**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM10-Q**

 
| **(Mark  One)**                                       |       |                                                                                          |
|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
|                                                  |       |                                                                                          |
| **x**                                                 | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                  |       |                                                                                          |
| **For the quarterly period ended September 30, 2007** |
|                                                  |       |                                                                                          |
| **or**                                                |
|                                                  |       |                                                                                          |
| **o**                                                 | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

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

 

**Commission File Number: 001-33471**

 

**EnerNOC,Inc.**

(ExactName of Registrant as Specified in Its Charter)

 

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

 

**(617) 224-9900**

(Registrant’sTelephone Number, Including Area Code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x    No o

 

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

 

LargeAccelerated Filer  o    AcceleratedFiler  o    Non-AcceleratedFiler  x

 

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

 

There were 18,612,047 sharesof the Registrant’s common stock, $.001 par value per share, outstanding as ofOctober 30, 2007.

 

 

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**Table ofContents**

 

**EnerNOC, Inc.**

**Index to Form 10-Q**

 
| ** **                                     | ** **                                                                                                                       | ** ** | **Page** |
|------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I   - Financial Information** |                                                                                                                             |       |
|                                           |                                                                                                                             |       |     |
| Item 1.                                   | Unaudited Condensed Consolidated  Financial Statements                                                                           |       |     |
|                                           |                                                                                                                             |       |     |
|                                           | Condensed  Consolidated Balance Sheets at September 30, 2007 (unaudited) and December  31, 2006                                  |       | 3        |
|                                           |                                                                                                                             |       |     |
|                                           | Unaudited  Condensed Consolidated Statements of Operations for the three and nine months  ended September 30, 2007 and 2006 |       | 4        |
|                                           |                                                                                                                             |       |     |
|                                           | Unaudited  Condensed Consolidated Statements of Cash Flows for the nine months ended  September 30, 2007 and 2006                |       | 5        |
|                                           |                                                                                                                             |       |     |
|                                           | Notes to Unaudited Condensed Consolidated Financial  Statements                                                                  |       | 6        |
|                                           |                                                                                                                             |       |     |
| Item 2  .                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                      |       | 14       |
|                                           |                                                                                                                             |       |     |
| Item 3.                                   | Quantitative  and Qualitative Disclosures About Market Risk                                                                      |       | 21       |
|                                           |                                                                                                                             |       |     |
| Item 4T.                                  | Controls and  Procedures                                                                                                         |       | 21       |
|                                           |                                                                                                                             |       |     |
| **Part II -  Other Information**     |                                                                                                                             |       |
|                                           |                                                                                                                             |       |     |
| Item 1.                                   | Legal Proceedings                                                                                                                |       | 22       |
|                                           |                                                                                                                             |       |     |
| Item 1A.                                  | Risk Factors                                                                                                                     |       | 22       |
|                                           |                                                                                                                             |       |     |
| Item 2.                                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                     |       | 34       |
|                                           |                                                                                                                             |       |     |
| Item 5.                                   | Other  Information                                                                                                               |       | 35       |
|                                           |                                                                                                                             |       |     |
| Item 6.                                   | Exhibits                                                                                                                         |       | 35       |
|                                           | Signatures                                                                                                                       |       | 36       |
|                                           | Exhibit Index                                                                                                                    |       | 37       |

 

2

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**PART I —FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**EnerNOC, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                             | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                             | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                             |       |                         |       |                        |       |
| Current assets                                                                                                                                                                         |       |                         |       |                        |       |
| Cash and cash equivalents                                                                                                                                                              |       | $                            | 73,790     |                        | $          | 9,184 |   |
| Restricted cash                                                                                                                                                                        |       | 2,543                        |       | 510                         |       |
| Marketable securities                                                                                                                                                                  |       | 12,600                       |       | —                      |       |
| Accounts receivable, net allowance for  doubtful accounts of $317 at September 30, 2007 and $7 at December 31, 2006                                                                    |       | 12,023                       |       | 4,447                       |       |
| Deferred costs of sales                                                                                                                                                                |       | 1,700                        |       | 410                         |       |
| Prepaid expenses and other current assets                                                                                                                                              |       | 878                          |       | 328                         |       |
| Total current assets                                                                                                                                                                   |       | 103,534                      |       | 14,879                      |       |
| Property and equipment, net                                                                                                                                                            |       | 20,320                       |       | 6,547                       |       |
| Goodwill and other intangible assets, net                                                                                                                                              |       | 13,644                       |       | 7,132                       |       |
| Deferred financing costs                                                                                                                                                               |       | 537                          |       | 668                         |       |
| Other assets                                                                                                                                                                           |       | 1,946                        |       | 724                         |       |
| Total assets                                                                                                                                                                           |       | $                            | 139,981    |                        | $          | 29,950 |   |
|                                                                                                                                                                                   |       |                         |       |                        |       |
| **Liabilities and Stockholders’ Equity  (Deficit)**                                                                                                                               |       |                         |       |                        |       |
| Current liabilities                                                                                                                                                                    |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                       |       | $                            | 2,646      |                        | $          | 1,660 |   |
| Accrued capacity payments                                                                                                                                                              |       | 9,753                        |       | 5,210                       |       |
| Current portion of deferred related-party  acquisition payments                                                                                                                        |       | 853                          |       | 1,989                       |       |
| Accrued payroll and related expenses                                                                                                                                                   |       | 2,613                        |       | 1,275                       |       |
| Accrued expenses and other current  liabilities                                                                                                                                        |       | 1,727                        |       | 1,215                       |       |
| Deferred revenue                                                                                                                                                                       |       | 3,113                        |       | 971                         |       |
| Current portion of long-term debt                                                                                                                                                      |       | 2,380                        |       | 1,128                       |       |
| Total current liabilities                                                                                                                                                              |       | 23,085                       |       | 13,448                      |       |
|                                                                                                                                                                                   |       |                         |       |                        |       |
| Long-term liabilities                                                                                                                                                                  |       |                         |       |                        |       |
| Long-term debt, net of current portion                                                                                                                                                 |       | 4,279                        |       | 4,072                       |       |
| Deferred related-party acquisition  payments, net of current portion                                                                                                                   |       | —                       |       | 400                         |       |
| Contingent consideration provision                                                                                                                                                     |       | 2,247                        |       | 2,247                       |       |
| Deferred revenue                                                                                                                                                                       |       | 114                          |       | 420                         |       |
| Redeemable convertible preferred stock  warrant liability                                                                                                                              |       | —                       |       | 606                         |       |
| Other liabilities                                                                                                                                                                      |       | 144                          |       | 149                         |       |
|                                                                                                                                                                                   |       |                         |       |                        |       |
| Total long-term liabilities                                                                                                                                                            |       | 6,784                        |       | 7,894                       |       |
|                                                                                                                                                                                   |       |                         |       |                        |       |
| Redeemable convertible preferred stock                                                                                                                                                 |       |                         |       |                        |       |
| Series A Redeemable Convertible Preferred  Stock, $0.001 par value; 713,118 shares authorized, issued, and outstanding  at December 31, 2006, at redemption value                      |       | —                       |       | 828                         |       |
| Series A-1 Redeemable Convertible Preferred  Stock, $0.001 par value; 916,212 shares authorized, issued, and outstanding  at December 31, 2006, at redemption value                    |       | —                       |       | 1,739                       |       |
| Series B Redeemable Convertible Preferred  Stock, $0.001 par value; 1,177,097 shares authorized, issued and outstanding  at December 31, 2006, at redemption value                     |       | —                       |       | 7,685                       |       |
| Series B-1 Redeemable Convertible Preferred  Stock, $0.001 par value; 296,632 shares authorized, 277,778 shares  issued and outstanding at December 31, 2006, at redemption value |       | —                       |       | 2,691                       |       |
| Series C Redeemable Convertible Preferred  Stock, $0.001 par value; 271,346 shares authorized, 104,921 shares issued and  outstanding at December 31, 2006, at redemption value   |       | —                       |       | 5,749                       |       |
| Stockholders’ equity (deficit)                                                                                                                                                    |       |                         |       |                        |       |
| Common stock, $0.001 par value; 50,000,000  shares authorized, 18,564,556 and 4,245,324 shares issued and outstanding at  September 30, 2007 and December 31, 2006, respectively       |       | 18                           |       | 4                           |       |
| Additional paid-in capital                                                                                                                                                             |       | 134,908                      |       | 771                         |       |
| Redeemable convertible preferred stock  subscription receivable                                                                                                                        |       | —                       |       | (800                        | )          |
| Accumulated deficit                                                                                                                                                                    |       | (24,814                      | )          | (10,059                     | )          |
|                                                                                                                                                                                   |       |                         |       |                        |       |
| Total stockholders’ equity (deficit)                                                                                                                                              |       | 110,112                      |       | (10,084                     | )          |
| Total liabilities, redeemable convertible  preferred stock and stockholders’ equity (deficit)                                                                                     |       | $                            | 139,981    |                        | $          | 29,950 |   |

 

*See accompanying notes.*

 

3

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**EnerNOC, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

 
| ** **                                             | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                                 | ** ** | **2006**                                                | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Revenues                                               |       | $                                                        | 19,139     |                                                    | $          | 10,978 |   | $ | 41,126 |   | $ | 20,192 |   |
| Cost of revenues                                       |       | 11,258                                                   |       | 5,212                                                   |       | 26,232 |   | 12,295 |   |
| Gross profit                                           |       | 7,881                                                    |       | 5,766                                                   |       | 14,894 |   | 7,897 |   |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses:                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Selling and marketing expenses                         |       | 4,362                                                    |       | 1,745                                                   |       | 11,840 |   | 3,832 |   |
| General and administrative expenses                    |       | 6,699                                                    |       | 1,945                                                   |       | 18,036 |   | 4,990 |   |
| Research and development expenses                      |       | 985                                                      |       | 189                                                     |       | 1,824 |   | 682 |   |
| Total operating expenses                               |       | 12,046                                                   |       | 3,879                                                   |       | 31,700 |   | 9,504 |   |
| (Loss) income from operations                          |       | (4,165                                                   | )          | 1,887                                                   |       | (16,806 | ) | (1,607 | ) |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest and other income                              |       | 1,709                                                    |       | 18                                                      |       | 2,537 |   | 109 |   |
| Interest expense                                       |       | (69                                                      | )          | (13                                                     | )          | (276 | ) | (158 | ) |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Net (loss) income                                      |       | $                                                        | (2,525     | )                                                       | $          | 1,892 |   | $ | (14,545 | ) | $ | (1,656 | ) |
|                                                   |       |                                                     |       |                                                    |       |   |   |   |   |
| Net (loss) income per share:                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Basic                                                  |       | $                                                        | (0.14      | )                                                       | $          | 0.52 |   | $ | (1.30 | ) | $ | (0.47 | ) |
| Weighted average number of shares used in  computation |       | 18,153                                                   |       | 3,649                                                   |       | 11,215 |   | 3,533 |   |
| Net (loss) income per share:                           |       |                                                     |       |                                                    |       |   |   |   |   |
| Diluted                                                |       | $                                                        | (0.14      | )                                                       | $          | 0.13 |   | $ | (1.30 | ) | $ | (0.47 | ) |
| Weighted average number of shares used in  computation |       | 18,153                                                   |       | 14,096                                                  |       | 11,215 |   | 3,533 |   |

 

*See accompanying notes.*

 

4

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**EnerNOC, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

 
| ** **                                                                     | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                       | ** ** | **2006** | ** ** |
| **Cash flows from operating activities**                                       |       |                                           |       |   |   |
| Net loss                                                                       |       | $                                              | (14,545    | ) | $ | (1,656 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities    |       |                                           |       |   |   |
| Depreciation                                                                   |       | 1,880                                          |       | 561 |   |
| Amortization of intangibles                                                    |       | 1,658                                          |       | 1,683 |   |
| Stock-based compensation expense                                               |       | 5,759                                          |       | 67 |   |
| Non-cash interest expense                                                      |       | 131                                            |       | — |   |
| Increase (decrease) in cash from changes in  operating assets and liabilities: |       |                                           |       |   |   |
| Accounts receivable                                                            |       | (7,576                                         | )          | (6,729 | ) |
| Deferred revenue                                                               |       | 1,722                                          |       | 177 |   |
| Prepaid expenses and other current assets                                      |       | (530                                           | )          | (204 | ) |
| Deferred cost of sales                                                         |       | (1,290                                         | )          | (24 | ) |
| Other noncurrent assets                                                        |       | (1,174                                         | )          | (19 | ) |
| Accrued capacity payments                                                      |       | 4,543                                          |       | 3,366 |   |
| Other noncurrent liabilities                                                   |       | (5                                             | )          | (71 | ) |
| Accounts payable and accrued expenses                                          |       | 2,836                                          |       | 579 |   |
| Net cash used in operating activities                                          |       | (6,591                                         | )          | (2,270 | ) |
|                                                                           |       |                                           |       |   |   |
| **Cash flows from investing activities**                                       |       |                                           |       |   |   |
| Purchase of marketable securities                                              |       | (15,000                                        | )          | — |   |
| Sale and maturity of marketable securities                                     |       | 2,400                                          |       | — |   |
| Purchase of Mdenergy, LLC                                                      |       | (3,362                                         | )          | — |   |
| Deferred related party acquisition payment  for Pinpoint Power DR LLC          |       | (1,470                                         | )          | (1,380 | ) |
| Purchase of eBidenergy, Inc.                                                   |       | —                                         |       | (27 | ) |
| Purchase of Celerity Energy Partners                                           |       | —                                         |       | (3,057 | ) |
| Purchases of property and equipment                                            |       | (15,656                                        | )          | (2,092 | ) |
| Net cash used in investing activities                                          |       | (33,088                                        | )          | (6,556 | ) |
|                                                                           |       |                                           |       |   |   |
| **Cash flows from financing activities**                                       |       |                                           |       |   |   |
| Proceeds from the issuance of common stock,  net of issuance costs             |       | 95,159                                         |       | — |   |
| Proceeds from exercises of stock options                                       |       | 105                                            |       | 1 |   |
| Proceeds from borrowing                                                        |       | 2,500                                          |       | — |   |
| Repayment of borrowings                                                        |       | (1,041                                         | )          | (604 | ) |
| Increase in restricted cash                                                    |       | (2,033                                         | )          | (111 | ) |
| Proceeds from the issuance of preferred  stock, net of issuance costs          |       | 9,990                                          |       | 2,630 |   |
| Repurchase of treasury stock                                                   |       | (395                                           | )          | — |   |
| Net cash provided by financing activities                                      |       | 104,285                                        |       | 1,916 |   |
| Net change in cash and cash equivalents                                        |       | 64,606                                         |       | (6,910 | ) |
| Cash and cash equivalents at beginning of  period                              |       | 9,184                                          |       | 9,719 |   |
|                                                                           |       |                                           |       |   |   |
| Cash and cash equivalents at end of period                                     |       | $                                              | 73,790     |   | $ | 2,809 |   |
|                                                                           |       |                                           |       |   |   |
| **Non-cash financing and investing activities**                                |       |                                           |       |   |   |
| Purchase of fixed assets through a capital  lease obligation                   |       | $                                              | —     |   | $ | 3 |   |
| Deferred related party stock issuance for  Pinpoint Power DR LLC               |       | $                                              | 66         |   | $ | 92 |   |
| Conversion and net exercise into common  stock of preferred stock warrant      |       | $                                              | 606        |   | $ | — |   |
| Purchase of eBidenergy, Inc. through the  issuance of common stock             |       | $                                              | —     |   | $ | 35 |   |
| Issuance of common stock to related party                                      |       | $                                              | 395        |   | $ | — |   |
| Accretion of preferred stock issuance costs                                    |       | $                                              | 216        |   | $ | 21 |   |
| Purchase of Mdenergy, LLC through the  issuance of common stock                |       | $                                              | 4,752      |   | $ | — |   |
|                                                                                |            |                                                |            |  |  |  |  |  |

 

*See accompanying notes.*

 

5

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**EnerNOC, INC.**

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

 

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

 

**Descriptionof Business**

 

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

 

**Basis ofConsolidation**

 

The unaudited condensed consolidatedfinancial statements of the Company include the accounts of its wholly-ownedsubsidiaries and have been prepared in conformity with accounting principlesgenerally accepted in the United States (GAAP). Intercompany transactions andbalances are eliminated upon consolidation. In the opinion of the Company’smanagement, the unaudited condensed consolidated financial statements includeall adjustments, consisting only of normal recurring adjustments, necessary fora fair presentation of the results of operations for this period.

 

The results of operationsfor the three and nine months ended September 30, 2007 are not necessarilyindicative of the results expected for the full fiscal year ending December 31,2007 or for any other fiscal period. The accompanying unaudited condensedconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended December 31,2006 and the footnotes thereto included in the Company’s registration statementon Form S-1, as filed with the Securities and Exchange Commission (SEC) onOctober 29, 2007.

 

**Reclassifications**

** **

Certain amounts inprior periods have been reclassified to conform to the 2007 presentation.  These reclassifications have no impact onpreviously reported results of operations or stockholders’ equity (deficit).

 

**Liquidity**

 

In May 2007, the Companycompleted its initial public offering (IPO) of 4,312,500 shares of common stockat a price of $26.00 per share, which includes the exercise of the underwriters’over-allotment option to purchase 562,500 shares and the sale of 225,000 sharesby certain of the Company’s stockholders. Net proceeds to the Company from the IPOwere approximately $95,200 (net of underwriting discounts and commissions andoffering expenses). Prior to its IPO, the Company had primarily funded itsoperations through the issuance of an aggregate of $27,900 in preferred stockand $7,500 in borrowings under its loan and security agreement described below.The Company used these proceeds to fund its operations, to develop itstechnology for its demand response programs, to open new markets and to makeacquisitions.

 

The Company had $73,790 incash and cash equivalents as of September 30, 2007, compared to $9,184 atDecember 31, 2006. The Company believes that its existing cash and cashequivalents, including the proceeds from its IPO and borrowings under its loanand security agreement, will be sufficient to meet its anticipated cash needsfor at least the next 24 months.

** **

**Allowance for Doubtful Accounts**

*** ***

The Company reduces grosstrade accounts receivable by an allowance for doubtful accounts. The allowancefor doubtful accounts is the Company's best estimate of the amount of probablecredit losses in the Company's existing accounts receivable. The Companyreviews its allowance for doubtful accounts on a regular basis and all past duebalances are reviewed individually for collectibility. Account balances arecharged off against the allowance after all means of collection have been exhaustedand the potential for recovery is considered remote. Provisions for allowancefor doubtful accounts are recorded in general and administrative expenses. 

 

Below is a summary of thechanges in the Company's allowance for doubtful accounts for the nine monthsended September 30, 2007.

 
| ** **                                        | ** ** | **Balance at  Beginning of Period** | ** ** | **Additions Charged to Expense** | ** ** | **Deductions - Write-offs, Payments and Other Adjustments** | ** ** | **Balance at End of Period** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------|------------|------------------------------|------------|
| Nine Months ended September 30, 2007  (unaudited) |       | $                                        | 7          |                             | $          | 310                                                         |       | $                            | —     |   | $ | 317 |   |
|                                                   |            |                                          |            |                                  |            |                                                             |            |                              |            |  |  |  |  |

 

 

**2. Acquisition**

 

On September 13, 2007, the Company acquired all ofthe outstanding membership interests of Mdenergy, LLC (MDE), an energyprocurement service provider, pursuant to the terms of a merger agreement. Thetotal purchase price paid by the Company at closing was approximately $7.9million, of which approximately $3.16 million was paid in cash and theremainder of which was paid by the issuance of 139,056 shares of the Company’scommon stock. Of the total shares of the Company’s common stock issued in the transaction,35,114 shares worth approximately $1.2 million at the closing were depositedinto an escrow fund to secure certain indemnification obligations of the formerholders of MDE membership interests.

 

In addition to the amounts paid at closing, theCompany is obligated to pay to the former holders of MDE membership interestsan earnout amount equal to two times the revenues of MDE’s business during theperiod from July 1, 2007 through December 31, 2007, such earnout to be payablein cash during the first quarter of 2008. The contingent consideration relatedto the earnout will be recorded as additional purchase price when thecontingency is resolved.

 

Pursuant to the merger agreement, the Company isalso obligated to pay to certain employees of MDE a cash bonus payment of up to$300,000 in the first quarter of 2008 and up to $600,000 in the first quarterof 2009 upon the achievement of certain revenue-based milestones during 2007and 2008, respectively. These payments are considered bonuses for postcombination services and will be expensed over the service period.

 

6

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                TheMDE acquisition has been accounted for under SFAS No. 141, *BusinessCombinations*. The closing of the MDE acquisition was on September13, 2007, and as such, the Company’s consolidated financial statements reflectMDE’s results of operations from that date forward.

 

The aggregate purchase price of $8,113 consists of the following: 

 
| Common  stock, $0.001 par value |   | $     | 4,752  |   |
|---------------------------------|--------|-------|--------|--------|
| Cash                            |   | 3,168 |   |
| Acquisition  related expenses   |   | 193   |   |
| Total  purchase price           |   | $     | 8,113  |   |

 

The aggregate purchase price has been allocated to the acquired assetsbased on their fair values as determined by the Company as follows: 

 
| Total purchase price                                          |   | $      | 8,113   |   |
|---------------------------------------------------------------|--------|--------|---------|--------|
| Prepaid expenses and other current assets                     |   |   | 20      |   |
| Computer equipment                                            |   | 12     |    |
| Customer contracts                                            |   | 2,400  |    |
| Employment agreements                                         |   | 90     |    |
| Accrued Expenses                                              |   | (66    | )  |
| Net assets acquired                                           |   | $      | 2,456   |   |
| Excess purchase price over the fair value  of assets acquired |   | $      | 5,657   |   |

 

                Thefinancial information above reflects a preliminary allocation of the purchaseprice. The estimated fair values of the assets acquired and liabilities assumedare not yet complete and are subject to future adjustments. In addition to theamounts paid at closing, the Company is obligated to pay the former holders of MDEmembership interests an earnout payment, as described above. These amounts willbe assessed if additional purchase price is deemed probable.

 

*Supplemental Information*

 

Thefollowing unaudited pro forma combined financial information is presented forcomparative purposes for the three and nine months ended September 30, 2007 and2006 and gives effect to certain adjustments, including amortization of thedefinite life intangible assets as if the acquisition occurred onJanuary 1, 2006. The information below is not necessarily indicative ofthe results of operations that would have actually been reported had thepurchase occurred at the beginning of the periods presented, nor is itnecessarily indicative of future financial position or results of operations(dollars in thousands, except per share data):

 
| ** **                                          | ** ** | **Three months  ended** | ** ** | **Nine months  ended**  | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                          | ** ** | **September  30, 2007** | ** ** | **September  30, 2006** | ** ** | **September  30, 2007** | ** ** | **September  30, 2006** | ** ** |
| Revenues                                            |       | $                            | 19,836     |                         | $          | 11,242 |   | $ | 43,002 |   | $ | 20,921 |   |
| Net (Loss) Income                                   |       | (3,149                       | )          | 1,846                        |       | (14,756 | ) | (1,636 | ) |
| Pro forma net (loss) income per share –  basic |       | $                            | (0.17      | )                            | $          | 0.49 |   | $ | (1.30 | ) | $ | (0.45 | ) |
| Pro forma net (loss) income per share -  diluted    |       | $                            | (0.17      | )                            | $          | 0.13 |   | $ | (1.30 | ) | $ | (0.45 | ) |

 

7

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**3. Recent Accounting Pronouncements**

 

In September 2006, the FinancialAccounting Standards Board (FASB) issued Statement of Financial AccountingStandards (SFAS) No. 157, *Fair ValueMeasurements* (SFAS No. 157). This statement defines fair valueas used in numerous accounting pronouncements, establishes a framework formeasuring fair value in GAAP and expands disclosure related to the use of fairvalue measures in financial statements. SFAS No. 157 does not expand theuse of fair value measures in financial statements, but standardizes itsdefinition and guidance in GAAP. The standard emphasizes that fair value is amarket-based measurement and not an entity-specific measurement based on anexchange transaction in which the entity sells an asset or transfers aliability (exit price). SFAS No. 157 establishes a fair value hierarchyfrom observable market data as the highest level to fair value based on anentity’s own fair value assumptions as the lowest level. SFAS No. 157 isto be effective for the Company’s financial statements issued in 2008, however,earlier application is encouraged. The Company does not expect thepronouncement to have a material impact on its consolidated financialstatements.

 

In February 2007, the FASBissued SFAS No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities* (SFAS 159).SFAS No. 159 provides an entity with the option, at specified electiondates, to measure certain financial assets and liabilities and other items atfair value, with changes in fair value recognized in earnings as those changesoccur. SFAS No. 159 also establishes presentation and disclosurerequirements that include displaying the fair value of those assets on the faceof the balance sheet and providing management’s reasons for electing the fairvalue option for each eligible item. The provisions of SFAS No. 159 willbecome effective beginning January 1, 2008. Early adoption ispermitted provided that an election is alsomade to apply the provisions of SFAS No. 157. The Company is currentlyevaluating the impact that SFAS No. 159 may have on its results of operationsand financial condition.

 

**4. Net LossPer Share**

 

Basic net loss per share iscomputed by dividing net loss by the weighted average number of common sharesoutstanding for the period. Diluted net loss per share is computed using theweighted average number of common shares outstanding and, when dilutive,potential common shares from options and warrants using the treasury stockmethod, and from convertible securities using the as-converted method. Thecalculation of dilutive weighted average shares outstanding is as follows:

 
| ** **                                         | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **September  30, 2007**     | ** ** | **September  30, 2006**    | ** ** | **September  30, 2007** | ** ** | **September  30, 2006** | ** ** |
| Basic weighted average shares outstanding          |       | 18,153,456                       |       | 3,648,846                       |       | 11,214,656 |   | 3,532,837 |   |
| Dilutive effect of:                                |       |                             |       |                            |       |   |   |   |   |
| Series A Redeemable Convertible Preferred  Stock   |       | —                           |       | 2,018,837                       |       | 1,002,023 |   | 2,018,837 |   |
| Series A-1 Redeemable Convertible Preferred  Stock |       | —                           |       | 2,593,796                       |       | 1,287,397 |   | 2,593,796 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Series B Redeemable Convertible Preferred  Stock   |       | —                           |       | 3,332,362                       |       | 1,653,975 |   | 3,332,362 |   |
| Series B-1 Redeemable Convertible Preferred  Stock |       | —                           |       | 786,390                         |       | 390,314 |   | 786,390 |   |
|                                               |       |                             |       |                            |       |   |   |   |   |
| Series C Redeemable Convertible Preferred  Stock   |       | —                           |       | —                          |       | 354,522 |   | — |   |
| Outstanding options and warrants                   |       | 2,179,211                        |       | 1,716,076                       |       | 2,380,476 |   | 1,528,576 |   |
| Shares held in escrow                              |       | 5,725                            |       | —                          |       | 1,929 |   | — |   |
| Dilutive weighted average shares  outstanding      |       | 20,338,392                       |       | 14,096,307                      |       | 18,285,292 |   | 13,792,798 |   |

 

Because the Company reporteda net loss for the three and nine months ended September 30, 2007 and the ninemonths ended September 30, 2006, all potential common shares have been excludedfrom the computation of dilutive net loss per share since the effect would havebeen antidilutive.

 

Included in the calculationof the weighted average number of common shares outstanding at September 30,2007 and September 30, 2006 are 44,260 and 110,211 contingently issuableshares of common stock, respectively. These shares were issuable in connectionwith the Company’s acquisition of Pinpoint Power DR LLC (PPDR) in 2005. Theseshares have been included in the calculation as there are no restrictions forissuance except for the passage of time.

 

The weighted average commonshares outstanding at September 30, 2007 does not include 35,114 shares issuedin the MDE acquisition that are held in escrow. These shares are included inthe calculation of diluted shares outstanding as if the contingency periodended on September 30, 2007.

 

**5.Marketable Securities**

 

Cashequivalents consist principally of money market funds and corporate bonds withoriginal maturities of three months or less at the date of purchase. Marketablesecurities consist primarily of municipal auction rate securities. Marketablesecurities at September 30, 2007 are classified as “available-for-sale.”Available-for-sale securities are carried at fair value, with the unrealizedgains and losses reported in a separate component of accumulated othercomprehensive income (loss) in stockholders’ equity (deficit). The cost of debtsecurities that are deemed available-for-sale securities is adjusted foramortization of premiums and accretion of discounts to maturity. Suchamortization and accretion are included in interest and other income. Realizedgains and losses and declines in value judged to be other-than-temporary onavailable-for-sale securities and other investments are included in investmentincome. The cost of securities sold is based on the specific identificationmethod. Interest and dividends on securities classified as available-for-saleare included in interest and other income. 

 

Thefollowing is a summary of our available-for-sale marketable securities (dollarsin thousands):

 

8

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| ** **                        | ** ** | **Gross unrealized** | ** **   |
|-----------------------------------|------------|---------------------------|--------------|
| **As of September 30, 2007**      | ** ** | **Cost**                  | ** **   | **Gains** | ** ** | **Losses** | ** ** | **Fair value** | ** ** |
| Municipal auction rate securities |       | $                         | 12,600       |   | $ | — |   | $ | — |   | $ | 12,600 |   |
|                              |       |                      |         |   |   |   |   |   |   |
| Total                             |       | $                         |  12,600 |   | $ |  — |   | $ |  — |   | $ |  12,600 |   |
|                                   |            |                           |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thefollowing is a summary of the cost and fair value of current available-for-salemarketable securities at September 30, 2007, by contractual maturity(dollars in thousands):
| ** **                             | ** ** | **Cost** | ** ** | **Fair value** | ** ** |
|----------------------------------------|------------|----------|------------|---------------------|------------|
| Due in one year or less                |       | $        | —     |                | $          | — |   |
| Due after one year through three years |       | —   |       | —              |       |
| Due after three years                  |       | 12,600   |       | 12,600              |       |
|                                   |       | $        | 12,600     |                | $          | 12,600 |   |

 

**6. Propertyand Equipment**

 

Property and equipment as ofSeptember 30, 2007 and December 31, 2006 consisted of the following:

 
| ** **                                                | ** ** | **Estimated Useful  Life (Years)** | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Computers and office equipment                            |       | 3                                            |       | $                            | 3,204      |                        | $          | 745 |   |
| Software                                                  |       | 3                                            |       | 2,278                        |       | 117                         |       |
| Demand response equipment                                 |       | 3-5                                          |       | 3,182                        |       | 1,767                       |       |
| Back-up generators                                        |       | 5                                            |       | 7,430                        |       | 885                         |       |
| Furniture and fixtures                                    |       | 5                                            |       | 624                          |       | 37                          |       |
| Leasehold improvements                                    |       | Lesser of the  useful life  or lease  term   |       | 819                          |       | 14                          |       |
| Assets under capital lease                                |       | Lesser of the useful life or lease term      |       | 201                          |       | 200                         |       |
| Construction-in-progress, including  capitalized interest |       |                                         |       | 5,629                        |       | 3,949                       |       |
|                                                      |       |                                         |       | 23,367                       |       | 7,714                       |       |
| Accumulated depreciation                                  |       |                                         |       | (3,047                       | )          | (1,167                      | )     |
| Property and equipment, net                               |       |                                         |       | $                            | 20,320     |                        | $          | 6,547 |   |

 

Depreciation expense was$962 and $218 for the three months ended September 30, 2007 and September 30,2006, respectively. For the nine months ended September 30, 2007 and September30, 2006, depreciation expense was $1,880 and $561, respectively.  For thethree months ended September 30, 2007 and September 30, 2006, $468 and $156were included in cost of revenues, and $494 and $62 were included in generaland administrative expenses, respectively. For the nine months ended September30, 2007 and September 30, 2006, $978 and $398 were included in cost ofrevenues and $902 and $163 were included in general and administrativeexpenses, respectively.

 

Software development costs of $0 and $677 for thethree and nine months ended September 30, 2007 have been capitalized inaccordance with Statement of Position No. 98-1, *Accounting for the Cost of Computer Software Developed or Obtained forInternal Use*. No amounts were capitalized during the three or ninemonths ended September 30, 2006. The Company ceased capitalizing softwaredevelopment costs as of May 31,2007 when the system becameoperational. These expenses are currently recorded in research and developmentcosts. The capitalized amount is included as software in property and equipmentat September 30, 2007.

 

Construction-in-progressconsists principally of demand response equipment and back-up generators thathave not been placed in service. Construction-in-progress at September 30, 2007and December 31, 2006 consisted of the following:

 

9

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| ** **                | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Software                  |       | $                            | —     |                        | $          | 786 |   |
| Demand response equipment |       | 595                          |       | —                      |       |
| Back-up generators        |       | 4,623                        |       | 3,036                       |       |
| Capitalized interest      |       | 411                          |       | 127                         |       |
|                      |       | $                            | 5,629      |                        | $          | 3,949 |   |

 

**7. Lettersof Credit**

 

The Company is contingentlyliable under unused letters of credit. Included in the September 30, 2007and December 31, 2006 restricted cash balances are unused letters of credit inthe amount of $2,543 and $510, respectively.

 

**8.Financing Arrangements**

 

In November 2006, theCompany entered into a loan and security agreement with a debt lender, whichloan and security agreement provides for borrowings of up to $19,500 pursuantto a term loan facility of up to $7,500 and an equipment term loan facility ofup to $12,000. The term loan portion of the facility allowed the Company toborrow $7,500 on or before March 31, 2007. Borrowings under the term loanfacility will mature on a 36 month amortization schedule. Under theequipment term loan portion of the facility, the Company was eligible to borrowup to $8,000 on or before June 30, 2007 and up to an additional $4,000 onor before December 31, 2007, in each case, if the Company is not indefault under the terms of the loan and security agreement at the time of theborrowing. Borrowings made under the equipment term loan facility will requirerepayment over a 36 to 84 month period, depending on the type ofequipment financed. Borrowings under the loan and security agreement currentlybear interest at (a) the greater of 5.22% or the yield on three-year U.S. TreasuryNotes on the date of the loan plus (b) in the case of the term loans, 655basis points per annum, and in the case of the equipment loans, 695 basispoints per annum. Provisions in the loan and security agreement imposerestrictions on the Company’s ability to, among other things (i) incurmore debt; (ii) pay dividends and make distributions; (iii) redeem orrepurchase capital stock; (iv) create liens; (v) enter intotransactions with affiliates; and (vi) merge or consolidate. The loan andsecurity agreement contains other customary covenants but does not imposefinancial ratio maintenance requirements. The loan and security agreementpermits the lender to declare an event of default under various circumstances,including if any event occurs that has a material adverse effect on theCompany. The borrowings under the term loan facility are collateralized by allassets of the Company and the equipment term loan facilities are collateralizedby the underwritten equipment. In connection with the loan and security agreement,the Company has deferred costs of $74 to execute the agreement, which areamortized over the loan term.

 

During 2006, the Companyborrowed $5,000 under the term loan facility, which amount matures onFebruary 1, 2010. In connection with this amount, on January 1, 2007,the Company began making monthly interest-only payments and commencingApril 1, 2007, the Company began making monthly principal and interestpayments of $168. During March 2007, the Company borrowed $2,500 under the termloan facility which matures on April 1, 2010. In connection with thisamount, on April 1, 2007, the Company began making monthly interest-onlypayments and commencing on May 1, 2007, the Company began making monthlyprincipal and interest payments of $83. As of September 30, 2007, there was$6,487 outstanding under the term loan facility. As of September 30, 2007,no borrowings were outstanding under the equipment loan facility and $12,000was available for future borrowing.

 

In connection with the termloan financing, the Company issued warrants to purchase up to $700 of itsSeries B-1 redeemable convertible preferred stock. Prior to the IPO, thesewarrants automatically converted into warrants to purchase 53,372 shares ofcommon stock. The warrants were exercised using the net exercise method whichresulted in the issuance by the Company of 26,447 shares of common stock. Therewere no proceeds received by the Company related to this transaction.

 

**9.Stockholders’ Equity**

 

**Stock Split**

 

OnMay 1, 2007, the Company effected a 2.831 for one split of its common stock.All financial information in the financial statements presented reflects theimpact of this split.

 

**InitialPublic Offering**

 

OnMay 18, 2007, the Company successfully completed its IPO. The IPO consisted ofthe sale of 4,312,500 shares of common stock at a price of $26.00 per share. Ofthese 4,312,500 shares, 4,087,500 shares were sold in the IPO by the Company,including 562,500 sharessoldpursuant to the exercise by the underwriters of their over-allotment option, whichexercise occurred in May 2007, and 225,000 shares were sold by certainstockholders of the Company. Net proceeds to the Company from the IPO afterdeducting underwriters’ discounts and commissions and offering expenses wereapproximately $95,200. Upon closing of the IPO, all of the Company’soutstanding shares of convertible preferred stock converted into an aggregateof 9,499,556 shares of common stock. Also in connection with the IPO,outstanding

 

10

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warrants to purchase Series B-1 redeemable convertible preferred stockwere automatically converted into warrants to purchase 26,447 shares of theCompany’s common stock.

 

Subsequentto the IPO, a significant amount of stock options were exercised. A total of146,282 shares were issued as a result of option exercises from May 18, 2007through September 30, 2007.

 

**10.Stock-Based Compensation**

 

For the three months endedSeptember 30, 2007 and 2006, the Company recorded total stock-basedcompensation expense of $1,439 and $35, respectively.  For the nine monthsended September 30, 2007 and 2006, the Company recorded total stock-basedcompensation expense of $5,759 and $67, respectively.  The components ofstock-based compensation expense are disclosed below.

 

*StockGrants*

 

On April 25, 2007, theCompany granted certain of its executives 104,393 shares of common stock thatwere held in treasury at March 31, 2007. The $2,300 fair value of theseshares at the date of grant was recognized in full as compensation expense inthe second quarter of 2007. The shares of common stock were issued at no costto the recipients.

 

*StockOptions*

 

Under the Company’s Amendedand Restated 2003 Stock Option and Incentive Plan (the 2003 Plan), options maybe granted to persons who are, at the time of grant, employees, officers, ordirectors of, or consultants or advisors to, the Company. The 2003 Planprovides for the granting of nonstatutory stock options, incentive stockoptions, stock bonuses, and rights to acquire restricted stock. The provisionsof the 2003 Plan limit the exercise of incentive stock options, but in no casemay the exercise period extend beyond ten years from the date of grant.Prior to the IPO, the option price at the date of grant was determined by theBoard of Directors of the Company (the Board) and was supported by acontemporaneous valuation by a third party valuation specialist. The 2003 Planexpired upon the IPO in May 2007.

 

The Company’s 2007 Employee,Director and Consultant Stock Plan (the 2007 Plan and together with the 2003Plan, the Plans) was adopted by the Board in April 2007 and by its stockholdersin May 2007 and became effective on May 17, 2007. The 2007 Plan provides forthe grant of incentive stock options, nonqualified stock options, restrictedand unrestricted stock awards and other stock-based awards to eligibleemployees, directors and consultants of the Company for up to an aggregatemaximum of 2,600,000 shares of the Company’s common stock. Options grantedunder the 2007 Plan are exercisable for a period determined by the Company, butin no event longer than ten years from the date of the grant. Options generallyvest ratably over four years. Under the 2007 Plan, the Company offersperformance based stock awards to certain members of its sales team for meetingtheir annual objectives.

 

On January 1, 2006, theCompany adopted SFAS No. 123(R), *ShareBased Payment* (SFAS No. 123 (R)). The Company has elected to use theBlack-Scholes option pricing model to determine the weighted average fair valueof stock options granted under the Plans. In accordance with SFASNo. 123(R), the Company recognizes the compensation cost of stock-basedawards on a straight-line basis over the vesting period of the award.Stock-based compensation for stock options issued to employees for the threeand nine months ended September 30, 2007 was $1,213 and $2,999,respectively. For the three and nine months ended September 30, 2006, thestock-based compensation to employees was $31 and $55, respectively.

 

In order to estimate thefair value of options granted in 2007, the Company utilized the Black-Scholesoption pricing model, utilizing the following assumptions (weighted averagesbased on grants during the period):

 
| Risk-free interest rate            |   | 4.1-5.0 | %      |
|------------------------------------|--------|---------|--------|
| Expected term of options, in years |   | 6.25    |   |
| Expected annual volatility         |   | 87      | %      |
| Expected dividend yield            |   | 0       | %      |

 

Volatility measures theamount that a stock price has fluctuated or is expected to fluctuate during aperiod. The Company determines volatility based on an analysis of comparablepublic companies. The risk-free interest rate is the rate available as of theoption date on zero-coupon U.S. government issues with a remaining term equalto the expected life of the option. Because the Company does not have asufficient history to estimate the expected term, the Company uses thesimplified method for estimating expected term described in Staff AccountingBulletin (SAB) No. 107, *Share Based Payment*.The simplified method is based on vesting-tranches and the contractual life ofeach grant. The Company has not paid dividends in the past and does not plan topay any dividends in the foreseeable future.

 

The Company accounts fortransactions in which services are received from non-employees in exchange forequity instruments based on the fair value of such services received or of theequity instruments issued, whichever is more reliably measured, in accordancewith SFAS No. 123, *Accounting forStock-Based Compensation* and Emerging Issue Task Force (EITF)No. 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or inConjunction With Selling, Goods or Services*. The stock-based

 

11

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compensationexpenserelated to stock option grants to non-employees for the three and nine monthsended September 30, 2007 was approximately $116 and $243, respectively.For the three and nine months ended September 30, 2006, the stock-basedcompensation expense related to stock option grants to non-employees was $4 and$12, respectively.

 

The following is a summaryof the Company’s stock option activity as of September 30, 2007 and the stockoption activity for all stock option plans during the nine months endedSeptember 30, 2007:

 
| ** **                                           | ** ** | **Nine Months Ended September 30, 2007** | ** ** | ** **                          | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | ** **                                                        | ** ** | ** **                          | ** ** | **Weighted-** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | ** **                                                        | ** ** | ** **                          | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **Number of  Options**                                       | ** ** | **Exercise  Price  Per Share** | ** ** | **Exercise  Price  Per Share** | ** ** | **Aggregate  Intrinsic  Value (2)** | ** ** |
| ** **                                           | ** ** | **(in Shares)**                                              | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding at beginning of year                     |       | 2,416,706                                                         |       |                                |       | $ | 0.44 |   |   |   |
| Granted                                              |       | 1,039,747                                                         |       |                                |       |   |   |   |   |
| Exercised                                            |       | (324,484                                                          | )          |                                |       |   |   |   |   |
| Cancelled                                            |       | (242,079                                                          | )          |                                |       |   |   |   |   |
| Outstanding at end of period                         |       | 2,889,890                                                         |       | $ 0.11-$40.79                  |       | $ | 7.37 |   | $ | 89,074 |   |
| Exercisable at end of period                         |       | 319,648                                                           |       | $ 0.11-$16.60                  |       | $ | 1.42 |   | $ | 11,751 |   |
| Vested or expected to vest at September 30,  2007(1) |       | 2,632,866                                                         |       | $ 0.11-$40.79                  |       | $ | 7.30 |   | $ | 81,300 |   |

 

----

(1)   This represents thenumber of vested options as of September 30, 2007 plus the number of unvestedoptions expected to vest as of September 30, 2007 based on the unvested optionsoutstanding at September 30, 2007, adjusted for the estimated forfeiture rateof 10%.

 

(2)   The aggregate intrinsicvalue was calculated based on the positive difference between the estimatedfair value of the Company’s common stock on September 30, 2007 of $38.18 andthe exercise price of the underlying options.

 

Of the stock optionsoutstanding as of September 30, 2007, 2,815,166 options were held by employeesand 74,724 options were held by non-employees. The grant-date fair value of the1,039,747 options granted during the nine months ended September 30, 2007was $20,610, after the Company reassessed the fair value of its common stock inconnection with its IPO considerations. Subsequent to the $3,242 of stock-basedcompensation expense recognized in the nine months ended September 30, 2007,the amount of stock-based compensation expense that may be recognized foroutstanding, unvested options as of September 30, 2007 was $19,833 whichis to be recognized over a weighted average period of 3.4 years. The amountthat may be recognized into expense over the next four years is as follows:

 
| Remainder of 2007 |   | $     | 1,459  |   |
|-------------------|--------|-------|--------|--------|
| 2008              |   | 5,788 |   |
| 2009              |   | 5,664 |   |
| 2010              |   | 5,427 |   |
| 2011              |   | 1,495 |   |
|              |   | $     | 19,833 |   |

 

12

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*RestrictedStock*

 

The following tablesummarizes the Company’s grants of restricted stock during the nine monthsended September 30, 2007:

 
| ** **                      | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Grant Date  Fair Value  Per Share** | ** ** |
|---------------------------------|------------|----------------------------|------------|-------------------------------------------------------------------------|------------|
| Nonvested at December 31, 2006  |       | 152,460                    |       | $                                                                       | 1.53       |   |
| Granted                         |       | 42,000                     |       | $                                                                       | 38.13      |   |
| Vested                          |       | (2,000                     | )          | $                                                                       | 38.13      |   |
| Nonvested at September 30, 2007 |       | 192,460                    |       | $                                                                       | 9.14       |   |

 

All shares underlying awardsof restricted stock are restricted in that they are not transferable until theyvest. The shares vest annually over a four year period from the date ofissuance, with the exception of 2,000 shares issued in 2007 that vestedimmediately. The fair value of the restricted stock is expensed ratably overthe vesting period. The shares of restricted stock have been issued at no costto the recipients, except for the 152,460 shares of restricted stock granted in2006 that were purchased for $0.51 per share. The Company records the proceedsreceived for unvested shares in accrued expenses. The amount will be amortizedinto additional paid-in capital as the shares vest. Subject to limitedexceptions, if the employee who received the restricted stock leaves theCompany prior to the vesting date for any reason, the shares of restrictedstock will be forfeited and returned to the Company. The stock-basedcompensation expense related to restricted stock awards for the three and ninemonths ended September 30, 2007 was $110 and $217, respectively.There were no restricted awards granted or outstanding during the nine monthsended September 30, 2006. For restricted stock at September 30, 2007, theCompany had $1,608 of stock-based compensation expense which is expected to berecognized over a weighted-average period of 3.4 years.

 

**11. IncomeTaxes**

 

The Company provides forincome taxes as set forth in SFAS No. 109, *Accountingfor Income Taxes*(SFAS No.109). Under SFAS No. 109, the liability method is used inaccounting for income taxes. Deferred tax assets and liabilities are determinedbased on differences between financial reporting and tax bases of assets andliabilities and are measured using the enacted tax rates in effect when thedifferences are expected to reverse. Deferred tax assets are reduced by avaluation allowance to reflect the uncertainty associated with their ultimaterealization.

 

The Company adopted FASBInterpretation 48, *Accounting forUncertainty in Income Taxes–An Interpretation of Statement 109* (FIN48), as of January 1, 2007. The adoption of FIN 48 did not have a materialimpact on the Company’s consolidated financial statements.

 

**12. RelatedParty Transactions**

 

**DeferredAcquisition Payments**

 

On June 1, 2005, the Companyacquired all of the outstanding membership interests in PPDR from the solemember of PPDR (the Sole Member) in a purchase business combination pursuant toa purchase agreement (the Purchase Agreement). Under the Purchase Agreement,the Company is required to (i) make fixed payments of $5,925 and (ii) issue303,001 shares of the Company’s common stock to the Sole Member. As ofSeptember 30, 2007, 44,260 shares remain to be issued through May 31, 2008. Aspart of the Purchase Agreement, the Company acquired a contract that contains aone-year option to extend, as of May 31, 2008, at the sole discretion of acertain customer. If exercised, the Company is obligated to make an additionalpayment of $2,366 and issue an additional 28,287 shares of the Company’s commonstock in connection with the Purchase Agreement.

 

As of September 30, 2007 andDecember 31, 2006, deferred payments to the Sole Member and the fair value ofthe common stock to be issued to the Sole Member are as follows:

 
| **At September 30, 2007** | ** ** | **Gross  Payment** | ** ** | **Discount  Payment** | ** ** | **Common  Stock** | ** ** | **Total** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|-----------|------------|
| Current liability                        |       | $                  | 895        |                  | $          | 809               |       | $         | 44         |   | $ | 853 |   |
| Long-term liability                      |       | —             |       | —                |       | —            |       | —    |       |
| Total                                    |       | $                  | 895        |                  | $          | 809               |       | $         | 44         |   | $ | 853 |   |

 

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| **At December 31, 2006** | ** ** | **Gross  Payment** | ** ** | **Discount  Payment** | ** ** | **Common  Stock** | ** ** | **Total** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|-----------|------------|
| Current liability                       |       | $                  | 2,023      |                  | $          | 1,923             |       | $         | 66         |   | $ | 1,989 |   |
| Long-term liability                     |       | 440                |       | 356                   |       | 44                |       | 400       |       |
| Total                                   |       | $                  | 2,463      |                  | $          | 2,279             |       | $         | 110        |   | $ | 2,389 |   |

 

**ContingentConsideration**

 

As of September 30,2007 and December 31, 2006, the Company recorded $2,247 in contingentconsideration provisions to the Sole Member as a noncurrent liability.

 

**13.Industry Segment Information**

 

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

 

During the three and ninemonths ended September 30, 2007 and 2006, the Company had certain customerswhose revenue individually represented 10% or more of the Company’s totalrevenues as follows:

 
| ** ** | ** ** | **Three Months Ended September 30,** | ** ** |
|------------|------------|----------------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                                 | ** ** | **2006** | ** ** |
| ** ** | ** ** | **Revenues**                                             | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| Customer 1 |       | $                                                        | 12,717     |   | 66.4 | % | $ | 7,074 |   | 64.4 | % |
| Customer 2 |       | $                                                        | 2,980      |   | 15.6 | % | $ | 1,602 |   | 14.6 | % |
| Customer 3 |       | *                                                        |       | * |   | $ | 1,356 |   | 12.4 | % |
| Total      |       | $                                                        | 15,697     |   | 82.0 | % | $ | 10,032 |   | 91.4 | % |
|            |            |                                                          |            |  |  |  |  |  |  |  |  |  |

 
| ** ** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------|------------|---------------------------------------------------------|------------|
| ** ** | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** ** | ** ** | **Revenues**                                            | ** ** | **% of Total  Revenues** | ** ** | **Revenues** | ** ** | **% of Total  Revenues** | ** ** |
| Customer 1 |       | $                                                       | 24,906     |   | 60.6 | % | $ | 14,329 |   | 71.0 | % |
| Customer 2 |       | $                                                       | 9,879      |   | 24.0 | % | $ | 2,471 |   | 12.2 | % |
| Customer 3 |       | *                                                       |       | * |   | * |   | * |   |
| Total      |       | $                                                       | 34,785     |   | 84.6 | % | $ | 16,800 |   | 83.2 | % |
|            |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

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* Less than10% of total revenue.

 

**14. Subsequent Events**

 

In October 2007, the Companypaid a total of $10.9 million in deposit as collateral in connection withcertain open market bidding commitments.

 

On October 29, 2007, theCompany filed a registration statement on Form S-1 relating to a proposedoffering of 4,000,000 shares of its common stock. The registration statement,which has not been declared effective as of November 2, 2007, specifies that itis expected that 800,000 of the shares will be offered by the Company and3,200,000 shares will be offered by certain stockholders. The Company and theselling stockholders expect to grant the underwriters an over-allotment optionto purchase up to 200,000 and 400,000 additional shares, respectively.

 

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

 

*Thefollowing discussion should be read with our unaudited financial statements andnotes included in Item 1 of this Quarterly Report on Form 10-Q for thethree and nine months ended September 30, 2007 and 2006, as well as the auditedfinancial statements and notes and Management’s Discussion and Analysis ofFinancial Condition and Results of Operations for the fiscal year endedDecember 31, 2006, included in our Registration Statement on Form S-1, as filedwith the Securities and Exchange Commission, or the SEC, on October 29, 2007.This Quarterly Report on Form 10-Q contains forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Withoutlimiting the foregoing, the words “may,” “will,” “should,” “could,” “expect,” “plan,”“intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,”“target” and*

 

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*variations of these terms or the negatives of thoseterms and similar expressions are intended to identify forward-lookingstatements. All forward-looking statements included in this Quarterly Report onForm 10-Q are based on current expectations, estimates, forecasts andprojections and the beliefs and assumptions of our management including,without limitation, our expectations regarding our results of operations,selling and marketing expenses, general and administrative expenses, researchand development expenses, and the sufficiency of our cash for futureoperations. 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 QuarterlyReport on Form 10-Q. You should carefully review those factors and alsocarefully review the risks outlined in other documents that we file from timeto time with the SEC.*

 

**Overview**

 

We are a leading developerand provider of clean and intelligent energy solutions. We use our NetworkOperations Center, or NOC, to remotely manage and reduce electricityconsumption across a network of commercial, institutional and industrialcustomer sites to enable a more information-based and responsive, orintelligent, electric power grid. Our customers are electric power gridoperators and utilities, as well as commercial, institutional and industrialend-users of electricity. Our demand response and energy management solutionshelp optimize the balance of electric supply and demand and create a lower riskand more environmentally sound alternative to building additional power plantsand transmission lines. Grid operators and utilities pay us a stream ofrecurring cash flows for managing demand response capacity that we share withparticipating end-use customers. We receive most of our revenues from gridoperators and utilities and we make payments to end-users of electricity forboth contracting to reduce electricity usage and actually doing so when calledupon. In doing so, we establish a base of installed users for an expandingportfolio of technology-enabled energy management solutions.

 

Our customer base has grownfrom 19 commercial, institutional and industrial customers with 70 sites in ournetwork at the end of 2004 to approximately 691 end-use customers for ourdemand response solutions with approximately 2,034 sites in our demand responsenetwork as of September 30, 2007. The demand response capacity we managethrough our network has grown from 10 megawatts, or MW, at the end of 2004to approximately 918 MW as of September 30, 2007. In addition, in thethird quarter of 2007, we entered into two new utility contracts which, inaggregate, would enable us to enroll up to an additional 145 MW of demandresponse capacity; of these, 120 MW are pursuant to a contract that is stillsubject to regulatory approval.

 

We continue to devotesubstantially all of our efforts toward the sale of our demand response andenergy management solutions. We have incurred cumulative net losses of $24.8million from inception to September 30, 2007. Our net losses were $5.8million for the year ended December 31, 2006 and $14.5 million for thenine months ended September 30, 2007.

 

OnSeptember 13, 2007, we acquired all of the outstanding membership interests ofMdenergy, LLC, or MDE, an energy procurement service provider, for a totalpurchase price of approximately $7.9 million, of which approximately $3.16million was paid in cash and the remainder of which was paid by the issuance of139,056 shares of our common stock. The acquisition of MDE enables us to applyleading energy market intelligence as well as an online reverse auctiontechnology platform, now called EnerNOC ExchangeTM, to helpcommercial, institutional, and industrial customers make more informedcommodity purchasing decisions. The MDE acquisition included the addition ofover 400 new commercial, institutional and industrial customers to whom we nowprovide energy management solutions. We intend to pursue opportunities toprovide demand response solutions to a substantial numbers of these newcustomers.

 

On May 18, 2007, wecompleted our initial public offering, or IPO, of 4,312,500 shares of commonstock at a price of $26.00 per share, which includes the exercise of theunderwriters’ over-allotment option to purchase 562,500 shares and the sale of225,000 by certain of our stockholders. Net proceeds to us from the offeringwere approximately $95.2 million (net of underwriting discounts and commissionsand offering expenses.)

 

We made three otheracquisitions through September 30, 2007. In June 2005, we acquiredPinpoint Power DR, the demand response business of Pinpoint Power LLC. Thisacquisition increased our base of end-use customers and capacity under managementin the New England region. To further strengthen our technology platform, weacquired certain assets and obligations of eBidenergy, Inc. from TrilliumCapital Partners LLC in February 2006. In May 2006, we acquiredsubstantially all of the assets of Celerity Energy Partners LLC, a demandresponse provider for grid operators and utilities, including all of themembership interests in Celerity Energy Partners San Diego LLC. Thisacquisition increased our base of end-use customers and capacity under managementin California.

 

15

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***Revenues***

 

We derive recurring revenuesfrom the sale of our demand response and energy management solutions. Ourrevenues from our demand response solutions consist primarily of capacity andenergy payments. In certain markets we enter into long-term capacity contractswith grid operators and utilities, generally ranging from three to10 years in duration, to deploy our demand response solutions. Inaddition, we derive revenues from demand response capacity we make available inopen market programs, which are open market bidding opportunities establishedby grid operators or utilities. In these open market programs, grid operatorsand utilities generally seek bids from companies such as ours to provide demandresponse capacity based on prices offered in competitive bidding. Theseopportunities are generally characterized by flexible capacity commitments andprices that vary by month.

 

Where we have a long-termcontract, we receive periodic capacity payments, which may vary monthly orseasonally, based upon enrolled capacity and predetermined payment rates. Wherewe operate in open markets, our revenues from demand response capacity paymentsgenerally vary month-to-month based upon our enrolled capacity and the marketpayment rate. Under both long-term contracts and open market programs, wereceive capacity payments regardless of whether we are called upon to reducedemand for electricity from the electric power grid. At least once per year wedemonstrate our capacity either through a demand response event or ameasurement and verification test. This demonstrated capacity is typically usedto calculate the continuing periodic capacity payments to be made to us untilthe next demand response event or test establishes a new demonstrated capacityamount. In most cases, we also receive a second type of payment for the amountof energy usage we actually curtail from the grid; we call this an energypayment. The energy payment is based upon the amount of energy usage weactually reduce from the electricity grid in kilowatt hours during the demandresponse event.

 

In accordance with SABNo. 101, *Revenue Recognition inFinancial Statements,* as amended by SAB No. 104, *Revenue Recognition* (SAB No. 104), in allof our arrangements, we do not recognize any revenues until we can determinethat persuasive evidence of an arrangement exists, delivery has occurred, thefee is fixed or determinable, and we deem collection to be probable. As theprogram rules may differ for each contract and/or region where we operate, weassess whether or not we have met the specific delivery requirements and deferrevenues as necessary. In accordance with SAB No. 104, we recognize demandresponse revenues when we have provided verification to the grid operator orutility of our ability to deliver the committed capacity under the agreement.Committed capacity is verified through the results of an actual demand responseevent or a measurement and verification test. Once the capacity amount has beenverified, the revenues are recognized and future revenues become fixed anddeterminable and are recognized monthly until the next verification event. Insubsequent verification events, if our verified capacity is below thepreviously verified amount, the grid operator or utility will reduce futurepayments based on the adjusted verified capacity amounts. The payments receivedfrom the customer can be decreased or increased, up to the committed capacityamounts under the agreement, in connection with subsequent verification events.Revenues recognized between demand response events or tests are not subject topenalty or customer refund.

 

Our energy managementsolutions include demand response audits where we evaluate end-use customers’energy utilization and operating flexibility to determine potential savings opportunitiesfrom implementing demand response, conserving energy and limiting peak demand.We receive a fee from our electric grid operator and utility customers for eachaudit typically based upon a rate times the amount of kilowatts, or kW, that weidentify that can be reduced from the electric power grid. We also use ourPowerTrakTM platform to deliver energy analytics and control, energyprocurement services and emissions tracking and trading support. We generallyreceive either a subscription-based fee or a percentage savings fee for theseenergy management solutions. We have yet to earn substantial revenues fromthese energy management solutions.

 

***Cost of Revenues***

 

Cost of revenues for ourdemand response solutions consists of payments we make to our commercial,institutional and industrial customers for their participation in our demandresponse network. We generally enter into one to five year contracts with ourend-use customers under which we deliver recurring cash payments to them forthe capacity they commit to make available on demand. We also generally make anadditional payment when a customer reduces consumption of energy from theelectric power grid. The equipment and installation costs for our devices atour commercial, institutional and industrial customer sites are capitalized anddepreciated over the lesser of the remaining term of the contract or theestimated useful life of the equipment and this depreciation is also reflectedin cost of revenues. When services have been provided, but the revenueassociated with the agreement have been deferred as a result of not meeting therevenue recognition criteria required by SAB No. 104, we also defer therelated direct costs of revenues for the service.

 

***Stock-Based Compensation***

 

Effective as of January 1,2006, we adopted the requirements of Statement of Financial AccountingStandards (SFAS) No. 123(R), *ShareBased Payment* (SFAS No. 123(R)). SFAS No. 123(R) addressesall forms of share-based payment awards, including shares issued under employeestock purchase plans, stock options, restricted stock and stock appreciationrights. SFAS No. 123(R) requires us to expense share-based payment awardswith compensation cost for share-based payment transactions measured at fairvalue. We continue to evaluate the effect that the adoption of SFASNo. 123(R) will have on our financial position and results of operations.For the three and nine months ended September 30, 2007, we recordedstock-based compensation expenses of approximately $1.4 million and $5.8 million,respectively, in connection with share-based payment

 

16

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awards to employees and non-employees. Included within the amount forthe nine months ended is $2.3 million in compensation expense associated with agrant that we made to our chief executive officer and our president in April2007. With respect to grants through September 30, 2007, a future expenseof non-vested options of approximately $19.8 million is expected to berecognized over a weighted-average period of 3.4 years. For restricted stock atSeptember 30, 2007, we had $1.6 million of stock-based compensation expensewhich is expected to be recognized over a weighted-average period of 3.4 years.See Footnote 10, “Stock-Based Compensation,” to the Unaudited CondensedConsolidated Financial Statements for further discussion regarding stockoptions.

 

**Consolidated Results of Operations**

 

***Three and Nine Months Ended September 30, 2007 Compared to the Threeand Nine Months Ended September 30, 2006***

 

***Revenues***

 

The following tablesummarizes our revenues for the three and nine months ended September 30,2007 and 2006 (dollars in thousands):

 
| ** **                  | ** ** | **Three Months  Ended**       | ** ** | ** **                   | ** ** |
|-----------------------------|------------|------------------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **September 30,   2007** | ** ** | **September  30, 2006** | ** ** | **Percentage  Change** | ** ** |
| Revenues:                   |       |                               |       |                         |       |   |   |
| Demand response solutions   |       | $                                  | 18,871     |                         | $          | 10,833 |   | 74.2 | % |
| Energy management solutions |       | 268                                |       | 145                          |       | 84.8 | % |
| Total revenues              |       | $                                  | 19,139     |                         | $          | 10,978 |   | 74.3 | % |

 
| ** **                  | ** ** | **Nine Months  Ended  September 30,  2007** | ** ** | **Nine Months  Ended  September 30,  2006** | ** ** | **Percentage  Change** | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------|------------|
| Revenues:                   |       |                                                  |       |                                                  |       |                   |       |
| Demand response solutions   |       | $                                                     | 40,502     |                                                  | $          | 20,000                 |       | 102.5 | % |
| Energy management solutions |       | 624                                                   |       | 192                                                   |       | 225.0                  | %          |
| Total revenues              |       | $                                                     | 41,126     |                                                  | $          | 20,192                 |       | 103.7 | % |

 

During the three and ninemonths ended September 30, 2007, the increase in our demand responsesolutions revenues was primarily due to an increase in our capacity undermanagement in all operating regions and the enrollment of new end-use customersin our demand response programs. Also contributing to the increase in ourdemand response solutions revenues was an increase in the number of ourcommercial, institutional and industrial customers utilizing our price-baseddemand response solutions to reduce their electrical consumption from theelectric power grid during times of high wholesale market prices. As ofSeptember 30, 2007, we had approximately 918 MW of electric capacity undermanagement compared to 294 MW of electric capacity under management as ofSeptember 30, 2006.

 

For the three and ninemonths ended September 30, 2007, the increase in our energy managementsolutions was primarily due to the initiation of our energy efficiencysolutions and our acquisition of MDE, an energy procurement service providerthat we acquired to augment our energy management solutions.

 

***Gross Profit and Gross Margin***

 

The following tablessummarize our gross profit and gross margin percentages for our demand responseand energy management solutions for the three and nine months ended September30, 2007 and 2006 (dollars in thousands):

 
| **Three Months Ended September 30,** | ** ** |
|--------------------------------------|------------|
| **2007**                             | ** ** | **2006** | ** ** |
| **Gross  Profit**                    | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| $                                    | 7,881      |   | 41.2 | % | $ | 5,766 |   | 52.5 | % |
|                                      |            |  |  |  |  |  |  |  |  |

 
| **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|
| **2007**                            | ** ** | **2006** | ** ** |
| **Gross  Profit**                   | ** ** | **Gross  Margin** | ** ** | **Gross  Profit** | ** ** | **Gross  Margin** | ** ** |
| $                                   | 14,894     |   | 36.2 | % | $ | 7,897 |   | 39.1 | % |
|                                     |            |  |  |  |  |  |  |  |  |

 

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Our gross profit has been,and will be, affected by many factors, including (a) the demand for ourdemand response and energy management solutions, (b) the selling price ofour solutions, (c) our cost of revenues, (d) the introduction of newclean and intelligent energy solutions and (e) our ability to open andenter new markets/regions and expand deeper into markets we already serve.

 

The decrease in the grossmargin percentage for the three and nine months ended September 30, 2007 wasprimarily due to the fact that our continued growth and a change in the mix ofdemand response programs in which we participate has lessened the impact of ourhigher summer margins associated with our Pinpoint Power DR contract. We alsoshared a higher percentage of the payments we received from utilities and gridoperators with our commercial, institutional and industrial customers thatcurtailed usage in times of high wholesale market prices.

 

***Operating Expenses***

 

The following tablessummarize our operating expenses for the three and nine months endedSeptember 30, 2007 and 2006 (dollars in thousands):

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2007**                                                 | ** ** | **2006**       | ** ** | **Change** | ** ** |
| Operating Expenses:                 |       |                                                     |       |           |       |   |   |
| Selling and marketing expenses      |       | $                                                        | 4,362      |           | $          | 1,745 |   | 150.0 | % |
| General and administrative expenses |       | 6,699                                                    |       | 1,945          |       | 244.4 | % |
| Research and development expenses   |       | 985                                                      |       | 189            |       | 421.2 | % |
| Total                               |       | $                                                        | 12,046     |           | $          | 3,879 |   | 210.5 | % |

 
| ** **                          | ** ** | **Nine Months Ended September 30,** | ** ** | **Percentage** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|----------------|------------|
| ** **                          | ** ** | **2007**                                                | ** ** | **2006**       | ** ** | **Change** | ** ** |
| Operating Expenses:                 |       |                                                    |       |           |       |   |   |
| Selling and marketing expenses      |       | $                                                       | 11,840     |           | $          | 3,832 |   | 209.0 | % |
| General and administrative expenses |       | 18,036                                                  |       | 4,990          |       | 261.4 | % |
| Research and development expenses   |       | 1,824                                                   |       | 682            |       | 167.4 | % |
| Total                               |       | $                                                       | 31,700     |           | $          | 9,504 |   | 233.5 | % |

 

Operatingexpenses consist of selling and marketing, general and administrative, andresearch and development expenses. Personnel-related costs are the mostsignificant component of each of these expense categories. We grew from 75employees at September 30, 2006 to 207 employees at September 30, 2007. Weexpect to continue to hire employees to support our growth for the foreseeablefuture.

 

***Selling and Marketing Expenses***

 

Selling and marketingexpenses consist primarily of (a) salaries and related personnel costs,(b) commissions, (c) travel, lodging and other out-of-pocketexpenses, (d) marketing programs such as trade shows, and (e) otherrelated overhead. Commissions are recorded as an expense when earned by theemployee. We expect increases in selling and marketing expenses in absolutedollar terms for the foreseeable future as we further increase the number ofsales professionals and, to a lesser extent, increase our marketing activities.

 

The increases in selling andmarketing expenses were primarily driven by the costs associated with anincrease in the number of selling and marketing employees from 26 at September30, 2006 to 70 at September 30, 2007. Stock-based compensation expense relatedto selling and marketing employees for the three and nine months endedSeptember 30, 2007, increased $0.6 million and $1.2 million, respectively, whencompared to the same periods in 2006.

 

***General and Administrative Expenses***

 

General and administrativeexpenses consist primarily of (a) salaries and related personnel costsrelated to our executive, finance, human resource, information technology andoperations organizations, (b) facilities expenses, (c) accounting andlegal professional fees, and (d) other related overhead. We expect generaland administrative expenses to continue to increase in absolute dollar termsfor the foreseeable future as we invest in infrastructure to support continuedgrowth and incur additional expenses related to being a public company,including

 

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increased audit and legal professional fees, costs of compliance withsecurities and other regulations, investor relations expenses, and higherinsurance premiums.

 

The increases in general andadministrative expenses were primarily due to costs associated with an increasein the number of general and administrative (including operations) employeesfrom 35 at September 30, 2006 to 106 at September 30, 2007, as well as togreater costs associated with being a public company. Stock-based compensationexpense related to general and administrative employees for the three and ninemonths ended September 30, 2007, increased $0.8 million and $4.3 million,respectively, when compared to the same periods in 2006. Included in thestock-based compensation during the second quarter of 2007 is $2.3 millionrelated to stock granted to certain of our executives which was recognized infull as compensation expense.

 

***Research and Development Expenses***

 

Research and developmentexpenses consist primarily of (a) salaries and related personnel costsrelated to our engineering organization, (b) payments to suppliers fordesign and consulting services, (c) costs relating to the design anddevelopment of new solutions and enhancement of existing solutions, (d) qualityassurance and testing, and (e) other related overhead. During 2006 andthrough May 31, 2007, we have capitalized internal software anddevelopment costs of $1.5 million in accordance with Statement ofPosition 98-1, *Accounting for the Costof Computer Software Developed or Obtained for Internal Use*, and theamount is included as software in property and equipment at September 30,2007. We intend to continue to invest in our research and development efforts.We expect research and development expenses to increase in absolute dollarterms for the foreseeable future.

 

The increases in researchand development expenses were primarily due to costs associated with anincrease in the number of research and development employees from 14 atSeptember 30, 2006 to 31 at September 30, 2007. Stock-based compensationexpense related to research and development employees for the three and ninemonths ended September 30, 2007 increased $0.1 million and $0.2 million,respectively, when compared to the same periods in 2006. Expense increases forthe three and nine months ended September 30, 2007 were slightly offset bycapitalized internal software and development costs of $0 and $0.7 million,respectively. On May 31, 2007, we ceased capitalizing internal software and developmentcosts as the asset was put into service.

 

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

 

Interest and other income(expense) consists primarily of interest income earned on cash balances. Wehistorically have invested our cash in money market funds. Interest and otherincome (expense) includes interest expense on our debt facilities.

 

Net interest and otherincome was $1.6 million for the three months ended September 30, 2007, comparedto net interest and other income of $5,000 for the three months ended September30, 2006. For the nine months ended September 30, 2007, net interest and otherincome was $2.3 million, compared to net interest and other expense of $49,000for the nine months ended September 30, 2006. The increase in interest andother income in the three and nine months ended September 30, 2007 as comparedto September 30, 2006 were primarily due to interest income earned on theproceeds from our IPO, partially offset by interest expense on our outstandingdebt.

 

***Income Taxes***

 

No provision for incometaxes was recorded for either the three or nine month periods ended September30, 2007 or 2006. We provided a full valuation allowance for our deferred taxassets because the realization of any future tax benefits could not besufficiently assured as of September 30, 2007 or 2006.

 

**Liquidityand Capital Resources**

 

***Overview***

 

In May 2007, we completed ourIPO of 4,312,500 shares of common stock at a price of $26.00 per share, whichincludes the exercise of the underwriters’ over-allotment option to purchase562,500 shares and the sale of 225,000 shares by certain of our stockholders.Net proceeds to us from the IPO were approximately $95.2 million (net ofunderwriting discounts and commissions and offering expenses). Prior to ourIPO, we primarily funded our operations through the issuance of an aggregate of$27.9 million in preferred stock and $7.5 million in borrowings under ourloan and security agreement. We used these proceeds to fund our operations, todevelop our technology for our demand response programs, to open new marketsand to make acquisitions.

 

We had approximately $73.8million in cash and cash equivalents as of September 30, 2007, compared to $9.2million at December 31, 2006. In October 2007, we posted cash collateral of$10.9 million in connection with certain of our open market biddingcommitments. We believe that our existing cash and cash equivalents, includingthe net proceeds from our IPO and borrowings under our loan and securityagreement, will be sufficient to meet our anticipated cash needs for at leastthe next 24 months.

 

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***Cash Flows***

 

The following tablesummarizes our cash flows for the nine months ended September 30, 2007 and 2006(dollars in thousands):

 
| ** **                                            | ** ** | **Nine Months  Ended**  | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
| ** **                                            | ** ** | **(In thousands)**      | ** ** |
| Cash flows used in operating activities               |       | $                            | (6,591     | ) | $ | (2,270 | ) |
| Cash flows used in investing activities               |       | (33,088                      | )          | (6,556 | ) |
| Cash flows provided by financing activities           |       | 104,285                      |       | 1,916 |   |
| Net increase (decrease) in cash and cash  equivalents |       | $                            | 64,606     |   | $ | (6,910 | ) |

 

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

 

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

 

Cash used in operatingactivities in the nine months ended September 30, 2007 was $6.6 millionand consisted of a $14.5 million net loss and approximately $1.5 million of netcash used for working capital purposes and other activities, offset by $9.4million of non-cash items, consisting primarily of depreciation andamortization, interest expense and stock-based compensation charges. Cash usedfor working capital and other activities primarily reflected a $7.6 millionincrease in accounts receivable due to increased revenues, a $0.5 millionincrease in prepaid expenses and other current assets, a $1.3 million increasein deferred cost of sales, and a decrease of $1.2 million in other noncurrentassets. These amounts were partially offset by an increase of $2.8 million inaccounts payable and accrued expenses, an increase in accrued capacity paymentsof $4.5 million and an increase in deferred revenue of $1.7 million as ouroperations continued to grow.

 

Cash used in operatingactivities in the nine months ended September 30, 2006 was $2.3 million andconsisted of a $1.7 million net loss and $2.9 million of net cash used byworking capital and other activities offset by $2.3 million of non-cash items,consisting primarily of depreciation and amortization and stock-basedcompensation charges. Cash used by working capital and other activitiesprimarily reflected a $6.7 million increase in accounts receivable offset by a$0.6 million increase in accounts payable and accrued expenses as ouroperations continued to grow, a $3.4 million increase in accrued capacitypayments and other noncurrent liabilities.

 

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

 

Cash used in investingactivities was $33.1 million and $6.6 million for the nine months endedSeptember 30, 2007 and 2006, respectively. Our principal cash investmentsrelated to installation services used to build out and expand our demandresponse programs, purchases of property and equipment, the cash portion of thepurchase price for our acquisitions of MDE and Pinpoint Power DR, theacquisition of the assets of eBidenergy Inc, and the acquisition ofsubstantially all of the assets of Celerity Energy Partners LLC. For the ninemonths ended September 30, 2007, purchases of available-for-sale securitieswere approximately $15.0 million and sales of available-for-salematurities were $2.4 million.

 

***Cash Flows Provided by Financing Activities***

 

Cash flows provided byfinancing activities were $104.3 million and $1.9 million for the nine monthsended September 30, 2007 and 2006, respectively. Cash flows provided byfinancing activities consisted of the following:

 

*EquityFinancing Activities*

 

In May 2007, we completedour IPO of 4,312,500 shares of common stock at a price of $26.00 per share,which includes the exercise of the underwriters’ over-allotment option topurchase 562,500 shares and the sale of 225,000 shares by certain of ourstockholders. Net proceeds to us from the IPO were approximately $95.2 million(net of underwriting discounts and commissions and offering expenses). InJanuary 2007, we raised $10 million of proceeds through sales of our Series CConvertible Preferred Stock. In May 2006, we raised $2.6 million of proceedsthrough sales of our Series B-1 Convertible Preferred Stock. In addition, wereceived approximately $0.1 million and $1,000 from exercises of common stockoptions during the nine months ended September 30, 2007 and September 30, 2006,respectively.

 

Duringthe nine months ended September 30, 2007, we increased our restricted cash by$2.0 million and incurred $3.6 million of costs associated with the filingof our IPO. In February 2007, we repurchased 104,393 shares of our common stockfor $0.4 million.

 

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*CreditFacility Borrowings*

 

During the nine months endedSeptember 30, 2007, we borrowed $2.5 million under the loan and securityagreement and made scheduled principal payments on our outstanding debt andcapital lease obligations of $1.0 million. During the nine months endedSeptember 30, 2006, we made $0.6 million of scheduled principal payments on ouroutstanding debt.

 

**CapitalSpending**

 

We have made capitalexpenditures primarily for general corporate purposes to support our growth andfor equipment installation related to our demand response programs. Our capitalexpenditures totaled $15.7 million and $2.1 million for the nine months endedSeptember 30, 2007 and 2006, respectively. Under certain of our contracts weare required to make capital expenditures of $4.0 million to $6.0 millionrelated to environmental control facilities. Most of those expenditures areexpected to be made in 2007 and the first half of 2008, and we do not expect tomake additional capital expenditures in connection with those contracts unlessour capacity commitment is expanded under the contracts.

 

**ContractualObligations**

 

The disclosures relating toour contractual obligations in our registration statement on Form S-1, which wefiled with the SEC on October 29, 2007, have not materially changed since wefiled that registration statement. As described in our registration statement,during the third quarter of 2007 and as part of our acquisition of MDE, weincurred the obligation to pay to the former members of MDE an earnout amountequal to two times the revenues of MDE’s business during the period from July1, 2007 through December 31, 2007.  Theearnout will be payable in cash during the first quarter of 2008.  Also in connection with the MDE acquisition,we are obligated to pay to certain employees of MDE a cash bonus payment of upto $300,000 in the first quarter of 2008 and up to $600,000 in the firstquarter of 2009 upon the achievement of certain revenue-based milestones during2007 and 2008, respectively, related to MDE’s services.

 

**Off-BalanceSheet Arrangements**

 

We have no off-balance sheetarrangements other than letters of credit issued in the ordinary course ofbusiness.

 

**Applicationof Critical Accounting Policies and Use of Estimates**

 

Our financial statements areprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires that wemake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. We base our estimates on historical experience andon various other assumptions that we believe to be reasonable under thecircumstances. We evaluate our estimates and assumptions on an ongoing basis.Our actual results may differ significantly from these estimates under differentassumptions or conditions. There have been no material changes to theseestimates during the third quarter of 2007. For a detailed explanation of thejudgments made in these areas, refer to “Management’s Discussion and Analysisof Financial Condition and Results of Operations” within our registrationstatement on Form S-1, which we filed with the SEC on October 29, 2007.

 

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

 

***Foreign Exchange Risk***

 

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

 

***Interest Rate Risk***

 

As of September 30, 2007,all of our $6.7 million of outstanding debt was at fixed interest rates;therefore, there was no significant impact from changes in interest rates.

 

Wemanage our cash and cash equivalents portfolio considering investmentopportunities and risks, tax consequences and overall financing strategies. Ourinvestment portfolio consists primarily of cash and cash equivalents, moneymarket funds, and municipal auction rate securities with carrying amountsapproximating market value. Asour investments are made with highly rated municipal auction rate securities and short-term securities, we are notanticipating any significant impact in the short term from a change in interestrates.

 

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

 

***Evaluation of Disclosure Controls and Procedures***

 

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures as ofSeptember 30, 2007. The term “disclosure controls and procedures,” as definedin Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended, or the Exchange Act, means controls and other procedures of a companythat are designed to ensure that information required to be disclosed by acompany in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its

 

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principal executive and principal financial officers as appropriate toallow timely decisions regarding required disclosure. Our management recognizesthat any controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving their objectives and managementnecessarily applies its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures. Based on the evaluation of our disclosurecontrols and procedures as of September 30, 2007, our chief executive officerand chief financial officer concluded that, as of such date, our disclosurecontrols and procedures were effective at the reasonable assurance level.

 

***Internal Control over Financial Reporting***

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)under the Exchange Act) occurred during the fiscal quarter endedSeptember 30, 2007, which has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART II —OTHER INFORMATION**

 

**Item 1.    Legal Proceedings.**

 

In the ordinary conduct ofour business we are subject to periodic lawsuits, investigations andclaims.  Although we cannot predict withcertainty the ultimate resolution of such lawsuits, investigations and claimsagainst us, we do not believe that any currently pending or threatened legalproceeding or proceedings to which we are a party will have a material adverseeffect on our business, results of operations, cash flows or financialcondition.

 

**Item 1A.  Risk Factors.**

 

*Aninvestment in our common stock involves a high degree of risk. You shouldcarefully read and consider the risks and uncertainties described belowtogether with the other information contained in this Quarterly Report on Form10-Q, including our financial statements and the notes thereto and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe risks and uncertainties described under the section titled “Risk Factors”of our registration statement on Form S-1 that we filed with the SEC on October29, 2007, before making an investment decision. If any of these risks actually occurs,our business, financial condition, results of operations, and future growthprospects may suffer. As a result, the trading price of our common stock coulddecline, and you may lose all or part of your investment.*

 

**RisksRelated to Our Business**

 

***We have incurred net losses since our inception, and we may continue toincur net losses in the future and may never reach profitability.***

 

Our net losses in 2004, 2005and 2006 were $1.9 million, $1.7 million and $5.8 million,respectively. Our net operating loss for the three and nine months endedSeptember 30, 2007 was $2.5 million and $14.5 million, respectively. Wehave not achieved profitability for any calendar year, although we have forcertain quarters, and we expect to continue to incur operating losses for theforeseeable future. As of September 30, 2007, we had an accumulateddeficit of $24.8 million. Initially, our operating losses were principallydriven by start-up costs and the costs of developing our technology, whichincluded research and development. More recently, our net losses have beenprincipally driven by selling and marketing, and general and administrativeexpenses. As we seek to grow our revenues and customer base, we plan tocontinue to expand our demand response and energy management solutions, whichwill require increased selling and marketing, general and administrative, andresearch and development expenses. These increased operating costs may cause usto incur net losses for the foreseeable future, and there can be no assurance thatwe will be able to grow our revenues, sustain the growth rate of our revenues,expand our customer base or become profitable. Furthermore, these expenses arenot the only factors that may contribute to our net losses. For example,interest expense on our currently outstanding debt and on any debt that weincur in the future could contribute to our net losses. As a result, even if wesignificantly increase our revenues, we may continue to incur net losses in thefuture. If we fail to achieve profitability, the market price of our commonstock could decline substantially.

 

***We have a limited operating history in an emerging market, which maymake it difficult to evaluate our business and prospects, and may expose us toincreased risks and uncertainties.***

 

We began operating as a NewHampshire limited liability company in December 2001, and wereincorporated as a Delaware corporation in June 2003. We first begangenerating revenues in 2003. Accordingly, we have only a limited history ofgenerating revenues, and the future revenue potential of our business in theemerging market for clean and intelligent energy solutions is uncertain. As aresult of our short operating history, we have limited financial data that canbe used to evaluate our business, strategies, performance and prospects or aninvestment in our common stock. Any evaluation of our business and ourprospects must be considered in light of our limited operating history and therisks and uncertainties encountered by companies at our stage of development.To address these risks and uncertainties, we must do the following:

 

•     maintain our current relationships anddevelop new relationships with grid operators and utilities and the entitiesthat regulate them;

 

•     maintain and expand our current relationshipsand develop new relationships with commercial, institutional and industrialcustomers;

 

•     maintain and enhance our existing demandresponse and energy management solutions;

 

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•           continue to develop clean and intelligentenergy solutions that achieve significant market acceptance;

 

•           continue to enhance our informationprocessing systems;

 

•           execute our business and marketing strategiessuccessfully;

 

•           respond to competitive developments;

 

•           attract, integrate, retain and motivatequalified personnel; and

 

•           continue to participate in shaping theregulatory environment.

 

We may be unable toaccomplish one or more of these objectives, which could cause our business tosuffer. In addition, accomplishing many of these goals might be very expensive,which could adversely impact our operating results and financial condition. Anypredictions about our future operating results may not be as accurate as theycould be if we had a longer operating history.

 

***Our results of operations could be adversely affected if our operatingexpenses do not correspond with the timing of our revenues.***

 

Most of our operatingexpenses, such as employee compensation and rental expense for properties, areeither relatively fixed in the short-term or incurred in advance of sales.Moreover, our spending levels are based in part on our expectations regardingfuture revenues. As a result, if revenues for a particular quarter are belowexpectations, we may not be able to proportionately reduce operating expensesfor that quarter. For example, if a demand response event or metering andverification test does not occur in a particular quarter, we may not be able torecognize revenues for the undemonstrated capacity in that quarter. Thisshortfall in revenues could adversely affect our operating results for thatquarter and could cause the market price of our common stock to declinesubstantially.

 

***We operate in highly competitive markets; if we are unable to competesuccessfully, we could lose market share and revenues.***

 

The market for clean andintelligent energy solutions is fragmented. Some traditional providers ofadvanced metering solutions have added, or may add, demand response services totheir existing business. We face strong competition from clean and intelligentenergy solutions providers, both larger and smaller than we are. We alsocompete against traditional supply-side resources such as natural gas-firedpeaking power plants. In addition, utilities and competitive electricitysuppliers offer their own demand response solutions, which could decrease ourbase of potential customers along with our revenues and profitability.

 

Many of our competitors havegreater financial resources than we do. Our competitors could focus theirsubstantial financial resources to develop a competing business model ordevelop products or services that are more attractive to potential customersthan what we offer. Some advanced metering infrastructure service providers,for example, are substantially larger and better capitalized than we are andhave the ability to combine advanced metering and demand response solutionsinto an integrated offering to a large, existing customer base. Our competitorsmay offer clean and intelligent energy solutions at prices below cost or evenfor free in order to improve their competitive positions. Any of thesecompetitive factors could make it more difficult for us to attract and retaincustomers, cause us to lower our prices in order to compete, and reduce ourmarket share and revenues, any of which could have a material adverse effect onour financial condition and results of operations. In addition, we may alsoface competition based on technological developments that reduce peak demandfor electricity, increase power supplies through existing infrastructure orthat otherwise compete with our demand response and energy managementsolutions.

 

***If we fail to successfully educate existing and potential grid operatorand utility customers regarding the benefits of our demand response and energymanagement solutions or a market otherwise fails to develop for thosesolutions, our ability to sell our solutions and grow our business could belimited.***

 

Our future success dependson commercial acceptance of our clean and intelligent energy solutions and ourability to obtain additional contracts. We anticipate that revenues related toour demand response solutions will constitute a substantial portion of ourrevenues for the foreseeable future. The market for clean and intelligentenergy solutions in general is relatively new. If we are unable to educate ourpotential customers about the advantages of our solutions over competingproducts and services, or our existing customers no longer rely on our demandresponse solutions, our ability to sell our solutions will be limited. Inaddition, because the clean and intelligent energy solutions sector is rapidlyevolving, we cannot accuratelyassess the size of the market, and we may have limited insight into trends thatmay emerge and affect our business. For example, we may have difficultypredicting customer needs and developing clean and intelligent energy solutionsthat address those needs. If the market for our demand response and our energymanagement solutions does not continue to develop, our ability to grow ourbusiness could be limited and we may not be able to achieve profitability.

 

***If the actual amount of demand response capacity that we make availableunder our capacity contracts is materially less than required, our committedcapacity could be reduced and we could be required to make refunds and paypenalty fees.***

 

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We provide demand responsecapacity to our grid operator and utility customers either under fixed pricelong-term contracts, or under terms established in open bidding markets wherecapacity is purchased. Under the long-term contracts and open bidding marketcommitments, grid operators and utilities make periodic payments to us based onthe amount of demand response capacity that we are obligated to make availableto them during the contract period, or make monthly payments to us based on theamount of demand response capacity that we chose to make available to themduring the relevant period. We refer to these payments as committed capacitypayments. Committed capacity is negotiated and established by the contract orset in the open market bidding process and is subject to subsequentconfirmation by measurement and verification tests or performance in a demandresponse event. In our open bidding markets, we offer different amounts ofcommitted capacity to our grid operator and utility customers based on marketrules on a periodic basis. We refer to measured and verified capacity as ourdemonstrated or proven capacity. Once demonstrated, the proven capacity amountstypically establish a baseline of capacity for each end-use customer site inour portfolio, on which committed capacity payments are calculated goingforward and until the next demand response event or measurement andverification test when we are called to make capacity available.

 

The capacity level that weare able to achieve varies with the electricity demand of targeted equipment,such as heating and cooling equipment, at the time an end-use customer iscalled to perform. Accordingly, our ability to deliver committed capacitydepends on factors beyond our control, such as temperature and humidity and thetime of day that an end-use customer is called to perform. The correctoperation of, and timely communication with, devices used to control equipmentare also important factors that affect available capacity. Under some of ourcontracts, any difference between our demonstrated capacity and the committedcapacity on which capacity payments were previously made will result in eithera refund payment from us to our grid operator or utility customer or anadditional payment to us by such customer. Any refund payable by us wouldreduce our deferred revenues, but would not impact our previously recognizedrevenues. If there is a true-up settlement due to a grid operator or utilitycustomer, we generally make a corresponding adjustment in our payments to theend-use customer or customers who failed to make the appropriate level ofcapacity available, however we are sometimes unable to do so. In addition, someof our contracts with and open market programs established by our grid operatorand utility customers provide for penalty payments, which can be substantial,in certain circumstances in which we do not meet our capacity commitments,either in measurement and verification tests or in demand response events.Further, because measurement and verification test results for some capacitycontracts establish capacity levels on which payments will be made until thenext test or demand response event, the payments to be made to us under suchcapacity contracts would be reduced until the level of capacity is establishedat the next test or demand response event. To date we have been required tomake only de minimis refund and penalty payments, and we have incurred onlyimmaterial downward adjustments in capacity payments, as a result of failuresto achieve our committed capacity levels. However, we could experiencesignificant period-to-period fluctuations in our financial results in futureperiods due to true-up settlements, capacity payment adjustments, replacementcosts or other payments, which could be substantial. We incurred aggregatepenalty payments of $54,971 and $1,971 during the nine months ended September30, 2007 and September 30, 2006, respectively.

 

***Our business may become subject to modified or new governmentregulation, which may negatively impact our ability to market our clean andintelligent energy solutions.***

 

While the electric powermarkets in which we operate are regulated, we are not directly subject to theregulatory framework applicable to the generation and transmission ofelectricity. However, the installation of devices used in providing thosesolutions and electric generators sometimes installed or activated whenproviding demand response solutions may be subject to governmental oversightand regulation under state and local ordinances relating to building codes,public safety regulations pertaining to electrical connections and local andstate licensing requirements. In the future, federal, state, provincial orlocal governmental entities may seek to change existing regulations or imposeadditional regulations. Any modified or new government regulation applicable toour current or future solutions, whether at the federal, state, provincial orlocal level, may negatively impact the installation, servicing and marketing ofthose solutions and increase our costs and the price of our solutions. In arelatively few instances, we have agreed to own and operate a back-up generatorat a commercial, institutional or industrial customer location for a period oftime and to activate the generator when capacity is called for dispatch so thatthe commercial, institutional or industrial customer can reduce its consumptionof electricity from the electric power grid. These generators could becomeineligible to participate in demand response programs in the future, or becompensated less for such participation, thereby reducing our revenues andadversely affecting our financial position. In addition, certain of ourcontracts and expansion of existing contracts with grid operators and utilitycustomers are subject to approval by state or local regulatory agencies. Therecan be no assurance that such approvals will be obtained or be issued on atimely basis  For example, we receivednotification in October 2007 from the California Public Utilities Commission,or the CPUC, that the CPUC denied our initial 25 MW expansion request that SanDiego Gas & Electric, or SDG&E, had supported for our demand reductionprogram, citing procedural requirements that SDG&E and we purposely omittedby seeking fast-tracked approval of our clean capacity resource. Although we areworking with SDG&E and the CPUC on the procedural actions that the CPUCrecommends, we cannot be certain that our expansion request will be granted.

 

***A substantial majority of our revenues are generated from contractswith, and open market sales to, a small number of grid operator and utilitycustomers, including in particular one grid operator customer, and themodification or termination of these contracts or sales relationships couldmaterially adversely affect our business.***

 

A majority of our revenueshave been generated from contracts with, and open market sales to, ISO NewEngland Inc. This customer accounted for 86%, 65% and 61% of our total revenuesin 

 

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2005, 2006 andthenine months ended September 30, 2007, respectively. Moreover, revenuesfrom our three largest grid operator and utility customers representedapproximately 88%, 93% and 88% of our total revenues in 2005, 2006 and the ninemonths ended September 30, 2007, respectively. Any modification ortermination of these contracts or key customer relationships could have amaterial adverse effect on our business.

 

A substantial portion of ourrevenues historically have been derived from three fixed price contracts. In2005 and 2006, and the nine months ended September 30, 2007, thesecontracts accounted for approximately 86%, 62% and 49%, respectively, of ourtotal revenues. Although we have entered into additional long-term contracts indifferent geographic regions and are regularly in discussions with ourcustomers to extend our existing contracts or enter into new contracts withthese existing customers, two of the three major contracts described aboveexpire in May 2008 and the third expires in December 2008. There can be noassurance that any of these contracts will be extended or that we will enterinto new contracts on favorable terms. If these contracts are not extended orreplaced, we would expect to enroll the capacity that we make available undersuch contracts in another demand response capacity program, although there isno assurance that we would be able to do so. In addition, other programs couldprovide lower capacity payments than our existing fixed price contracts. Thus,the failure to renew any of these contracts could significantly reduce ourrevenues.

 

***Failure of third parties to manufacture quality products or providereliable services in a timely manner could cause delays in the delivery of oursolutions, which could damage our reputation, cause us to lose customers andnegatively impact our growth.***

 

Our success depends on ourability to provide quality, reliable demand response and energy managementsolutions in a timely manner, which in part requires the proper functioning offacilities and equipment owned, operated or manufactured by third parties uponwhich we depend. For example, our reliance on third parties includes:

 

•     utilizing components that we install or haveinstalled at commercial, institutional and industrial locations;

 

•     outsourcing email notification and cellularand paging wireless communications that are used to notify our end-usecustomers of their need to reduce electricity consumption at a particular timeand to execute instructions to devices installed at our customer locations andwhich are programmed to automatically reduce consumption on receipt of suchcommunications; and

 

•     outsourcing certain installation andmaintenance operations to third-party providers.

 

Any delays, malfunctions,inefficiencies or interruptions in these products, services or operations couldadversely affect the reliability or operation of our demand response and energymanagement solutions, which could cause us to experience difficulty retainingcurrent customers and attracting new customers. Such delays could also resultin our making refunds or paying penalty fees to our grid operator and utilitycustomers. In addition, our brand, reputation and growth could be negativelyimpacted.

 

***If we lose key personnel upon whom we are dependent, we may not be ableto manage our operations and meet our strategic objectives.***

 

Our continued successdepends to a considerable degree upon the continued availability,contributions, vision, skills, experience and effort of our senior management,sales and marketing, engineering and operations teams. We do not maintain “keyperson” insurance on any of our employees. We have entered into employmentagreements with certain members of our senior management team, but none ofthese agreements guarantees the services of the individual for a specifiedperiod of time. All of the agreements with members of our senior managementteam provide that employment is at-will and may be terminated by the employeeat any time and without notice. Although we do not have any reason to believethat we may lose the services of any of these persons in the foreseeablefuture, the loss of the services of any of these persons might impede ouroperations or the achievement of our strategic and financial objectives. Werely on our engineering team to research, design and develop new and enhanceddemand response and energy management solutions. We rely on our operations teamto install, test, deliver and manage our demand response solutions. The loss orinterruption of the service of members of our senior management, sales andmarketing, engineering or operations teams, or our inability to attract orretain other qualified personnel or advisors could have a material adverseeffect on our business, financial condition and results of operations and couldsignificantly reduce our ability to manage our operations and implement ourstrategy.

 

***We expect to continue to expand our sales and marketing, operations,engineering, research and development capabilities and financial and reportingsystems, and as a result, we may encounter difficulties in managing our growth,which could disrupt our operations.***

 

We expect to experiencesignificant growth in the number of our employees and the scope of ouroperations. To manage our anticipated future growth, we must continue toimplement and improve our managerial, operational, financial and reportingsystems, expand our facilities, and continue to recruit and train additionalqualified personnel. All of these measures will require significantexpenditures and will demand the attention of management. Due to our limitedresources, we may not be able to effectively manage the expansion of ouroperations or recruit and adequately train additional qualified personnel. Thephysical expansion of our operations may lead to significant costs and maydivert our management and business development resources. Any inability tomanage growth could delay the execution of our business plans or disrupt ouroperations.

 

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We are currently in theprocess of implementing a new software system that will integrate all of ourdepartments and functions onto a single computer system. Any difficulties ordelays in implementing this system could make it more difficult for us to growand manage our operations, divert management attention from operations andrequire further expense.

 

We compete for personnel andadvisors with other companies and other organizations, many of which are largerand have greater name recognition and financial and other resources than we do.If we are not able to hire, train and retain the necessary personnel, or ifthese managerial, operational, financial and reporting improvements are notimplemented successfully, we could lose customers and revenues.

 

We allocate our operations,sales and marketing, research and development, general and administrative, andfinancial resources based on our business plan, which includes assumptionsabout current and future contracts with grid operator and utility customers andcommercial, institutional and industrial customers, variable prices in openmarkets for demand response capacity, the development of ancillary servicesmarkets which enable demand response as a revenue generating resource and avariety of other factors relating to electricity markets, and the resultingdemand for our demand response and energy management solutions. However, thesefactors are uncertain. If our assumptions regarding these factors prove to beincorrect or if alternatives to those offered by our solutions gain furtheracceptance, then actual demand for our demand response and energy managementsolutions could be significantly less than the demand we anticipate and we maynot be able to sustain our revenue growth or achieve profitability.

 

***An oversupply of electric generation capacity and varying regulatorystructures in certain regional power markets could negatively affect ourbusiness and results of operations.***

 

Although demand for electriccapacity has been increasing throughout North America, a buildup of newelectric generation facilities could result in excess electric generationcapacity in certain regional power markets. In addition, the electric powerindustry is highly regulated. The regulatory structures in regional electricitymarkets are varied and some regulatory requirements make it more difficult forus to provide some or all of our demand response solutions in those regions.For instance, in some markets, such as Texas, regulated quantity or paymentlevels for demand response capacity or energy make it more difficult for us tocost-effectively enroll and manage many commercial, institutional andindustrial customers in demand response programs. Further, some markets, suchas New York, have regulatory structures that do not yet include demand responseas a qualifying resource for purposes of short-term reserve requirements knownas ancillary services. As part of our business strategy, we intend to expandinto additional regional electricity markets. However, the combination ofexcess electric generation capacity and unfavorable regulatory structures couldlimit the number of regional electricity markets available to us for expansion.Unfavorable regulatory decisions in markets where we currently operate couldalso negatively affect our business. For example, regulators could modifymarket rules in certain areas to further limit the use of back-up generators indemand response markets or could implement bidding caps that could lower ourrevenue opportunities. A limit on back-up generators would mean that some ofthe capacity reductions we aggregate from end-use customers willing to reduceconsumption from the grid by activating their own back-up generators duringdemand response events would not qualify as capacity, and we would have to findadditional sources of capacity from end-use customers willing to reduce load bycurtailing consumption rather than by generating electricity themselves.

 

***We face pricing pressure relating to electric capacity made availableto grid operators and utilities and in the percentage or fixed amount paid tocommercial, institutional and industrial customers for making capacityavailable, which could adversely affect our results of operations and financialposition and delay or prevent our future profitability.***

 

The rapid growth of theclean and intelligent energy solutions sector is resulting in increasinglyaggressive pricing, which could cause the prices for clean and intelligentenergy solutions to decrease over time. Our grid operator and utility customersmay switch to other clean and intelligent energy solutions providers based onprice, particularly if they perceive the quality of our competitors’ productsor services to be equal or superior to ours. Continued decreases in the priceof capacity by our competitors could result in a loss of grid operator andutility customers or a decrease in the growth of our business, or it mayrequire us to lower our prices for capacity to remain competitive, which wouldresult in reduced revenues and lower profit margins and would adversely affectour results of operations and financial position and delay or prevent ourfuture profitability. Continued increases in the percentage or fixed amountpaid to commercial, institutional and industrial customers by our competitorsfor making capacity available could result in a loss of commercial,institutional and industrial customers or a decrease in the growth of ourbusiness. It also may require us to increase the percentage or fixed amount wepay to our commercial, institutional and industrial customers to remaincompetitive, which would result in increases in the cost of revenues and lowerprofit margins and would adversely affect our results of operations andfinancial position and delay or prevent our future profitability.

 

***Our inability to protect our intellectual property could negativelyaffect our business and results of operations.***

 

Ourability to compete effectively depends in part upon the maintenance andprotection of the intellectual property related to our demand responsesolutions. We hold only one issued patent. Patent protection is unavailable forcertain aspects of the technology and operational processes that are importantto our business. Any patent held by us or to be issued to us, or any of ourpending patent applications, could be challenged, invalidated, unenforceable orcircumvented. Moreover, some of our trademarks which are not in use may becomeavailable to others. To date, we have relied principally on copyright,trademark and trade secrecy laws, as well as confidentiality agreements and licensingarrangements, to establish and protect our intellectual property. However, wehave not obtained confidentiality agreements from all of our customers andvendors and although we have entered into confidentiality agreements with allof our employees, we cannot be certain

 

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that these agreements will be honored. Some of our confidentialityagreements are not in writing, and some customers are subject to laws andregulations that require them to disclose information that we would otherwiseseek to keep confidential. Policing unauthorized use of our intellectualproperty is difficult and expensive, as is enforcing our rights againstunauthorized use. The steps that we have taken or may take may not preventmisappropriation of the intellectual property on which we rely. In addition,effective protection may be unavailable or limited if we expand to otherjurisdictions outsidetheUnited States, as the intellectual property laws of foreign countries sometimesoffer less protection or have onerous filing requirements. From time to time,third parties may infringe our intellectual property rights. Litigation may benecessary to enforce or protect our rights or to determine the validity andscope of the rights of others. Any litigation could be unsuccessful, cause usto incur substantial costs, divert resources away from our daily operations,and result in the impairment of our intellectual property. Failure toadequately enforce our rights could cause us to lose rights in our intellectualproperty and may negatively affect our business.

 

***We may be subject to damaging and disruptive intellectual propertylitigation related to allegations that our demand response and energymanagement solutions infringe on intellectual property held by others, whichcould result in the loss of use of those solutions.***

 

Third-party patentapplications and patents may be applicable to our clean and intelligent energysolutions. As a result, third-parties may in the future make infringement andother allegations that could subject us to intellectual property litigationrelating to our solutions, which litigation could be time-consuming andexpensive, divert attention and resources away from our daily operations,impede or prevent delivery of our solutions, and require us to pay significantroyalties, licensing fees and damages. In addition, parties making infringementand other claims may be able to obtain injunctive or other equitable reliefthat could effectively block our ability to provide our solutions and couldcause us to pay substantial damages. In the event of a successful claim ofinfringement, we may need to obtain one or more licenses from third parties,which may not be available at a reasonable cost, or at all.

 

***If our information technology systems fail to adequately gather andassess data used in providing our clean and intelligent energy solutions, or ifwe experience an interruption in their operation, our business, financialcondition and results of operations could be adversely affected.***

 

The efficient operation ofour business is dependent on our information technology systems. We rely on ourinformation technology systems to effectively control the devices which enableour demand response solutions; gather and assess data used in providing ourenergy management solutions; manage relationships with our customers; andmaintain our research and development data. The failure of our informationtechnology systems to perform as we anticipate could disrupt our business and productdevelopment and make us unable, or severely limit our ability, to respond todemand response events. In addition, our information technology systems arevulnerable to damage or interruption from:

 

•            earthquake, fire, flood and other naturaldisasters;

 

•            terrorist attacks and attacks by computerviruses or hackers;

 

•            power loss; and

 

•            computer systems, Internet,telecommunications or data network failure.

 

Although our informationtechnology systems have fail-over redundancy where they are housed, we do nothave geographic fail-over redundancy. Any interruption in the operation of ourinformation technology systems could result in decreased revenues under ourdemand response contracts and energy management contracts and commitments,reduced margins on revenues where fixed payments are due to our commercial,institutional, and industrial customers, reductions in our demonstratedcapacity levels going forward, customer dissatisfaction and lawsuits and couldsubject us to penalties, any of which could have a material adverse effect onour business, financial condition and results of operations.

 

***We depend on the electric power industry for revenues and, as a result,our operating results have experienced, and may continue to experience,significant variability due to volatility in electric power industry spendingand other factors affecting the electric utility industry, such as seasonalityof peak demand.***

 

Wecurrently derive substantially all of our revenues from the sale of demandresponse solutions, directly or indirectly, to the electric power industry.Purchases of our demand response solutions by grid operators or electricutilities may be deferred or cancelled as a result of many factors, includingmergers and acquisitions involving electric utilities, changing regulations,fluctuations in interest rates and increased electric utility capital spendingon traditional supply-side resources. In addition, sales of capacity in openmarkets are particularly susceptible to variability based on changes in thespending patterns of our grid operator and utility customers and on associatedfluctuating market prices for capacity. In addition, peak demand forelectricity and other capacity constraints tend to be seasonal. Peak demand inthe United States tends to be most extreme in warmer months. Hence, somecapacity markets yield higher prices for capacity or contract for theavailability of a greater amount of capacity during these warmer months. As aresult, our demand response revenues can be seasonal. For example, in 2006, ourdemand response revenues in the third quarter were higher than our demandresponse revenues in the fourth quarter. Further, occasional events, such as aspike in natural gas prices, can lead grid operators and utilities to implementshort-term calls for demand response capacity to respond

 

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to these events, but we cannot be sure that such calls will continue orthat we will be in a position to generate revenues when they do occur. In thefirst quarter of 2006, we earned $3.6 million under the Demand ResponseWinter Supplemental Program, a temporary demand response program established byISO New England Inc. in response to an anticipated shortage in natural gasresulting from Hurricanes Katrina and Rita. We have experienced, and may in thefuture experience, significant variability in our revenues, on both an annualand a quarterly basis, as a result of these and other factors. Pronouncedvariability or an extended period of reduction in spending by grid operatorsand utilities, or continued requests from grid operators and utilities to payfor demand response capacity at prices that are not equal on a monthly orquarterly basis over the course of a contract year, could negatively impact ourbusiness and make it difficult for us to accurately forecast our future sales,which could lead to increased spending by us that does not result in increasesin revenues.

 

***Electric power industry sales cycles can be lengthy and unpredictableand require significant employee time and financial resources with noassurances that we will realize revenues.***

 

Sales cycles with gridoperator and utility customers are generally long and unpredictable. The gridoperators and utilities that are our potential customers generally haveextended budgeting, procurement and regulatory approval processes. They alsotend to be risk averse and tend to follow industry trends rather than be thefirst to purchase new products or services, which can extend the lead time foror prevent acceptance of new products or services such as our demand responsesolutions. Accordingly, our potential customers may take longer to reach adecision to purchase services. This extended sales process requires thededication of significant time by our personnel and our use of significantfinancial resources, with no certainty of success or recovery of our relatedexpenses. It is not unusual for a grid operator or utility customer to gothrough the entire sales process and not accept any proposal or quote.

 

***An increased rate of terminations by our commercial, institutional andindustrial customers, or their failure to renew contracts when they expire,would negatively impact our business by reducing our revenues and requiring usto spend more money to maintain and grow our commercial, institutional andindustrial customer base.***

 

Our ability to providedemand response capacity under our demand response contracts depends on thenumber of commercial, institutional and industrial customers who enter intoagreements with us to reduce electricity consumption on demand and the levelsof consumption which those customers agree to reduce. The average annual rateof terminations by our commercial, institutional and industrial customers in2004, 2005, and 2006 was less than 1%. If this termination rate increases, orif customers do not renew their contracts as they expire, we will need toacquire additional commercial, institutional and industrial customers or expandour relationships with existing commercial, institutional and industrialcustomers in order to maintain our revenues and grow our business. The loss ofrevenues resulting from terminations could be significant, and limitingcustomer terminations is an important factor in our ability to achieve futureprofitability. If we are unsuccessful in controlling our commercial,institutional and industrial customer terminations, we may be unable to acquirea sufficient number of new customers or we may incur significant costs toreplace customers, which could cause our revenues to decrease and our cost ofrevenues to increase, and delay or prevent our profitability.

 

***The success of our businesses depends in part on our ability to developnew clean and intelligent energy solutions and increase the functionality ofour current demand response and energy management solutions.***

 

The market for demandresponse and energy management solutions is characterized by rapidtechnological changes, frequent new software introductions, Internet-relatedtechnology enhancements, uncertain product life cycles, changes in customerdemands, and evolving industry standards and regulations. We may not be able tosuccessfully develop and market new clean and intelligent energy solutions thatcomply with present or emerging industry regulations and technology standards.Also, any new regulation or technology standard could increase our cost ofdoing business.

 

From time to time, ourcustomers have expressed a need for increased functionality in our solutions.In response, and as part of our strategy to enhance our clean and intelligentenergy solutions and grow our business, we plan to continue to make substantialinvestments in the research and development of new technologies. Our futuresuccess will depend in part on our ability to continue to design new,competitive clean and intelligent energy solutions, enhance our existing demandresponse and energy management solutions and provide new, value-added servicesto our customers. Initiatives to develop new solutions will require continuedinvestment, and we may experience unforeseen problems in the performance of ourtechnologies and operational processes, including new technologies andoperational processes that we develop and deploy, to implement our solutions.In addition, software addressing the procurement and management of energyassets is complex and can be expensive to develop, and new software andsoftware enhancements can require long development and testing periods. If weare unable to develop new clean and intelligent energy solutions orenhancements to our existing demand response and energy management solutions ona timely basis, or if the market does not accept such solutions, we will loseopportunities to realize revenues and customers and our business and results ofoperations will be adversely affected.

 

***Any internal or external security breaches involving our demandresponse and energy management solutions could harm our reputation, and eventhe perception of security risks of our solutions or the transmission of dataover the Internet, whether or not valid, could inhibit market acceptance of oursolutions and cause us to lose customers.***

 

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We and our customers use ourdemand response and energy management solutions to compile and analyzesensitive or confidential information related to our customers. In addition,some of our demand response and energy management solutions allow us toremotely control equipment at commercial, institutional and industriallocations. Our demand response and energy management solutions rely on thesecure transmission of proprietary data over the Internet for some of theirfunctionality. Well-publicized compromises of Internet security could have theeffect of substantially reducing confidence in the Internet as a medium of datatransmission. The occurrence or perception of security breaches in our demandresponse and energy management solutions or our customers’ concerns aboutInternet security or the security of our solutions, whether or not they arewarranted, could have a material adverse effect on our business, harm ourreputation, inhibit market acceptance of our demandresponse and energy management solutions andcause us to lose customers, any of which could have a material adverse effecton our financial condition and results of operations.

 

We may come into contactwith sensitive consumer information or data when we perform operational,installation or maintenance functions for our customers. Even the perceptionthat we have improperly handled sensitive, confidential information could havea negative effect on our business. If, in handling this information, we fail tocomply with privacy or security laws, we could incur civil liability togovernment agencies, customers and individuals whose privacy is compromised. Inaddition, third parties may attempt to breach our security or inappropriatelyuse our demand response and energy management solutions through computerviruses, electronic break-ins and other disruptions. If a breach is successful,confidential information may be improperly obtained, and we may be subject tolawsuits and other liabilities.

 

***We may require significant additional capital to pursue our growthstrategy, but we may not be able to obtain additional financing on acceptableterms or at all.***

 

The growth of our businesswill depend on substantial amounts of additional capital for marketing andproduct development of our demand response and energy management solutions. Ourcapital requirements will depend on many factors, including the rate of ourrevenue growth, our introduction of new solutions and enhancements to existingsolutions, and our expansion of sales and marketing and product developmentactivities. In addition, we may consider strategic acquisitions ofcomplementary businesses or technologies to grow our business, such as ouracquisition of MDE, which could require significant capital and could increaseour capital expenditures related to future operation of the acquired businessor technology. Because of our losses, we do not fit traditional credit lendingcriteria. We may not be able to obtain loans or additional capital onacceptable terms or at all. Moreover, our current loan and security agreementcontains restrictions on our ability to incur additional indebtedness, which,if not waived, could prevent us from obtaining needed capital. Any futurecredit facilities would likely contain similar restrictions. In the eventadditional funding is required, we may not be able to obtain bank creditarrangements or effect an equity or debt financing on terms acceptable to us orat all. A failure to obtain additional financing when needed could adverselyaffect our ability to maintain and grow our business.

 

***Our loan and security agreement contains financial and operatingrestrictions that may limit our access to credit. If we fail to comply withcovenants in our loan and security agreement, we may be required to repay ourindebtedness thereunder, which may have an adverse effect on our liquidity.***

 

Provisions in our seniorloan and security agreement with Bluecrest Capital Partners, L.P., or BluecrestCapital, as assignee of Ritchie Capital Finance, L.L.C., impose restrictions onour ability to, among other things:

 

•            incur more debt;

 

•            pay dividends and make distributions;

 

•            redeem or repurchase capital stock;

 

•            create liens;

 

•            enter into transactions with affiliates; and

 

•            merge or consolidate.

 

Our loan and security agreementalso contains other customary covenants. We may not be able to comply withthese covenants in the future. Our failure to comply with these covenants mayresult in the declaration of an event of default and could cause us to beunable to borrow under our loan and security agreement with Bluecrest Capital.In addition to preventing additional borrowings under our loan and securityagreement, an event of default, if not cured or waived, may result in theacceleration of the maturity of indebtedness outstanding under the agreement,which would require us to pay all amounts outstanding. If an event of defaultoccurs, we may not be able to cure it within any applicable cure period, if atall. If the maturity of our indebtedness is accelerated, we may not have sufficientfunds available for repayment or we may not have the ability to borrow orobtain sufficient funds to replace the accelerated indebtedness on termsacceptable to us, or at all.

 

***Our ability to use our net operating loss carryforwards may be subjectto limitation.***

 

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Generally, a change of morethan 50% in the ownership of a company’s stock, by value, over a three yearperiod constitutes an ownership change for U.S. federal income tax purposes. Anownership change may limit a company’s ability to use its net operating losscarryforwards attributable to the period prior to such change. The number ofshares of our common stock that we issued in our IPO, together with anysubsequent shares of stock we issue, may be sufficient, taking into accountprior or future shifts in our ownership over a three year period, to cause usto undergo an ownership change. As a result, if we earn net taxable income, ourability to use our pre-change net operating loss carryforwards to offset U.S.federal taxable income may become subject to limitations, which couldpotentially result in increased future tax liability for us.

 

***We may not be able to identify suitable acquisition candidates orcomplete acquisitions successfully, which may inhibit our rate of growth, andacquisitions that we complete may expose us to a number of unanticipatedoperational and financial risks.***

 

In addition to organicgrowth, we intend to continue to pursue growth through the acquisition ofcompanies or assets that may enable us to expand our project skill-sets andcapabilities, enlarge our geographic market, add experienced managementpersonnel and increase our service offerings. However, we may be unable toimplement this growth strategy if we cannot identify suitable acquisitioncandidates, reach agreement on potential acquisitions on acceptable terms,successfully integrate personnel or assets that we acquire, or for otherreasons. Our acquisition efforts may involve certain risks, including:

 

•     we may have difficulty integrating operationsand systems;

 

•     key personnel and customers of the acquiredcompany may terminate their relationships with the acquired company as a resultof the acquisition;

 

•     we may experience additional financial andaccounting challenges and complexities in areas such as tax planning andfinancial reporting;

 

•     we may assume or be held liable for risks andliabilities (including for environmental-related costs) as a result of ouracquisitions, some of which we may not discover during our due diligence;

 

•     our ongoing business may be disrupted orreceive insufficient management attention; and

 

•     we may not be able to realize the costsavings or other financial and operational benefits we anticipated.

 

The process of negotiatingacquisitions and integrating acquired products, services, technologies,personnel, or businesses might result in operating difficulties andexpenditures and might require significant management attention that wouldotherwise be available for ongoing development of our business, whether or notany such transaction is ever consummated. Moreover, we might never realize theanticipated benefits of any acquisition. Future acquisitions could result inpotentially dilutive issuances of equity securities, the incurrence of debt,contingent liabilities, or impairment expenses related to goodwill, andimpairment or amortization expenses related to other intangible assets, whichcould harm our financial condition. In addition, if we are unable to integrateany acquired businesses, products or technologies effectively, our business,financial condition and results of operations may be materially adverselyaffected. In September 2007, we acquired MDE and there can be no assurance thatwe will be able to successfully integrate it or any other companies, productsor technologies that we acquire.

 

***Our ability to provide bid bonds, performance bonds or letters ofcredit is limited and could negatively affect our ability to bid on or enterinto significant long-term agreements.***

 

We are occasionally requiredto provide bid bonds or performance bonds to secure our performance underlong-term contracts with our grid operator and utility customers. In addition,some of our customers also require collateral in the form of letters of creditto secure performance or to fund possible damages or true-up payments as theresult of a failure to make available capacity at agreed levels or an event ofdefault under our contracts with them. Our ability to obtain such bonds andletters of credit primarily depends upon our capitalization, working capital,past performance, management expertise and reputation and external factorsbeyond our control, including the overall capacity of the surety market. Suretycompanies consider those factors in relation to the amount of our tangible networth and other underwriting standards that may change from time to time.Events that affect surety markets generally may result in bonding becoming moredifficult to obtain in the future, or being available only at a significantlygreater cost. As of September 30, 2007, we had $2.5 million of letters ofcredit outstanding. Our inability to obtain adequate bonding or letters ofcredit and, as a result, to bid or enter into significant long-term agreements,could have a material adverse effect on our future revenues and businessprospects. In addition, in October 2007, we posted collateral of $10.9 millionin connection with our open market bidding programs.

 

***If the software we use in providing our demand response and energymanagement solutions produces inaccurate information or is incompatible withthe systems used by our customers, it could make us unable to provide oursolutions, which could lead to a loss of revenues and trigger penalty payments.***

 

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Our software is complex and,accordingly, may contain undetected errors or failures when introduced orsubsequently modified. Software defects or inaccurate data may cause incorrectrecording, reporting or display of information about the level of demand reductionat a commercial, institutional and industrial customer location, which couldcause us to fail to meet our commitments to have capacity available. Althoughwe have not incurred penalty payments or adjusted revenue in 2005, 2006, or thefirst nine months of 2007 for failures to have capacity available due toinaccurate software information, any such failures could cause us to be subjectto penalty payments to our grid operator and utility customers or reducerevenue in the period the adjustment is identified and result in reductions incapacity payments under contracts in subsequent periods. In addition, suchdefects and inaccurate data may prevent us from successfully providing ourenergy management solutions, which would result in lost revenues. Softwaredefects or inaccurate data may lead to customer dissatisfaction and ourcustomers may seek to hold us liable for any damages incurred. As a result, wecould lose customers, our reputation may be harmed and our financial conditionand results of operations could be materially adversely affected.

 

We currently serve acommercial, institutional and industrial customer base that uses a wide varietyof constantly changing hardware, software applications and operating systems.Building control, process control and metering systems frequently reside onnon-standard operating systems. Our demand response and energy managementsolutions need to interface with these non-standard systems in order to gatherand assess data and to implement changes in electricity consumption. Ourbusiness depends on the following factors, among others:

 

•      our ability to integrate our technology with new and existing hardwareand software systems, including metering, building control, process control,and distributed generation systems;

 

•      our ability to anticipate and support new standards, especiallyInternet-based standards and building control system protocol languages; and

 

•      our ability to integrate additional software modules under developmentwith our existing technology and operational processes.

 

If we are unable toadequately address any of these factors, our results of operations andprospects for growth and profitability could be materially adversely effected.

 

***We may face certain product liability or warranty claims if we disruptour customers’ networks or applications.***

 

For some of our current andplanned solutions, our software and hardware is integrated with our customers’networks and software applications. The integration of our software andhardware may entail the risk of product liability or warranty claims based ondisruption to these networks or applications. In addition, the failure of oursoftware and hardware to perform to customer expectations could give rise towarranty claims against us. Any of these claims, even if without merit, couldresult in costly litigation or divert management’s attention and resources.Although we carry general liability insurance, our current insurance coveragecould be insufficient to protect us from all liability that may be imposedunder these types of claims. A material product liability claim may seriouslyharm our results of operations.

 

**RisksRelated to Our Common Stock**

 

***We expect our quarterly revenues and operating results to fluctuate. Ifwe fail to meet the expectations of market analysts or investors, the marketprice of our common stock could decline substantially.***

 

Our quarterly revenues andoperating results have fluctuated in the past and may vary from quarter toquarter in the future. Accordingly, we believe that period-to-periodcomparisons of our results of operations may be misleading. You should not relyupon the results of one quarter as an indication of future performance. Ourrevenues and operating results may fall below the expectations of securitiesanalysts or investors in some future quarter or quarters. Our failure to meetthese expectations could cause the market price of our common stock to declinesubstantially.

 

Our quarterly revenues andoperating results may vary depending on a number of factors, including:

 

•      demand for and acceptance of our clean and intelligent energysolutions;

 

•      delays in the implementation and delivery of our clean and intelligentenergy solutions, which may impact the timing of our recognition of revenues;

 

•      delays or reductions in spending for clean and intelligent energysolutions by our customers and potential customers;

 

•      the long lead time associated with securing new customer contracts;

 

•      the mix of our revenues during any period, particularly on a regionalbasis, since local payments for demand response capacity tend to vary accordingto the level of available capacity in given regions;

 

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•      the termination of existing contracts with grid operator and utilitycustomers;

 

•      development of new relationships and maintenance and enhancement ofexisting relationships with customers and strategic partners;

 

•      the pricing terms of some long-term capacity contracts that provide forhigher payments during warmer months and lower payments during the rest of theyear;

 

•      temporary capacity programs that could be implemented by grid operatorsand utilities to address short-term capacity deficiencies, such as the2006 Demand Response Winter Supplemental Program in New England after HurricanesKatrina and Rita;

 

•      changes in open market rules and pricing for demand response capacity;and

 

•      increased expenditures for sales and marketing, software developmentand other corporate activities.

 

***We do not intend to pay dividends on our common stock.***

 

We have not declared or paidany cash dividends on our common stock to date, and we do not anticipate payingany dividends on our common stock in the foreseeable future. We currentlyintend to retain all available funds and any future earnings for use in thedevelopment, operation and growth of our business. In addition, our loan andsecurity agreement prohibits us from paying dividends and future loanagreements may also prohibit the payment of dividends. Any future determinationrelating to our dividend policy will be at the discretion of our board ofdirectors and will depend on our results of operations, financial condition,capital requirements, business opportunities, contractual restrictions andother factors deemed relevant. To the extent we do not pay dividends on ourcommon stock, investors must look solely to stock appreciation for a return ontheir investment in our common stock.

 

***Shares eligible for future sale may cause the market price for ourcommon stock to decline even if our business is doing well.***

 

Sales of substantial amountsof our common stock in the public market, or the perception that these salesmay occur, could cause the market price of our common stock to decline. Thiscould also impair our ability to raise additional capital in the future throughthe sale of our equity securities. Under our certificate of incorporation, weare authorized to issue up to 50,000,000 shares of common stock, of which18,564,556 shares of common stock were outstanding at September 30, 2007. Ofthese shares, the shares of common stock sold in our IPO are freelytransferable without restriction or further registration under the SecuritiesAct by persons other than “affiliates,” as that term is defined inRule 144 under the Securities Act. In addition, substantially all of ourshares of outstanding common stock will be freely tradeable immediately uponthe termination of the lock-up agreements described below. Certain of ourstockholders will be able to cause us to register common stock that they ownunder the Securities Act pursuant to registration rights that are described in “CertainRelationships and Related Transactions—Registration Rights” contained in ourregistration statement on Form S-1, which we filed with the SEC on October 29,2007. We also registered all shares of common stock that we may issue under ourAmended and Restated 2003 Stock Option and Incentive Plan, or 2003 Stock Plan,and our 2007 Employee, Director and Consultant Stock Plan, or 2007 Stock Plan.

 

Our executive officers anddirectors and most of our stockholders have entered into lock-up agreements inconnection with our IPO, pursuant to which they have agreed, subject to certainexceptions and extensions, not to sell or transfer, directly or indirectly, anyshares of our common stock for a period of 180 days from the date of ourfinal prospectus dated May 17, 2007, which is on file with the SEC or toexercise registration rights during such period with respect to such shares.However, after the lock-up period expires, or if the lock-up restrictions arewaived by the underwriters, such persons will be able to sell their shares andexercise registration rights to cause them to be registered. We cannot predictthe size of future issuances of our common stock or the effect, if any, thatfuture sales and issuances of shares of our common stock, or the perception ofsuch sales or issuances, would have on the market price of our common stock.

 

***Provisions of our charter, bylaws, and Delaware law and of some of ouremployment arrangements may make an acquisition of us or a change in ourmanagement more difficult and could discourage acquisition bids or mergerproposals, which may adversely affect the market price of our common stock.***

 

Certain provisions of ourcertificate of incorporation and bylaws could discourage, delay, or prevent amerger, acquisition, or other change of control that stockholders may considerfavorable, including transactions in which you might otherwise receive apremium for your shares. These provisions also could limit the price thatinvestors might be willing to pay in the future for shares of our common stock,thereby depressing the market price of our common stock. Stockholders who wishto participate in these transactions may not have the opportunity to do so.Furthermore, these provisions could prevent or frustrate attempts by ourstockholders to replace or remove our management. These provisions:

 

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•      allow the authorized number of directors to be changed only byresolution of our board of directors;

 

•      require that vacancies on the board of directors, includingnewly-created directorships, be filled only by a majority vote of directorsthen in office;

 

•      establish a classified board of directors, providing that not allmembers of the board be elected at one time;

 

•      authorize our board of directors to issue, without stockholderapproval, blank check preferred stock that, if issued, could operate as a “poisonpill” to dilute the stock ownership of a potential hostile acquirer to preventan acquisition that is not approved by our board of directors;

 

•      require that stockholder actions must be effected at a duly calledstockholder meeting and prohibit stockholder action by written consent;

 

•      prohibit cumulative voting in the election of directors, which wouldotherwise allow holders of less than a majority of stock to elect somedirectors;

 

•      establish advance notice requirements for stockholder nominations toour board of directors or for stockholder proposals that can be acted on atstockholder meetings;

 

•      limit who may call stockholder meetings; and

 

•      require the approval of the holders of 75% of the outstanding shares ofour capital stock entitled to vote in order to amend certain provisions of ourcertificate of incorporation and bylaws.

 

Some of our employmentarrangements and restricted stock and incentive stock option agreements providefor severance payments and accelerated vesting of benefits, includingaccelerated vesting of restricted stock and options, upon a change of control.These provisions may discourage or prevent a change of control.

 

In addition, because we areincorporated in Delaware, we are governed by the provisions of Section 203of the Delaware General Corporation Law, which may, unless certain criteria aremet, prohibit large stockholders, in particular those owning 15% or more of ouroutstanding voting stock, from merging or combining with us for a proscribedperiod of time.

 

***The requirements of being a public company, including compliance withthe reporting requirements of the Securities Exchange Act of 1934 and TheNasdaq Global Market, require significant resources, increase our costs anddistract our management, and we may be unable to comply with these requirementsin a timely or cost-effective manner.***

 

As a public company withequity securities listed on The Nasdaq Global Market, we must comply withstatutes and regulations of the SEC and requirements of The Nasdaq GlobalMarket, with which we were not required to comply prior to the completion ofour initial public offering in May 2007. Complying with these statutes,regulations and requirements occupies a significant amount of the time of ourboard of directors and management and will significantly increases our costsand expenses.

 

In addition, as a publiccompany we incur substantially higher costs to obtain director and officerliability insurance policies than we did as a private company. These factorscould make it more difficult for us to attract and retain qualified members ofour board of directors, particularly to serve on our audit committee.

 

***Our failure to maintain adequate internal control over financialreporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002or prevent or detect material misstatements in our annual or interimconsolidated financial statements in the future could materially harm ourbusiness and cause our stock price to decline.***

 

As a public company, ourinternal control over financial reporting is required to comply with thestandards adopted by the Public Company Accounting Oversight Board incompliance with the requirements of Section 404 of the Sarbanes-Oxley Actof 2002. Accordingly, we are required to document and test our internalcontrols and procedures to assess the effectiveness of our internal controlover financial reporting. In addition, our independent registered publicaccounting firm is required to report on management’s assessment of theeffectiveness of our internal control over financial reporting and theeffectiveness of our internal control over financial reporting in 2008. If weare unable to maintain effective control over financial reporting, suchconclusion would be disclosed in our Annual Report on Form 10-K for theyear ending December 31, 2008. In the future, we may identify materialweaknesses and deficiencies which we may not be able to remediate in a timelymanner. If we fail to maintain effective internal control over financialreporting in accordance with Section 404, we will not be able to concludethat we have and maintain effective internal control over financial reportingor our independent registered accounting firm may not be able to issue anunqualified report on the effectiveness of our internal control over financialreporting. As a result, our ability to report our financial 

 

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results on a timely and accurate basis may be adversely affected, wemay be subject to sanctions or investigation by regulatory authorities,including the SEC or The Nasdaq Global Market, and investors may loseconfidence in our financial information, which in turn could cause the marketprice of our common stock to decrease. We may also be required to restate ourfinancial statements from prior periods. In addition, testing and maintaininginternal control in accordance with Section 404 requires increasedmanagement time and resources. Any failure to maintain effective internalcontrol over financial reporting could impair the success of our business andharm our financial results, and you could lose all or a significant portion ofyour investment.

 

***Insiders will continue to have substantial control over us, which coulddelay or prevent a change of corporate control or result in the entrenchment ofmanagement and/or the board of directors.***

 

As of September 30, 2007,our directors, executive officers and principal stockholders, together withtheir affiliates and related persons, beneficially own, in the aggregate,approximately 67% of our outstanding common stock. As a result, thesestockholders, if acting together, will continue to have the ability todetermine the outcome of matters submitted to our stockholders for approval,including the election and removal of directors and any merger, consolidation,or sale of all or substantially all of our assets. In addition, these persons,if acting together, will have the ability to control the management and affairsof our company. Accordingly, this concentration of ownership may harm themarket price of our common stock by:

 

•      delaying, deferring, or preventing a change of control;

 

•      entrenching our management and/or the board of directors;

 

•      impeding a merger, consolidation, takeover, or other businesscombination involving us;

 

•      discouraging a potential acquirer from making a tender offer orotherwise attempting to obtain control of us; or

 

•      causing us to enter into transactions or agreements that are not in thebest interests of all stockholders.

 

In addition, Delaware lawlimits the protection afforded minority stockholders, and we do not intend toenact provisions that may be beneficial to minority holders, such as cumulativevoting.

 

***If securities or industry analysts do not publish research or publishinaccurate or unfavorable research about our business, our stock price and tradingvolume could decline.***

 

The tradingmarket for our common stock will continue to depend in part on the research andreports that securities or industry analysts publish about us or our business.If these analysts do not continue to provide adequate research coverage or ifone or more of the analysts who covers us downgrades our stock or publishesinaccurate or unfavorable research about our business, our stock price wouldlikely decline. If one or more of these analysts ceases coverage of our companyor fails to publish reports on us regularly, demand for our stock could decrease,which could cause our stock price and trading volume to decline.

 

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

 

(a)   Unregistered Sales of Equity Securities

 

We offered, issued and/orsold the following unregistered securities during the quarter ended September30, 2007:

 

On September 13, 2007, inconnection with our acquisition of MDE, we issued 139,056 shares of our commonstock worth approximately $4.7 million to the holders of membership interestsof MDE. Also on September 13, 2007, we issued 66,921 shares of our common stockto each of Lighthouse Capital Partners IV, L.P. and Lighthouse Capital PartnersV, L.P. upon each entity’s net exercise of warrants to purchase shares of ourcommon stock.

 

These issuances ofsecurities were made in reliance on an exemption from the registrationprovisions of the Securities Act of 1933, as amended, or the Securities Act,set forth in Rule 506 of Regulation D promulgated thereunder. The recipients ofsecurities in each such transaction represented their intention to acquire thesecurities for investment only and not with a view to or for sale in connectionwith any distribution thereof and appropriate legends were affixed to the sharecertificates and other instruments issued in such transactions. The sales ofthese securities were made without general solicitation or advertising.

 

(b)      Use of Proceeds

 

We registered shares of ourcommon stock in connection with our IPO under the Securities Act. Theregistration statement on Form S-1 (File No. 333-140632) filed in connectionwith our IPO was declared effective by the SEC on May 17, 2007. The offeringcommenced on May 17, 2007 and did not terminate before any securities weresold. As of the date of this filing, the offering has terminated. Includingshares sold pursuant to the exercise by the underwriters of theirover-allotment option, 4,087,500 shares of our common stock were registered andsold in the IPO by us and an additional 225,000 shares of common stock wereregistered and sold by the selling stockholders named in the registrationstatement. All the shares were sold at a price to the public of $26.00 pershare.

 

The managing underwriters ofthe offering were Credit Suisse Securities (USA) LLC and Morgan Stanley &Co. Incorporated. The net offering proceeds received by us, after deductingunderwriting discounts and commissions and expenses incurred in connection withthe offering, were approximately $95.2 million. These expenses consisted ofdirect payments of:

 

i.    $7.4 millionin underwriters discounts, fees and commissions; and

 

ii.    $3.6million in legal, accounting and printing fees and miscellaneous expenses.

 

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No payments for suchexpenses were directly or indirectly to (i) any of our directors, officers ortheir associates, (ii) any person(s) owning 10% or more of any class of ourequity securities or (iii) any of our affiliates.

 

The net proceeds ofapproximately $95.2 million from the IPO are invested in short-terminvestment grade securities and money market accounts. We currently plan to usethe net proceeds from the offering to fund the expansion of our business intonew regions and expand our customer base, to finance research and development,to fund cash consideration for future acquisitions and for other generalcorporate purposes. We also may repay indebtedness. There has been no materialchange in the planned use of proceeds from our IPO as described in our finalprospectus filed with the SEC on May 18, 2007 pursuant to Rule 424(b). ThroughSeptember 30, 2007, the proceeds from our IPO have been used to fund theoperations of our business and for general corporate purposes.

 

**Item5.  Other Information.**

 

On November 1,2007, we, the holders of substantially all of our shares of common stock issuedupon conversion of our preferred stock in connection with our IPO, and ourfounders, entered into a fifth amended and restated investor rights agreement,which amended and restated our fourth amended and restated investor rightsagreement, entered into on May 11, 2007. The agreement provides, among other things, the parties thereto, as wellas our executive officers, with certain registration rights and associatedrights and obligations, including payment of expenses and indemnification by usin connection with the exercise of such registration rights.  The fifth amended and restated investorrights agreement has been included as an exhibit to this Quarterly Report onForm 10-Q as Exhibit 4.1.

 

**Item 6.  Exhibits.**

 

The following documents arefiled as exhibits to this report:

 
| 2.1   |   | Agreement and Plan of  Merger, dated as of September 12, 2007, by and among EnerNOC, Inc., a  Delaware corporation, Mdenergy, LLC, a Connecticut limited liability company,  MDE Acquisition LLC, a Delaware limited liability company and a wholly-owned  subsidiary of EnerNOC, Inc., Clifford Sirlin, in his capacity as the  Mdenergy, LLC members’ representative, and Clifford Sirlin and Andrew  Appelbaum, individually, filed as an Exhibit to EnerNOC, Inc.’s Current  Report on Form 8-K (File No. 001-33471) filed on September 18, 2007 and  incorporated herein by reference. |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1   |   | Fifth Amended and Restated  Investor Rights Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1* |   | Demand Response Resource  Purchase Agreement, by and between EnerNOC, Inc. and Southern California  Edison Company, dated September 27, 2007, filed as an Exhibit to EnerNOC,  Inc.’s Current Report on Form 8-K/A (File No. 001-33471) filed on October 12,  2007 and incorporated herein by reference.                                                                                                                                                                                                                                                                                         |
| 31.1  |   | Certification of Chief  Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-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)  promulgated under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1  |   | Certification of Chief  Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-14(b)  promulgated under the Securities Exchange Act of 1934, as amended, and  Section 1350 of Chapter 63 of Title 18 of the United States Code.                                                                                                                                                                                                                                                                                                                                                       |
| 32.2  |   | Certification of Chief  Financial Officer of EnerNOC, Inc. pursuant to Rule 13a-14(b)  promulgated under the Securities Exchange Act of 1934, as amended, and  Section 1350 of Chapter 63 of Title 18 of the United States Code.                                                                                                                                                                                                                                                                                                                                                       |

 

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*  Confidential portions of this Exhibit havebeen filed separately with the Securities and Exchange Commission pursuant to agrant of confidential treatment.

 

35

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**SIGNATURES**

 

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

 
|                         | EnerNOC, Inc. |
|------------------------------|---------------|
|                         |          |   |
| Date: November 5,  2007 | By:           | /s/ Timothy G. Healy |   |
|                         |          | Timothy G. Healy |
|                         |          | Chief Executive Officer |
|                         |          | (principal executive  officer) |
|                         |          |   |
| Date: November 5,  2007 | By:           | /s/ Neal C. Isaacson |   |
|                         |          | Neal C. Isaacson |
|                         |          | Chief Financial Officer |
|                         |          | (principal financial and  accounting officer) |

 

36

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**Exhibit Index**

 
| **Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.1        |       | Agreement and Plan of  Merger, dated as of September 12, 2007, by and among EnerNOC, Inc., a  Delaware corporation, Mdenergy, LLC, a Connecticut limited liability company,  MDE Acquisition LLC, a Delaware limited liability company and a wholly-owned  subsidiary of EnerNOC, Inc., Clifford Sirlin, in his capacity as the  Mdenergy, LLC members’ representative, and Clifford Sirlin and Andrew  Appelbaum, individually, filed as an Exhibit to EnerNOC, Inc.’s Current  Report on Form 8-K (File No. 001-33471) filed on September 18, 2007 and  incorporated herein by reference. |
| 4.1        |       | Fifth Amended and Restated  Investor Rights Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1*      |       | Demand Response Resource  Purchase Agreement, by and between EnerNOC, Inc. and Southern California  Edison Company, dated September 27, 2007, filed as an Exhibit to EnerNOC,  Inc.’s Current Report on Form 8-K/A (File No. 001-33471) filed on October 12,  2007 and incorporated herein by reference.                                                                                                                                                                                                                                                                                         |
| 31.1       |       | Certification of Chief  Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-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) promulgated  under the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1       |       | Certification of Chief  Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-14(b)  promulgated under the Securities Exchange Act of 1934, as amended, and  Section 1350 of Chapter 63 of Title 18 of the United States Code.                                                                                                                                                                                                                                                                                                                                                       |
| 32.2       |       | Certification of Chief  Financial Officer of EnerNOC, Inc. pursuant to Rule 13a-14(b)  promulgated under the Securities Exchange Act of 1934, as amended, and  Section 1350 of Chapter 63 of Title 18 of the United States Code.                                                                                                                                                                                                                                                                                                                                                       |

 

----

*  Confidential portions of this Exhibit havebeen filed separately with the Securities and Exchange Commission pursuant to agrant of confidential treatment.

 

37

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