nonvested at December 31, 2009 |       | 114,000       |       | $                    | 11.55      |   |
| Granted                             |       | 285,000       |       | 28.59                |       |
| Vested                              |       | (28,500       | )          | 11.55                |       |
| Cancelled                           |       | —        |       | —               |       |
| Nonvested at March 31, 2010    |       | 370,500       |       | $                    | 24.66      |   |

 

Prior to 2009, theCompany had not granted any restricted stock units.

 

The weighted average grant date fair value of restricted stock unitsgranted during the three months ended March 31, 2009 was $11.55 pershare.  The total fair value ofrestricted stock units that vested during the three months ended March 31,2010 was $962.

** **

**10.Income Taxes**

 

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

 

ASC 740 also provides criteria for the recognition, measurement,presentation and disclosures of uncertain tax positions. A tax benefit from anuncertain tax position may be recognized if it is “more likely than not” thatthe position is sustainable based solely on its technical merits. As of March 31,2010 and December 31, 2009, the Company had no unrecognized tax benefits.

 

In accordance with ASC 740, each interim period is considered an integralpart of the annual period and tax expense is measured using an estimated annualeffective tax rate. The Company is required, at the end of each interimreporting period, to make its best estimate of the annual effective tax ratefor the full fiscal year and use that rate to provide for income taxes on acurrent year-to-date basis.  If anenterprise has an ordinary loss for the year to date at the end of an interimperiod and anticipates ordinary income for the fiscal year, which is the casewith the Company, the enterprise will record an interim period tax benefitbased on applying the estimated annual effective tax rate to the ordinary lossas long as the tax benefits are realized during the year or recognizable as adeferred tax asset as of the end of the year. As a result, the Company recorded an income tax benefit of $1,167 forthe three months ended March 31, 2010, which included consideration of thetax benefit recognized by the Company from stock option deductions generatedduring the three months ended March 31, 2010. This tax benefit relatesprincipally to losses incurred from operations in the United States, which theCompany expects to realize in 2010 based on forecasted pre-tax income for the fiscalyear ending December 31, 2010 (fiscal 2010), partially offset by lossesfrom foreign operations for which no tax benefit can be recognized, resultingin an effective tax rate for the three months ended March 31, 2010 of7.6%.  The Company’s estimated annualeffective tax rate for fiscal 2010 is 13.8%. However, the estimated annual effective tax rate could be reduced infuture quarters of fiscal 2010 as a result of tax benefit from stock optionswhich are not recognized in the determination of the estimated annual effectiverate until they occur.  The Company’sestimated annual effective tax rate is lower than the statutory rate as aresult of the Company’s federal and state net operating loss carryforwards tooffset future federal and state taxable income. Even though the Company’s net federal and state net operating losscarryforwards exceed the Company’s estimated taxable income for fiscal 2010,the Company’s estimated annual effective tax rate is greater than zero due tofederal alternative minimum taxes for which the utilization of net operating losscarryforwards is limited, and certain state taxes for jurisdictions where theCompany does not have sufficient net operating loss carryforwards, as well asthe amortization of tax deductible goodwill, which generates a deferred taxliability that cannot be offset by net operating losses or other deferred taxassets since its reversal is considered indefinite in nature.

 

The Company recorded an income tax provision of $181 for the threemonths ended March 31, 2009.  Thistax provision is primarily related to the amortization of tax deductiblegoodwill, which generated a deferred tax liability that cannot be offset by netoperating losses or other deferred tax assets since its reversal is consideredindefinite in nature.

 

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The Companyreviews all available evidence to evaluate the recovery of deferred tax assets,including the recent history of accumulated losses in all tax jurisdictionsover the last three years as well as its ability to generate income in futureperiods. As of March 31, 2010 and December 31, 2009, due to theuncertainty related to the ultimate use of the Company’s deferred income taxassets, the Company has provided a full valuation allowance.

 

**11.  Concentrations of Credit Risk**

 

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk principally consist of cash and cash equivalents, restrictedcash and accounts receivable. The Company maintains its cash and cashequivalent balances with highly rated financial institutions and, consequently,such funds are subject to minimal credit risk.

 

The Company’scustomers are principally located in the northeastern and PJM Interconnection(PJM) regions of the United States. The Company performs ongoing creditevaluations of the financial condition of its customers and generally does notrequire collateral. Although the Company is directly affected by the overallfinancial condition of the energy industry, as well as global economicconditions, management does not believe significant credit risk exists as of March 31,2010. The Company generally has not experienced any material losses related toreceivables from individual customers or groups of customers in the energyindustry. The Company maintains an allowance for doubtful accounts based onaccounts past due and historical collection experience. The Company’s lossesrelated to collection of trade receivables have consistently been withinmanagement’s expectations. Due to these factors, no additional credit riskbeyond amounts provided for collection losses is believed by management to beprobable.

 

The followingtable sets forth the Company’s significant customers. PJM Interconnection andISO-New England, Inc. are regional grid operator customers and arecomprised of multiple utilities and were formed to control the operation of aregional power system, coordinate the supply of electricity, and establish fairand efficient markets.

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **Revenues**                           | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| PJM Interconnection        |       | $                                      | 195        |   | 1 | % | $ | 60 |   | 0 | % |
| ISO-New England, Inc. |       | 17,420                                 |       | 62 | % | 14,459 |   | 79 | % |
| Total                      |       | $                                      | 17,615     |   | 63 | % | $ | 14,519 |   | 79 | % |

 

Accounts receivablefrom these customers was approximately $9,356 and $9,788 at March 31, 2010and December 31, 2009, respectively. Unbilled revenue from these customerswas $16,374 and $40,388 at March 31, 2010 and December 31, 2009,respectively.

 

Deposits and restrictedcash consist of funds to secure performance under certain customer contractsand open market bidding programs. Deposits held by customers were $3,314 and$3,024 at March 31, 2010 and December 31, 2009, respectively.

 

**12. Legal Proceedings**

 

The Company issubject to legal proceedings, claims and litigation arising in the ordinarycourse of business. The Company does not expect the ultimate costs to resolvethese matters to have a material adverse effect on the Company’s consolidatedfinancial condition, results of operations or cash flows.

 

**13.  Recent Accounting Pronouncements**

 

In September 2009, the Financial AccountingStandards Board (FASB) ratified ASC Update No. 2009-13, *Multiple-Deliverable Revenue Arrangements* (ASU2009-13).  ASU 2009-13 amends existingrevenue recognition accounting pronouncements that are currently within thescope of FASB ASC Subtopic 605-25. This consensus provides for two significantchanges to the existing multiple element revenue recognition guidance. First,this guidance deletes the requirement to have objective and reliable evidenceof fair value for undelivered elements in an arrangement and will result

 

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in more deliverables being treated as separate units of accounting. Thesecond change modifies the manner in which the transaction consideration isallocated across the separately identified deliverables. These changes may resultin entities recognizing more revenue up-front, and entities will no longer beable to apply the residual method and defer the fair value of undeliveredelements. Upon adoption of these new rules, each separate unit of accountingmust have a selling price, which can be based on management’s estimate whenthere is no other means to determine the fair value of that undelivered item,and the arrangement consideration is allocated based on the elements’ relativeselling price. This accounting guidance is effective no later than fiscal yearsbeginning on or after June 15, 2010, but may be adopted early as of thefirst quarter of an entity’s fiscal year. Entities may elect to adopt thisaccounting guidance either through prospective application to all revenuearrangements entered into or materially modified after the date of adoption orthrough a retrospective application to all revenue arrangements for all periodspresented in the financial statements. The Company is currently evaluating theimpact of this revised accounting guidance, including the period in which theCompany will adopt this guidance.

 

In January 2010,the FASB issued ASU 2010-06, *Improving Disclosure aboutFair Value Measurements*(ASU 2010-06).  ASU 2010-06 requires additional disclosuresregarding fair value measurements, amends disclosures about post-retirementbenefit plan assets and provides clarification regarding the level ofdisaggregation of fair value disclosures by investment class. ASU 2010-06 iseffective for interim and annual reporting periods beginning after December 15,2009, except for certain Level 3 activity disclosure requirements that will beeffective for reporting periods beginning after December 15, 2010. Theadoption of this standard did not have a material impact on the Company’sconsolidated financial position or results of operations.

 

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

 

*Thefollowing discussion should be read in conjunction with our unaudited condensedconsolidated financial statements and related notes thereto included elsewherein this Quarterly Report on Form 10-Q, as well as our audited financialstatements and notes thereto and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2009, as filed with the Securitiesand Exchange Commission, or the SEC, on March 12, 2010. This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, asamended, or the Exchange Act. Without limiting the foregoing, the words “may,” “will,”“should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”“predict,” “potential,” “continue,” “target” and variations of those terms orthe negatives of those terms and similar expressions are intended to identifyforward-looking statements. All forward-looking statements included in thisQuarterly Report on Form 10-Q are based on current expectations,estimates, forecasts and projections and the beliefs and assumptions of ourmanagement including, without limitation, our expectations regarding ourresults of operations, operating expenses and the sufficiency of our cash forfuture operations. We assume no obligation to revise or update any suchforward-looking statements. Our actual results could differ materially fromthose anticipated in these forward-looking statements as a result of certainimportant factors, including those set forth below under this Item 2 — “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” Part II,Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q,as well as in our Annual Report on Form 10-K for the fiscal year ended December 31,2009. You should carefully review those factors and also carefully review therisks outlined in other documents that we file from time to time with the SEC.*

 

**Overview**

 

We are a leading providerof clean and intelligent energy management applications and services, whichinclude comprehensive demand response services, data-driven energy efficiencyservices, energy price and risk management services and enterprise carbonmanagement services.  During the firstquarter of 2010, we released an updated energy management application platform,which includes the latest release of our four energy management applicationsand enhances previous iterations of our PowerTrak and CarbonTrak enterprisesoftware platforms and our monitoring-based commissioning services.  Our customers are commercial, institutionaland industrial end-users of energy, as well as electric power grid operatorsand utilities.

 

We believe that we arethe largest demand response service provider in the United States forcommercial, institutional and industrial customers. As of March 31, 2010,we managed over 4,350 MW of demand response capacity across an end-use customerbase of approximately 3,100 accounts and 7,200 customer sites throughoutmultiple electric power grids. Demand response is an alternative to traditionalpower generation and transmission infrastructure projects that enables gridoperators and utilities to reduce the likelihood of service disruptions, suchas brownouts and blackouts, during periods of peak electricity demand, andotherwise manage the electric power grid during short-term imbalances of supplyand demand. We use our Network Operations Center, or NOC, and comprehensivedemand response application, DemandSMART, to remotely manage and reduceelectricity consumption across a growing network of commercial, institutionaland industrial customer sites, making demand response capacity available togrid operators and utilities on demand while helping end-users of electricityachieve energy savings, environmental benefits and improved financial results.To date, we have received substantially all of our revenues from grid operatorsand utilities, who make recurring payments to us for managing demand responsecapacity that we share with end-users of electricity in exchange for suchend-users reducing their power consumption when called upon.

 

We build upon ourposition as a leading demand response services provider by using our NOC andenergy management application platform to also deliver a portfolio ofadditional energy management applications to our customers, including thecross-selling of these energy management applications to existing end-usecustomers.  These additional energymanagement applications include our SiteSMART, SupplySMART and CarbonSMARTapplications.  SiteSMART is ourdata-driven energy efficiency application that has multiple features, includingmonitoring-based commissioning tools, commissioning and retro-commissioningauthority services, energy consulting and engineering services, distributedgeneration services and owner-engineer services.  SupplySMART is our energy price and riskmanagement application and service that provides our end-use customers locatedin restructured or deregulated markets throughout the United States with theability to more effectively manage the energy supplier selection process,including energy supply product procurement and implementation.  CarbonSMART is our enterprise carbonmanagement application that supports the measurement, tracking, analysis, andreporting and management of greenhouse gas emissions.

 

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We continue to devotesubstantially all of our efforts toward the sale of our energy managementapplications and services. We have incurred net losses from inception to March 31,2010. Our net loss was $14.2 million and $12.5 million, respectively, for thethree months ended March 31, 2010 and 2009.  As of March 31, 2010, our accumulateddeficit was $91.5 million.

 

In our demand responsebusiness we match obligation, in the form of MW that we agree to deliver to ourutility and grid operator customers, with supply, in the form of MW that we areable to curtail from the electric power grid. We increase, and occasionallydecrease, our obligation through open market programs, supplemental demandresponse programs, auctions or other similar capacity arrangements, openprogram registrations and bilateral contracts to account for changes in supplyand demand forecasts in order to achieve more favorable pricing opportunities.We increase our ability to curtail demand from the electric power grid bydeploying a sales team to contract with our commercial, institutional andindustrial customers and by installing our equipment at these customers’ sitesto connect them to our network. When we are called upon by our utility or gridoperator customers to deliver MW, we use our DemandSMART application todispatch this network to meet the demands of these utility and grid operatorcustomers. We refer to the above activities as managing our portfolio of demandresponse capacity.

 

**Significant Recent Developments**

 

In April 2010, we and one of our subsidiariesentered into a second loan modification agreement to our loan and securityagreement with Silicon Valley Bank, or SVB, which increased our borrowing limitfrom $35.0 million to $50.0 million, as well as modified certain of ourfinancial covenant debt compliance requirements.  We refer to our loan and security agreementwith SVB, as modified in May 2009 and April 2010, as the SVB creditfacility.

 

In March 2010, weacquired substantially all of the assets and certain liabilities of SmallFootLLC, or Smallfoot, and ZOX, LLC, or Zox, which were not affiliated with us butwere entities under common control. Smallfoot was in the process of developing wireless systems that manageand coordinate electricity demand for small commercial facilities and Zox wasin the process of developing hardware and software for automated utility meterreading.  The total purchase price paidby us at closing was approximately $1.4 million, of which $1.1 million was paidin cash and the remainder of which was paid by the issuance of 8,758 shares ofour common stock that had a fair value of approximately $0.3 million.

 

In February 2010, Dr.Susan F. Tierney was elected to serve as a member of our board of directors.

** **

**Revenues and Expense Components**

 

***Revenues***

 

We derive recurringrevenues from the sale of our energy management applications and services. Ourrevenues from our demand response services primarily consist of capacity andenergy payments. We derive revenues from demand response capacity that we makeavailable in open market programs, which are open market bidding opportunitiesestablished by grid operators and utilities. In these open market programs,grid operators and utilities generally seek bids from companies such as ours toprovide demand response capacity based on prices offered in competitivebidding. These opportunities are generally characterized by flexible capacitycommitments and prices that vary by hour, day, month, bidding period orsupplemental, new or modified programs. In certain markets, we enter intolong-term capacity contracts with grid operators and utilities, generallyranging from three to 10 years in duration, to deploy our demand responseservices. Our revenues have historically been higher in our second and thirdfiscal quarters compared to other quarters in our fiscal year due to seasonal demandrelated to the demand response market.

 

Where we operate in openmarket programs, our revenues from demand response capacity payments generallyvary month-to-month based upon our enrolled capacity and the market paymentrate. Where we have a long-term contract, we receive periodic capacitypayments, which may vary monthly or seasonally, based upon enrolled capacityand predetermined payment rates. Under both long-term contracts and open marketprograms, we receive capacity payments regardless of whether we are called uponto reduce demand for electricity from the electric power grid and we recognizerevenue over the applicable delivery period, even where payments are made overa different period. We generally demonstrate our capacity either through a demandresponse event or a measurement and verification 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 during a demand response event; we call this an energy payment.

 

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We do not recognize anyrevenues until we can determine that persuasive evidence of an arrangementexists, delivery has occurred, the fee is fixed or determinable, and we deemcollection to be reasonably assured. As program rules may differ for eachlong-term contract and/or region where we operate, we assess whether or not wehave met the specific service requirements under the program rules andrecognize or defer revenues as necessary. We recognize demand response revenueswhen we have provided verification to the grid operator or utility of ourability to deliver the committed capacity under the contract or open marketprogram. Committed capacity is verified through the results of an actual demandresponse event or a measurement and verification test. Once the capacity amounthas been verified, the revenues are recognized and future revenues become fixedor determinable and are recognized monthly over the performance period untilthe next verification event. In subsequent verification events, if our verifiedcapacity is below the previously verified amount, the grid operator or utilitycustomer will reduce future payments based on the adjusted verified capacityamounts.

 

We defer incrementaldirect costs incurred related to the acquisition or origination of a contractor open market program in a transaction that results in the deferral or delayof revenue recognition. As of March 31, 2010 and December 31, 2009,the incremental direct costs deferred were approximately $0.9 million and$0.9 million, respectively. During the three months ended March 31,2010 and 2009, we did not defer any contract origination costs. These deferredexpenses would not have been incurred without our participation in a certainopen market program and will be expensed in proportion to the related revenuebeing recognized. In addition, we capitalize the costs of our production andgeneration equipment utilized in the delivery of our demand response servicesand expense such equipment over the lesser of its useful life or the term ofthe contractual arrangement. These capitalized costs are included in propertyand equipment in our consolidated balance sheets. We believe that thisaccounting treatment appropriately matches expenses with the associatedrevenue.

 

As of March 31,2010, we had over 4,350 MW under management in our demand response network,meaning that we had entered into definitive contracts with our commercial,institutional and industrial customers with respect to over 4,350 MW of demandresponse capacity. We generally begin earning revenues from our MW undermanagement within approximately one month from the date on which we “enable”the MW, or the date on which we can reduce the MW from the electricity grid ifcalled upon to do so. An exception is the PJM Interconnection, or PJM, forwardcapacity market, which is a market in which we expect to continue to increaseour participation and derive revenues for the foreseeable future. Because PJMoperates on a June to May program-year basis, a MW that we enableafter June of each year may not begin earning revenue until June ofthe following year. This results in a longer average revenue recognition lagtime in our end-use customer portfolio from the point in time when we considera MW to be under management to when we earn revenues from the MW. Certain othermarkets in which we currently participate or choose to participate in thefuture may operate in a manner similar to the PJM forward capacity market,which would create a delay in recognizing revenue from the MW that we enable inthose markets.

 

Revenues generated fromopen market sales to PJM, a grid operator customer, accounted for 1% and 0%,respectively, of our total revenues for the three months ended March 31,2010 and 2009. Under certain contracts and programs, such as PJM’s EmergencyLoad Response Program, the period during which we are required to perform maybe shorter than the period over which we receive payments under that contractor program. In these cases, we record revenue over the mandatory performanceobligation period, and a portion of the revenues that have been earned isrecorded and accrued as unbilled revenue. Our unbilled revenue of $16.4 millionat March 31, 2010 will be billed and collected through May 31, 2010.

 

Revenues generated fromopen market sales to ISO New England, Inc., or ISO-NE, a grid operatorcustomer, accounted for 62% and 79%, respectively, of our total revenues forthe three months ended March 31, 2010 and 2009.

 

In addition to demandresponse, we generally receive either a subscription-based or consulting fee ora percentage savings fee for arrangements under which we provide services fromour other energy management solutions. Revenues derived from our other energy management solutions were$3.5 million and $1.6 million, respectively, for the three monthsended March 31, 2010 and 2009.

 

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***Costof Revenues***

 

Cost of revenuesfor our demand response services consists primarily of payments that we make toour commercial, institutional and industrial customers for their participationin our demand response network. We generally enter into three to five yearcontracts with our commercial, institutional and industrial customers underwhich we deliver recurring cash payments to them for the capacity they committo make available on demand. We also generally make an additional payment whena commercial, institutional or industrial customer reduces consumption ofenergy from the electric power grid during a demand response event. Theequipment and installation costs for our devices, which monitor energy usage,communicate with sites and, in certain instances, remotely control energy usageto achieve committed capacity, at our commercial, institutional and industrialcustomer sites are capitalized and depreciated over the lesser of the remainingestimated customer relationship period or the estimated useful life of theequipment, and this depreciation is reflected in cost of revenues. We alsoincluded in cost of revenues our amortization of capitalized internal-usesoftware costs related to our energy management applications. We also includein cost of revenues the monthly telecommunications and data costs we incur as aresult of being connected to commercial, institutional and industrial customersites and our internal payroll and related costs allocated to a commercial, institutionaland industrial customer site. Certain costs such as equipment depreciation andtelecommunications and data costs are fixed and do not vary based on revenuesrecognized.  These fixed costs couldimpact our gross margin trends described below during interim periods.  Cost of revenues for our other energymanagement solutions include third party services, equipment depreciation andthe wages and associated benefits that we pay to our project managers for the performanceof their services.

 

***GrossProfit and Gross Margin***

 

Gross profit consists of our total revenues less ourcost of revenues. Our gross profit has been, and will be, affected by manyfactors, including (a) the demand for our energy management applications, (b) theselling price of our energy management applications, (c) our cost ofrevenues, (d) the way in which we manage our portfolio of demand responsecapacity, (e) the introduction of new clean and intelligent energysolutions, (f) our demand response event performance and (g) our abilityto open and enter new markets and regions and expand deeper into markets wealready serve. Our outcomes in negotiating favorable contracts with ourcommercial, institutional and industrial customers, as well as with our utilityand grid operator customers, the effective management of our portfolio ofdemand response capacity and our demand response event performance are theprimary determinants of our gross profit and gross margin.

 

***OperatingExpenses***

 

Operating expenses consist of selling and marketing,general and administrative, and research and development expenses.Personnel-related costs are the most significant component of each of theseexpense categories. We grew from 357 full-time employees at March 31, 2009to 427 full-time employees at March 31, 2010. We expect to continue tohire employees to support our growth for the foreseeable future. In addition,we incur significant up-front costs associated with the expansion of the numberof MW under our management, which we expect to continue for the foreseeablefuture. Although we expect our overall operating expenses to increase inabsolute dollar terms for the foreseeable future as we grow our MW undermanagement and further increase our headcount, we expect our overall annualoperating expenses to decrease as a percentage of total annual revenues as weleverage our existing employee base and continue generating revenues from ourMW under management.

 

*Sellingand Marketing*

 

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

 

*Generaland Administrative*

 

General and administrative expenses consist primarilyof (a) salaries and related personnel costs, including costs associatedwith share-based payment awards, related to our executive, finance, humanresource, information technology and operations organizations, (b) facilitiesexpenses, (c) accounting and legal professional fees, (d) depreciationand amortization 

 

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and (e) other related overhead. We expect general andadministrative expenses to continue to increase in absolute dollar terms forthe foreseeable future as we invest in infrastructure to support our continuedgrowth. We expect general and administrative expenses to decrease as apercentage of total annual revenues as we leverage our current infrastructureand employee base.  However, amortizationexpense from intangible assets acquired in future acquisitions could impactthis trend.

* *

*Researchand Development*

 

Research and development expenses consist primarily of(a) salaries and related personnel costs, including costs associated withshare-based payment awards, related to our research and developmentorganization, (b) payments to suppliers for design and consulting services,(c) costs relating to the design and development of new energy managementapplications and services and enhancement of existing energy managementapplications and services, (d) quality assurance and testing and (e) otherrelated overhead. During the three months ended March 31, 2010 and 2009,we capitalized internal use software costs of $1.2 million and$0.6 million, respectively, and the amounts are included as software inproperty and equipment. We expect research and development expenses to increasein absolute dollar terms for the foreseeable future as we develop newtechnologies and to decrease as a percentage of total revenues in the long termas we leverage our existing technology.

*** ***

***Stock-BasedCompensation***

 

We account for stock-based compensation in accordancewith Accounting Standards Codification, or ASC, 718, *StockCompensation*.  As such, allshare-based payments to employees, including grants of stock options,restricted stock and restricted stock units, are recognized in the statement ofoperations based on their fair values as of the date of grant. For stockoptions granted prior to January 1, 2009, the fair value for these optionswas estimated at the date of grant using a Black-Scholes option-pricing model,and for stock options granted on or after January 1, 2009, the fair valueof each award is and has been estimated on the date of grant using a trinomialvaluation model. For the three months ended March 31, 2010 and 2009, werecorded expenses of approximately $4.3 million and $2.8 million,respectively, in connection with share-based payment awards to employees andnon-employees. With respect to grants through March 31, 2010, a futureexpense of non-vested options of approximately $16.4 million is expectedto be recognized over a weighted average period of 2.3 years and a futureexpense of restricted stock and restricted stock unit awards of approximately$11.3 million is expected to be recognized over a weighted average periodof 3.3 years.

*** ***

***OtherIncome and Expense, Net***

 

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

*** ***

***InterestExpense***

 

Interest expense consists of interest on our capitallease obligations, fees on the SVB credit facility and fees associated withissuing letters of credit and other financial assurances.

** **

**ConsolidatedResults of Operations**

*** ***

***ThreeMonths Ended March 31, 2010 Compared to the Three Months Ended March 31,2009***

*** ***

***Revenues***

 

The following table summarizes our revenues for thethree months ended March 31, 2010 and 2009 (dollars in thousands):

 

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| ** **                        | ** ** | **Three Months Ended  March 31,** | ** ** | **Dollar** | ** ** | **Percentage** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|------------|------------|----------------|------------|
| ** **                        | ** ** | **2010**                               | ** ** | **2009**   | ** ** | **Change**     | ** ** | **Change** | ** ** |
| Revenues:                         |       |                                   |       |       |       |           |       |   |   |
| Demand response solutions         |       | $                                      | 24,666     |       | $          | 16,800         |       | $ | 7,866 |   | 46.8 | % |
| Other energy management solutions |       | 3,455                                  |       | 1,623      |       | 1,832          |       | 112.9 | % |
| Total revenues                    |       | $                                      | 28,121     |       | $          | 18,423         |       | $ | 9,698 |   | 52.6 | % |

 

For the three months ended March 31, 2010, ourdemand response revenues increased by $7.9 million, or 46.8%, as comparedto the three months ended March 31, 2009. The increase in our demand response revenues was primarily due to anincrease in our MW under management in the following existing operating areasand our expansion into new markets and programs (dollars in thousands):

 
| ** **                               | ** ** | **Revenue Increase:**                           | ** ** |
|------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **March 31, 2009 to  March 31, 2010** | ** ** |
| New England                              |       | $                                               | 3,423      |   |
| Tennessee Valley Authority               |       | 2,372                                           |       |
| New York ISO                             |       | 1,560                                           |       |
| PJM                                      |       | 135                                             |       |
| Other                                    |       | 376                                             |       |
| Total increased demand response revenues |       | $                                               | 7,866      |   |

 

The increase in our demand response revenues for thethree months ended March 31, 2010 compared to the three months ended March 31,2009 was also attributable to more favorable pricing in certain operating areas,specifically ISO-NE, and our effective management of our portfolio of demandresponse capacity.  The current favorablepricing in the ISO-NE region will cease upon the commencement of the upcomingISO-NE program year which starts on June 1, 2010.  Additionally, we have expanded ourparticipation and MW under management in the Tennessee Valley Authority regionsince the first quarter of 2009, which contributed to the increase in ourdemand response revenues.  The increaseis also attributable to our participation in the New York ISO region, where weexperienced a demand response event in the first quarter of 2010, whichresulted in the fees under this arrangement through March 31, 2010becoming fixed or determinable and therefore, recognized as revenue in thefirst quarter of 2010.  The increase inour demand response revenues was offset by a reduction in energy payments dueto lower real-time demand response prices that affected our participation incertain economic demand response programs, including the day-ahead program withISO-NE.

 

For the three months ended March 31, 2010, ourother energy management solutions revenues increased by $1.8 million, or 113%,compared to the three months ended March 31, 2009.  Revenues related to our SiteSMART applicationfor the three months ended March 31, 2010 increased approximately$1.6 million compared to the same period in 2009 primarily due to a fullquarter of recognized revenue related to our acquisition of Cogent Energy, Inc.,or Cogent, which occurred in December 2009.

 

We currently expect our revenues to increase in 2010compared to 2009 as we seek to further increase our MW under management in alloperating regions, enroll new end-use customers in our demand responseprograms, continue to sell our other energy management solutions to our new andexisting demand response customers and pursue more favorable pricingopportunities.

 

***GrossProfit and Gross Margin***

 

The following table summarizes our gross profit andgross margin percentages for our demand response and other energy managementsolutions for the three months ended March 31, 2010 and 2009 (dollars inthousands):

 

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| **Three Months Ended  March 31,** | ** ** |
|----------------------------------------|------------|
| **2010**                               | ** ** | **2009** | ** ** |
| **Gross Profit**                       | ** ** | **Gross Margin** | ** ** | **Gross Profit** | ** ** | **Gross Margin** | ** ** |
| $                                      | 9,575      |   | 34.0 | % | $ | 7,898 |   | 42.9 | % |
|                                        |            |  |  |  |  |  |  |  |  |

 

Our gross profit increased during the three monthsended March 31, 2010 as compared to the three months ended March 31,2009 primarily due to the substantial increase in our revenues, as well as theeffective management of our portfolio of demand response capacity and ourstrong demand response event performance.

 

Our gross margin decreased during the three monthsended March 31, 2010 as compared to the three months ended March 31,2009 primarily due to costs incurred in connection with payments that we madeto our commercial, institutional and industrial customers pursuant to certainprograms under which we did not recognize corresponding revenues. The decrease ingross margin was also due to increased depreciation and amortization ofcapitalized costs, increased telecommunications and data costs, and a demandresponse event in a historically lower margin program that occurred during thethree months ended March 31, 2010 with no similar event having occurred duringthe three months ended March 31, 2009.

 

We currently expect that our gross margin for the yearending December 31, 2010 will be relatively flat as compared to the yearended December 31, 2009, and that our gross margin for the third quarterof 2010 will be the highest gross margin among our four quarterly reportingperiods in 2010, consistent with our gross margin pattern in 2009. Further, forthe year ended December 31, 2009 we were able to derive significantprofits from MW in the PJM incremental auctions, which may not occur at similarlevels beyond 2010.

 

***OperatingExpenses***

 

The following table summarizes our operating expensesfor the three months ended March 31, 2010 and 2009 (dollars in thousands):

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|----------------------------|------------|----------------------------------------|------------|----------------|------------|
| ** **                 | ** ** | **2010**                               | ** ** | **2009**       | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(in thousands)**                     | ** ** | ** **     | ** ** |
| Operating Expenses:        |       |                                   |       |           |       |   |   |
| Selling and marketing      |       | $                                      | 9,851      |           | $          | 8,667 |   | 13.7 | % |
| General and administrative |       | 13,012                                 |       | 9,702          |       | 34.1 | % |
| Research and development   |       | 2,057                                  |       | 1,537          |       | 33.8 | % |
| Total                      |       | $                                      | 24,920     |           | $          | 19,906 |   | 25.2 | % |

 

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

 

*Selling and Marketing Expenses*

* *
| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                               | ** ** | **2009**       | ** ** | **Change** | ** ** |
|                      |       | **(in thousands)**                     |       |           |       |
| Payroll and related costs |       | $                                      | 6,008      |           | $          | 5,670 |   | 6.0 | % |
| Stock-based compensation  |       | 1,048                                  |       | 1,025          |       | 2.2 | % |
| Other                     |       | 2,795                                  |       | 1,972          |       | 41.7 | % |
| Total                     |       | $                                      | 9,851      |           | $          | 8,667 |   | 13.7 | % |

 

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The increase in selling and marketing expenses for thethree months ended March 31, 2010 compared to the same period in 2009 wasprimarily driven by the payroll and related costs associated with an increasein the number of selling and marketing full-time employees from 130 at March 31,2009 to 160 at March 31, 2010. The increase in payroll and related costsfor the three months ended March 31, 2010 compared to the same period in2009 was primarily attributable to an increase in sales commissions payable tocertain members of our sales force of $0.2 million, as well as the timingassociated with our hiring new full-time employees during 2010 as compared to2009. These increases were partially offset by lower average salary rates peremployee.  The increase in other sellingand marketing expenses for the three months ended March 31, 2010 ascompared to the same period in 2009 was primarily due to increases inprofessional services and marketing costs of $0.1 million and $0.1million, respectively, due to our rebranding efforts, facility costs of$0.4 million due to the expansion of our existing office space, andtechnology and communication costs of $0.2 million due to the expansion ofour data service centers.

 

*General and Administrative Expenses*

* *
| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                               | ** ** | **2009**       | ** ** | **Change** | ** ** |
| ** **                | ** ** | **(in thousands)**                     | ** ** | ** **     | ** ** |
| Payroll and related costs |       | $                                      | 6,790      |           | $          | 4,975 |   | 36.5 | % |
| Stock-based compensation  |       | 3,131                                  |       | 1,626          |       | 92.6 | % |
| Other                     |       | 3,091                                  |       | 3,101          |       | (0.3 | )% |
| Total                     |       | $                                      | 13,012     |           | $          | 9,702 |   | 34.1 | % |

 

The increase in general and administrative expensesfor the three months ended March 31, 2010 compared to the same period in2009 was primarily driven by payroll and related costs due to an increase inexecutive compensation and employee bonus payments, as well as increasedstock-based compensation as a result of additional stock-based awards tocertain officers and directors.  Theincrease in payroll and related costs for the three months ended March 31,2010 compared to the same period in 2009 was also attributable to an increasein the number of general and administrative full-time employees from 180 at March 31,2009 to 216 at March 31, 2010.  Theincrease in stock-based compensation for the three months ended March 31,2010 compared to the same period in 2009 was primarily due to annualstock-based awards granted to our officers and directors. 

 

*Research and Development Expenses*

 
| ** **                | ** ** | **Three Months Ended  March 31,** | ** ** | **Percentage** | ** ** |
|---------------------------|------------|----------------------------------------|------------|----------------|------------|
| ** **                | ** ** | **2010**                               | ** ** | **2009**       | ** ** | **Change** | ** ** |
| ** **                | ** ** | **(in thousands)**                     | ** ** | ** **     | ** ** |
| Payroll and related costs |       | $                                      | 1,191      |           | $          | 848 |   | 40.4 | % |
| Stock-based compensation  |       | 167                                    |       | 168            |       | (0.6 | )% |
| Other                     |       | 699                                    |       | 521            |       | 34.2 | % |
| Total                     |       | $                                      | 2,057      |           | $          | 1,537 |   | 33.8 | % |

 

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The increase inresearch and development expenses for the three months ended March 31,2010 compared to the same period in 2009 was primarily driven by the costs associatedwith an increase in the number of research and development full-time employeesfrom 47 at March 31, 2009 to 51 at March 31, 2010. This increase waspartially offset by capitalized internal use software costs of$1.2 million at March 31, 2010 and $0.6 million at March 31,2009. The increase in other research and development expenses for the threemonths ended March 31, 2010 compared to the same period in 2009 wasprimarily due to an increase in professional services of $0.1 million andtechnology and communication costs of $0.1 million.

 

***OtherIncome (Expense), Net***

 

Other income, net for the three months ended March 31,2010 was primarily comprised of a nominal amount of interest income as well asa nominal amount of foreign exchange gains related to certain receivablesdenominated in foreign currencies.  Otherexpense, net for the three months ended March 31, 2009 was primarilycomprised of foreign exchange losses related to certain receivables denominatedin foreign currencies.

 

***InterestExpense***

 

The decrease in interest expense for the three monthsended March 31, 2010 compared to the same period in 2009 was due to ourrepayment of outstanding borrowings on our SVB credit facility of $4.4 millionduring the fourth quarter of 2009, resulting in no interest expense related toour borrowings in the first quarter of 2010. Interest expense for the first quarter of 2010 includes interest on ouroutstanding capital leases, letters of credit origination fees, and amortizationof deferred financing fees.

 

***IncomeTaxes***

 

Although we have a lossbefore income taxes for the three months ended March 31, 2010, weanticipate that we will incur income before income taxes for the fiscal yearending December 31, 2010, or fiscal 2010. Therefore, we anticipate that we will record a provision for incometaxes for fiscal 2010, and therefore will realize the benefit of the lossbefore income taxes incurred during the three months ended March 31, 2010during fiscal 2010.  As a result, werecorded an income tax benefit of $1.2 million for the three months ended March 31,2010, inclusive of consideration of the tax benefit from stock optiondeductions generated during the three months ended March 31, 2010 on ourestimated annual effective tax rate. This tax benefit relates principally to losses incurred from operationsin the United States, which we expect to realize in 2010 based on forecastedpre-tax income for fiscal 2010, partially offset by losses from foreignoperations for which no tax benefit can be recognized, resulting in aneffective tax rate for the three months ended March 31, 2010.  Our estimated annual effective tax rate forfiscal 2010 is 13.8%.  However, theestimated annual effective tax rate could be reduced in future quarters offiscal 2010 as a result of tax benefit from stock options which are notrecognized in the determination of the estimated annual effective rate untilthey occur.  Our estimated annualeffective tax rate is lower than the statutory rate as a result of our federaland state net operating loss carryforwards to offset future federal and statetaxable income.  Even though our federaland state net operating loss carryforwards exceed our estimated taxable incomefor fiscal 2010, our estimated annual effective tax rate is greater than zerodue to federal alternative minimum taxes for which the utilization of netoperating loss carryforwards is limited, and certain state taxes forjurisdictions where we do not have sufficient net operating loss carryforwards,as well as 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.

 

We recorded an income taxprovision of $0.2 million for the three months ended March 31, 2009.  This tax provision was primarily related tothe amortization of tax deductible goodwill, which generated a deferred taxliability that cannot be offset by net operating losses or other deferred taxassets since its reversal is considered indefinite in nature.

 

We review all availableevidence to evaluate the recovery of our deferred tax assets, including therecent history of accumulated losses in all tax jurisdictions over the lastthree years as well as our ability to generate income in future periods. As of March 31,2010 and December 31, 2009, due to the uncertainty related to the ultimateuse of our deferred income tax assets, we have provided a full valuationallowance.

 

***NetLoss***

 

Net loss for the three months ended March 31,2010 was $14.2 million, or $0.59 per basic and diluted share, compared to a netloss of $12.5 million, or $0.63 per basic and diluted share, for the threemonths ended March 31, 2009. Excluding stock-based compensation chargesand amortization of expenses related to acquisition-related assets, non-GAAPnet loss for the three months ended March 31, 2010 was $9.8 million,or $0.41 per basic and diluted share, compared to a

 

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non-GAAP net loss of $9.5 million, or $0.48 per basic and dilutedshare, for the three months ended March 31, 2009. Please refer to thesection below entitled “Use of Non-GAAP Financial Measures” for areconciliation of non-GAAP measures to the most directly comparable measurecalculated and presented in accordance with GAAP.

 

**Use ofNon-GAAP Financial Measures**

 

In this Quarterly Report on Form 10-Q, we providecertain “non-GAAP financial measures.” A non-GAAP financial measure refers to anumerical financial measure that excludes (or includes) amounts that areincluded in (or excluded from) the most directly comparable financial measurecalculated and presented in accordance with GAAP in our financial statements.In this Quarterly Report on Form 10-Q, we provide non-GAAP net loss andnon-GAAP net loss per share data as additional information relating to ouroperating results. These non-GAAP measures exclude expenses related tostock-based compensation and amortization expense related to acquisition-related assets. Management uses these non-GAAP measures for internal reportingand forecasting purposes. We have provided these non-GAAP financial measures inaddition to GAAP financial results because we believe that these non-GAAPfinancial measures provide useful information to certain investors andfinancial analysts in assessing our operating performance due to the followingfactors:

 

·                  we believe that the presentation of non-GAAP measures that adjust forthe impact of stock-based compensation expenses and amortization expenserelated to acquisition-related assets provides investors and financial analystswith a consistent basis for comparison across accounting periods and,therefore, are useful to investors and financial analysts in helping them tobetter understand our operating results and underlying operational trends;

 

·                  although stock-based compensation is an important aspect of thecompensation of our employees and executives, stock-based compensation expenseis generally fixed at the time of grant, then amortized over a period ofseveral years after the grant of the stock-based instrument, and generallycannot be changed or influenced by management after the grant; and

 

·                  we do not acquire intangible assets on a predictable cycle. Ourintangible assets relate solely to business acquisitions. Amortization costsare fixed at the time of an acquisition, are then amortized over a period ofseveral years after the acquisition and generally cannot be changed orinfluenced by management after the acquisition.

 

Pursuant to the requirements of the SEC, we haveprovided below a reconciliation of each non-GAAP financial measure used to themost directly comparable financial measure prepared in accordance with GAAP.These non-GAAP financial measures are not prepared in accordance with GAAP.These measures may differ from the non-GAAP information, even where similarlytitled, used by other companies and therefore should not be used to compare ourperformance to that of other companies. The presentation of this additionalinformation is not meant to be considered in isolation or as a substitute fornet loss or net loss per share prepared in accordance with GAAP.

 

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| ** **                                               | ** ** | **Three Months Ended  March 31,**               | ** ** |
|----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                               | ** ** | **2010**                                             | ** ** | **2009** | ** ** |
| ** **                                               | ** ** | **(In thousands, except share and  per share data)** | ** ** |
| GAAP net loss                                            |       | $                                                    | (14,200    | ) | $ | (12,534 | ) |
| ADD: Stock-based compensation                            |       | 4,346                                                |       | 2,819 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 388                                                  |       | 169 |   |
| LESS: Income tax effect of Non-GAAP adjustments (1)      |       | (360                                                 | )          | — |   |
| Non-GAAP net loss                                        |       | $                                                    | (9,826     | ) | $ | (9,546 | ) |
| GAAP net loss per basic and diluted share                |       | $                                                    | (0.59      | ) | $ | (0.63 | ) |
| ADD: Stock-based compensation                            |       | 0.18                                                 |       | 0.14 |   |
| ADD: Amortization expense of acquired intangible  assets |       | 0.01                                                 |       | 0.01 |   |
| LESS: Income tax effect of Non-GAAP adjustments          |       | (0.01                                                | )          | — |   |
| Non-GAAP net loss per basic and diluted share            |       | $                                                    | (0.41      | ) | $ | (0.48 | ) |
| Weighted average number of common shares outstanding     |       |                                                 |       |   |   |
| Basic                                                    |       | 24,051,114                                           |       | 19,993,981 |   |
| Diluted                                                  |       | 24,051,114                                           |       | 19,993,981 |   |

 

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(1)          Represents the reduction in the incometax benefit recorded for the three months ended March 31, 2010 based onour effective tax rate for the three months ended March 31, 2010.

 

**Liquidityand Capital Resources**

 

**Overview**

 

Since inception, we have generated significant losses.As of March 31, 2010, we had an accumulated deficit of $91.5 million.As of March 31, 2010, our principal sources of liquidity were cash andcash equivalents totaling $117.4 million, a decrease of $2.3 millionfrom the December 31, 2009 balance of $119.7 million. As of March 31,2010, we were contingently liable for $29.4 million in connection withoutstanding letters of credit under the SVB credit facility. As of March 31,2010 and December 31, 2009, we had restricted cash balances of$7.9 million, which relate to amounts to collateralize unused outstandingletters of credit and cover financial assurance requirements in certain of theprograms in which we participate.

 

At March 31, 2010 and December 31, 2009, ourexcess cash was primarily invested in money market funds.

 

We believe our existing cash and cash equivalents at March 31,2010 and our anticipated net cash flows from operating activities will besufficient to meet our anticipated cash needs, including investing activities,for at least the next 12 months. Our future working capital requirementswill depend on many factors, including, without limitation, the rate at whichwe sell certain of our energy management applications and services to utilitiesand grid operators and the increasing rate at which letters of credit orsecurity deposits are required by those utilities and grid operators, the introductionand market acceptance of new energy management applications, the expansion ofour sales and marketing and research and development activities, and thegeographic expansion of our business operations. To the extent that our cashand cash equivalents and our anticipated cash flows from operating activitiesare insufficient to fund our future activities or planned future acquisitions,we may be required to raise additional funds through bank credit arrangements,including the potential expansion or renewal of the SVB credit facility, orpublic or private equity or debt financings. We also may raise additional fundsin the event we determine in the future to effect one or more acquisitions ofbusinesses, technologies or products. In addition, we may elect to raiseadditional funds even before we need them if the conditions for raising capitalare favorable. Accordingly, we have filed a shelf registration statement withthe SEC to register shares of our common stock and other securities for sale,giving us the opportunity to raise funding when needed or otherwise consideredappropriate at prices and on terms to be determined at the time of any suchofferings. We currently have the ability to sell approximately$62.1 million of our securities under the shelf registration statement.Any equity or equity-linked financing could be dilutive to existingstockholders. In the event we require additional cash resources, we may not beable to obtain bank credit arrangements or effect any equity or debt financingon terms acceptable to us or at all.

 

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**CashFlows**

 

The following table summarizes our cash flows for thethree months ended March 31, 2010 and 2009 (dollars in thousands):

 

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Cash flows provided by (used in) operating  activities |       | $                                      | 3,122      |   | $ | (5,326 | ) |
| Cash flows used in investing activities                |       | (6,978                                 | )          | (1,040 | ) |
| Cash flows provided by financing activities            |       | 1,506                                  |       | 53 |   |
| Effects of exchange rate changes on cash               |       | (5                                     | )          | — |   |
| Net decrease in cash and cash equivalents              |       | $                                      | (2,355     | ) | $ | (6,313 | ) |

 

*CashFlows Provided by (Used in) Operating Activities*

 

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

 

Cash provided by operating activities for the threemonths ended March 31, 2010 was $3.1 million and consisted of a netloss of $14.2 million offset by $9.8 million of net cash provided byworking capital and other activities and $7.5 million of non-cash items,primarily consisting of depreciation and amortization, deferred tax benefit andstock-based compensation charges. Cash provided by working capital and otheractivities consisted of a decrease of $24.0 million in unbilled revenuesrelating to the PJM demand response market, a decrease in accounts receivableof $1.3 million due to the timing of cash receipts under the demandresponse programs in which we participate, and a $0.5 million increase indeferred revenue.  These amounts werepartially offset by cash used from working capital and other activities, whichreflected an increase in prepaid expenses and other assets of $0.6 million anda decrease of $0.1 million in accounts payable and accrued expenses due to thetiming of payments, a $13.0 million decrease in accrued capacity payments,the majority of which was related to the PJM demand response market, and a$2.3 million decrease in accrued payroll and related expenses.

 

Cash used inoperating activities for the three months ended March 31, 2009 was $5.3million and consisted of a $12.5 million net loss, which was offset byapproximately $1.3 million of net cash provided by working capital and otheractivities and by $6.0 million of non-cash items, primarily consisting ofdepreciation and amortization, interest expense, deferred tax liabilities andstock-based compensation charges. Cash provided by working capital consisted ofa decrease of $6.9 million in unbilled revenues relating to the PJM demandresponse market, a decrease in accounts receivable of $1.3 million due to thetiming of cash receipts under the demand response programs in which weparticipate, and an increase in deferred revenue of $0.4 million. These amountswere partially offset by cash used for working capital and other activities,which reflected a $4.5 million decrease in accrued capacity payments, themajority of which was related to the PJM demand response market, a decrease of$0.8 million in payroll and related expenses, a decrease of $0.7 million inaccounts payable and accrued expenses, and an increase of $1.3 million inprepaid expenses and other current assets.

 

*CashFlows Used in Investing Activities*

 

Cash used in investing activities was$7.0 million for the three months ended March 31, 2010. Our principalcash investments during the three months ended March 31, 2010 related toinstallation services used to build out and expand our demand response andother energy management solutions and purchases of property and equipment.During the three months ended March 31, 2010, we acquired Smallfoot andZox for a purchase price of $1.4 million, of which $1.1 million was paid incash.  We had an increase in restrictedcash and deposits resulting in a reduction of cash of $0.3 million primarily asa result of our cash deposits made in connection with demand response programsin which we participate. During the three months ended March 31, 2010, wealso incurred $5.6 million in capital expenditures primarily related tothe purchase of office equipment and demand response equipment and othermiscellaneous expenditures.

 

Cash used in investing activities was $1.0 million forthe three months ended March 31, 2009. For the three months ended March 31,2009, our principal cash investments related to installation services used tobuild out and expand our demand response and other energy management solutionsand purchases of property and equipment. For the three months

 

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ended March 31, 2009, sales of available-for-sale securities were$1.5 million.  Also, for the three months ended March 31, 2009, wehad a decrease in restricted cash of $0.3 million primarily as a result of ourfinancing arrangement with SVB, which allows for the issuance of letters ofcredit in connection with demand response programs in which we may participate.During the three months ended March 31, 2009, we also incurred$2.9 million in capital expenditures primarily related to the purchase ofoffice equipment and demand response equipment and other miscellaneousexpenditures.

 

*CashFlows Provided by Financing Activities*

 

Cash provided by financing activities was$1.5 million for the three months ended March 31, 2010 and$0.1 million for the three months ended March 31, 2009 primarilyconsisting of proceeds that we received from exercises of options to purchaseshares of our common stock during the three months ended March 31, 2010and 2009.

 

*Credit Facility Borrowings*

 

Pursuant to the terms of the SVB credit facility, SVBwill, among other things, make revolving credit and term loan advances andissue letters of credit for our account. All unpaid principal and accrued interest is due and payable in full on August 5,2010, which is the maturity date. Our obligations under the SVB credit facilityare secured by all of our assets and the assets of our subsidiaries, excludingany intellectual property. The SVB credit facility contains customary terms andconditions for credit facilities of this type. In addition, we are required tomeet certain financial covenants customary with this type of facility,including maintaining a minimum specified tangible net worth and a minimummodified quick ratio. The SVB credit facility contains customary events ofdefault. If a default occurs and is not cured within any applicable cure periodor is not waived, our obligations under the SVB credit facility may beaccelerated. We were in compliance with all financial covenants under the SVBcredit facility at March 31, 2010 and, as of that date, we had repaid theoutstanding borrowings thereunder of $4.4 million. As of March 31,2010, we continue to have an aggregate of $29.4 million in letters ofcredit issued for our account under the SVB credit facility.

 

In April 2010, we and one of our subsidiariesentered into the second loan modification agreement to the SVB credit facility,which increased our borrowing limit from $35.0 million to $50.0 million, aswell as modified certain of our financial covenant debt compliance requirements.  For additional information regarding the SVBcredit facility, see Note 7 to our unaudited condensed consolidatedfinancial statements contained herein.

 

**ContingentEarn-Out Payments**

 

In connection with our acquisition of Cogent, weagreed to make a single contingent earn-out payment of $1.5 million incash, to be paid, if at all, based on the achievement of a certain minimumrevenue-based milestone and a certain earnings-based milestone of Cogent forthe year ending December 31, 2010. Both of these milestones need to beachieved in order for the earn-out payment to occur and there will be nopartial payment if the milestones are not fully achieved. As we believe that itis remote that the earn-out payment will not be made, we determined the fairvalue of the earn-out payment based on the present value of the $1.5 million,which will be paid in December 2010.

 

In connection with our acquisition of South RiverConsulting, LLC, or SRC, in addition to the amounts paid at closing, weincurred a contingent obligation to pay to the former holders of SRC membershipinterests an earn-out amount equal to 50% to 60% of the revenues of SRC’sbusiness during each twelve-month period from May 1, 2008 through April 30,2010, which would be recognized as additional purchase price when earned. Theearn-out payments are based on the achievement of certain minimum revenue-basedmilestones of SRC and are paid in a combination of cash and shares of ourcommon stock.  The additional purchaseprice recorded in the second quarter of 2009, which was related to the May 1,2008 to April 30, 2009 earn-out period, totaled $1.5 million, of which$0.7 million was paid in cash during the second quarter of 2009 and theremainder of which was paid by the issuance of 44,776 shares of our commonstock during the third quarter of 2009. During the first quarter of 2010, we determined that beyond a reasonabledoubt the potential earn-out related to the period of May 1, 2009 to April 30,2010 will occur.  As such, we accrued 60%of the revenues for SRC’s business from May 1, 2009 through March 31,2010 related the earn-out payment achieved through March 31, 2010 totaling$1.7 million.  The final earn-out relatedto the May 1, 2009 through April 30, 2010 earn-out period will bedetermined and settled during the second quarter of 2010.

 

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**Capital Spending**

 

We have made capital expenditures primarily forgeneral corporate purposes to support our growth and for equipment installationrelated to our business. Our capital expenditures totaled $5.6 million and$2.9 million during the three months ended March 31, 2010 and 2009,respectively. As we continue to grow, we expect our capital expenditures for2010 to increase as compared to 2009.

 

**ContractualObligations**

 

As of March 31,2010, the contractual obligations disclosure contained in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2009, which we filed with the SECon March 12, 2010, has not materially changed.

 

**Off-BalanceSheet Arrangements**

 

As of March 31, 2010, we did not have anyoff-balance sheet arrangements, as defined in Item 303(a)(4)(ii) ofRegulation S-K, that have or are reasonably likely to have a current orfuture effect on our financial condition, changes in our financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that is material to investors. We have issued letters ofcredit in the ordinary course of our business in order to participate incertain demand response programs. As of March 31, 2010, we had outstandingletters of credit totaling $29.4 million. For information on thesecommitments and contingent obligations, see Note 8 to our unauditedcondensed consolidated financial statements contained herein.

 

**CriticalAccounting Policies and Use of Estimates**

 

The discussion and analysis of our financial conditionand results of operations are based upon our interim condensed consolidatedfinancial statements, which have been prepared in accordance with GAAP. Thepreparation of these consolidated financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to revenue recognition for multiple element arrangements,allowance for doubtful accounts, valuations and purchase price allocationsrelated to business combinations, expected future cash flows including growthrates, discount rates, terminal values and other assumptions and estimates usedto evaluate the recoverability of long-lived assets and goodwill, estimatedfair values of intangible assets and goodwill, amortization methods and periods,certain accrued expenses and other related charges, stock-based compensation,contingent liabilities, tax reserves and recoverability of our net deferred taxassets and related valuation allowance. We base our estimates on historicalexperience and various other assumptions that are believed to be reasonableunder the circumstances. Actual results could differ from these estimates ifpast experience or other assumptions do not turn out to be substantiallyaccurate. Any differences may have a material impact on our financial conditionand results of operations.

 

The critical accounting estimates used in thepreparation of our financial statements that we believe affect our moresignificant judgments and estimates used in the preparation of our interimcondensed consolidated financial statements presented in this Quarterly Reporton Form 10-Q are described in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and in the notes to theconsolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2009, which we filed with the SEC on March 12,2010.  Except as disclosed herein, therehave been no material changes to our critical accounting policies or estimatesduring the three months ended March 31, 2010.

 

**RecentAccounting Pronouncements**

 

In September 2009, the FASB ratified ASC Update No. 2009-13,*Multiple-Deliverable Revenue Arrangements*(ASU 2009-13). ASU 2009-13 amends existing revenue recognition accountingpronouncements that are currently within the scope of FASB ASC Subtopic 605-25.This consensus provides for two significant changes to the existing multipleelement revenue recognition guidance. First, this guidance deletes therequirement to have objective and reliable evidence of fair value forundelivered elements in an arrangement and will result in more deliverablesbeing treated as separate units of accounting. The second change modifies themanner in which the transaction consideration is allocated across the separatelyidentified deliverables. These changes may result in entities recognizing morerevenue up-front, and entities will no longer be able to apply the residualmethod and defer the fair value of undelivered elements. Upon adoption of thesenew rules, each separate unit of accounting must have a selling price, whichcan be based on management’s estimate when there is no other means to determinethe fair value of that undelivered item, and the arrangement consideration isallocated based on the

 

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elements’ relative selling price. This accounting guidance is effectiveno later than fiscal years beginning on or after June 15, 2010 but may beadopted early as of the first quarter of an entity’s fiscal year. Entities mayelect to adopt this accounting guidance either through prospective applicationto all revenue arrangements entered into or materially modified after the dateof adoption or through a retrospective application to all revenue arrangementsfor all periods presented in the financial statements. We are currentlyevaluating the impact of this revised accounting guidance, including the periodin which we will adopt this guidance.

 

In January 2010,the FASB issued ASU 2010-06, *Improving Disclosure aboutFair Value Measurements*, or ASU 2010-06.  ASU 2010-06 requires additional disclosuresregarding fair value measurements, amends disclosures about post-retirement benefitplan assets and provides clarification regarding the level of disaggregation offair value disclosures by investment class. ASU 2010-06 is effective forinterim and annual reporting periods beginning after December 15, 2009,except for certain Level 3 activity disclosure requirements that will beeffective for reporting periods beginning after December 15, 2010. Theadoption of this standard did not have a material impact on our consolidatedfinancial position or results of operations.

 

**Item3.  Quantitative and Qualitative Disclosures About Market Risk.**

 

At March 31,2010, there had not been a material change in the interest rate riskinformation and foreign exchange risk information disclosed in the “Quantitativeand Qualitative Disclosures about Market Risk” subsection of the sectionentitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2009, which we filed with the SEC on March 12,2010.

 

**Item 4. Controls and Procedures.**

 

***DisclosureControls and Procedures***

 

Our principal executive officer and principalfinancial officer, after evaluating the effectiveness of our disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q,have concluded that, based on such evaluation, our disclosure controls andprocedures were effective to ensure that information required to be disclosedby us in the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theSEC’s rules and forms, and is accumulated and communicated to ourmanagement, including our principal executive and principal financial officers,or persons performing similar functions, as appropriate to allow timelydecisions regarding required disclosure.

 

***InternalControl over Financial Reporting***

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the fiscal quarter ended March 31, 2010 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II— OTHER INFORMATION**

 

**Item 1.   Legal Proceedings.**

 

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

 

**Item 1A. Risk Factors.**

 

We operate in arapidly changing environment that involves a number of risks that couldmaterially affect our business, financial condition or future results, some ofwhich are beyond our control.  In addition to the other information setforth in this Quarterly Report on Form 10-Q, the risks and uncertaintiesthat we believe are most important for you to consider are discussed in Part I— Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2009, which we filed with the SECon March 12, 2010.   During the three months ended March 31,2010, there were no material changes to the risk factors that were disclosed inPart I — Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2009.

 

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

 

(a)       Unregistered Sales of Equity Securities

 

We offered, issuedand/or sold the following unregistered securities during the three months endedMarch 31, 2010: on March 15, 2010, in connection with our acquisitionof substantially all of the assets of Smallfoot and Zox, we issued 8,758 sharesof our common stock.

 

The issuance ofthe securities described above was deemed to be exempt from registration underthe Securities Act in reliance on Section 4(2) of the Securities Actas transactions by an issuer not involving any public offering. The recipientsof these securities in such transaction represented their intention to acquirethe securities for investment only and not with a view to or for sale inconnection with any distribution thereof. Such recipients received writtendisclosures that the securities have not been registered under the SecuritiesAct and that any resale must be made pursuant to a registration or an availableexemption from such registration. All of these securities are deemed restrictedsecurities for the purposes of the Securities Act. The sales of thesesecurities were made without general solicitation or advertising.

 

**Item6.  Exhibits.**

 
| 10.1@* |   | EnerNOC, Inc.  Amended and Restated Non-Employee Director Compensation Policy.                                                                                                                                                                                                                                                                                                    |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2   |   | Second Loan  Modification Agreement, dated as of April 23, 2010, by and among  EnerNOC, Inc., EnerNOC Securities Corporation and Silicon Valley Bank,  filed as Exhibit 10.1 to the Registrant’s Current Report on  Form 8-K filed with the SEC on April 29, 2010 (File  No. 001-33471), is incorporated by reference herein as  Exhibit 10.2. |
| 31.1*  |   | Certification of  Chief Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or  Rule 15d-14(a) promulgated under the Securities Exchange Act of  1934, as amended.                                                                                                                                                                                  |
| 31.2*  |   | Certification of  Chief Financial Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                                                                                                  |
| 32.1*  |   | Certification of  the Chief Executive Officer and Chief Financial Officer of EnerNOC, Inc.  pursuant to Rule 13a-14(b) promulgated under the Securities  Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 |

 

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@                                    Management contract, compensatory plan orarrangement.

*                                         Filed herewith.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                   | EnerNOC, Inc. |
|------------------------|--------------------|
|                   |               |
| Date: May 7, 2010 | By:                | /s/ Timothy G. Healy |
|                   |               | Timothy G. Healy |
|                   |               | Chief Executive Officer |
|                   |               | (principal executive  officer) |
|                   |               |   |
| Date: May 7, 2010 | By:                | /s/ Timothy Weller |
|                   |               | Timothy Weller |
|                   |               | Chief Financial Officer  and Treasurer |
|                   |               | (principal financial  officer) |

 

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**Exhibit Index**

 
| **Number** | ** ** | **Exhibit Title**                                                                                                                                                                                                                                                                                                                                                                 |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.1@*     |       | EnerNOC, Inc.  Amended and Restated Non-Employee Director Compensation Policy.                                                                                                                                                                                                                                                                                                    |
| 10.2       |       | Second Loan  Modification Agreement, dated as of April 23, 2010, by and among  EnerNOC, Inc., EnerNOC Securities Corporation and Silicon Valley Bank,  filed as Exhibit 10.1 to the Registrant’s Current Report on  Form 8-K filed with the SEC on April 29, 2010 (File  No. 001-33471), is incorporated by reference herein as  Exhibit 10.2. |
| 31.1*      |       | Certification of  Chief Executive Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                                                                                                  |
| 31.2*      |       | Certification of  Chief Financial Officer of EnerNOC, Inc. pursuant to  Rule 13a-14(a) or Rule 15d-14(a) promulgated under the  Securities Exchange Act of 1934, as amended.                                                                                                                                                                                  |
| 32.1*      |       | Certification of  the Chief Executive Officer and Chief Financial Officer of EnerNOC, Inc.  pursuant to Rule 13a-14(b) promulgated under the Securities  Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                   |

 

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@                                    Management contract, compensatory plan orarrangement.

*                                         Filed herewith.

 

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