EnerNOC, Inc.
ENERNOC INC (Form: S-1, Received: 02/12/2007 17:25:14)

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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

As filed with the Securities and Exchange Commission on February 12, 2007

Registration No. 333-          



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

EnerNOC, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  7389
(Primary Standard Industrial
Classification Code Number)
  87-0698303
(I.R.S. Employer
Identification No.)

75 Federal Street
Suite 300
Boston, MA 02110
(617) 224-9900

(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)

Timothy G. Healy
Chief Executive Officer
75 Federal Street
Suite 300
Boston, MA 02110
(617) 224-9900

(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service of Process)


With a copy to:
Jonathan L. Kravetz, Esq.
Thomas R. Burton III, Esq.
Sahir C. Surmeli, Esq.
Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
(617) 542-6000
  Alan F. Denenberg, Esq.
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, CA 94025
(650) 752-2000

         Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box.     o

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o

        If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.     o


CALCULATION OF REGISTRATION FEE


Title of Each Class of
Securities to be Registered

  Proposed Maximum
Aggregate
Offering Price(1)

  Amount of
Registration Fee(2)


Common Stock, $0.001 par value   $100,000,000   $10,700

(1)
Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933, as amended.

(2)
Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

         The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion, dated February 12, 2007

                     Shares

GRAPHIC

EnerNOC, Inc.

Common Stock


        This is our initial public offering of shares of our common stock. We are selling              shares of common stock, and the selling stockholders named in this prospectus are selling              shares of common stock. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $                and $                per share. We intend to apply to list our common stock on the Nasdaq Global Market under the symbol "ENOC."

        The underwriters have an option to purchase a maximum of                            additional shares to cover over-allotments of shares.

         Investing in our common stock involves risks. See "Risk Factors" beginning on page 7.

 
  Price to
Public

  Underwriting
Discounts and
Commissions

  Proceeds
to Issuer

  Proceeds to
the Selling
Stockholders

Per Share   $   $   $   $
Total   $   $   $   $

        Delivery of the shares of common stock will be made on or about                            , 2007.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Credit Suisse   Morgan Stanley

Canaccord Adams   Jefferies & Company

The date of this prospectus is              , 2007.



TABLE OF CONTENTS

 
SUMMARY
RISK FACTORS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED HISTORICAL FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
EXECUTIVE COMPENSATION
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
MATERIAL U.S. FEDERAL TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON STOCK
UNDERWRITING
NOTICE TO CANADIAN RESIDENTS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

         You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.

Industry and Market Data

        This prospectus includes market and industry data and forecasts that we obtained from internal research, publicly available information and industry publications and surveys. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Unless otherwise noted, statements as to our market position relative to our competitors are approximated and based on the above-mentioned third-party data and internal analysis and estimates as of the date of this prospectus. Although we believe the industry and market data and statements as to market position to be reliable as of the date of this prospectus, this information could prove inaccurate. Industry and market data could be wrong because of the method by which sources obtained their data and because information cannot always be verified with certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties. In addition, we do not know all of the assumptions regarding general economic conditions or growth that were used in preparing the forecasts from sources cited herein. We have not independently verified, and make no representation as to the accuracy of, this information.

Dealer Prospectus Delivery Obligation

         Until                , 2007, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer's obligation to deliver a prospectus when acting as an underwriter and with respect to their unsold allotments or subscriptions.



SUMMARY

         This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the risks discussed under "Risk Factors" and the financial statements and related notes included elsewhere in this prospectus before making an investment decision. In this prospectus, unless otherwise specified or the context otherwise requires, "EnerNOC," "we," "us" and "our" refer to EnerNOC, Inc. and its subsidiaries and, prior to our incorporation on June 5, 2003, to EnerNOC, LLC.

Company Overview

        EnerNOC is a leading developer and provider of clean and intelligent power solutions to commercial, institutional and industrial customers, as well as electric power grid operators and utilities. Our technology-enabled demand response and energy management solutions help optimize the balance of electric supply and demand. We use our Network Operations Center, or NOC, to remotely manage electricity consumption across a network of end-use customer sites and make electric capacity and energy available to grid operators and utilities on demand. This provides a significantly lower cost and more environmentally sound peak load management solution than building power plants and transmission lines to meet extreme periods of peak electricity demand. By making our capacity available to grid operators and utilities, we generate a stream of recurring revenues. Since inception, our business has grown substantially. With over 1,150 customer sites and 525 megawatts, or MW, of electric capacity under management as of February 1, 2007, we believe that we are the largest national demand response solutions provider to commercial, institutional and industrial customers. Our revenues grew from $0.8 million in 2004 to $20.2 million in the nine months ended September 30, 2006.

        The electric power industry in North America faces enormous challenges to meet increasing demand. Under-investment in generation, transmission and distribution infrastructure in recent years in key regions, coupled with a dramatic growth in electricity consumption, has led to an increased frequency of blackouts and brownouts. Moreover, the margin between electric supply and demand is projected to drop below minimum target levels in Texas, New England, the Mid-Atlantic, the Midwest, and the Rocky Mountain region within the next two to three years. According to the International Energy Agency, the United States and Canada need to add 758,000 MW of additional capacity at a cost of $1.6 trillion between 2003 and 2030 to meet projected demand. As the electric power industry confronts these challenges, technology-enabled demand response has emerged as an important solution to help address the imbalance in electric supply and demand.

        We are a pioneer in the development, implementation and broader adoption of technology-enabled demand response solutions. We focus on the commercial, institutional and industrial market, which represents over 60% of U.S. electricity consumption. Our robust and scalable technology platform and proprietary operational processes enable us to manage electrical equipment located at multiple, broadly dispersed end-use customer sites to make electric capacity and energy available on demand for grid operators and utilities. We have the flexibility to remotely reduce electricity usage in a matter of minutes, or send curtailment instructions to our end-use customers to be implemented on site.

        We began providing demand response solutions in one state in 2003 and expanded nationally to over 20 states in five regions by the end of 2006. From our start in one open market in 2003 to our current 18 contracts and open market programs with grid operators and utilities, we have increased our electric capacity under management with commercial, institutional and industrial customers to 137 MW at the end of 2005 and to 525 MW as of February 1, 2007.

Market Opportunities

        We believe that our solutions address extreme peaks in demand for electricity more efficiently than building additional electric generation, transmission and distribution infrastructure. Because we estimate that over 10% of this supply-side infrastructure is typically built to meet peaks in demand that occur

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less than 1% of the time, demand response solutions have the potential to offset $5.9 billion per year in projected infrastructure expenditures in the United States and Canada. As the largest national demand response solutions provider to the commercial, institutional and industrial market, we are well positioned to address this substantial market opportunity for demand response. In addition, our PowerTrak enterprise energy management software platform enables us to deliver to our end-use customer base an expanding portfolio of energy management solutions, including advanced metering, energy analytics and control, energy procurement services, and emissions tracking and trading support.

Competitive Strengths

        We are well positioned for continued leadership and rapid expansion in the clean and intelligent power solutions sector. Our competitive strengths include:

        First-Mover Advantage with National Presence.     We are a pioneer in the development, implementation and broader adoption of technology-enabled demand response solutions on a national scale. During 2006 we reliably delivered our demand response capacity over 50 times and responded to simultaneous events in multiple geographic regions. As a result, we have developed a substantial base of operating experience in delivering outsourced demand response solutions.

        Highly Scalable Business Model Focused on Commercial, Institutional and Industrial Customers.     The large size of our target customers, along with our enterprise energy management software platform, enables us to rapidly scale our business in existing and new geographies. Our customers' size also substantially lowers our acquisition cost per unit of capacity compared to the acquisition cost of residential customers. In addition, our commercial, institutional and industrial customer base creates substantial opportunities for us to provide additional energy management solutions.

        Recurring Revenues.     We enter into long-term contracts and participate in open market programs with grid operators and utilities through which we generate recurring capacity payments. These recurring payments substantially increase the visibility and predictability of our future revenues.

        Comprehensive Technology Platform.     We have a proprietary technology platform that creates significant barriers to entry. We leverage the Internet as well as advances in metering and automation technologies to make demand response participation viable for a wide range of commercial, institutional and industrial customers. In addition, rather than being limited to curtailing electricity used by a specific type of equipment, our platform enables us to manage a wide array of equipment and systems to implement appropriate demand response solutions on an end-user by end-user basis.

        Growing Customer Base.     We have rapidly and significantly grown our base of grid operator and utility customers since inception. In addition, we have nearly 350 commercial, institutional and industrial customers across a broad base of market sectors, including technology, education, food sales and storage, government, healthcare and manufacturing/industrial. Because we have a national presence, we are able to offer a single platform for national chains to participate in demand response opportunities across different regions.

Strategy

        We seek to capitalize on our proprietary technology platform and leading market position to continue providing clean and intelligent power solutions to commercial, institutional and industrial customers, grid operators, and utilities. Ultimately, our mission is to become the leading outsourced energy management solutions provider for commercial, institutional and industrial customers worldwide. Key elements of our strategy include:

        Target Aggressive Expansion in Existing Territories.     We will continue to pursue additional long-term contracts and open market opportunities with grid operators and utilities that will allow us to attract additional commercial, institutional and industrial customers to our demand response network in our

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existing markets. We will also seek to provide additional energy management solutions to these end-use customers. We believe that our technology-enabled solutions, the recurring payments that we generate and our national presence will enable us to continue to grow rapidly.

        Strengthen National Presence by Entering New Geographic Regions.     We intend to expand in new geographic regions by (i) educating and marketing to existing and prospective customers, consumer advocates, consultants, industry experts, and policy makers; (ii) designing and developing demand response programs and goals in cooperation with grid operators, utilities, regulators, and governmental agencies; and (iii) continually enhancing our technology-enabled energy management solutions.

        Expand Sales of Our Portfolio of Technology-Enabled Energy Management Solutions.     We will continue to leverage our technology, including our PowerTrak enterprise energy management software platform. This platform enables us to deliver an expanding portfolio of energy management solutions, including advanced metering, energy analytics and control, energy procurement services and emissions tracking and trading support. Because we gather substantial amounts of energy usage data from our end-use customers as part of our demand response offering, we are uniquely positioned to deliver energy management solutions to those customers.

        Pursue Targeted Strategic Acquisitions.     We intend to pursue selective acquisitions to reinforce our leadership position in the expanding clean and intelligent power solutions sector. This sector consists of a number of companies with offerings or customer relationships that present attractive acquisition opportunities. Our track record includes successfully integrating acquired companies to increase our customer base, enter new geographic territories and enhance our technology.

Corporate Information

        EnerNOC, Inc., a Delaware corporation, was incorporated on June 5, 2003. We operated as EnerNOC, LLC, a New Hampshire limited liability company, from December 2001 until June 2003. In June 2005, we acquired Pinpoint Power DR LLC, or Pinpoint Power DR, the demand response business of Pinpoint Power LLC. In February 2006, we acquired all of the assets of eBidenergy, Inc. from Trillium Capital Partners LLC. In May 2006, we acquired substantially all of the assets of Celerity Energy Partners LLC, a demand response provider for grid operators and utilities, including all of the membership interests in Celerity Energy Partners San Diego LLC.

        Our principal executive offices are located at 75 Federal Street, Suite 300, Boston, Massachusetts 02110, and our telephone number at this address is (617) 224-9900. Our website is http://www.EnerNOC.com. Information on, or accessible through, our website is not a part of, and is not incorporated into, this prospectus.

        Our trademarks include: EnerNOC, Get More from Energy, Energy for Education, Capacity on Demand, PowerTrak, Celerity Energy, eNode, and ENTREX. We have trademark applications pending that correspond to the following marks: The Greenest kWh is the One Never Used, The Greenest Kilowatt-hour is the One Never Used, The Greenest kW is the One Never Built, The Greenest Kilowatt is the One Never Built, The Cleanest kWh is the One Never Used, One-Click Curtailment, Negawatt Network and CarbonTrak.

        Other trademarks or service marks appearing in this prospectus are the property of their respective holders.

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The Offering

Common stock offered by us             shares

Common stock offered by selling stockholders

 

          shares

Common stock to be outstanding after the offering

 

          shares

Use of proceeds

 

We estimate that the net proceeds to us from this offering will be approximately $         million. We plan to use these net proceeds to fund the expansion of our business into new regions and expand our customer base, to finance research and development, to repay indebtedness, to fund cash consideration for future acquisitions and for other general corporate purposes. We will not receive any proceeds from the sale of shares by the selling stockholders. See "Use of Proceeds."

Dividend policy

 

We currently do not intend to pay any cash dividends on our common stock.

Risk factors

 

You should carefully read and consider the information set forth under "Risk Factors," together with all of the other information set forth in this prospectus, before deciding to invest in shares of our common stock.

Listing and Trading symbol

 

We intend to apply to list our common stock on the Nasdaq Global Market under the symbol "ENOC."

General Information About This Prospectus

        Except as otherwise indicated or the context otherwise requires, throughout this prospectus, the number of shares of common stock shown to be outstanding after this offering and other share-related information are based on the number of shares outstanding as of January 15, 2007, and:

    reflect a            for            stock split, which will take place immediately prior to the closing of this offering;

    reflect the conversion of all outstanding shares of our preferred stock into an aggregate of 3,355,551 shares of common stock upon the closing of this offering, before giving effect to the stock split;

    assume no exercise of the underwriters' over-allotment option;

    exclude 66,353 shares of common stock that we may issue upon exercise of outstanding warrants as of January 15, 2007 (of which, warrants to acquire 18,853 shares of common stock will expire at the closing of this offering unless exercised prior thereto), with exercise prices ranging from $0.475 per share to $37.13 per share and having a weighted average exercise price of $10.89 per share, before giving effect to the stock split;

    exclude 850,980 shares of common stock issuable upon the exercise of stock options outstanding at a weighted average exercise price of $1.17 per share, before giving effect to the stock split;

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    exclude 237,303 shares of common stock reserved for future awards under the 2003 Stock Plan as of January 15, 2007, which terminates upon completion of this offering, before giving effect to the stock split; and

    exclude                   shares of common stock reserved for future awards under the 2007 Stock Plan, which becomes effective upon completion of this offering, before giving effect to the stock split.

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Summary Historical Financial Data

        The following tables set forth our summary historical financial data for the periods indicated. We prepared this information using our consolidated financial statements for each of the periods presented. You should read this information in conjunction with our audited and unaudited consolidated financial statements and related notes, "Selected Historical Financial Data," and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The summary historical financial data for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be attained for a full year.

 
  Year Ended December 31,
  Nine Months Ended
September 30,

 
 
  2003
  2004
  2005
  2005
  2006
 
 
   
   
   
  (unaudited)

 
 
  (in thousands, except per share amounts)

 
Statement of Operations Data:                                
Revenues   $ 15   $ 819   $ 9,826   $ 8,425   $ 20,192  
Cost of revenues     9     362     4,190     2,703     12,295  
   
 
 
 
 
 
  Gross profit     6     457     5,636     5,722     7,897  
Selling and marketing expenses     58     751     2,228     1,071     3,832  
General and administrative expenses     254     835     4,211     2,345     4,990  
Research and development expenses     271     778     981     763     682  
   
 
 
 
 
 
  Income (loss) from operations     (577 )   (1,907 )   (1,784 )   1,543     (1,607 )
Interest and other income (expense), net         14     78     53     (103 )
   
 
 
 
 
 
  Net income (loss)   $ (577 ) $ (1,893 ) $ (1,706 ) $ 1,596   $ (1,710 )
   
 
 
 
 
 
  Net income (loss) per share, basic   $ (0.58 ) $ (1.89 ) $ (1.29 ) $ 1.29   $ (1.12 )
  Net income (loss) per share, diluted   $ (0.58 ) $ (1.89 ) $ (1.29 ) $ 0.38   $ (1.12 )
 
  As of September 30, 2006
 
  Actual
  Pro Forma
as Adjusted

 
  (unaudited)

  (unaudited)

 
  (in thousands)

Balance Sheet Data:            
Cash and cash equivalents   $ 2,920   $  
Total assets     22,738      
Total long-term debt, including current portion     1,388      
Total redeemable convertible preferred stock and stockholders' equity     7,206      

(1)
The pro forma as adjusted column gives effect to:

the sale of an aggregate of 271,346 shares of our Series C Convertible Preferred Stock, as if it occurred on September 30, 2006;

the conversion of all outstanding shares of our preferred stock into shares of our common stock upon consummation of this offering; and

the sale of            shares of our common stock in this offering at an assumed initial public offering price of $            per share (the midpoint of the range set forth on the cover of this prospectus), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and the application of the net proceeds as described under "Use of Proceeds."

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RISK FACTORS

         An investment in our common stock involves a high degree of risk. You should carefully read and consider the risks and uncertainties described below together with the other information contained in this prospectus, including our financial statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" before making an investment decision. If any of these risks actually occurs, our business, financial condition, results of operations, and future growth prospects may suffer. As a result, the trading price of our common stock could decline, and you may lose all or part of your investment.


Risks Related to Our Business

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

        Our net operating losses in 2004 and 2005 were $1.9 million and $1.8 million, respectively. Our net operating loss for the nine months ended September 30, 2006 was $1.6 million. We have not achieved profitability for any calendar year, although we have for certain quarters, and we expect to continue to incur net operating losses for the foreseeable future. As of September 30, 2006, we had an accumulated deficit of $6.0 million. Initially, our net operating losses were principally driven by start-up costs and the costs of developing our technology, which included research and development. More recently, our net operating losses have been principally driven by selling and marketing, and general and administrative expenses. As we seek to grow our revenues and customer base, we plan to continue to expand our demand response and energy management solutions, which will require increased selling and marketing, and research and development expenses. These increased operating costs may cause us to incur net losses for the foreseeable future, and there can be no assurance that we will be able to grow our revenues, sustain the growth rate of our revenues, expand our customer base or become profitable. Furthermore, these expenses are not the only factors that may contribute to our net operating losses. For example, interest expense on our currently outstanding debt and on any debt that we incur in the future could contribute to our net losses. As a result, even if we significantly increase our revenues, we may continue to incur net operating losses in the future. If we fail to achieve profitability, the market price of our common stock could decline substantially.

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

        We began operating as a New Hampshire limited liability company in December 2001, and were incorporated as a Delaware corporation in June 2003. We first began generating revenues in 2003. Accordingly, we have only a limited history of generating revenues, and the future revenue potential of our business in the emerging market for clean and intelligent power solutions is uncertain. As a result of our short operating history, we have limited financial data that can be used to evaluate our business, strategies, performance and prospects or an investment in our common stock. Any evaluation of our business and our prospects must be considered in light of our limited operating history and the risks 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 and develop new relationships with grid operators and utilities and the entities that regulate them;

    maintain and expand our current relationships and develop new relationships with commercial, institutional and industrial customers;

    maintain and enhance our existing demand response and energy management solutions;

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    continue to develop clean and intelligent power solutions that achieve significant market acceptance;

    continue to enhance our information processing systems;

    execute our business and marketing strategies successfully;

    respond to competitive developments;

    attract, integrate, retain and motivate qualified personnel; and

    continue to participate in shaping the regulatory environment.

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

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

        Most of our operating expenses, such as employee compensation and rental expense for properties, are either relatively fixed in the short-term or incurred in advance of sales. Moreover, our spending levels are based in part on our expectations regarding future revenues. As a result, if revenues for a particular quarter are below expectations, we may not be able to proportionately reduce operating expenses for that quarter. For example, if a demand response event or metering and verification test does not occur in a particular quarter, we may not be able to recognize revenues for the undemonstrated capacity in that quarter. This shortfall in revenues could adversely affect our operating results for that quarter and could cause the market price of our common stock to decline substantially.

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

        The market for clean and intelligent power solutions is fragmented. Some traditional providers of advanced metering solutions have added, or may add, demand response services to their existing business. We face strong competition from clean and intelligent power solutions providers, both larger and smaller than we are. We also compete against traditional supply-side resources such as natural gas-fired peaking power plants. In addition, utilities and competitive electricity suppliers offer their own demand response solutions, which could decrease our base of potential customers along with our revenues and profitability.

        Many of our competitors have greater financial resources than we do. Our competitors could focus their substantial financial resources to develop a competing business model or develop products or services that are more attractive to potential customers than what we offer. Some advanced metering infrastructure service providers, for example, are substantially larger and better capitalized than we are and have the ability to combine advanced metering and demand response solutions into an integrated offering to a large, existing customer base. Our competitors may offer clean and intelligent power solutions at prices below cost or even for free in order to improve their competitive positions. Any of these competitive factors could make it more difficult for us to attract and retain customers, cause us to lower our prices in order to compete, and reduce our market share and revenues, any of which could have a material adverse effect on our financial condition and results of operations.

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If we fail to successfully educate existing and potential grid operator and utility customers regarding the benefits of our demand response and energy management solutions or a market otherwise fails to develop for those solutions, our ability to sell our solutions and grow our business could be limited.

        Our future success depends on commercial acceptance of our clean and intelligent power solutions and our ability to obtain additional contracts. We anticipate that revenues related to our demand response solutions will constitute a substantial portion of our revenues for the foreseeable future. The market for clean and intelligent power solutions in general is relatively new. If we are unable to educate our potential customers about the advantages of our solutions over competing products and services, or our existing customers no longer rely on our demand response solutions, our ability to sell our solutions will be limited. In addition, because the clean and intelligent power solutions sector is rapidly evolving, we cannot accurately assess the size of the market, and we may have limited insight into trends that may emerge and affect our business. For example, we may have difficulty predicting customer needs and developing clean and intelligent power solutions that address those needs. If the market for our demand response and our energy management solutions does not continue to develop, our ability to grow our business could be limited and we may not be able to achieve profitability.

If the actual amount of electric capacity that we make available under our capacity contracts is materially less than required our committed capacity could be reduced and we could be required to make refunds and pay penalty fees.

        We provide electric capacity to our grid operator and utility customers either under fixed price long-term contracts, or under terms established in open bidding markets where capacity is purchased. Under the long-term contracts and open bidding market commitments, grid operators and utilities make periodic payments to us based on the amount of electric capacity that we are obligated to make available to them during the contract period, or make monthly payments to us based on the amount of electric capacity that we chose to make available to them during the relevant period. We refer to these payments as committed capacity payments. Committed capacity is negotiated and established by the contract and is subject to subsequent confirmation by measurement and verification tests or performance in a demand response event. In our open bidding markets, we offer different amounts of committed capacity to our grid operator and utility customers based on market rules on a periodic basis, which is typically monthly. We refer to measured and verified capacity as our demonstrated or proven capacity. Once demonstrated, the proven capacity amounts typically establish a baseline of capacity for each end-use customer site in our portfolio, on which committed capacity payments are calculated going forward and until the next demand response event or measurement and verification test when we are called to make capacity available.

        The capacity level that we are able to achieve varies with the electricity demand of targeted equipment, such as heating and cooling equipment, at the time an end-use customer is called to perform. Accordingly, our ability to deliver committed capacity depends on factors beyond our control, such as temperature and humidity and the time of day that an end-use customer is called to perform. The correct operation of, and timely communication with, devices used to control equipment are also important factors that affect available capacity. Under some of our contracts, any difference between our demonstrated capacity and the committed capacity on which capacity payments were previously made will result in either a refund payment from us to our grid operator or utility customer or an additional payment to us by such customer. Any refund payable by us would reduce our deferred revenues, but would not impact our previously recognized revenues. If there is a true-up settlement due to a grid operator or utility customer, we generally make a corresponding adjustment in our payments to the end-use customer or customers who failed to make the appropriate level of capacity available, however we are sometimes unable to do so. In addition, some of our contracts with our grid operator and 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

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demand response events. Further, because measurement and verification test results for some capacity contracts establish capacity levels on which payments will be made until the next test or demand response event, the payments to be made to us under such capacity contracts would be reduced until the level of capacity is established at the next test or demand response event. To date we have been required to make only de minimis refund and penalty payments, and we have incurred only immaterial downward adjustments in capacity payments, as a result of failures to achieve our committed capacity levels. However, we could experience significant period-to-period fluctuations in our financial results in future periods due to true-up settlements, capacity payment adjustments, replacement costs or other payments, which could be substantial.

Our business may become subject to modified or new government regulation, which may negatively impact our ability to market our clean and intelligent power solutions.

        While the electric power markets in which we operate are regulated, we are not directly subject to the regulatory framework applicable to the generation and transmission of electricity. However, the installation of devices used in providing those solutions and electric generators sometimes installed or activated when providing demand response solutions may be subject to governmental oversight and regulation under state and local ordinances relating to building codes, public safety regulations pertaining to electrical connections and local and state licensing requirements. In the future, federal, state, provincial or local governmental entities may seek to change existing regulations or impose additional regulations. Any modified or new government regulation applicable to our current or future solutions, whether at the federal, state, provincial or local level, may negatively impact the installation, servicing and marketing of those solutions and increase our costs and the price of our solutions. In a relatively few instances, we have agreed to own and operate a back-up generator at a commercial, institutional or industrial customer location for a period of time and to activate the generator when capacity is called for dispatch so that the commercial, institutional or industrial customer can reduce its consumption of electricity from the electric power grid. These generators could become ineligible to participate in demand response programs in the future, or be compensated less for such participation, thereby reducing our revenues and adversely affecting our financial position.

A substantial majority of our revenues are generated from contracts with, and open market sales to, a small number of grid operator and utility customers, including in particular one grid operator customer, and the modification or termination of these contracts or sales relationships could materially adversely affect our business.

        A majority of our revenues have been generated from contracts with, and open market sales to, one grid operator customer. This customer accounted for 86% and 71% of our total revenues in 2005 and the nine months ended September 30, 2006, respectively. Moreover, revenues from our three largest grid operator and utility customers represented approximately 89% and 93% of our total revenues in 2005 and the nine months ended September 30, 2006, respectively. Any modification or termination of these contracts or key customer relationships could have a material adverse effect on our business.

        More than half of our revenues are derived from three fixed price contracts. In 2005 and the nine months ended September 30, 2006, these contracts accounted for approximately 86% and 61%, respectively, of our total revenues. Although we have entered into additional long-term contracts in different geographic regions and are regularly in discussion with our customers to extend our existing contracts or enter into new contracts with these existing customers, the three major contracts described above expire in 2008. There can be no assurance that any of these contracts will be extended or that we will enter into new contracts on favorable terms. If these contracts are not extended or replaced, we would expect to enroll the capacity that we make available under such contracts in another demand response capacity program, although there is no assurance that we would be able to do so. In addition,

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other programs could provide lower capacity payments than our existing fixed price contracts. Thus, the failure to renew any of these contracts could significantly reduce our revenues.

Failure of third parties to manufacture quality products or provide reliable services in a timely manner could cause delays in the delivery of our solutions, which could damage our reputation, cause us to lose customers and negatively impact our growth.

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

    utilizing components that we install or have installed at commercial, institutional and industrial locations;

    outsourcing email notification and cellular and paging wireless communications that are used to notify our end-use customers of their need to reduce electricity consumption at a particular time and to execute instructions to devices installed at our customer locations and which are programmed to automatically reduce consumption on receipt of such communications; and

    outsourcing certain installation and maintenance operations to third-party providers.

        Any delays, malfunctions, inefficiencies or interruptions in these products, services or operations could adversely affect the reliability or operation of our demand response and energy management solutions, which could cause us to experience difficulty retaining current customers and attracting new customers. Such delays could also result in our making refunds or paying penalty fees to our grid operator and utility customers. In addition, our brand, reputation and growth could be negatively impacted.

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

        Our continued success depends 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 "key person" insurance on any of our employees. We have entered into employment agreements with the members of our senior management team, but none of these agreements guarantees the services of the individual for a specified period of time. All of the agreements with members of our senior management team provide that employment is at-will and may be terminated by the employee at any time and without notice. Although we do not have any reason to believe that we may lose the services of any of these persons in the foreseeable future, the loss of the services of any of these persons might impede our operations or the achievement of our strategic and financial objectives. We rely on our engineering team to research, design and develop new and enhanced demand response and energy management solutions. We rely on our operations team to install, test, deliver and manage our demand response solutions. The loss or interruption of the service of members of our senior management, sales and marketing, engineering or operations teams, or our inability to attract or retain other qualified personnel or advisors could have a material adverse effect on our business, financial condition and results of operations and could significantly reduce our ability to manage our operations and implement our strategy.

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

        We expect to experience significant growth in the number of our employees and the scope of our operations. To manage our anticipated future growth, we must continue to implement and improve our managerial, operational, financial and reporting systems, expand our facilities, and continue to recruit and train additional qualified personnel. All of these measures will require significant expenditures and will demand the attention of management. Due to our limited resources, we may not be able to effectively manage the expansion of our operations or recruit and adequately train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our business plans or disrupt our operations.

        We are currently in the process of implementing a new enterprise resource planning system. Any difficulties or delays in implementing this system could make it more difficult for us to grow and manage our operations, divert management attention from operations and require further expense.

        We compete for personnel and advisors with other companies and other organizations, many of which are larger and 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 if these managerial, operational, financial and reporting improvements are not implemented successfully, we could lose customers and revenues.

        We allocate our operations, sales and marketing, research and development, general and administrative, and financial resources based on our business plan, which includes assumptions about current and future contracts with grid operator and utility customers and commercial, institutional and industrial customers, variable prices in open markets for demand response capacity, the development of ancillary services markets which enable demand response as a revenue generating resource and a variety of other factors relating to electricity markets, and the resulting demand for our demand response and energy management solutions. However, these factors are uncertain. If our assumptions regarding these factors prove to be incorrect or if alternatives to those offered by our solutions gain further acceptance, then actual demand for our demand response and energy management solutions could be significantly less than the demand we anticipate and we may not be able to sustain our revenue growth or achieve profitability.

An oversupply of electric generation capacity and varying regulatory structures in certain regional power markets could negatively affect our business and results of operations.

        Although demand for electric capacity has been increasing throughout North America, a buildup of new electric generation facilities could result in excess electric generation capacity in certain regional power markets. In addition, the electric power industry is highly regulated. The regulatory structures in regional electricity markets are varied and some structures make it difficult for us to provide demand response solutions in those regions. As part of our business strategy, we intend to expand into additional regional electricity markets. However, the combination of excess electric generation capacity and unfavorable regulatory structures could limit the number of regional electricity markets available to us for expansion. Unfavorable regulatory decisions in markets where we currently operate could also negatively affect our business. For example, regulators could modify market rules in certain areas to limit the use of back-up generators in demand response markets or could implement bidding caps that could lower capacity payments. A limit on back-up generators would mean that some of the capacity reductions we aggregate from end-use customers willing to reduce consumption from the grid by activating their own back-up generators during demand response events would not qualify as capacity,

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and we would have to find additional sources of capacity from end-use customers willing to reduce load by curtailing consumption rather than by generating electricity themselves.

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

        The rapid growth of the clean and intelligent power solutions sector is resulting in increasingly aggressive pricing, which could cause the prices for clean and intelligent power solutions to decrease over time. Our grid operator and utility customers may switch to other clean and intelligent power solutions providers based on price, particularly if they perceive the quality of our competitors' products or services to be equal or superior to ours. Continued decreases in the price of capacity by our competitors could result in a loss of grid operator and utility customers or a decrease in the growth of our business, or it may require us to lower our prices for capacity to remain competitive, which would result in reduced revenues and lower profit margins and would adversely affect our results of operations and financial position and delay or prevent our future profitability. Continued increases in the percentage or fixed amount paid to commercial, institutional and industrial customers by our competitors for making capacity available could result in a loss of commercial, institutional and industrial customers or a decrease in the growth of our business. It also may require us to increase the percentage or fixed amount we pay to our commercial, institutional and industrial customers to remain competitive, which would result in increases in the cost of revenues and lower profit margins and would adversely affect our results of operations and financial position and delay or prevent our future profitability.

Our inability to protect our intellectual property could negatively affect our business and results of operations.

        Our ability to compete effectively depends in part upon the maintenance and protection of the intellectual property related to our demand response solutions. We hold only one issued patent. Patent protection is unavailable for certain aspects of the technology and operational processes that are important to our business. Any patent held by us or to be issued to us, or any of our pending patent applications, could be challenged, invalidated, unenforceable or circumvented. Moreover, some of our trademarks which are not in use may become available to others. To date, we have relied principally on copyright, trademark and trade secrecy laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our intellectual property. However, we have not obtained confidentiality agreements from all of our customers and vendors and although we have entered into confidentiality agreements with all of our employees, we cannot be certain that these agreements will be honored. Some of our confidentiality agreements are not in writing, and some customers are subject to laws and regulations that require them to disclose information that we would otherwise seek to keep confidential. Policing unauthorized use of our intellectual property is difficult and expensive, as is enforcing our rights against unauthorized use. The steps that we have taken or may take may not prevent misappropriation of the intellectual property on which we rely. In addition, effective protection may be unavailable or limited if we expand to other jurisdictions outside the United States, as the intellectual property laws of foreign countries sometimes offer less protection or have onerous filing requirements. From time to time, third parties may infringe our intellectual property rights. Litigation may be necessary to enforce or protect our rights or to determine the validity and scope of the rights of others. Any litigation could be unsuccessful, cause us to incur substantial costs, divert resources away from our daily operations, and result in the impairment of our intellectual property. Failure to adequately enforce our rights could cause us to lose rights in our intellectual property and may negatively affect our business.

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We may be subject to damaging and disruptive intellectual property litigation related to allegations that our demand response and energy management solutions infringe on intellectual property held by others, which could result in the loss of use of those solutions.

        Third-party patent applications and patents may be applicable to our clean and intelligent power solutions. As a result, third-parties may in the future make infringement and other allegations that could subject us to intellectual property litigation relating to our solutions, which litigation could be time-consuming and expensive, divert attention and resources away from our daily operations, impede or prevent delivery of our solutions, and require us to pay significant royalties, licensing fees and damages. In addition, parties making infringement and other claims may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our solutions and could cause us to pay substantial damages. In the event of a successful claim of infringement, 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 and assess data used in providing our clean and intelligent power solutions, or if we experience an interruption in their operation, our business, financial condition and results of operations could be adversely affected.

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

    earthquake, fire, flood and other natural disasters;

    terrorist attacks and attacks by computer viruses or hackers;

    power loss; and

    computer systems, Internet, telecommunications or data network failure.

        Although our information technology systems have fail-over redundancy where they are housed, we do not have geographic fail-over redundancy. Any interruption in the operation of our information technology systems could result in decreased revenues under our demand 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 demonstrated capacity levels going forward, customer dissatisfaction and lawsuits and could subject us to penalties, any of which could have a material adverse effect on our 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 spending and other factors affecting the electric utility industry, such as seasonality of peak demand.

        We currently derive substantially all of our revenues from the sale of demand response solutions, directly or indirectly, to the electric power industry. Purchases of our demand response solutions by grid operators or electric utilities may be deferred or cancelled as a result of many factors, including mergers and acquisitions involving electric utilities, changing regulations, fluctuations in interest rates and increased electric utility capital spending on traditional supply-side resources. In addition, sales of capacity in open markets are particularly susceptible to variability based on changes in the spending patterns of our grid operator and utility customers and on associated fluctuating market prices for capacity. In addition, peak demand for electricity and other capacity constraints tend to be seasonal.

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Peak demand in the United States tends to be most extreme in warmer months. Hence, some capacity markets yield higher prices for capacity during these warmer months. As a result, our demand response revenues can be seasonal. For example, in 2005, our demand response revenues in the third quarter were higher than our demand response revenues in the fourth quarter. Further, occasional events, such as a spike in natural gas prices, can lead grid operators and utilities to implement short-term calls for demand response capacity to respond to these events, but we cannot be sure that such calls will continue or that we will be in a position to generate revenues when they do occur. In the first quarter of 2006, we earned $3.6 million under the Demand Response Winter Supplemental Program, a temporary demand response program established by ISO New England Inc. in response to an anticipated shortage in natural gas resulting from Hurricanes Katrina and Rita. We have experienced, and may in the future experience, significant variability in our revenues, on both an annual and a quarterly basis, as a result of these and other factors. Pronounced variability or an extended period of reduction in spending by grid operators and utilities, or continued requests from grid operators and utilities to pay for demand response capacity at prices that are not equal on a monthly or quarterly basis over the course of a contract year, could negatively impact our business 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 increases in revenues.

Electric power industry sales cycles can be lengthy and unpredictable and require significant employee time and financial resources with no assurances that we will realize revenues.

        Sales cycles with grid operator and utility customers are generally long and unpredictable. The grid operators and utilities that are our potential customers generally have extended budgeting, procurement and regulatory approval processes. They also tend to be risk averse and tend to follow industry trends rather than be the first to purchase new products or services, which can extend the lead time for or prevent acceptance of new products or services such as our demand response solutions. Accordingly, our potential customers may take longer to reach a decision to purchase services. This extended sales process requires the dedication of significant time by our personnel and our use of significant financial resources, with no certainty of success or recovery of our related expenses. It is not unusual for a grid operator or utility customer to go through the entire sales process and not accept any proposal or quote.

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

        Our ability to provide electric capacity under our demand response contracts depends on the number of commercial, institutional and industrial customers who enter into agreements with us to reduce electricity consumption on demand and the levels of consumption which those customers agree to reduce. The average annual rate of terminations by our commercial, institutional and industrial customers in 2004, 2005 and 2006 was less than 1%. If this termination rate increases, or if customers do not renew their contracts as they expire, we will need to acquire additional commercial, institutional and industrial customers or expand our relationships with existing commercial, institutional and industrial customers in order to maintain our revenues and grow our business. The loss of revenues resulting from terminations could be significant, and limiting customer terminations is an important factor in our ability to achieve future profitability. If we are unsuccessful in controlling our commercial, institutional and industrial customer terminations, we may be unable to acquire a sufficient number of new customers or we may incur significant costs to replace customers, which could cause our revenues to decrease and our cost of revenues to increase, and delay or prevent our profitability.

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

        The market for demand response and energy management solutions is characterized by rapid technological changes, frequent new software introductions, Internet-related technology enhancements, uncertain product life cycles, changes in customer demands, and evolving industry standards and regulations. We may not be able to successfully develop and market new clean and intelligent power solutions that comply with present or emerging industry regulations and technology standards. Also, any new regulation or technology standard could increase our cost of doing business.

        From time to time, our customers have expressed a need for increased functionality in our solutions. In response, and as part of our strategy to enhance our clean and intelligent power solutions and grow our business, we plan to continue to make substantial investments in the research and development of new technologies. Our future success will depend in part on our ability to continue to design new, competitive clean and intelligent power solutions, enhance our existing demand response and energy management solutions and provide new, value-added services to our customers. Initiatives to develop new solutions will require continued investment, and we may experience unforeseen problems in the performance of our technologies and operational processes, including new technologies and operational processes that we develop and deploy, to implement our solutions. In addition, software addressing the procurement and management of energy assets is complex and can be expensive to develop, and new software and software enhancements can require long development and testing periods. If we are unable to develop new clean and intelligent power solutions or enhancements to our existing demand response and energy management solutions on a timely basis, or if the market does not accept such solutions, we will lose opportunities to realize revenues and customers and our business and results of operations will be adversely affected.

Any internal or external security breaches involving our demand response and energy management solutions could harm our reputation, and even the perception of security risks of our solutions or the transmission of data over the Internet, whether or not valid, could inhibit market acceptance of our solutions and cause us to lose customers.

        We and our customers use our demand response and energy management solutions to compile and analyze sensitive or confidential information related to our customers. In addition, some of our demand response and energy management solutions allow us to remotely control equipment at commercial, institutional and industrial locations. Our demand response and energy management solutions rely on the secure transmission of proprietary data over the Internet for some of their functionality. Well-publicized compromises of Internet security could have the effect of substantially reducing confidence in the Internet as a medium of data transmission. The occurrence or perception of security breaches in our demand response and energy management solutions or our customers' concerns about Internet security or the security of our solutions, whether or not they are warranted, could have a material adverse effect on our business, harm our reputation, inhibit market acceptance of our demand response and energy management solutions and cause us to lose customers, any of which could have a material adverse effect on our financial condition and results of operations.

        We may come into contact with sensitive consumer information or data when we perform operational, installation or maintenance functions for our customers. Even the perception that we have improperly handled sensitive, confidential information could have a negative effect on our business. If, in handling this information, we fail to comply with privacy or security laws, we could incur civil liability to government agencies, customers and individuals whose privacy is compromised. In addition, third parties may attempt to breach our security or inappropriately use our demand response and energy management solutions through computer viruses, electronic break-ins and other disruptions. If a breach is successful, confidential information may be improperly obtained, and we may be subject to lawsuits and other liabilities.

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We may require significant additional capital to pursue our growth strategy, but we may not be able to obtain additional financing on acceptable terms or at all.

        The growth of our business will depend on substantial amounts of additional capital for marketing and product development of our demand response and energy management solutions. Our capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions, and our expansion of sales and marketing and product development activities. In addition, we may consider strategic acquisitions of complementary businesses or technologies to grow our business, which could require significant capital and could increase our capital expenditures related to future operation of the acquired business or technology. Because of our losses, we do not fit traditional credit lending criteria. We may not be able to obtain loans or additional capital on acceptable terms or at all. Moreover, our current loan and security agreement contains restrictions on our ability to incur additional indebtedness, which, if not waived, could prevent us from obtaining needed capital. Any future credit facilities would likely contain similar restrictions. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all. A failure to obtain additional financing when needed could adversely affect our ability to maintain and grow our business.

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

        Provisions in our senior loan and security agreement with Bluecrest Capital Partners, L.P., or Bluecrest Capital, as assignee of Ritchie Capital Finance, L.L.C., impose restrictions on our 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 agreement also contains other customary covenants. We may not be able to comply with these covenants in the future. Our failure to comply with these covenants may result in the declaration of an event of default and could cause us to be unable to borrow under our loan and security agreement with Bluecrest Capital. In addition to preventing additional borrowings under our loan and security agreement, an event of default, if not cured or waived, may result in the acceleration of the maturity of indebtedness outstanding under the agreement, which would require us to pay all amounts outstanding. If an event of default occurs, we may not be able to cure it within any applicable cure period, if at all. If the maturity of our indebtedness is accelerated, we may not have sufficient funds available for repayment or we may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to us, or at all.

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

        Generally, a change of more than 50% in the ownership of a company's stock, by value, over a three year period constitutes an ownership change for U.S. federal income tax purposes. An ownership change may limit a company's ability to use its net operating loss carryforwards attributable to the period prior to such change. The number of shares of our common stock that we issue in this offering may be sufficient, taking into account prior or future shifts in our ownership over a three year period,

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to cause us to undergo an ownership change. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss carryforwards to offset U.S. federal taxable income may become subject to limitations, which could potentially result in increased future tax liability for us.

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

        In addition to organic growth, we intend to continue to pursue growth through the acquisition of companies or assets that may enable us to expand our project skill-sets and capabilities, enlarge our geographic market, add experienced management personnel and increase our service offerings. However, we may be unable to implement this growth strategy if we cannot identify suitable acquisition candidates, reach agreement on potential acquisitions on acceptable terms, successfully integrate personnel or assets that we acquire, or for other reasons. Our acquisition efforts may involve certain risks, including:

    we may have difficulty integrating operations and systems;

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

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

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

    our ongoing business may be disrupted or receive insufficient management attention; and

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

        The process of negotiating acquisitions and integrating acquired products, services, technologies, personnel, or businesses might result in operating difficulties and expenditures and might require significant management attention that would otherwise be available for ongoing development of our business, whether or not any such transaction is ever consummated. Moreover, we might never realize the anticipated benefits of any acquisition. Future acquisitions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities, or impairment expenses related to goodwill, and impairment or amortization expenses related to other intangible assets, which could harm our financial condition. In addition, if we are unable to integrate any acquired businesses, products or technologies effectively, our business, financial condition and results of operations may be materially adversely affected.

Our ability to provide bid bonds, performance bonds or letters of credit is limited and could negatively affect our ability to bid on or enter into significant long-term agreements.

        We are occasionally required to provide bid bonds or performance bonds to secure our performance under long-term contracts with our grid operator and utility customers. Our ability to obtain such bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and external factors beyond our control, including the overall capacity of the surety market. Surety companies consider those factors in relation to the amount of our tangible net worth and other underwriting standards that may change from time to time. Events that affect surety markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. In addition, some of our customers also require collateral in the form of letters of credit to secure performance or to fund possible damages or true-up

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payments as the result of a failure to make available capacity at agreed levels or an event of default under our contracts with them. We are prohibited from obtaining additional letters of credit without a waiver under our loan and security agreement with Bluecrest Capital. As of September 30, 2006, we had $0.1 million of letters of credit outstanding. Our inability to obtain adequate bonding or letters of credit and, as a result, to bid or enter into significant long-term agreements, could have a material adverse effect on our future revenues and business prospects.

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

        Our software is complex and, accordingly, may contain undetected errors or failures when introduced or subsequently modified. Software defects or inaccurate data may cause incorrect recording, reporting or display of information about the level of demand reduction at a commercial, institutional and industrial customer location, which could cause us to fail to meet our commitments to have capacity available, cause us to have to make true-up payments or penalty payments to our grid operator and utility customers and result in reductions in capacity payments under contracts in subsequent periods. In addition, such defects and inaccurate data may prevent us from successfully providing our energy management solutions, which would result in lost revenues. Software defects or inaccurate data may lead to customer dissatisfaction and our customers may seek to hold us liable for any damages incurred. As a result, we could lose customers, our reputation may be harmed and our financial condition and results of operations could be materially adversely affected.

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

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

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

    our ability to integrate additional software modules under development with our existing technology and operational processes.

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

We may face certain product liability or warranty claims if we disrupt our customers' networks or applications.

        For some of our current and planned solutions, our software and hardware is integrated with our customers' networks and software applications. The integration of our software and hardware may entail the risk of product liability or warranty claims based on disruption to these networks or applications. In addition, the failure of our software and hardware to perform to customer expectations could give rise to warranty claims against us. Any of these claims, even if without merit, could result in costly litigation or divert management's attention and resources. Although we carry general liability insurance, our current insurance coverage could be insufficient to protect us from all liability that may be imposed under these types of claims. A material product liability claim may seriously harm our results of operations.

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Risks Related to Our Common Stock and this Offering

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

        Our quarterly revenues and operating results have fluctuated in the past and may vary from quarter to quarter in the future. Accordingly, we believe that period-to-period comparisons of our results of operations may be misleading. You should not rely upon the results of one quarter as an indication of future performance. Our revenues and operating results may fall below the expectations of securities analysts or investors in some future quarter or quarters. Our failure to meet these expectations could cause the market price of our common stock to decline substantially.

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

    demand for and acceptance of our clean and intelligent power solutions;

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

    delays or reductions in spending for clean and intelligent power solutions 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 regional basis, since local payments for demand response capacity tend to vary according to the level of available capacity in given regions;

    the termination of existing contracts with grid operator and utility customers;

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

    the pricing terms of some long-term capacity contracts that provide for higher payments during warmer months and lower payments during the rest of the year;

    temporary capacity programs that could be implemented by grid operators and utilities to address short-term capacity deficiencies, such as the 2006 Demand Response Winter Supplemental Program in New England after Hurricanes Katrina and Rita;

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

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

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

        We have not declared or paid any cash dividends on our common stock to date, and we do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings for use in the development, operation and growth of our business. In addition, our loan and security agreement prohibits us from paying dividends and future loan agreements may also prohibit the payment of dividends. Any future determination relating to our dividend policy will be at the discretion of our board of directors and will depend on our results of operations, financial condition, capital requirements, business opportunities, contractual restrictions and other factors deemed relevant. To the extent we do not pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in our common stock.

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

        Sales of substantial amounts of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. This could also impair our ability to raise additional capital in the future through the sale of our equity securities. Under our amended and restated certificate of incorporation that will be in effect upon the completion of this offering, we are authorized to issue up to            shares of common stock, of which            shares of common stock will be outstanding following this offering. Of these shares, the shares of common stock sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, or the Securities Act, by persons other than "affiliates," as that term is defined in Rule 144 under the Securities Act. In addition,                    shares of common stock will become freely tradeable after the termination of the lock-up agreements described below. Certain of our stockholders will be able to cause us to register common stock that they own under the Securities Act pursuant to registration rights that are described in "Certain Relationships and Related Transactions—Registration Rights." We also intend to register all shares of common stock that we may issue under our Amended and Restated 2003 Stock Option and Incentive Plan, or 2003 Stock Plan, and our 2007 Stock Option and Incentive Plan, or 2007 Stock Plan.

        Our executive officers and directors and most of our stockholders have entered into lock-up agreements described under the caption "Underwriting," pursuant to which they have agreed, subject to certain exceptions and extensions, not to sell or transfer, directly or indirectly, any shares of our common stock for a period of 180 days from the date of this prospectus or to exercise registration rights during such period with respect to such shares. However, after the lock-up period expires, or if the lock-up restrictions are waived by the underwriters, such persons will be able to sell their shares and exercise registration rights to cause them to be registered. We cannot predict the size of future issuances of our common stock or the effect, if any, that future sales and issuances of shares of our common stock, or the perception of such sales or issuances, would have on the market price of our common stock. See "Shares Eligible for Future Sale."

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

        Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon the completion of this offering could discourage, delay, or prevent a merger, acquisition, or other change of control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors 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 wish to participate in these transactions may not have the opportunity to do so. Furthermore, these provisions could prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions:

    allow the authorized number of directors to be changed only by resolution of our board of directors;

    require that vacancies on the board of directors, including newly-created directorships, be filled only by a majority vote of directors then in office;

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

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    authorize our board of directors to issue, without stockholder approval, blank check preferred stock that, if issued, could operate as a "poison pill" to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that is not approved by our board of directors;

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

    prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of stock to elect some directors;

    establish advance notice requirements for stockholder nominations to our board of directors or for stockholder proposals that can be acted on at stockholder meetings;

    limit who may call stockholder meetings; and

    require the approval of the holders of 80% of the outstanding shares of our capital stock entitled to vote in order to amend certain provisions of our amended and restated certificate of incorporation and restated bylaws.

        Some of our employment arrangements and restricted stock and incentive stock option agreements provide for severance payments and accelerated vesting of benefits, including accelerated vesting of restricted stock and options, upon a change of control. This offering will not constitute a change of control under such agreements. These provisions may discourage or prevent a change of control.

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

The requirements of being a public company, including compliance with the reporting requirements of the Securities Exchange Act of 1934 and the Nasdaq Global Market, will require greater resources, increase our costs and distract our management, and we may be unable to comply with these requirements in a timely or cost-effective manner.

        As a public company with equity securities listed on the Nasdaq Global Market, we will need to comply with statutes and regulations of the Securities and Exchange Commission, or SEC, and requirements of the Nasdaq Global Market, with which we were not required to comply prior to this offering. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our board of directors and management and will substantially increase our costs and expenses. We will need to:

    institute a more comprehensive compliance function;

    prepare and distribute periodic and current public reports in compliance with our obligations under the federal securities laws;

    establish new internal policies, such as those relating to disclosure controls and procedures and insider trading;

    establish and maintain appropriate committees of our board of directors;

    involve and retain to a greater degree outside counsel and accountants in the above activities; and

    establish and maintain an investor relations function, including the provision of certain information on our website.

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        In addition, as a public company we expect that we will incur substantially higher costs to obtain director and officer liability insurance policies. These factors could make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee.

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

        As a public company, our internal control over financial reporting will be required to comply with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. Accordingly, we will be required to document and test our internal controls and procedures to assess the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm will be required to report on management's assessment of the effectiveness of our internal control over financial reporting and the effectiveness of our internal control over financial reporting. If we are unable to maintain effective control over financial reporting, such conclusion would be disclosed in our Annual Report on Form 10-K for the year ending December 31, 2008. In the future, we may identify material weaknesses and deficiencies which we may not be able to remediate in a timely manner. If we fail to maintain effective internal control over financial reporting in accordance with Section 404, we will not be able to conclude that we have and maintain effective internal control over financial reporting or our independent registered accounting firm may not be able to issue an unqualified report on the effectiveness of our internal control over financial reporting. As a result, our ability to report our financial results on a timely and accurate basis may be adversely affected, we may be subject to sanctions or investigation by regulatory authorities, including the SEC or the Nasdaq Global Market, and investors may lose confidence in our financial information, which in turn could cause the market price of our common stock to decrease. We may also be required to restate our financial statements from prior periods. In addition, testing and maintaining internal control in accordance with Section 404 will require increased management time and resources. Any failure to maintain effective internal control over financial reporting could impair the success of our business and harm our financial results, and you could lose all or a significant portion of your investment.

Purchasers of common stock will experience immediate and substantial dilution.

        Based on an assumed initial public offering price of $          per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution in the net tangible book value per share of common stock of $          per share from the offering price. Investors purchasing common stock in this offering will contribute approximately      % of the total amount invested by stockholders since inception, but will only own approximately       % of the shares of common stock outstanding. In addition, following this offering we will also have a significant number of outstanding warrants and options to purchase our common stock, with the options having exercise prices significantly below the initial public offering price of our common stock. You will incur further dilution if outstanding options or warrants to purchase common stock are exercised. In addition, our amended and restated certificate of incorporation that will be in effect upon the completion of this offering allows us to issue significant numbers of additional shares, including shares that may be issued under the 2003 Stock Plan and the 2007 Stock Plan, which could result in further dilution to purchasers of our common stock in this offering.

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

        After this offering, our directors, executive officers and principal stockholders, together with their affiliates and related persons, will beneficially own, in the aggregate, approximately        % of our outstanding common stock, or approximately      % if the underwriters' over-allotment option is exercised in full. As a result, these stockholders, if acting together, will have the ability to determine 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 affairs of our company. Accordingly, this concentration of ownership may harm the market 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 business combination involving us;

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

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

        In addition, Delaware law limits the protection afforded minority stockholders, and we do not intend to enact provisions that may be beneficial to minority holders, such as cumulative voting.

There has been no active trading market for our common stock, and an active trading market may not develop.

        Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq Global Market or other markets on which we may choose to list or how liquid such markets might become. The lack of an active market may impair the value of your shares and your ability to sell your shares at the time you wish to sell them. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to acquire other companies, products or technologies by using our common stock as consideration.

If our stock price declines after this offering, you could lose all or a significant part of your investment.

        The initial public offering price for the shares being sold in this offering will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. This price may not reflect the market price of our common stock following this offering. In addition, the market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price paid by you in this offering. In recent years, the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies, in many instances for reasons unrelated to their operating performance, financial condition or business fundamentals. Similarly, the market price of our common stock could be subject to wide fluctuations in response to a number of factors, many of which we cannot control, including:

    changes in securities analysts' recommendations or their estimates of our future financial performance;

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    our investors' reaction to our press releases, announcements and our filings with the SEC and to those of our competitors;

    changes in market valuations of similar companies;

    fluctuations in broader stock market prices and volumes;

    investor perception of our industry or our prospects;

    additions or departures of key personnel;

    commencement of or involvement in litigation;

    loss of a key customer or termination of or failure to renew a significant customer contract;

    changes in governmental regulations affecting our business or that of our customers;

    announcements by us or our competitors of strategic alliances, significant contracts, new technologies, acquisitions, commercial relationships, joint ventures or capital commitments;

    variations in our quarterly results of operations or cash flows, particularly as a result of our revenue recognition policy, which is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Use of Estimates—Revenue Recognition;"

    revenues and operating results failing to meet the expectations of securities analysts or investors in a particular quarter;

    quarterly variations in our or our competitors' results of operations;

    our ability to develop and market new and enhanced solutions on a timely basis and, if necessary, obtain regulatory clearance or approval for and market new and enhanced solutions on a timely basis;

    technological developments that reduce peak demand for electricity, increase power supplies or that otherwise compete with our demand response and energy management solutions;

    changes in prices paid for capacity by electric power grid operators and utilities or in our pricing policies or pricing policies of our competitors;

    announcements of new electricity supply facilities being constructed;

    future issuances and sales of our common stock or convertible debt or preferred stock;

    demand for and trading volume of our common stock;

    sales of large blocks of our common stock, including sales by our executive officers, directors and significant stockholders;

    changes in accounting principles; and

    changes in general conditions in the domestic and worldwide economies or financial markets and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.

        The occurrence of any of these factors and other factors beyond our control could cause the market price of our common stock to decline significantly. As a result, you could lose a significant part or all of your investment in our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur

25



substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

        Management will retain broad discretion over the use of the net proceeds from this offering. Stockholders may not agree with such uses and our use of the proceeds may not yield a significant return or any return at all for our stockholders. The failure by our management to apply these funds effectively could have a material adverse effect on our business.

        We intend to use the proceeds from this offering to fund the expansion of our business into new regions and expand our customer base, to finance research and development, to repay indebtedness, to fund cash consideration for future acquisitions and for other general corporate purposes. Because of the number and variability of factors that will determine our use of the proceeds from this offering, their ultimate use may vary substantially from their currently intended use. For a further description of our intended use of the proceeds of the offering, see "Use of Proceeds."

Securities analysts may not initiate coverage of our common stock or may issue negative reports, which may have a negative impact on the market price of our common stock.

        Securities analysts may elect not to provide research coverage of our common stock after the completion of this offering. If securities analysts do not cover our common stock after the completion of this offering, the lack of research coverage may cause the market price of our common stock to decline. The trading market for our common stock may be affected in part by the research and reports that industry or financial analysts publish about our business. If one or more of the analysts who elects to cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, recently-adopted rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 between the SEC, other regulatory agencies and a number of investment banks, have led to a number of fundamental changes in how analysts are reviewed and compensated. It may be difficult for companies such as ours, with smaller market capitalizations, to attract independent financial analysts that will cover our common stock. This could have a negative effect on the market price of our stock.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus contains forward-looking statements that are based on our management's beliefs and assumptions and on information currently available to us. The forward-looking statements are contained principally in the sections entitled "Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." When used in this prospectus, the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "should," "will," "would," and similar expressions identify forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in any forward-looking statements are reasonable, these plans, intentions, or expectations are based on assumptions, are subject to risks and uncertainties and may not be achieved. Our actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied, by the forward-looking statements contained in this prospectus. Important factors that could cause actual results to differ materially from our forward-looking statements are set forth in this prospectus, including under the heading "Risk Factors." Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management's beliefs and assumptions only as of the date of this prospectus. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. These statements include, among other things, statements relating to:

    our estimates of market sizes and anticipated uses of our demand response and other energy management solutions;

    our estimates regarding anticipated operating losses, future revenues, expenses, capital requirements, liquidity, the sufficiency of our cash resources and our needs for additional financing;

    our ability to market, commercialize, and achieve market acceptance for our demand response and other energy management solutions;

    our anticipated use of the proceeds of this offering;

    our business strategy and our underlying assumptions about trends in the electric power industry and about market data, including the availability of electric power supply and transmission and distribution constraints;

    our estimates regarding what percentage of electric industry infrastructure is constructed to meet peaks in demand for electricity;

    our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others; and

    management's goal, expectations and objectives and other similar expressions concerning matters that are not historical facts.

        Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all of these factors, they include, among others, the following:

    changes in the available electric capacity provided by our programs;

    loss of a significant customer;

    our dependence on the electric utility industry;

    our ability to realize the benefits of our long-term contracts with grid operators and utilities;

27


    technological developments that reduce peak demand or increase power supplies;

    changes in general economic conditions and capital markets;

    actions of customers and competitors;

    disruptions due to equipment interruption or failure at third-party manufacturing facilities or on third-party networks;

    execution of planned capital projects;

    effects of current and future local, state, federal and provincial laws, policies and regulations;

    the costs associated with being a public company and our ability to comply with the internal control and reporting obligations of public companies;

    our ability to retain key personnel; and

    other factors discussed in more detail under "Risk Factors."

        Potential investors are urged to consider these factors and the other factors described under "Risk Factors" carefully in evaluating any forward-looking statements and are cautioned not to place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make in this prospectus are reasonable, we can provide no assurance that such plans, intentions or expectations will be achieved. These statements are based on assumptions made by us based on our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate in the circumstances. Such statements are subject to a number of risks and uncertainties, many of which are beyond our control.

        Except as required by applicable law, we assume no obligation to update any forward-looking statements publicly or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

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USE OF PROCEEDS

        We estimate that our net proceeds from the sale of            shares of our common stock in this offering, assuming an initial public offering price of $            per share (the midpoint of the range set forth on the cover of this prospectus), will be approximately $            million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $            per share would increase (decrease) the net proceeds to us from this offering by $            million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.

        We plan to use these net proceeds to fund the expansion of our business into new regions and expand our customer base, to finance research and development, to repay $          of aggregate principal amount of indebtedness and related fees, to fund cash consideration for future acquisitions and for other general corporate purposes. We have no present understandings, commitments or agreements to acquire any businesses or technologies. We will not receive any proceeds from the sale of shares by the selling stockholders.

        The indebtedness that we intend to repay consists of borrowings under our loan and security agreement with Bluecrest Capital. Borrowings under our loan and security agreement currently bear interest at (a) the greater of 5.22% or the yield on three-year U.S. Treasury Notes on the date of the loan plus (b) in the case of our term loans, 655 basis points per annum, and in the case of our equipment loans, 695 basis points per annum. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facility Borrowings."

        Other than with respect to the repayment of indebtedness, we have not yet determined the amount of our remaining net proceeds to be used specifically for any of the foregoing purposes. Accordingly, management will have flexibility in applying our remaining net proceeds of this offering. Pending their use, we intend to invest our net proceeds from this offering in short-term, investment grade, interest-bearing instruments.


DIVIDEND POLICY

        We have never paid or declared any cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, and other factors that our board of directors deems relevant. The terms of our current loan and security agreement with Bluecrest Capital preclude us, and the terms of any future debt or credit facility may preclude us, from paying dividends.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2006:

    on an actual basis;

    on a pro forma basis to give effect to the sale of an aggregate of 271,346 shares of our Series C Convertible Preferred Stock and the authorization of 271,346 shares of our Series C Convertible Preferred Stock and 271,346 shares of our Common Stock, into which our Series C Convertible Preferred Stock is convertible as if such transactions occurred on September 30, 2006; and

    on a pro forma as adjusted basis to give effect to the sale of an aggregate of 271,346 shares of our Series C Convertible Preferred Stock, the conversion of all outstanding shares of our preferred stock into 3,355,551 shares of common stock, the sale of the shares of common stock by us in this offering at an assumed initial public offering price of $                 per share and the application of the net proceeds therefrom as described in "Use of Proceeds" and the effectiveness of our amended and restated certificate of incorporation that will be effective upon completion of this offering, as if such transactions occurred on September 30, 2006.

        For purposes of the pro forma as adjusted column of the capitalization table below, we have assumed the net proceeds from this offering will be $            million after deducting underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the initial public offering price would change each of the cash and cash equivalents, total stockholders' equity and total capitalization line items by approximately $            million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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        You should read this table in conjunction with "Use of Proceeds," "Selected Historical Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the notes thereto included elsewhere in this prospectus.

 
  As of September 30, 2006
 
  Actual
  Pro Forma
  Pro Forma
as Adjusted

 
  (dollars in thousands, except per share amounts)

Cash and cash equivalents(1)   $ 2,920   $     $  
   
 
 
Long-term debt, including current portion   $ 1,388   $     $  
Series A Redeemable Convertible Preferred Stock, $0.001 par value per share; 713,118 shares authorized, issued, and outstanding at September 30, 2006, at redemption value, actual and pro forma; no shares authorized, issued and outstanding, pro forma as adjusted     826          
Series A-1 Redeemable Convertible Preferred Stock, $0.001 par value per share; 916,212 shares authorized, issued, and outstanding at September 30, 2006, at redemption value, actual and pro forma; no shares authorized, issued and outstanding, pro forma as adjusted     1,739          
Series B Redeemable Convertible Preferred Stock, $0.001 par value per share; 1,188,487 shares authorized, 1,177,097 issued and outstanding at September 30, 2006, at redemption value, actual and pro forma; no shares authorized, issued and outstanding, pro forma as adjusted     7,679          
Series B-1 Redeemable Convertible Preferred Stock, $0.001 par value per share; 277,778 shares authorized, issued and outstanding at September 30, 2006, at redemption value, actual and pro forma; no shares authorized, issued and outstanding, pro forma as adjusted     2,642          
Series C Redeemable Convertible Preferred Stock, $0.001 par value per share; no shares authorized, issued, and outstanding, actual; 271,346 shares authorized, issued, and outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted       $ 15,000    

Stockholders' equity:

 

 

 

 

 

 

 

 

 
  Common stock, $0.001 par value per share; 5,497,096 shares authorized and 1,249,959 shares issued and outstanding, actual; 6,132,115 shares authorized and 1,249,959 shares issued and outstanding, pro forma;                        shares authorized and                        shares issued and outstanding, pro forma as adjusted   $ 1         $  
Additional paid-in capital     309            
Accumulated deficit     (5,990 )          
   
 
 
    Total redeemable convertible preferred stock and stockholders' equity   $ 7,206   $     $  
   
 
 
Total capitalization   $ 8,594   $     $  
   
 
 

(1)
Includes $110 that is subject to restrictions on withdrawal related to outstanding letters of credit.

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DILUTION

        If you invest in our common stock, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after the completion of this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the existing stockholders for the presently outstanding stock. The information provided below assumes conversion of all our preferred stock into common stock and the effectiveness of a    for    stock split of our common stock.

        As of December 31, 2006, our net tangible book value was approximately $         million, or approximately $        per share, and was approximately $                million, or $        per share, on a pro forma basis after giving effect to the sale of an aggregate of 271,346 shares of our Series C Convertible Preferred Stock. Net tangible book value per share represents the amount of total tangible assets less our total liabilities, divided by the number of shares outstanding.

        On a pro forma as adjusted basis, after giving effect to the sale of an aggregate of 271,346 shares of our Series C Convertible Preferred Stock and the sale of             shares of common stock in this offering at an assumed initial public offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus), after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2006 would have been approximately $        , or $        per share. This represents an immediate increase in pro forma net tangible book value of $        per share to our existing stockholders and an immediate dilution of $        per share to new investors purchasing common stock in this offering.

        The following table illustrates this dilution to new investors on a per share basis:

Assumed initial public offering price per share         $  
  Net tangible book value per share as of December 31, 2006   $        
  Increase in net tangible book value per share attributable to sale of Series C Convertible Preferred Stock            
Pro forma net tangible book value per share as of December 31, 2006 after giving effect to sale of Series C Convertible Preferred Stock            
  Increase in net tangible book value per share attributable to new investors purchasing shares in this offering            
Pro forma as adjusted net tangible book value per share as of December 31, 2006 after giving effect to the sale of Series C Convertible Preferred Stock and this offering            
Dilution per share to new investors         $  

        The following table summarizes, as of December 31, 2006, the differences between the number of shares of common stock owned by existing stockholders and to be owned by new public investors, the aggregate cash consideration paid to us and the average price per share paid by our existing stockholders and to be paid by new public investors purchasing shares of common stock in this offering

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at an assumed initial public offering price of $            per share (the midpoint of the range set forth on the cover of this prospectus) after giving effect to the sale of Series C Convertible Preferred Stock:

 
  Shares Purchased(1)
   
   
   
 
  Total Consideration
   
 
  Average
Price
Per Share

 
  Number
  Percent
  Amount
  Percent
Existing stockholders         % $       % $  
New public investors         %         %    
   
 
 
 
     
  Total       100 % $     100 %    
   
 
 
 
     

(1)
The number of shares disclosed for the existing stockholders includes shares being sold by the selling stockholders in this offering. The number of shares disclosed for the new investors does not include the shares being purchased by the new investors from the selling stockholders in this offering.

        If the underwriters exercise their over-allotment option in full, the number of shares of common stock held by new investors will increase to approximately             shares, or approximately      % of the total number of shares of our common stock to be outstanding after this offering, our existing stockholders would own approximately      % of the total number of shares of our common stock to be outstanding after this offering, the pro forma as adjusted net tangible book value per share of common stock would be approximately $            and the dilution in pro forma as adjusted net tangible book value per share of common stock to new investors would be $            .

        A $1.00 increase (decrease) in the initial public offering price would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to the offering by $            , the pro forma as adjusted net tangible book value per share of our common stock after giving effect to this offering by $            and the dilution in net tangible book value per share of our common stock to new investors in this offering by $            , assuming no change to the number of shares of common stock offered by us as set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

33



SELECTED HISTORICAL FINANCIAL DATA

        The following tables set forth our selected historical financial data for the periods indicated. EnerNOC, Inc., a Delaware corporation, was incorporated on June 5, 2003. Prior to that date we operated as EnerNOC, LLC, a New Hampshire limited liability company that was formed in December 2001, however, operations did not commence until 2002. The selected statement of operations data for the years ended December 31, 2003, 2004 and 2005 and the selected balance sheet data as of December 31, 2004 and 2005 have been derived from our audited financial statements and related notes thereto included elsewhere in this prospectus. The selected balance sheet data as of December 31, 2003 has been derived from our audited financial statements and related notes thereto not included in this prospectus. The selected historical data as of and for the years ended December 31, 2001 and 2002 has been derived from our unaudited financial statements not included in this prospectus. The selected historical financial data as of and for the nine months ended September 30, 2006 has been derived from our unaudited financial statements and related notes thereto included elsewhere in this prospectus. The selected statement of operations data for the nine months ended September 30, 2005 and 2006 and the summary balance sheet data as of September 30, 2006 have been derived from our unaudited financial statements and related notes thereto, which are included elsewhere in this prospectus and, in our opinion, reflect all adjustments, consisting of normal accruals, necessary for a fair statement of the data for that period. The summary balance sheet data as of September 30, 2005 has been derived from our unaudited financial statements not included in this prospectus. The selected historical financial data for the nine months ended September 30, 2006 are not indicative of the results that may be attained for the full year.

        The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited and unaudited financial statements and the notes thereto included elsewhere in this prospectus.

 
  Year Ended December 31,
  Nine Months Ended
September 30,

 
 
  2001
  2002
  2003
  2004
  2005
  2005
  2006
 
 
  (unaudited)

   
   
   
  (unaudited)

 
 
  (in thousands, except per share amounts)

 
Statement of Operations Data:                                            
Revenues   $   $   $ 15   $ 819   $ 9,826   $ 8,425   $ 20,192  
Cost of revenues             9     362     4,190     2,703     12,295  
   
 
 
 
 
 
 
 
  Gross profit             6     457     5,636     5,722     7,897  
Selling and marketing expenses             58     751     2,228     1,071     3,832  
General and administrative expenses         9     254     835     4,211     2,345     4,990  
Research and development expenses         16     271     778     981     763     682  
   
 
 
 
 
 
 
 
  Income (loss) from operations         (25 )   (577 )   (1,907 )   (1,784 )   1,543     (1,607 )
Interest and other income (expense), net                 14     78     53     (103 )
   
 
 
 
 
 
 
 
  Net income (loss)   $   $ (25 ) $ (577 ) $ (1,893 ) $ (1,706 ) $ 1,596   $ (1,710 )
   
 
 
 
 
 
 
 
  Net income (loss) per share, basic   $   $ (0.25 ) $ (0.58 ) $ (1.89 ) $ (1.29 ) $ 1.29   $ (1.12 )
   
 
 
 
 
 
 
 
  Net income (loss) per share, diluted   $   $ (0.25 ) $ (0.58 ) $ (1.89 ) $ (1.29 ) $ 0.38   $ (1.12 )
   
 
 
 
 
 
 
 

34


 
  As of December 31,
  As of September 30,
 
  2001
  2002
  2003
  2004
  2005
  2005
  2006
 
  (unaudited)

   
   
   
  (unaudited)

 
  (in thousands)

Balance Sheet Data:                                          
Cash and cash equivalents   $ *   $ 1   $ 167   $ 213   $ 9,719   $ 12,581   $ 2,920
Total assets     *     1     328     2,766     19,651     24,948     22,738
Total long-term debt, including current portion                 1,750     1,989     2,185     1,388
Total redeemable convertible preferred stock and stockholders' equity     *     (25 )   199     51     6,101     9,402     7,206

*
Less than $1.

35



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business and operations. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements wherever they appear in this prospectus. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under "Risk Factors" and elsewhere in this prospectus. You should read "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements."

Overview

        We are a leading developer and provider of clean and intelligent power solutions to commercial, institutional and industrial customers, as well as grid operators and utilities. We operated as a New Hampshire limited liability company from December 2001 until June 2003, when we were incorporated in Delaware. We use our Network Operations Center, or NOC, to remotely manage electricity consumption at end-use customer sites and make electric capacity and energy available to grid operators and utilities on demand to help avoid blackouts, brownouts and high wholesale market prices. Our demand response solutions provide a lower risk and more environmentally sound alternative to building power plants and transmission lines and provide a stream of recurring cash flows that we share with participating end-use customers. In doing so, we establish a base of installed users for an expanding portfolio of technology-enabled energy management solutions.

        From our incorporation in June 2003 through January 2007, we raised an aggregate of $28.1 million through the issuance of preferred stock in a series of financings, the proceeds of which we invested in expanding our research and development organization, building our sales, marketing, operations and administration functions, and acquiring complementary businesses and technologies. Our customer base has grown from 19 commercial, institutional and industrial customers with 70 sites in our network at the end of 2004 to nearly 350 end-use customers with approximately 1,150 sites in our network as of February 1, 2007. The demand response capacity we manage through our network has grown from 10 megawatts, or MW, at the end of 2004 to 525 MW as of February 1, 2007. Our revenues have grown from $0.8 million in 2004 to $20.2 million in the nine months ended September 30, 2006.

        We made three acquisitions through December 31, 2006. In June 2005, we acquired Pinpoint Power DR, the demand response business of Pinpoint Power LLC. This acquisition increased our base of end-use customers and capacity under management in the New England region. To further strengthen our technology platform, we acquired certain assets and obligations of eBidenergy, Inc. from Trillium Capital Partners LLC in February 2006. In May 2006, we acquired substantially all of the assets of Celerity Energy Partners LLC, a demand response provider for grid operators and utilities, including all of the membership interests in Celerity Energy Partners San Diego LLC. This acquisition increased our base of end-use customers and capacity under management in California.

Revenues and Expense Components

    Revenues

        We derive recurring revenues from the sale of our demand response and energy management solutions. Our revenues from our demand response solutions consist primarily of capacity and energy payments. In certain markets we enter into long-term capacity contracts with grid operators and utilities, generally ranging from three to 10 years in duration, to deploy our demand response solutions. In addition, we derive revenues from demand response capacity we make available in open market programs.

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

        In accordance with SAB No. 101, as amended by SAB No. 104, in all of our arrangements, we do not recognize any revenues until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be probable. As the program rules may differ for each contract and/or region where we operate, we assess whether or not we have met the specific delivery requirements and defer revenues as necessary. In accordance with SAB No. 104, we recognize demand response revenues when we have provided verification to the grid operator or utility of our ability to deliver the committed capacity under the agreement. Committed capacity is verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenues are recognized and future revenues become fixed and determinable and is recognized monthly until the next verification event. Revenues recognized between demand response events or tests are not subject to penalty or customer refund.

        Our energy management solutions include demand response audits where we evaluate end-use customers' energy utilization and operating flexibility to determine potential savings opportunities from implementing demand response, conserving energy and limiting peak demand. We receive a fee from our electric grid operator and utility customers for each audit typically based upon a rate times the amount of kilowatts, or kW, we identify that can be reduced from the electric power grid. We also use our PowerTrak platform to deliver energy analytics and control, energy procurement services and emissions tracking and trading support. We generally receive either a subscription-based fee or a percentage savings fee for these energy management solutions. We have yet to earn substantial revenues from these energy management solutions.

        A majority of our revenues have been generated from contracts with, and open market sales to, ISO New England Inc. This customer accounted for 86% and 71% of our total revenues in 2005 and the nine months ended September 30, 2006, respectively. Moreover, revenues from our three largest grid operator and utility customers represented approximately 89% and 93% of our total revenues in 2004, 2005 and the nine months ended September 30, 2006, respectively. The termination of these contracts or key customer relationships could have a material adverse effect on our business. However, we anticipate that our dependence on these customer relationships will decrease as we expand further into existing geographic markets and continue to extend our network to encompass new markets.

        More than half of our revenues are derived from three fixed price contracts with one grid operator and one utility. In 2005 and the nine months ended September 30, 2006, these contracts accounted for approximately 86% and 61%, respectively, of our total revenues. Although we have entered into additional long-term contracts in different geographies and are regularly in discussion with our customers to extend our existing contracts, or enter into new contracts with these existing customers, the three major contracts described above expire in 2008.

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    Cost of Revenues

        Cost of revenues for our demand response solutions consists of payments we make to our commercial, institutional and industrial customers for their participation in our demand response network. We generally enter into one to five year contracts with our end-use customers under which we deliver recurring cash payments to them for the capacity they commit to make available on demand. We also generally make an additional payment when a customer reduces consumption of energy from the electric power grid. The equipment and installation costs for our devices at our commercial, institutional and industrial customer sites are capitalized and depreciated over the lesser of the remaining term of the contract or the estimated useful life of the equipment and this depreciation is also reflected in cost of revenues. Cost of revenues for energy management solutions include the wages and associated benefits we pay to our Certified Energy Managers and Professional Engineers for the performance of those services.

    Gross Profit

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

    Operating Expenses

        Operating expenses consist of selling and marketing, general and administrative, and research and development expenses. Personnel-related costs are the most significant component of each of these expense categories. We grew from eight employees at December 31, 2003 to 100 employees at December 31, 2006. We expect to continue to hire employees to support our growth.

        Selling and marketing expenses consist primarily of (a) salaries and related personnel costs, (b) commissions, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such as trade shows, and (e) other related overhead. Commissions are recorded as expense when earned by the employee. We expect increases in selling and marketing expenses in absolute dollar terms for the foreseeable future as we further increase the number of sales professionals and, to a lesser extent, increase our marketing activities. We expect selling and marketing expenses to decrease as a percentage of total revenues as we leverage our current sales and marketing personnel.

        General and administrative expenses consist primarily of (a) salaries and related personnel costs related to our executive, finance, human resource, information technology and operations organizations, (b) facilities expenses, (c) accounting and legal professional fees, and (d) other related overhead. We expect general and administrative expenses to continue to increase in absolute dollar terms and as a percentage of total revenues for the foreseeable future as we invest in infrastructure to support continued growth and incur additional expenses related to being a public company, including increased audit and legal professional fees, costs of compliance with securities and other regulations, investor relations expenses, and higher insurance premiums.

        Research and development expenses consist primarily of (a) salaries and related personnel costs related to our engineering organization, (b) payments to suppliers for design and consulting services, (c) costs relating to the design and development of new solutions and enhancement of existing solutions, (d) quality assurance and testing, and (e) other related overhead. To date, we have capitalized interim software and development costs of $0.5 million in accordance with SOP 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, and the amount is included in construction-in-progress at September 30, 2006. We intend to continue to invest in our research and development efforts. We expect research and development expenses to increase in absolute dollar terms for the foreseeable future and to decrease as a percentage of total revenues in the long term.

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    Stock-Based Compensation

        Effective as of January 1, 2006, we adopted the requirements of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share Based Payment (SFAS No. 123(R)). SFAS No. 123(R) addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123(R) requires us to expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. We continue to evaluate the effect that the adoption of SFAS No. 123(R) will have on our financial position and results of operations. We currently expect that our adoption of SFAS No. 123(R) will adversely affect our operating results to some extent in future periods. For the nine months ended September 30, 2006, we recorded expenses of approximately $48,000 in connection with share-based payment awards to employees. A future expense of non-vested options of approximately $0.6 million is expected to be recognized over a weighted-average period of 3.9 years. The adoption of SFAS No. 123(R) will have no effect on our financial position or cash flows for any period.

    Other Income (Expense), Net

        Other income (expense) consists primarily of interest income earned on cash balances. We historically have invested our cash in money market funds. Other income (expense) also includes interest expense on our debt facilities.

Consolidated Results of Operations

    Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2006

    Revenues

        The following table summarizes our revenues for the nine months ended September 30, 2005 and 2006 (dollars in thousands):

 
  Nine Months Ended
September 30,

   
 
 
  Percentage
Change

 
 
  2005
  2006
 
Revenues:                  
  Demand response solutions   $ 7,930   $ 20,033   153 %
  Energy management solutions     495     159   (68 )%
   
 
 
 
    Total revenues   $ 8,425   $ 20,192   140 %
   
 
     
Deferred revenues   $ 590   $ 949   61 %
   
 
     

        For the nine months ended September 30, 2006, we had revenues of $20.2 million compared to $8.4 million for the nine months ended September 30, 2005, an increase of $11.8 million, or 140%.

        Our demand response solutions revenues were $20.0 million for the nine months ended September 30, 2006 compared to $7.9 million for the nine months ended September 30, 2005, an increase of $12.1 million, or 153%. During the nine months ended September 30, 2006, we increased our capacity under management in all operating regions and entered the territory covered by the grid operator PJM Interconnection, in the Mid-Atlantic and parts of the Mid-West. As of September 30, 2006, we had approximately 294 MW of electric capacity under management compared to 79 MW of electric capacity as of September 30, 2005.

39


        Our energy management solutions revenues were $0.2 million for the nine months ended September 30, 2006, compared to $0.5 million for the nine months ended September 30, 2005, a decrease of $0.3 million, or 68%. While our demand response audit activity increased by $0.1 million during the nine months ended September 30, 2006 due to an increase in the number of audits performed, our energy management solutions were lower than the corresponding period in 2005 due primarily to a one-time project we performed during the first nine months of 2005.

        Our deferred revenues consist of demand response and energy management solutions revenues. Demand response solutions revenues are deferred until we have provided verification to the grid operator or utility of our ability to deliver the committed capacity under the agreement. Committed capacity is verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenues are recognized and future revenues become fixed and determinable and are recognized monthly until the next demand response event or test. We defer non-refundable, up-front payments for set up fees received from customers. Revenues associated with such payments are recognized on a straight-line basis over the estimated length of the customer relationship. We defer our energy management solutions revenues over the performance period until cash is received for services previously rendered.

    Gross Profit and Gross Margin

        The following table summarizes our gross profit and gross margin percentages for our demand response solutions for the nine months ended September 30, 2005 and 2006 (dollars in thousands):

 
  Nine Months Ended September 30,
 
 
  2005
  2006
 
 
  Gross
Profit

  Gross
Margin

  Gross
Profit

  Gross
Margin

 
Demand response solutions   $ 5,722   68 % $ 7,897   39 %

        Our gross profit was $7.9 million for the nine months ended September 30, 2006 compared to $5.7 million for the nine months ended September 30, 2005, an increase of $2.2 million, or 38%. Our gross margin for the nine months ended September 30, 2006 was 39% compared to 68% for the nine months ended September 30, 2005. Our gross margin in the first nine months of 2005 was unusually high compared to the first nine months of 2006 due to the timing of our acquisition of Pinpoint Power DR in 2005 as well as higher payments provided to end-use customers in connection with a winter demand response program in New England in the first quarter of 2006 which carried lower margins.

    Operating Expenses

        The following table summarizes our operating expenses for the nine months ended September 30, 2005 and 2006 (dollars in thousands):

 
  Nine Months Ended
September 30,

   
 
 
  Percentage
Change

 
 
  2005
  2006
 
Operating Expenses:                  
  Selling and marketing expenses   $ 1,071   $ 3,832   258 %
  General and administrative expenses     2,345     4,990   113 %
  Research and development expenses     763     682   (11 )%
   
 
     
    Total   $ 4,179   $ 9,504   127 %
   
 
     

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    Selling and Marketing Expenses

        Selling and marketing expenses were $3.8 million for the nine months ended September 30, 2006 compared to $1.1 million for the nine months ended September 30, 2005, an increase of $2.8 million, or 258%. The growth of our sales organization during the period contributed to a $2.1 million increase in selling and marketing expenses, due primarily to increased compensation, benefits and travel expenses. Higher operating expenses of $0.7 million to open new markets and operate in existing markets, including public relations and marketing programs, contributed to the increase in selling and marketing expenses in the 2006 period.

    General and Administrative Expenses

        General and administrative expenses were $5.0 million for the nine months ended September 30, 2006 compared to $2.3 million for the nine months ended September 30, 2005, an increase of $2.7 million, or 113%. An increase in the number of employees as of September 30, 2006 contributed to a $1.0 million increase in general and administrative expenses, due primarily to increased compensation and benefits expenses. Increased expenses of $0.7 million, including lease expense for larger office facilities, professional fees and general expenses to support our operations, contributed to the increase in general and administrative expenses. In addition, depreciation and amortization expenses were $1.0 million higher for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 due to our acquisitions of the assets of Pinpoint Power DR, eBidenergy, Inc. and the assets of Celerity Energy Partners LLC.

    Research and Development Expenses

        Research and development expenses were $0.7 million for the nine months ended September 30, 2006 compared to $0.8 million for the nine months ended September 30, 2005, a decrease of $0.1 million, or 11%. An increase in the number of employees as of September 30, 2006 contributed to a $0.4 million increase in research and development expenses due primarily to increased compensation and benefits expenses. Higher operating expenses of $0.1 million to support our demand response programs contributed to the increase in research and development expenses. Both of these increases were offset by $0.5 million of capitalized internal software and development costs.

    Interest Income (Expense), Net

        Net interest expense was $103,000 for the nine months ended September 30, 2006 compared to net interest income of $53,000 for the nine months ended September 30, 2005, due to a decrease in interest income of $108,000 related to lower average cash balances and an increase in interest expense of $48,000 from higher average debt balances outstanding during the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005.

    Income Taxes

        No provision for income taxes was recorded for either the nine months ended September 30, 2006 or September 30, 2005. We provided a full valuation allowance for our deferred tax assets because the realization of any future tax benefits could not be sufficiently assured as of September 30, 2006 or September 30, 2005.

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    Year Ended December 31, 2004 Compared to Year Ended December 31, 2005

    Revenues

        The following table summarizes our revenues for the years ended December 31, 2004 and 2005 (dollars in thousands):

 
  Year Ended
December 31,

 
  2004
  2005
Revenues:            
  Demand response solutions   $ 606   $ 9,348
  Energy management solutions     213     478
   
 
    Total revenues   $ 819   $ 9,826
   
 
Deferred revenues   $ 340   $ 772
   
 

        For the year ended December 31, 2005, we had revenues of $9.8 million compared to $0.8 million for the year ended December 31, 2004, an increase of $9.0 million.

        Our demand response solutions revenues were $9.3 million for the year ended December 31, 2005 compared to $0.6 million for the year ended December 31, 2004, an increase of $8.7 million. During 2005 we increased our capacity under management and began operating in New York and California. As of December 31, 2005, we had approximately 137 MW of electric capacity under management compared to 10 MW of electric capacity as of December 31, 2004.

        Our energy management solutions revenues were $0.5 million for the year ended December 31, 2005 compared to $0.2 million for the year ended December 31, 2004, an increase of $0.3 million. The increase in 2005 is the result of our performing demand response audits in California.

    Gross Profit and Gross Margin

        The following table summarizes our gross profit and gross margin percentages for our demand response solutions for the years ended December 31, 2004 and 2005 (dollars in thousands):

 
  Year Ended December 31,
 
 
  2004
  2005
 
 
  Gross
Profit

  Gross
Margin

  Gross
Profit

  Gross
Margin

 
Demand response solutions   $ 457   56 % $ 5,636   57 %

        Our gross profit was $5.6 million for the year ended December 31, 2005 compared to $0.5 million for the year ended December 31, 2004, an increase of $5.2 million. Our gross margin for the years ended December 31, 2005 and December 31, 2004 was 57% and 56%, respectively.

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    Operating Expenses

        The following table summarizes our operating expenses for the years ended December 31, 2004 and 2005 (dollars in thousands):

 
  Year Ended
December 31,

 
  2004
  2005
Operating Expenses:            
  Selling and marketing expenses   $ 751   $ 2,228
  General and administrative expenses     835     4,211
  Research and development expenses     778     981
   
 
    Total   $ 2,364   $ 7,420
   
 

    Selling and Marketing Expenses

        Selling and marketing expenses were $2.2 million for the year ended December 31, 2005 compared to $0.8 million for the year ended December 31, 2004, an increase of $1.4 million. An increase in the number of employees as of December 31, 2005 contributed to a $1.2 million increase in selling and marketing expenses, due primarily to increased compensation, benefits and travel expenses. Higher operating expenses of $0.2 million to open new markets and programs also contributed to the increase in selling and marketing expenses.

    General and Administrative Expenses

        General and administrative expenses were $4.2 million for the year ended December 31, 2005 compared to $0.8 million for the year ended December 31, 2004, an increase of $3.4 million. An increase in the number of employees as of December 31, 2005 contributed to a $1.4 million increase in general and administrative expenses, due primarily to increased compensation and benefits expenses. Higher operating expenses of $0.7 million to support our demand response programs contributed to the increase in general and administrative expenses. In addition, depreciation and amortization expenses were $1.2 million higher for 2005 compared to the year ended 2004 due to our acquisition of Pinpoint Power DR.

    Research and Development Expenses

        Research and development expenses were $1.0 million for the year ended December 31, 2005 compared to $0.8 million for the year ended December 31, 2004, an increase of $0.2 million. An increase in the number of employees as of December 31, 2005 contributed to a $0.3 million increase in research and development expenses, due primarily to increased compensation and benefits expenses. This was partially offset by a $0.1 million decrease in consulting and outside services expenses as full time employees replaced the consultants.

    Interest Income (Expense), Net

        Net interest income was $78,000 for the year ended December 31, 2005, compared to net interest income of $14,000 for the year ended December 31, 2004, due to an increase in interest income of $181,000 related to higher average cash balances, partially offset by an increase in interest expense of $117,000 from higher average debt balances outstanding during the year ended December 31, 2005, compared to the year ended December 31, 2004.

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    Income Taxes

        No provision for income taxes was recorded for either the years ended December 31, 2004 or December 31, 2005. We provided a full valuation allowance for our deferred tax assets because the realization of any future tax benefits could not be sufficiently assured as of December 31, 2004 or December 31, 2005.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2004

    Revenues

        The following table summarizes our revenues for the years ended December 31, 2003 and 2004 (dollars in thousands):

 
  Year Ended
December 31,

 
  2003
  2004
Revenues:            
  Demand response solutions   $ 13   $ 606
  Energy management solutions     2     213
   
 
    Total revenues   $ 15   $ 819
   
 
Deferred revenues   $ 50   $ 340
   
 

        For the year ended December 31, 2004, we had revenues of $0.8 million compared to $15,000 for the year ended December 31, 2003, an increase of $0.8 million.

        Our demand response solutions revenues were $0.6 million for the year ended December 31, 2004 compared to $13,000 for the year ended December 31, 2003, an increase of $0.6 million. During 2004 we initiated operations and began selling demand response solutions in New England and New York. As of December 31, 2004, we had approximately 8 MW of capacity under management compared to approximately 3 MW of capacity as of December 31, 2003.

        Our energy management solutions revenues were $0.2 million for the year ended December 31, 2004 compared to $2,000 for the year ended December 31, 2003, an increase of $0.2 million attributable to one customer.

    Gross Profit and Gross Margin

        The following table summarizes our gross profit and gross margin percentages for our demand response solutions for the years ended December 31, 2003 and 2004 (dollars in thousands):

 
  Year Ended December 31,
 
 
  2003
  2004
 
 
  Gross
Profit

  Gross
Margin

  Gross
Profit

  Gross
Margin

 
Demand response solutions   $ 6   40 % $ 457   56 %

        Our gross profit was $0.5 million for the year ended December 31, 2004 compared to $6,000 for the year ended December 31, 2003, an increase of $0.5 million. Our gross margin for the year ended December 31, 2004 increased to 56% from 40% for the year ended December 31, 2003. An increase in higher-margin demand response solutions compared to non-refundable, up-front payments for set up fees received from customers resulted in an increase in total gross margin.

44



    Operating Expenses

        The following table summarizes our operating expenses for the years ended December 31, 2003 and 2004 (dollars in thousands):

 
  Year Ended
December 31,

 
  2003
  2004
Operating Expenses:            
  Selling and marketing expenses   $ 58   $ 751
  General and administrative expenses     254     835
  Research and development expenses     271     778
   
 
    Total   $ 583   $ 2,364
   
 

    Selling and Marketing Expenses

        Selling and marketing expenses were $0.8 million for the year ended December 31, 2004 compared to $58,000 for the year ended December 31, 2003, an increase of $0.7 million. An increase in the number of employees as of December 31, 2004 contributed to a $0.6 million increase in selling and marketing expenses, due primarily to compensation including sales commissions, benefits and travel expenses. Higher operating expenses of $0.1 million to open new markets and programs contributed to the increase in selling and marketing expenses.

    General and Administrative Expenses

        General and administrative expenses were $0.8 million for the year ended December 31, 2004 compared to $0.3 million for the year ended December 31, 2003, an increase of $0.5 million. An increase in the number of employees as of December 31, 2004 contributed to a $0.2 million increase in general and administrative expenses, due primarily to increased compensation and benefits expenses. Higher operating expenses of $0.3 million to support our demand response programs contributed to the increase in general and administrative expenses.

    Research and Development Expenses

        Research and development expenses were $0.8 million for the year ended December 31, 2004 compared to $0.3 million for the year ended December 31, 2003, an increase of $0.5 million. An increase in the number of employees as of December 31, 2004 contributed to a $0.4 million increase in research and development expenses, due primarily to increased compensation and benefits expenses. Higher operating expenses of $0.1 million to support our demand response programs contributed to the increase in operating and development expenses.

    Interest Income (Expense), Net

        Net interest income was $14,000 for the year ended December 31, 2004 compared to no interest income (expense) for the year ended December 31, 2003, due to an increase in interest income of $110,000 related to higher average cash balances, partially offset by an increase in interest expense of $96,000 from higher average debt balances outstanding during the year ended December 31, 2004 compared to the year ended December 31, 2003.

    Income Taxes

        No provision for income taxes was recorded for either the years ended December 31, 2004 or December 31, 2003. We provided a full valuation allowance for our deferred tax assets because the realization of any future tax benefits could not be sufficiently assured as of December 31, 2004 or December 31, 2003.

45


Quarterly Results of Operations

        The following tables set forth our unaudited quarterly statements of operations data and operations data as a percent of revenues for the seven quarters ended September 30, 2006. The unaudited quarterly information in the seven quarters ended September 30, 2006, in our opinion, reflects all adjustments, consisting of normal accruals, necessary for a fair statement of the data for each of those quarters. This data should be read in conjunction with the financial statements and the related notes included elsewhere in this prospectus. These quarterly operating results are not necessarily indicative of our operating results for any future period.

 
  Quarter Ended in 2005
  Quarter Ended in 2006
 
 
  March 31
  June 30
  September 30
  December 31
  March 31
  June 30
  September 30
 
 
  (unaudited)

 
 
  (in thousands, except per share amounts)

 
Quarterly Statement of Operations Data:                                            
Total revenues   $ 551   $ 2,416   $ 5,458   $ 1,401   $ 5,114   $ 4,100   $ 10,978  
Cost of revenues     223     673     1,807     1,487     4,414     2,669     5,212  
   
 
 
 
 
 
 
 
  Gross profit     328     1,743     3,651     (86 )   700     1,431     5,766  
Selling and marketing expenses     293     369     409     1,157     873     1,214     1,745  
General and administrative expenses     371     671     1,303     1,866     1,497     1,548     1,945  
Research and development expenses     183     223     357     218     332     161     189  
   
 
 
 
 
 
 
 
  Income (loss) from operations     (519 )   480     1,582     (3,327 )   (2,002 )   (1,492 )   1,887  

Interest and other income (expense), net

 

 

34

 

 

3

 

 

16

 

 

25

 

 

(23

)

 

(31

)

 

(49

)
   
 
 
 
 
 
 
 
  Net income (loss)   $ (485 ) $ 483   $ 1,598   $ (3,302 ) $ (2,025 ) $ (1,523 ) $ 1,838  
   
 
 
 
 
 
 
 
  Net income (loss) per share (basic)   $ (0.48 ) $ 0.44   $ 0.98   $ (2.13 ) $ (1.31 ) $ (0.98 ) $ 1.25  
   
 
 
 
 
 
 
 
  Net income (loss) per share (diluted)   $ (0.48 ) $ 0.12   $ 0.35   $ (2.13 ) $ (1.31 ) $ (0.98 ) $ 0.36  
   
 
 
 
 
 
 
 
 
  Quarter Ended in 2005
  Quarter Ended in 2006
 
 
  March 31
  June 30
  September 30
  December 31
  March 31
  June 30
  September 30
 
 
  (unaudited)

 
Quarterly Statement of Operations Data:                              
Total revenues   100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenues   40.5   27.9   33.1   106.1   86.3   65.1   47.5  
   
 
 
 
 
 
 
 
  Gross profit   59.5   72.1   66.9   (6.1 ) 13.7   34.9   52.5  
Selling and marketing expenses   53.2   15.3   7.5   82.6   17.1   29.6   15.9  
General and administrative expenses   67.3   27.8   23.9   133.2   29.3   37.8   17.7  
Research and development expenses   33.2   9.2   6.5   15.6   6.5   3.9   1.7  
   
 
 
 
 
 
 
 
  Income (loss) from operations   (94.2 ) 19.8   29.0   (237.5 ) (39.2 ) (36.4 ) 17.2  

Interest and other income (expense), net

 

6.2

 

0.1

 

0.3

 

1.8

 

(0.4

)

(0.7

)

(0.4

)
   
 
 
 
 
 
 
 
  Net income (loss)   (88.0 )% 19.9 % 29.3 % (235.7 )% (39.6 )% (37.1 )% 16.8 %
   
 
 
 
 
 
 
 

46


Revenues

        Our revenues can fluctuate from quarter to quarter based upon the following factors: (i) the seasonality of our demand response business in some of the markets in which we operate, where payments under some long-term contracts can be concentrated in particular seasons and months and pursuant to certain open markets for demand response capacity that function only in certain seasons or months, (ii) the timing of the recognition of our revenues based upon verification of our ability to deliver committed demand response capacity, (iii) the implementation by grid operators and utilities of temporary market programs in response to forecast short-term strains on available capacity in particular regions and (iv) the timing of any acquisitions we may make.

        In the second quarter of 2005, we acquired Pinpoint Power DR, which resulted in an additional $1.5 million of revenues and 46 MW of capacity under management in June 2005. The payment levels for demand response capacity and energy revenues associated with the capacity contract held by Pinpoint Power DR are higher in the summer (June to September), than in other months. Because our costs related to this contract are relatively constant over the course of the year, this positively impacted our gross margin for the quarter.

        In the third quarter of 2005, primarily as a result of the Pinpoint Power DR capacity contract providing higher revenues during the summer months, in the quarter there was a $3.0 million increase in revenues over the second quarter of 2005. Because our costs related to this contract are relatively constant over the course of the year, this positively impacted our gross margin for the quarter.

        In the fourth quarter of 2005, revenues were $4.0 million lower than the third quarter of 2005 due to the reduced revenues in winter under the Pinpoint Power DR capacity contract.

        In the first quarter of 2006, we participated in a winter demand response program initiated by one of our customers in response to an anticipated shortage in natural gas resulting from Hurricanes Katrina and Rita. This program generated revenues of $3.6 million for the quarter.

        Excluding the effect of the winter demand response program described above in the first quarter of 2006, revenues in the second quarter of 2006 increased by $2.6 million over the first quarter of 2006, resulting primarily from the higher rates under the Pinpoint Power DR capacity contract in June. We also substantially increased our demand response network in New England with the addition of a large contract which increased revenues by $0.9 million.

        In the third quarter of 2006, our revenues were $6.8 million higher than the second quarter of 2006, primarily as a result of the higher revenues during summer months under the Pinpoint Power DR capacity contract, an increase in our MWs under management, energy payments we received for responding to an increased number of demand response events, and our participation in a California summer-only open market capacity program.

Selling and Marketing Expenses

        In the fourth quarter of 2005, our selling and marketing expenses were $0.7 million higher than the third quarter of 2005. An increase in selling and marketing headcount resulted in an increase in wages, commissions, bonuses, and other payroll related expenses which contributed $0.5 million to the increase. The increase in selling and marketing headcount also resulted in a $0.1 million increase in travel related expenses. Higher legal expenses associated with our corporate development initiatives contributed $0.1 million to the increase.

        In the first quarter of 2006, our selling and marketing expenses were $0.3 million lower than the fourth quarter of 2005, primarily because we incurred year-end bonus and commission expenses in the fourth quarter of 2005 rather than the first quarter of 2006. With the exception of that quarter, selling and marketing expenses increased sequentially each quarter since the quarter ended March 31, 2005, as

47



we increased our selling and marketing headcount and related expenses to increase our commercial, institutional and industrial customer base.

General and Administrative Expenses

        In the fourth quarter of 2005, our general and administrative expenses were $0.6 million higher than the third quarter of 2005, primarily due to an increase in payroll and payroll-related costs associated with increased headcount, recruiting, training and professional fees.

        In the first quarter of 2006, our general and administrative expenses were $0.4 million lower than the fourth quarter of 2005, primarily because we incurred year-end bonus and commission expenses in the fourth quarter of 2005 rather than the first quarter of 2006 and we incurred higher accounting and legal professional fees. With the exception of that quarter, general and administrative expenses increased sequentially each quarter since the quarter ended March 31, 2005. These increases reflect an increase in headcount and infrastructure associated with the growth of the Company.

Liquidity and Capital Resources

    Overview

        Since our founding in 2001, we have funded our operations primarily through the issuance of an aggregate of $28.1 million in preferred stock and $5.0 million in borrowings under our loan and security agreement described below. We used these proceeds to fund our operations, to develop our technology for our demand response programs, to open new markets and for acquisitions. We believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities, borrowings under our loan and security agreement and the net proceeds from this offering will be sufficient to meet our anticipated cash needs for at least the next 24 months.

    Cash Flows

        The following table summarizes our cash flows for the nine months ended September 30, 2005 and 2006 and for the years ended December 31, 2003, 2004 and 2005 (dollars in thousands):

 
  Year Ended
December 31,

  Nine Months Ended
September 30,

 
 
  2003
  2004
  2005
  2005
  2006
 
Operating activities   $ (552 ) $ (1,867 ) $ 2,498   $ 2,879   $ (2,341 )
Investing activities     (78 )   (1,575 )   (885 )   1,400     (6,485 )
Financing activities     796     3,488     7,893     8,089     2,027  
   
 
 
 
 
 
Increase (decrease) in cash and cash equivalents   $ 166   $ 46   $ 9,506   $ 12,368   $ (6,799 )

    Cash Flows (Used in) Provided by Operating Activities

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

        Cash used in operating activities in the nine months ended September 30, 2006 was $2.3 million and consisted of a $1.7 million net loss offset by $2.3 million of non-cash items, consisting primarily of depreciation and amortization and stock-based compensation charges, and $2.9 million of net cash used for working capital purposes and other activities. Cash used in working capital and other activities, primarily reflected a $6.7 million increase in accounts receivable attributable to the significant increase

48



in revenues over the summer months partially offset by a $3.9 million increase in accounts payable and accrued expenses as our operations continued to grow.

        Cash provided by operating activities in the nine months ended September 30, 2005 was $2.9 million and consisted of $1.6 million of net income and $0.9 million of depreciation and amortization and stock-based compensation charges, and $0.4 million of net cash provided by working capital and other activities. Cash provided by working capital reflected a $1.4 million increase in accounts payable and accrued expenses as our operations continued to grow, a $0.3 million increase in deferred revenue, a $0.7 million decrease in prepaid expenses partially offset by $1.9 million increase in accounts receivable primarily attributable to the significant increase in revenues over the summer months.

        Cash provided by operating activities in 2005 was $2.5 million and consisted of $1.7 million of net loss offset by $1.5 million of non-cash items, consisting primarily of depreciation and amortization and stock-based compensation charges, and $2.7 million of net cash provided by working capital and other activities. Cash provided by working capital primarily reflected a $0.9 million increase in accounts payable and accrued expenses as our operations continued to grow, a $0.4 million increase in deferred revenue, a $0.6 million decrease in prepaid expenses and a $0.6 million decrease in accounts receivable.

        Cash used in operating activities in 2004 was $1.9 million and consisted of $1.9 million of net loss offset by $0.1 million of non-cash items, consisting primarily of depreciation and amortization and stock-based compensation charges, and $0.1 million of net cash used by working capital and other activities. Cash used in working capital and other activities primarily reflected a $0.5 million increase in accounts receivable, a $0.4 million increase in prepaid expenses and other assets partially offset by a $0.5 million increase in accounts payable and accrued expense, and a $0.3 million increase in deferred revenue.

        Cash used in operating activities in 2003 was $0.6 million and consisted primarily of a $0.6 million of net loss.

    Cash Flows (Used in) Provided by Investing Activities

        Cash used in investing activities was $0.1 million, $1.6 million and $0.9 million for 2003, 2004 and 2005, respectively. For the nine months ended September 30, 2005, cash provided by investing activities was $1.4 million for the nine months ended September 30, 2006, cash used in investing activities was $6.5 million. Our principal cash investments have related to purchases of equipment, furniture and fixtures, a loan to Pinpoint Power DR prior to our acquisition of the Pinpoint Power DR membership interests, the cash portion of the purchase price for our acquisition of all the membership interests of Pinpoint Power DR, and installation services used to build out and expand our demand response programs. Installation services are purchased from third-party vendors and represent the installation of the demand response hardware at commercial, institutional and industrial customer locations. We formalized our business plan during 2003 and began to add employees in anticipation of initiating operations. In 2003, we made $0.1 million of capital expenditures. During 2004, we loaned $1.2 million to Pinpoint Power DR as part of a purchase agreement and made $0.4 million of capital expenditures. During 2005 and in conjunction with our acquisition of Pinpoint Power DR, we acquired $1.2 million of cash in the transaction, the $1.2 million loan was repaid and we had an additional $1.0 million in capital expenditures for equipment, furniture and fixtures.

    Cash Flows Provided by Financing Activities

        Cash flows provided by financing activities were $0.8 million, $3.5 million and $7.9 million for the years 2003, 2004 and 2005, respectively. For the nine months ended September 30, 2005 and 2006, cash

49


flows provided by financing activities were $8.1 million and $2.0 million, respectively. Cash flows provided by financing activities consisted of the following:

    Equity Financing Activities

        We raised $0.8 million of net proceeds through sales of our Series A Convertible Preferred Stock in June 2003, $1.7 million of net proceeds through sales of our Series A-1 Convertible Preferred Stock in January 2004, and $7.8 million of net proceeds through sales of our Series B Convertible Preferred Stock in January and September 2005. We raised $2.8 million of net proceeds through sales of our Series B-1 Convertible Preferred Stock in May 2006. We raised an additional $15.0 million of proceeds through sales of our Series C Convertible Preferred Stock in December 2006 and January 2007. All of the shares of preferred stock will convert into common stock upon completion of this offering. In addition, we received $0.5 million from exercises of common stock options in 2006.

    Credit Facility Borrowings

        In November 2006, we entered into a loan and security agreement with Ritchie Capital Finance, L.L.C, which has been assigned to Bluecrest Capital. This loan and security agreement provides for borrowings of up to $19.5 million pursuant to a term loan facility of up to $7.5 million and an equipment term loan facility of up to $12.0 million. Under the term portion of the loan, we borrowed $5.0 million on November 20, 2006 and used the proceeds to pay off our then outstanding loan from Lighthouse Capital Partners V, L.P., or Lighthouse, in an amount of $1.5 million with the remainder for working capital purposes. The term loan portion of the facility allows us to borrow up to an additional $2.5 million on or before March 31, 2007. Under the equipment term loan portion of the facility, we may borrow up to $8.0 million on or before June 30, 2007 and up to an additional $4.0 million on or before December 31, 2007, in each case, if we are not in default under the terms of our loan and security agreement at the time of the borrowing. Borrowings under our loan and security agreement currently bear interest at (a) the greater of 5.22% or the yield on three-year U.S. Treasury Notes on the date of the loan plus (b) in the case of our term loans, 655 basis points per annum, and in the case of our equipment loans, 695 basis points per annum. Provisions in our loan and security agreement impose restrictions on our ability to, among other things (i) incur more debt; (ii) pay dividends and make distributions; (iii) redeem or repurchase capital stock; (iv) create liens; (v) enter into transactions with affiliates; and (vi) merge or consolidate. Our loan and security agreement contains other customary covenants but does not impose financial ratio maintenance requirements. The agreement permits the lender to declare an event of default under various circumstances, including if any event occurs that has a material adverse effect on us.

        In June 2004, we entered into a loan and security agreement with Lighthouse to provide up to $2.5 million of financing. The borrowings under this agreement were paid in full and the agreement was terminated when we entered into our new credit facility described above.

        We believe that our existing cash and cash equivalents, our anticipated cash flows from operating activities, borrowings under our loan on security agreement and the net proceeds from this offering will be sufficient to meet our anticipated cash needs for at least the next 24 months. Our future working capital requirements will depend on many factors, including the rate of our revenue growth, our introduction of new solutions and enhancements to existing solutions, and our expansion of sales and marketing and product development activities. To the extent that our cash and cash equivalents, cash flows from operating activities, and net proceeds of this offering are insufficient to fund our future activities, we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products that will complement our existing operations. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all.

50


    Capital Spending

        We have made capital expenditures primarily for general corporate purposes to support our growth and for equipment installation related to our demand response programs. Our capital expenditures totaled $0.1 million in 2003, $0.4 million in 2004, $1.6 million in 2005 and $2.0 million in the nine months ended September 30, 2006. We are not currently party to any agreements related to future capital expenditures.

Contractual Obligations

        Information regarding our significant contractual obligations of the types described below as of December 31, 2006, without giving effect to the repayment of indebtedness with the proceeds from this offering, is set forth in the following table (dollars in thousands):

 
  Payments Due by Period
Contractual Obligations

  Total
  Less than
1 Year

  1-3 Years
  3-5 Years
  More Than
5 Years

Debt obligations, including interest   $ 5,959   $ 1,655   $ 4,304   $   $
Capital lease obligations     263     60     160     43    
Operating lease obligations     1,105     477     628        
Deferred acquisition payments to related party (cash and stock)     2,574     2,089     485        
   
 
 
 
 
  Total   $ 9,901   $ 4,281   $ 5,577   $ 43   $
   
 
 
 
 

        Our debt obligations consist of a $5.0 million loan from Ritchie Capital Finance, L.L.C., which has been assigned to Bluecrest Capital. We borrowed this amount on November 20, 2006 when we drew down $5.0 million of our $7.5 million term loan facility and used the proceeds to pay off our then outstanding loan from Lighthouse, in an amount of $1.5 million and the rest for working capital purposes. The term loan portion of the facility allows us to borrow up to an additional $2.5 million on or before March 31, 2007 and the equipment loan portion of the facility allows us to borrow up to an additional $12.0 million.

        Our capital lease obligations consist of computer equipment associated with our acquisition of all of the assets of eBidenergy, Inc. from Trillium Capital Partners LLC in February 2006 and a telephone system we lease for which we have a bargain purchase option at the end of the five year term.

        Our operating lease obligations relate to the lease of our corporate headquarters in Boston, Massachusetts, our offices in New York, New York, Rochester, New York and Meriden, Connecticut and leased vans.

        In January 2007, we entered into an agreement for additional space for office facilities in Boston, Massachusetts. Our future additional obligation under this lease amendment, which is not reflected in the table above, is approximately $0.1 million.

        As part of our acquisition of Pinpoint Power DR from Pinpoint Power LLC, we acquired a long-term capacity contract that provides a grid operator customer an option to extend the term of its contract with Pinpoint Power DR by one year. If the option is exercised, we are obligated to make an additional payment of $2.4 million to Pinpoint Power LLC and issue 28,287 shares of our common stock to an affiliate of Pinpoint Power LLC. This contingent payment is not reflected in the table above.

Off-Balance Sheet Arrangements

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

51



Quantitative and Qualitative Disclosure About Market Risk

    Interest Rate Risk

        As of December 31, 2006, all of our $5.0 million of outstanding debt was at floating interest rates. An increase of 1% in the prime rate or the three-month LIBOR rate would result in an increase in our interest expense of approximately $72,000 per year.

Application of Critical Accounting Policies and Use of Estimates

        Our financial statements are prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions. There have been no material changes to these estimates for the periods presented in this prospectus.

        We believe that of our significant accounting policies, which are described in Note 1 to our consolidated financial statements included in this prospectus, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations.

    Revenue Recognition

        We recognize revenues in accordance with SAB No. 101, as amended by SAB No. 104. In all of our arrangements, we do not recognize any revenues until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be probable. In making these judgments, we evaluate these criteria as follows:

    Evidence of an arrangement. We consider a non-cancelable agreement signed by the customer and us to be representative of persuasive evidence of an arrangement.

    Delivery has occurred. We consider delivery to have occurred when service has been delivered to the customer and no post-delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved.

    Fees are fixed or determinable. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment, we recognize revenues when the right to a refund or adjustment lapses. If offered payment terms exceed our normal terms, we recognize revenues as the amounts become due and payable or upon the receipt of cash.

    Collection is deemed probable. We conduct a credit review for all transactions at the inception of an arrangement to determine the creditworthiness of the customer. Collection is deemed probable if, based upon our evaluation; we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not probable, revenues are deferred and recognized upon the receipt of cash.

        We enter into agreements to provide demand response solutions. Demand response revenues are earned based on our ability to deliver committed capacity. Energy event revenue is contingent revenue earned based upon the actual amount of energy provided during the energy event.

52



        In accordance with SAB No. 104, we recognize demand response revenue when we have provided verification to the grid operator or utility of our ability to deliver the committed capacity under the agreement which entitles us to payments under the contract. Committed capacity is verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenue is recognized and future revenue becomes fixed or determinable and is recognized monthly until the next demand response event or test. Ongoing demand response revenue recognized between demand response events or tests that are not subject to penalty or customer refund are recognized in revenue. If the revenue is subject to penalty or refund, the revenue is deferred until the liability is resolved.

        In certain contracts, we receive both non refundable up-front payments for set up fees and monthly demand response fees. These up-front payments are deferred and recognized on a straight-line basis over the estimated customer life as a component of demand response revenue. The costs incurred for the customer set up are capitalized and included in property and equipment as demand response equipment.

        Revenue from energy events is recognized when earned. Energy event revenue is deemed to be substantive and represents the culmination of a separate earnings process and is recognized when the energy event is initiated by the customer.

        As described above, customer contracts may include performance guarantees. We do not recognize any revenue prior to the successful completion of the performance requirement. Under these agreements, the customers may require us to provide an advance security deposit or a letter of credit or restricted deposits.

    Allowance for Doubtful Accounts

        We offset gross trade accounts receivable with an allowance for doubtful accounts. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We review our allowance for doubtful accounts on a regular basis, and all past due balances are reviewed individually for collectibility. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. Provisions for allowance for doubtful accounts are recorded in general and administrative expense. If our historical collection experience does not reflect our future ability to collect outstanding accounts receivables, our future provision for doubtful accounts could be materially affected. To date, we have not incurred any significant write-offs of accounts receivable and have not been required to revise any of our assumptions or estimates used in determining our allowance for doubtful accounts. As of September 30, 2006, the allowance for doubtful accounts was $4,000.

    Impairment of Long-Lived Assets

        Long-lived assets, such as property and equipment, goodwill and intangible assets, are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. All of our identifiable intangible assets are amortized using the straight-line method over their estimated useful lives. We use estimates in determining the value of goodwill and intangible assets, including estimates of useful lives of intangible assets, discounted future cash flows and fair values of the related operations. We intend to test goodwill for impairment each year, under the guidance of SFAS No. 142, Goodwill and Other Intangible Assets . To date, we have not recorded any impairment charges on these long-lived assets.

    Stock-Based Compensation

        Through December 31, 2005, we accounted for our stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting

53


for Stock Issued to Employees , and related interpretations. Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the deemed fair value of our common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted.

        Through December 31, 2005, we accounted for stock-based compensation expense for non-employees using the fair value method prescribed by SFAS No. 123 and the Black-Scholes option-pricing model, and recorded the fair value, for financial reporting purposes, of non-employee stock options as an expense over either the vesting term of the option or the service period.

        In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), which requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. We adopted SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) requires nonpublic companies that used the minimum value method in SFAS No. 123 for either recognition or pro forma disclosures to apply SFAS No. 123(R) using the prospective-transition method. As such, we will continue to apply APB Opinion No. 25 in future periods to equity awards outstanding on the date we adopted SFAS No. 123(R) that were measured using the minimum value method. In accordance with SFAS No. 123(R), we will recognize the compensation cost of stock-based awards on a straight-line basis over the vesting period of the award. Effective with our adoption of SFAS No. 123(R), we have elected to use the Black-Scholes option pricing model to determine the weighted-average fair value of stock options granted on and after the date of adoption.

        As there was no public market for our common stock prior to this offering, we have determined the volatility for options granted in 2006 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies. The expected volatility for options granted during the nine months ended September 30, 2006 was 87.0%. The expected life of options has been determined utilizing the "simplified" method as prescribed by SAB No. 107, Share-Based Payment. The expected life of options granted during the year ended December 31, 2006 was 6.25 years. For the nine months ended September 30, 2006, the weighted-average risk free interest rate used was 4.66%. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options. We have not paid and do not anticipate paying cash dividends on our shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was our historical policy under SFAS No. 123. As a result, we applied our actual forfeiture rate of 10.5% in the nine months ended September 30, 2006 in determining the expense recorded in our consolidated statement of operations.

        For the nine months ended September 30, 2006, we recorded expense of approximately $48,000 in connection with stock-based awards. A future expense of non-vested stock options of approximately $0.6 million is expected to be recognized over a weighted-average period of 3.9 years. The adoption of SFAS No. 123(R) will have no effect on our financial position or cash flow for any period.

        In connection with our issuance of stock options and restricted stock awards, our board of directors, with input from management, determined the fair value of our common stock. The board exercised judgment in determining the estimated fair value of our common stock on the date of grant based on several factors, including the liquidation preferences, dividend rights and voting control attributable to our then-outstanding redeemable convertible preferred stock and, primarily, the likelihood of achieving a liquidity event such as an initial public offering or sale of our company. In the absence of a public trading market for our common stock, the board considered objective and subjective factors in determining the fair value of our common stock. In addition, in 2006, our board

54



engaged Shields & Company, Inc., an unrelated third-party valuation specialist, that we refer to as the valuation specialist, to assist management in preparing valuation reports for stock options and restricted stock awards granted by the board. Based upon our internal peer company analyses and based on several arm's-length transactions involving our common stock supportive of the results produced by this valuation methodology, we believe the methodology used was reasonable.

        In connection with the preparation of our financial statements for the year ended December 31, 2006 and in preparing for the initial public offering of our common stock, we examined the valuations of our common stock during the 18-month period ended December 31, 2006, in light of the Practice Aid of the American Institute of Certified Public Accountants entitled Valuation of Privately-Held-Company Equity Securities Issued as Compensation , or the Practice Aid. In March 2006, we engaged the valuation specialist to provide a contemporaneous appraisal of the fair value of our common stock as of March 31, 2006. The resulting report provides the valuation specialist's opinion that the fair value of our common stock was approximately $1.45 as of March 31, 2006. We believe that the valuation methodologies that we used prior to this offering were consistent with the Practice Aid.

        During 2003, 2004, 2005 and 2006 we granted stock options and restricted stock awards to employees to purchase a total of 1,238,554 shares of common stock at exercise or purchase prices ranging from $0.30 to $1.45 per share.

        From our inception through December 31, 2002, we were considered a development stage company. We did not recognize any revenue during this period and incurred cumulative operating losses of $25,000. During 2003, we recognized revenue of $15,000 and incurred an operating loss of $0.6 million. During 2003 we granted stock options and restricted stock awards to purchase shares of our common stock at an exercise or purchase price of $0.30 per share, the estimated fair value of our common stock. This fair value was determined by our board using the market approach, taking into consideration the issuance price and associated liquidation preferences and rights of our Series A Convertible Preferred Stock, as well as the high degree of uncertainty surrounding our future prospects and markets. The sales price of our Series A Convertible Preferred Stock on June 17, 2003 was $1.20 per share. Each share of the Series A Convertible Preferred Stock is convertible into common stock on a one-for-one basis and holds a liquidation preference of $1.20 per share. Given the size of the liquidation preference, the values assigned to stock-based awards at the time of grant time were deemed by our board to be fair value.

        In January 2004, our Series A-1 Convertible Preferred Stock financing was completed at an issuance price of $1.90 per share. Based upon this issuance price, our board increased the estimated fair value of our common stock by 58% to $0.475 per share. The fair value was determined by our board using the market approach, taking into consideration the issuance price and associated liquidation preferences and rights of the Series A and A-1 Convertible Preferred Stock, as well as the high degree of uncertainty surrounding our future prospects and markets. Each share of Series A-1 Convertible Preferred Stock is convertible into common stock on a 1-for-1 basis and holds a liquidation preference of $1.90 per share. Given the size of the liquidation preference of the combined Series A and A-1 Convertible Preferred Stock, the values assigned to stock-based awards at the time of grant time were deemed to be fair value.

        In December 2004, we finalized the negotiations of the terms of our Series B Convertible Preferred Stock with our investors. In January 2005, our Series B Convertible Preferred Stock financing was completed at an issuance price of $6.58 per share. Based upon this issuance price, our board increased the estimated fair value of our common stock by 111% to $1.00 per share. The fair value was determined by our board using the market approach, taking into consideration the issuance price and associated liquidation preferences and rights of our Series A, A-1 and B Convertible Preferred Stock, as well as the high degree of uncertainty surrounding our future prospects and markets. Each share of Series B Convertible Preferred Stock is convertible into common stock on a one-for-one basis and

55



holds a liquidation preference of $6.58 per share. Given the size of the liquidation preference of the combined Series A, A-1 and B Convertible Preferred Stock, the values assigned to stock-based awards at the time of grant time were deemed to be fair value.

        On each of July 7, August 1, and September 15, 2005, the board granted stock options and restricted stock awards to purchase shares of our common stock at an exercise or purchase price of $1.00 per share, the fair value of our common stock determined by the board on each of those dates. During the first half of 2005 we continued to operate in a loss position, and therefore used cash to fund operations. Certain acquisition discussions concluded without a transaction being consummated, our California open market program posed certain challenges and key management positions remained unfilled. The board determined that there were no other significant events that had occurred during this period that would have given rise to an increase in the fair value of our common stock.

        On both October 26, 2005 and December 15, 2005, the board granted stock options and restricted stock awards to purchase shares of our common stock at an exercise or purchase price of $1.00 per share, the fair value of our common stock determined by the board on each of those dates. The board considered, among other factors, our positive financial performance through December 31, 2005, management's operating forecast for 2006 and the continued uncertainty with respect to our ability to open and enter new markets, as evidenced by the rejection of our proposal to provide demand response services in Laredo, Texas by the Electric Reliability Council of Texas.

        During the year ended December 31, 2006, we granted stock-based awards, consisting of stock options and restricted stock awards with exercise or purchase prices as follows:

Grants Made During Year Ended December 31, 2006

  Number of Option and Restricted Shares Granted
  Exercise or
Purchase Price(1)

  Weighted-Average
Fair Value of
Common Stock(2)

April 13, 2006   72,250   1.45   4.74
May 11, 2006   85,500   1.45   4.74
September 7, 2006   66,800   1.45   5.15
November 6, 2006   125,063   1.45   5.15
December 7, 2006   274,080   1.45   25.11
Total:   623,693        

(1)
Fair value as determined in a contemporaneous valuation by an unrelated valuation specialist.

(2)
Subsequently reassessed in preparation for our initial public offering.

        In March 2006, we engaged the valuation specialist to perform a contemporaneous valuation of our common stock as of March 31, 2006. The appraisal of our common stock was performed using the probability weighted-expected return method consistent with the Practice Aid. For the future liquidity events, liquidity dates of March 31, 2009 and March 31, 2010, were assumed. The most likely liquidity event was assumed to be our continued operations in our current geographic territory and acquisition by a company seeking to consolidate regional market participants, which we refer to as the regional sale scenario, which was assigned a probability weighting of 50%. An initial public offering was assigned a probability of 10%, and the expansion of the geographic scope of our business and our subsequent sale to an industry leader, which we refer to as the geographic growth sale scenario, was assigned a probability of 20%.

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        The indicated value for our common stock was determined by the valuation specialist to be $1.45 per share. The indicated value was equal to 15% of the price of our Series B-1 Convertible Preferred Stock of $9.90 per share issued on May 16, 2006, which included an assumption of marketability. In determining the fair value of our common stock, the valuation specialist applied a discount for lack of marketability to reflect the fact that there is no established trading market for our stock. The valuation specialist determined the size of the discount for lack of marketability by using as a starting point the average discount for lack of marketability applicable to shares of restricted stock issued by publicly traded companies, which various published studies have calculated to be approximately 60% to 65%, and adjusting such average discount to reflect those factors that were considered to make our common stock less marketable than shares of restricted stock of public companies. These factors included the following: the prospects and timeframe for an initial public offering of our stock or a sale of our company; existing contractual restrictions on the transferability of our common stock; the perceived risk of the enterprise; the concentration of ownership of our stock among our venture capital investors; the difficulty of valuing the enterprise and our common stock; and absence of dividend payments on our common stock. The valuation specialist assessed these factors and their impact in further reducing the marketability of our common stock. A discount for lack of marketability was applied by the valuation specialist, which yielded a fair value of approximately $1.45 per share, corroborating the fair value determined by the board on April 13, 2006.

        On both April 13 and May 11, 2006, the board granted stock options to purchase shares of our common stock at an exercise or purchase price of $1.45 per share, the fair value of our common stock as of March 31, 2006 as determined by our valuation specialist. The board considered, among other factors, the results of our operations during the first quarter of 2006, the fact that we continued to operate in a loss position and used cash to fund operations, and management's operating forecast through December 31, 2006. The board determined that there were no other significant events that had occurred during this period that would have given rise to a change in the fair value of our common stock.

        On September 7, 2006, November 6, 2006 and December 7, 2006, the board granted stock options and restricted stock awards to purchase shares of our common stock at an exercise or purchase price of $1.45 per share, the fair value of our common stock as of March 31, 2006 as determined by our valuation specialist. Through the first three quarters of 2006 we continued to operate in a loss position, and therefore used cash to fund operations. Numerous opportunities to open new markets proved unsuccessful. We were adversely impacted by the Neptune cable transmission system brought on line to serve Long Island, New York. NYISO approved a filing with the Federal Energy Regulatory Commission for an In-City Capacity Mitigation proposal that could drive down the prices for capacity in New York City. In addition, ISO New England was debating whether demand response capacity made available by replacement of electricity consumption from the electric power grid with back-up generation, rather than reductions in consumption, would be allowed to participate at existing or increased levels in upcoming capacity markets. The board determined that there were no other significant events that had occurred during this period that would have given rise to a change in the fair value of our common stock.

        In December 2006, we engaged the valuation specialist to perform a contemporaneous valuation of our common stock as of December 31, 2006. The appraisal of our common stock was performed using the probability weighted-expected return method consistent with the Practice Aid. For the future liquidity events, liquidity dates in the third quarter of 2007, and the fourth quarter of 2008, were assumed. The most likely liquidity event was assumed to be the initial public offering scenario as we had begun discussions with investment bankers about going public. This event was assigned a probability weighting of 50%. The regional sale scenario was assigned a probability of 25%, and the geographic growth sale scenario was assigned a probability of 10%.

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        The fair value of our common stock was determined by the valuation specialist to be $21.34 per share as of December 31, 2006. This value was equal to 39% of the price of our Series C Convertible Preferred Stock of $55.28 per share issued on December 29, 2006 and January 5, 2007, which included an assumption of marketability. The Series C financing was issued to existing investors and is not a third party indicator of value. In determining the fair value of our common stock, the valuation specialist applied a discount for lack of marketability to reflect the fact that there is no established trading market for our stock. The valuation specialist determined the size of the discount for lack of marketability by using as a starting point the average discount for lack of marketability applicable to shares of restricted stock issued by publicly traded companies, which various published studies have calculated to be approximately 10% to 40%, and adjusting such average discount to reflect those factors that were considered to make our common stock less marketable than shares of restricted stock of public companies. These factors included the following: the prospects and timeframe for an initial public offering of our stock or a sale of our company; existing contractual restrictions on the transferability of our common stock; the perceived risk of the enterprise; the concentration of ownership of our stock among our venture capital investors; the difficulty of valuing the enterprise and our common stock; and lack of dividends. The valuation specialist assessed these factors and their impact in further reducing the marketability of our common stock. A discount for lack of marketability was applied by the valuation specialist, which yielded a fair value of approximately $21.34 per share.

        As a result of our engaging a valuation specialist for the purposes of determining the value at March 31, 2006 and December 31, 2006 and in connection with the preparation for this offering, we reassessed certain assumptions used by the valuation specialist in arriving at the value. Specifically, the assumptions reassessed were (i) the discount rate applied by an investor to achieve a required rate of return for an investment in a business like ours, (ii) the probability weighting of liquidity events and (iii) the discount for lack of marketability used in determining the fair value of our common stock.

        For options granted on April 13 and on May 11, 2006, (i) the discount rate applied by an investor to achieve a required rate of return for an investment in a business like ours was reduced from 60% to 35%, (ii) the assigned probability weightings for a regional sale scenario decreased from a probability of 50% to a probability of 40%, an initial public offering increased from a probability of 10% to a probability of 20%, and a geographic growth sale scenario remained at a probability of 20% and (iii) the discount for lack of marketability decreased from 40% to 0%. As a result of these changes, we reassessed the fair value of our common stock as of April 13 and May 11, 2006 to be $4.74 per share for fair value for financial statement purposes. Based on this reassessment, we will recognize compensation expense as of September 30, 2006 of $42,264 to reflect the difference between the reassessed fair value of our common stock and the grant price using the Black-Scholes option pricing model.

        For options granted on September 7 and on November 6, 2006, (i) the discount rate applied by an investor to achieve a required rate of return for an investment in a business like ours was decreased from 60% to 35%, (ii) the assigned probability weightings for a regional sale scenario decreased from a probability of 50% to a probability of 30%, an initial public offering increased from a probability of 10% to a probability of 30%, and a geographic growth sale scenario remained at a probability of 20% and (iii) the discount for lack of marketability decreased from 40% to 0%. As a result of these changes, we reassessed the fair value of our common stock as of September 7 and November 6, 2006 to be $5.15 per share for fair value for financial statement purposes. Based on this reassessment, we will recognize compensation expense as of September 30, 2006 of $5,674 to reflect the difference between the reassessed fair value of our common stock and the grant price using the Black-Scholes option pricing model.

        For options granted on December 7, 2006, the discount for lack of marketability was decreased from 15% to 0%. As a result of that change, we reassessed the fair value of our common stock as of December 7, 2006 to be $25.11 per share for fair value for financial statement purposes. Based on this

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reassessment, we will recognize compensation expense of $149,463 to reflect the difference between the reassessed fair value of our common stock and the grant price using the Black-Scholes option pricing model.

    Accounting for Income Taxes

        We have incurred net losses since our inception. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes , which requires companies to recognize deferred income tax assets and liabilities for temporary differences between the financial reporting and tax bases of recorded assets and liabilities and the expected benefits of net operating loss and credit carryforwards. SFAS No. 109 requires that deferred income tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred income tax assets will not be realized. We evaluate the realizability of our deferred income tax assets, primarily resulting from net operating loss and credit carryforwards, and adjust our valuation allowance, if necessary.

        Once we utilize our net operating loss carryforwards, we would expect our provision for income tax expense in future periods to reflect an effective tax rate that will be significantly higher than past periods. The adoption of SFAS No. 123(R) will potentially result in tax benefits that are currently difficult to predict.


New Accounting Pronouncements

    SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123(R))

        In December 2004, FASB issued SFAS No. 123(R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation , supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees , and amends SFAS No. 95, Statement of Cash Flows . Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.

        In March 2005, the SEC issued SAB No. 107, Share-Based Payment , which summarizes the views of the SEC staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and regulations. SAB No. 107 provides guidance on several topics, including valuation methods, the classification of compensation expense, capitalization of compensation expenses related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements, and disclosures in "Management's Discussion and Analysis of Financial Condition and Results of Operations" subsequent to adoption of SFAS No. 123(R).

        In April 2005, the SEC issued Final Rule 74 (FR-74) Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment . FR-74 allows companies to implement SFAS No. 123(R) at the beginning of their next fiscal year (January 1, 2006 for us), instead of the next reporting period that begins after June 15, 2005. FR-74 does not change the accounting required by SFAS No. 123(R); it only changes the implementation date of the standard.

        We adopted SFAS No. 123(R) using the prospective method on January 1, 2006. We cannot predict the level of its impact since it will depend upon the level of share-based payments granted in the future. However, we generally expect compensation expense to increase.

    FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48)

        In July 2006, FASB issued FIN 48, which clarifies the accounting for uncertainty in tax positions. This interpretation requires that we recognize in our financial statements the impact of a tax position if

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that position is more likely than not of being sustained upon examination, based on the technical merits of the position. The provisions of FIN 48 are effective as of January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We have not yet determined the impact that the adoption of FIN 48 will have on our future results of operations and financial position.

    SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity

        In May 2005, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments With Characteristics of Both Liabilities and Equity . This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. The provisions of this statement are effective for existing or new contracts for fiscal periods beginning after December 15, 2005. We do not expect the pronouncement to have a material impact on our consolidated financial statements.

    SFAS No. 157, Fair Value Measurements

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). This statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in GAAP and expands disclosure related to the use of fair value measures in financial statements. SFAS No. 157 does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in GAAP. The standard emphasizes that fair value is a market-based measurement and not an entity-specific measurement based on an exchange transaction in which the entity sells an asset or transfers a liability (exit price). SFAS No. 157 establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity's own fair value assumptions as the lowest level. SFAS No. 157 is to be effective for our financial statements issued in 2008; however, earlier application is encouraged. We do not expect the pronouncement to have a material impact on our consolidated financial statements.

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BUSINESS

Company Overview

        EnerNOC is a leading developer and provider of clean and intelligent power solutions to commercial, institutional and industrial customers, as well as electric power grid operators and utilities. Our technology-enabled demand response and energy management solutions help optimize the balance of electric supply and demand. We use our Network Operations Center, or NOC, to remotely manage electricity consumption across a network of end-use customer sites and make electric capacity and energy available to grid operators and utilities on demand. This provides a significantly lower cost and more environmentally sound peak load management solution than building power plants and transmission lines to meet extreme periods of peak electricity demand. By making our capacity available to grid operators and utilities, we generate a stream of recurring revenues. Since inception, our business has grown substantially. With over 1,150 customer sites and 525 megawatts, or MW, of electric capacity under management as of February 1, 2007, we believe that we are the largest national demand response solutions provider to commercial, institutional and industrial customers. Our revenues grew from $0.8 million in 2004 to $20.2 million in the nine months ended September 30, 2006.

        The electric power industry in North America faces enormous challenges to meet increasing demand. Under-investment in generation, transmission and distribution infrastructure in recent years in key regions, coupled with a dramatic growth in electricity consumption, has led to an increased frequency of blackouts and brownouts. According to the United States Department of Energy, these reliability problems are estimated to cost the United States $80 billion per year, primarily in lost productivity. Moreover, the margin between electric supply and demand is projected to drop below minimum target levels in Texas, New England, the Mid-Atlantic, the Midwest, and the Rocky Mountain region within the next two to three years. According to the International Energy Agency, the United States and Canada need to add 758,000 MW of additional capacity at a cost of $1.6 trillion between 2003 and 2030 to meet projected demand. As the electric power industry confronts these challenges, technology-enabled demand response has emerged as an important solution to help address the imbalance in electric supply and demand. For example, the Energy Policy Act of 2005 declared it the official policy of the United States to encourage demand response and the adoption of devices that enable it.

        We are a pioneer in the development, implementation and broader adoption of technology-enabled demand response solutions. We focus on the commercial, institutional and industrial market, which represents over 60% of U.S. electricity consumption. Our robust and scalable technology platform and our proprietary operational processes enable us to manage many types of electrical equipment and systems, such as lights, heating and cooling systems, and generators, located at multiple, broadly dispersed end-use customer sites to make electric capacity and energy available on demand for grid operators and utilities. We have the flexibility to remotely reduce electricity usage in a matter of minutes, or send curtailment instructions to our end-use customers to be implemented on site.

        We believe that our solutions address extreme peaks in demand for electricity more efficiently than building additional electric generation, transmission and distribution infrastructure because over 10% of this supply-side infrastructure is typically built to meet peaks in demand that occur less than 1% of the time. If demand response solutions were to replace the infrastructure built for such extreme peaks, it would offset $5.9 billion of expenditures per year for the period between 2003 and 2030, representing what we believe to be our market opportunity in the United States and Canada. We are well positioned as a market leader to address this substantial market opportunity for demand response. In addition, our PowerTrak enterprise energy management software platform enables us to deliver to our end-use customer base an expanding portfolio of energy management solutions, including advanced metering, energy analytics and control, energy procurement services, and emissions tracking and trading support.

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        We began providing demand response solutions in one state in 2003 and expanded nationally to over 20 states in five regions by the end of 2006. From our start in one open market in 2003 to our current 18 contracts and open market programs with grid operators and utilities, we have increased our electric capacity under management with commercial, institutional and industrial customers to 137 MW at the end of 2005 and 525 MW as of February 1, 2007.


Industry Background

    The Electric Power Industry

        Historically, electric utility companies were formed in North America as regulated monopolies to manage the capital intensive, mission critical service of delivering electricity to end-use customers. Each local utility was vertically integrated, with responsibility for owning, managing, and delivering all components of the electric power industry: generation, transmission, distribution and retail sales. Each utility was also responsible for maintaining reliability standards based on avoiding service disruptions, commonly known as blackouts. In about half of North America, the industry continues to operate in this vertically integrated fashion.

        In the rest of North America, including New England, New York, the Mid-Atlantic, the Midwest, Texas, California, and Ontario, Canada, the electric power industry has been restructured to foster a competitive environment. In these restructured markets, utilities continue to operate and maintain the local distribution lines, delivering electricity to consumers as they had before, but power generators and electricity suppliers are now allowed to openly compete for business. Independent system operators, referred to as ISOs, or regional transmission organizations, referred to as RTOs, have been formed in these restructured markets to take control of the operation of the regional power system, coordinate the supply of electricity, and establish fair and efficient markets. ISOs and RTOs are collectively referred to as grid operators. These grid operators are responsible for maintaining Federal reliability standards designed to avoid service disruptions.

        Increasingly, grid operators and utilities in both restructured markets and in traditionally regulated markets are challenged to reliably provide electricity during periods of peak demand. Clean and intelligent power solutions can provide a lower cost, reliable and environmentally sound alternative to building additional supply infrastructure in both traditionally regulated and restructured markets.

    Challenges Facing the Electric Power Industry

        Because electricity cannot be economically stored, it must be generated, delivered, and consumed at the moment that it is needed by end-use customers. Maintaining a reliable electric power system therefore requires real-time balancing between supply and demand. Power generation, transmission and distribution facilities are built to capacity levels that can service the maximum amount of anticipated demand plus a reserve margin intended to serve as a buffer to protect the system in critical periods of peak demand or unexpected events such as failure of a power plant or major transmission line. However, under-investment in generation, transmission, and distribution infrastructure in recent years, coupled with a dramatic growth in peak demand, has led to an increased frequency of voltage reductions—commonly known as brownouts—and blackouts, which are collectively estimated to cost the United States $80 billion per year, primarily in lost productivity, according to the United States Department of Energy. These challenges are exacerbated by environmental concerns and stringent regulatory environments which make it increasingly difficult to find suitable sites, obtain permits, and construct generation, transmission and distribution facilities where they are needed most, often in densely populated areas.

        According to the North American Electric Reliability Council, demand for electricity is expected to increase over the next 10 years by 19% in the United States and 13% in Canada, but generation capacity is expected to increase by only 6% in the United States and 9% in Canada during that same

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period. As a result, capacity is projected to drop below minimum target levels in Texas, New England, the Mid-Atlantic, the Midwest, and the Rocky Mountain region, in the next two to three years, with other portions of the Northeastern United States, Southwest, and Western United States falling below minimum target levels in the next 10 years. In Western Canada, additional capacity resources will be needed as soon as 2008. According to the International Energy Agency, the United States and Canada will need to add 758,000 MW of additional capacity between 2003 and 2030 to reliably meet expected annual growth in demand. This presents enormous economic, environmental and logistical challenges.

        In addition to the challenges arising from the need to build additional generation capacity in North America, under-investment in the transmission and distribution infrastructure required to deliver power from centralized power plants to end-use customers has resulted in an overburdened electric power grid. This periodically prevents the transport of power to constrained areas during periods of peak demand, which can affect reliability and cause significant economic impacts. Whereas demand for electricity is expected to increase over the next 10 years by 19% in the United States and 13% in Canada, total transmission miles in the United States are projected to increase by less than 7% and less than 4% in Canada during the same period.

Our Market Opportunity

        According to the International Energy Agency, electric power infrastructure expenditures in the United States and Canada are expected to exceed $1.6 trillion between 2003 and 2030. We estimate that over 10% of the electric power infrastructure in North America has been constructed in order to supply electricity during periods of peak demand that occur less than 1% of the time, or approximately 88 hours per year. Based on these estimates, we believe that the market in the United States and Canada for reducing demand during these critical peak hours, in place of building supply infrastructure, is $5.9 billion per year, if the need to build-out infrastructure occurs on an equal annual basis. Using the same assumptions, we estimate that the market for eliminating the top 1% of peak demand for electricity worldwide during this same period could be over $35 billion per year.

        As indicated in the table below, we have substantial opportunities to continue expanding our capacity under management in the regions in which we already provide our demand response solutions as well as in other regions in North America and, eventually, internationally. The table depicts each of our geographic markets served, the length of time we have operated in that region, the contracts and programs in each region through which we generate revenues, the electric capacity we currently manage in the region, and our estimate of the market potential in megawatts for our demand response solutions. As with our longest served market, New England, we expect to increase over time our capacity under management, and thereby increase our revenues, in each of the geographic regions we serve.

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Our Geographic Regions, Contracts and Markets


Region
(Years of Operation in Region)

  Type of
Contract/Open
Market Program (OMP)

  Date of Contract/
Initial
Enrollment
in OMP

  Initial Expiration Date

  Electric
Capacity Under Management
2/1/07
(MW)

  Regional
Peak Demand
2006
(MW)

  Demand Response Potential Market Opportunity
(MW)(1)



 

 

 

 

 

 

 

 

 

 

 

 

 

New England
(4 years)

 

Reliability-Based OMP(2)
Price-Based OMP

 

Mar 2003
Jul 2003

 

May 2010
May 2010

 

 

 

 

 

 
    Reliability-Based Contract(2)   Jun 2004   May 2008            
    Reliability-Based Contract(2)   Jun 2004   May 2008            
    Reliability-Based Contract(2)   Apr 2006   Dec 2008   392   28,127   2,813
    Price-Based OMP   Jul 2006   May 2010            
    Ancillary Services OMP   Oct 2006   Sep 2007            
    Reliability-Based OMP(2)   Dec 2006   May 2010            
    Reliability-Based OMP   Jun 2010   Open-ended            


New York
(2.5 years)

 

Reliability-Based OMP
Reliability-Based Contract

 

Aug 2004
Oct 2006

 

Open-Ended
Mar 2012

 

55

 

33,939

 

3,394




California
(2.5 years)


 


Price-Based OMP (2)
Reliability-Based Contract
Reliability-Based OMP
Reliability-Based OMP


 


Oct 2004
May 2006
Mar 2007
May 2007


 


May 2007
Dec 2017
Dec 2008
Dec 2008


 


52


 


50,270


 


5,027



Mid-Atlantic/Part Mid-West
(0.5 years)

 

Ancillary Services OMP
Price-Based OMP
Reliability-Based OMP

 

Aug 2006
Aug 2006
Jun 2007

 

Open-Ended
Open-Ended
Open-Ended

 

26

 

144,644

 

14,464



New Mexico
(0 years)

 

Reliability-Based Contract

 

Feb 2007(5)

 

Dec 2017

 

0

 

1,779

(4)

178



Total

 

 

 

 

 

 

 

525

 

258,759

 

25,876



(1)
Calculated as 10% of regional peak demand, estimated to occur during 1% of annual hours.

(2)
We expect to transition capacity committed to grid operators and utilities under these contracts and programs, to the extent they are not extended or replaced, into reliability-based open market programs that have been introduced.

(3)
Pending New Mexico Public Regulation Commission approval.

(4)
2005 Public Service Company of New Mexico system peak demand.

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        The column above labeled Type of Contract/Open Market Program (OMP) describes, on a region by region basis, how we provide our demand response solutions to electric power grid operators and utilities under long-term contracts and in open market programs. Our long-term contracts generally have terms of three to 10 years and predetermined capacity commitment and payment levels. Our open market program opportunities are generally characterized by flexible capacity commitments and prices that vary by month. Within these contracts and open market programs we offer the following solutions to serve the needs of grid operators and utilities:

    reliability-based demand response, which requires a level of demand response capacity to be available for dispatch on call by grid operators and utilities;

    price-based demand response, which enables commercial, institutional and industrial customers to monitor and respond to electricity market price signals by reducing electricity usage; and

    ancillary services, which include resources utilized for short-term reserve requirements, including operating reserves, called upon by grid operators and utilities during short-term events such as the loss of a transmission line or a power plant.


The EnerNOC Solution

        We have developed a proprietary suite of technology applications and operational processes that enable us to make electric capacity and energy available to grid operators and utilities on demand and remotely manage electricity consumption at commercial, institutional and industrial customer sites. Our solution provides the following benefits:

        Compelling Value Proposition to Grid Operators and Utilities.     On the supply side, grid operators and utilities deploy our technology-enabled demand response solutions to supplement, avoid, or defer costly investments in generation, transmission and distribution facilities and to enhance the reliability of the electric power system. Our demand response solution helps grid operators and utilities achieve their capacity and capacity reserve margin goals quickly and economically and allows them to diversify their portfolio of resources, without requiring the installation of any hardware or software at their facilities. Whereas it typically takes years to site, permit and construct a power plant and the associated transmission and distribution infrastructure, demand response capacity can be enabled within months, in densely populated, constrained areas, exactly where the new capacity is needed most and with no need for new transmission or distribution infrastructure. We either enter into long-term contracts to sell our demand response capacity to grid operators and utilities, or participate in the open market opportunities for demand response that they establish. Together with these demand response solutions, our energy management solutions enhance the reliability of regional electric power grids by providing grid operators and utilities the ability to measure, manage, shift and reduce energy consumption in specific distribution areas within minutes.

        Compelling Value Proposition to End-Use Customers.     On the demand side, our turnkey, outsourced demand response and energy management solutions create new streams of recurring cash flows, reduce energy costs, and simplify energy management for participating commercial, institutional and industrial customers. Our offerings involve no up-front capital investment on the part of the participating customer. We share payments, called capacity payments, that we receive from grid operators and utilities with our end-use customers for giving us the ability to reduce their electrical consumption whether or not we are actually called upon to do so. We also generally make additional payments, called energy payments, when they actually reduce their consumption from the electric power grid.

        Energy Management Solutions for End-Use Customers.     Our demand response solutions position us to deliver a complete portfolio of energy management solutions to our commercial, institutional and industrial customers. These end-use customers are increasingly focused on efficiently managing their energy consumption and reducing costs. The real-time energy consumption data that we gather in our

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PowerTrak enterprise energy management software platform empowers us to develop customized energy management solutions to reduce our end-use customers' energy costs. The devices that we have installed in connection with our demand response solutions enable us to implement many of these solutions. By delivering a recurring cash stream for our end-use customers, we are often viewed by them as a trusted partner who can help address their increasingly complex energy challenges.

        Open, Scalable and Secure Architecture.     Our NOC is supported by our PowerTrak enterprise energy management software platform, which is built on an open and scalable Web services architecture. PowerTrak is able to interface with energy management and building automation systems at commercial, institutional and industrial sites, thereby enabling us to cost-effectively leverage existing technology for remote monitoring and control from our NOC. PowerTrak's analytical tools enable a single NOC operator to supervise hundreds of end-use metering and control points and simultaneously optimize demand response performance and energy savings measures across numerous customer sites and geographic regions. We have built a comprehensive security infrastructure, including firewalls, intrusion detection systems, and data encryption, and have established fail-over redundancy for our information technology systems.

        Reduced Environmental Impact.     By reducing electricity consumption during periods of peak demand and other system emergencies, our demand response solutions can displace older, inefficiently-used power plants, and defer new generation, transmission and distribution development, resulting in reduced emissions and land use benefits. These environmental benefits are particularly clear when demand response capacity qualifies under regional regulations as operating reserves. In these areas, grid operators and utilities call on demand response when contingencies such as power plant or transmission outages occur, which can offset the need to keep centralized peaking power plants running on idle for thousands of hours per year. Dispatchable demand response capacity therefore allows grid operators and utilities to meet reserve requirements with significantly less environmental impact than conventional supply-side alternatives. In addition, we believe that growing participation in demand response by commercial, institutional and industrial organizations will lead to an increased focus on energy management efforts, including energy efficiency and conservation, through which end-use customers can significantly reduce air emissions.


Competitive Strengths

        Our competitive strengths position us for continued leadership and rapid expansion in the clean and intelligent power solutions sector.

        First-Mover Advantage with National Presence.     We are a pioneer in the development, implementation and broader adoption of technology-enabled demand response solutions to commercial, institutional and industrial customers on a national scale. We believe that with over 1,150 customer sites across multiple electric power grids as of February 1, 2007, we are the largest national demand response service provider for commercial, institutional and industrial customers. We reliably delivered our demand response capacity over 50 times in 2006 when called upon by grid operators and utilities, including delivery during simultaneous events in multiple geographic regions. Our average performance in events during the summer of 2006, measured as delivered capacity over committed capacity, was greater than 97%. As a result, we have developed a substantial base of operating experience in delivering demand response solutions.

        Highly Scalable Business Model Focused on Commercial, Institutional and Industrial Customers.     The large size of our target customers, along with our enterprise energy management software platform, enables us to rapidly scale our business in existing and new geographies. Once a demand response market is established in a region, the marginal cost of acquiring and servicing commercial, institutional and industrial customers is relatively low. In addition, the large size of our target end-use customers significantly lowers our acquisition cost per unit of capacity compared to the acquisition cost of

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residential customers. Commercial, institutional and industrial customers also often have one decision maker who controls multiple sites, thereby accelerating our acquisition of new capacity under management, lowering our cost to expand our network of managed sites and providing more opportunities to sell our energy management solutions.

        Recurring Revenues.     We engage in long-term contracts and participate in open market programs with grid operators and utilities through which we are paid a recurring capacity payment. These long-term contracts generally range between three and 10 years in duration. These recurring payments significantly increase the visibility and predictability of our future revenues. In addition, we enter into long-term agreements with commercial, institutional and industrial customers that provide us with demand response capacity. These contracts contribute to customer loyalty and foster end-use customer retention. Although not part of their initial arrangement, a portion of these recurring cash flows can be used by our commercial, institutional and industrial customers to purchase our suite of energy management solutions.

        Comprehensive Technology Platform.     Our proprietary technology platform, in addition to our operations experience, creates significant barriers to entry. We leverage the Internet, as well as advancements in metering and automation technologies, to make demand response participation viable for a wide range of commercial, institutional and industrial organizations. The open design architecture of our proprietary technology platform enables us to interface with existing and new energy management and building automation systems at customer sites which use a variety of protocol languages. Once an end-use customer is enabled in our network, we collect real-time energy consumption data. This data enables our software to perform demand response measurement and verification, and also provides the underlying information to conduct further energy management analysis and provide decision-making support. In addition, rather than being limited to curtailing electricity used by a specific type of equipment, our platform enables us to manage a wide array of equipment and systems to implement appropriate demand response solutions on an end-user by end-user basis.

        Growing Customer Base.     We have rapidly and significantly grown our base of grid operator and utility customers since inception. Our grid operator and utility customer base includes ISO New England, New York ISO, PJM Interconnection, The Connecticut Light and Power Company, National Grid, Pacific Gas and Electric Company, Southern California Edison Company, San Diego Gas and Electric Company and Public Service Company of New Mexico, among others. We have nearly 350 end-use commercial, institutional, and industrial customers, including Adobe Systems, Albertsons, AT&T, California State University, General Electric, Level 3 Communications, Pfizer, and Stop & Shop, among others. In addition, because we have a national presence, we are able to offer a single platform for national chains to participate in our solutions across different regions with different market rules and conditions.


Strategy

        Our goal is to capitalize on our proprietary technology platform and leading market position to continue providing clean and intelligent power solutions to commercial, institutional and industrial customers, grid operators, and utilities. Ultimately, our goal is to become the leading outsourced energy management solutions provider for commercial, institutional and industrial customers worldwide. Key elements of our strategy include:

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        Target Aggressive Expansion in Existing Territories.     We will continue to pursue opportunities to provide demand response capacity to grid operators and utilities in markets where we currently operate through additional long-term contracts and open market opportunities for demand response capacity. To provide this demand response capacity, we will enter into additional long-term agreements with commercial, institutional and industrial customers. We will also seek to provide additional energy management solutions to these end-use customers. Our direct sales force will continue to primarily focus their efforts on the six following vertical markets: technology, education, food sales and storage, government, healthcare, and manufacturing/industrial. We believe that our full-service technology-enabled solutions, the recurring payments that we provide and our national presence will enable us to continue to pursue rapid growth of our end-use customer base.

        Strengthen National Presence by Entering New Geographic Regions.     We will also continue to expand our addressable market by pursuing new demand response and energy management opportunities in new geographic regions. We intend to accomplish this and capitalize on the trend toward a more responsive and distributed electricity grid by (i) educating and marketing to existing and prospective customers, consumer advocates, consultants, industry experts, and policy makers; (ii) designing and developing demand response programs and goals in cooperation with grid operators, utilities, regulators, and governmental agencies; and (iii) continually enhancing our technology-enabled energy management solutions.

        Expand Sales of Our Growing Portfolio of Technology-Enabled Energy Management Solutions.     We believe that our demand response solutions have uniquely positioned us to deliver additional energy management solutions to our growing network of commercial, institutional and industrial customers. We will continue to leverage our technology, including our PowerTrak enterprise energy management software platform. This platform enables us to measure, manage, benchmark, and optimize end-use customers' energy consumption and facility operations. We will continue to use real-time and historical energy data to help end-use customers analyze and control their consumption of electricity, forecast demand, measure real-time performance during demand response events, continuously monitor building management equipment to optimize system operation, model rates and tariffs, and create energy scorecards to benchmark similar facilities. In addition, we will continue to bring energy procurement-related services and emissions tracking solutions to our customers. We believe that end-use customers will become increasingly aware of their energy costs and consumption and will look to advanced analytics and trusted third-party providers to help them better manage their overall energy expenditures.

        Pursue Targeted Strategic Acquisitions.     We intend to make selective acquisitions to strengthen our competitive position in the growing clean and intelligent power solutions sector. This sector consists of a number of companies with offerings or customer relationships that present attractive acquisition opportunities. We have acquired and successfully integrated companies to increase our customer base, enter new geographic territories and enhance our technology.


Our Clean and Intelligent Power Solutions

    Demand Response Solutions

        Demand response is achieved when end-use customers reduce their consumption of electricity from the electric power grid in response to a market signal. End-use customers can reduce their consumption of electricity by reducing demand (for example, by dimming lights, resetting air conditioning set-points or shutting down production lines) or they can self-generate electricity with onsite generation (for example, by means of a backup generator or onsite cogeneration). Our demand response capacity provides a more timely, cost-effective, and environmentally sound alternative to building conventional supply-side resources, such as natural gas-fired peaking power plants, to meet infrequent periods of peak demand.

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        Although electric power utilities have offered less technology-enabled forms of demand response to their largest electricity consumers for decades in the form of interruptible tariffs — a mechanism that allows utilities to call on customers to reduce consumption during periods of peak demand in exchange for lower rates — these programs lack an affordable means of real-time data communication and adequate automation technologies to make demand response participation viable for most commercial, institutional and industrial organizations. We believe that the advent of the Internet as well as cost-effective and robust metering and control technologies have created a new opportunity for technology-enabled demand response solutions to drive significant benefits for all stakeholders.

        We have pursued this opportunity by building our own proprietary technologies and operational processes that make demand response participation possible for a wider range of electricity consumers. The devices that we install at our commercial, institutional and industrial customer sites transmit to us via the Internet electrical consumption data on a one-, five- or 15- minute basis, which is referred to in the electric power industry as real-time data. Our proprietary software applications analyze the data from individual sites and aggregate data for specific regions. When a demand response event occurs, our NOC automatically processes the notification coming from the grid operator or utility. Our NOC operators then begin activating procedures to curtail demand from the grid at our commercial, institutional and industrial customer sites. Our one-click curtailment activation sends signals to all registered sites in the targeted geography where the event occurred. Upon activation of remote demand reduction, our technology, which is receiving real-time data from each site, is able to determine on a real-time basis whether the location is performing as expected. Signals are relayed to our NOC operators when further steps are needed to achieve demand reductions at any given location. Each customer site is monitored for the duration of the demand response event and operations are automatically restored to normal when the event ends.

        We offer the following three distinct demand response solutions to serve the needs of grid operators and utilities: (i) reliability-based demand response, (ii) price-based demand response, and (iii) short-term reserve resources referred to in the electric power industry as ancillary services.

        Reliability-Based Demand Response.     We receive recurring capacity payments from grid operators and utilities for being on call, which means having available a previously registered demand response capacity that we have aggregated from our commercial, institutional and industrial customers, regardless of whether we receive a signal to reduce consumption. When we receive a signal from a grid operator or utility customer, which we refer to as a dispatch signal, our proprietary software applications automatically notify our end-use customers that a demand reduction is needed and initiate processes that reduce electrical consumption by our commercial, institutional and industrial customers in the targeted area. When we are called to implement a demand reduction, we typically receive an additional payment for the energy that we reduce. We share the energy payments and capacity payments we receive with our commercial, institutional and industrial customers. We are called upon to perform by grid operators and utilities during periods of high demand or supply shortfalls, otherwise known as capacity deficiency events. By aggregating a large number of end-use customers to participate in these reliability-based programs, we believe that we have played a significant role over the past three years in helping to prevent brownouts and blackouts in some of the most capacity constrained regions in the United States. We currently provide reliability-based demand response solutions to ISO New England Inc., The New York Independent System Operator, The Connecticut Light and Power Company, San Diego Gas and Electric Company, Southern California Edison Company and Pacific Gas and Electric Company, among others. To date, our reliability-based demand response solutions have represented most of our revenues; revenues from this solution grew from $9.0 million in 2005 to $18.4 million in the first nine months of 2006.

        Price-Based Demand Response.     Our price-based demand response solutions enable commercial, institutional and industrial customers to monitor and respond to wholesale electricity market price signals when it is cost-effective for them to do so. We register a "strike price" with respect to each

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customer using this solution, above which it may be economical for that end-use customer to reduce its consumption of electricity. We receive an energy payment in the amount of the wholesale market price for the electricity that the customer does not consume and share this payment with that customer. If prices in a given market approach a given strike price, our solutions automatically notify the customer and remotely initiate the processes established to reduce electrical consumption from the electric power grid. We currently participate in price response programs in the Mid-Atlantic, New England and California. To date, our price-based demand response solutions have represented a small portion of our revenues; revenues from this solution grew from $56,000 in 2005 to $1.4 million in the first nine months of 2006.

        Ancillary Services.     Demand response is increasingly utilized for short-term reserve requirements, referred to in the electric power industry as ancillary services, including operating reserves. This solution is called upon by grid operators and utilities during short-term contingency events such as the loss of a transmission line or large power plant. Through our technology, certain end-use customers are able to provide near instantaneous response for these numerous short-term system events, and often do so with negligible impact on their business operations. Grid operators and utilities rely on a reserve pool of these quick-start resources to step in and provide short-term support as needed during these contingency events. The goal of grid operators and utilities is to get these resources back into standby mode as quickly as possible after they are dispatched so that the reserve pool of available capacity is replenished. Examples of ancillary services markets in which we currently participate include PJM Interconnection's Synchronized Reserves Market, in which we were the first provider of demand response capacity, and ISO New England's Demand Response Reserves Pilot program. To date, our ancillary services solutions have represented a small portion of our revenues; revenues from this solution grew from $0 in 2005 to $34,000 in the first nine months of 2006.

    Our Additional Energy Management Solutions

        We have an expanding portfolio of additional energy management solutions. We believe that our demand response solutions have uniquely positioned us to deliver additional energy management solutions to our growing network of commercial, institutional and industrial customers. By collecting and reporting real-time energy consumption data and by delivering a stream of recurring cash flows to our end-use customers through demand response solutions, we believe that we are often viewed by them as a trusted partner who can help address their increasingly complex energy challenges. Our energy management solutions are aimed at helping address these challenges and at leveraging our customer relationships. The diagram below provides an overview of these solutions.

LOGO

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        We currently offer the following technology-enabled energy management solutions to our commercial, institutional and industrial customers:

    Advanced Metering.   We offer meter data gathering and storage services for advanced meters that either we have installed as part of our demand response solutions or customers have installed for various energy management and reporting purposes. In special cases, we provide our advanced metering solutions to other, smaller demand response service providers.

    Energy Analytics and Control.   We offer dedicated coverage from our Energy Services Bureau. Our Energy Services Bureau is a team of in-house energy management professionals who serve as outsourced energy managers for our commercial, institutional and industrial customers. This team uses real-time interval data, our PowerTrak platform, proprietary algorithms and other trade secrets to distill energy data into actionable energy management strategies that reduce energy costs at our customers' facilities. Some of these continuous commissioning strategies include real-time and ongoing lighting and temperature monitoring, control and scheduling, as well as automatic notification of out-of-parameter energy consumption or equipment performance readings.

    Energy Procurement Services.   We offer to our end-use customers various services related to procuring commodity supply contracts from competitive electricity suppliers. We use our market knowledge and industry relationships, along with actual customer electricity usage data that we track and manage through PowerTrak, to achieve savings for customers. We bring customers strategic advice to help them capture favorable energy procurement contracts from competitive electricity suppliers. We take no position in the commodities market and assume no associated risk.

    Emissions Tracking and Trading Support.   We offer an outsourced technology-enabled solution to help our commercial, institutional and industrial customers mitigate the impact of their emissions of carbon dioxide and other greenhouse gases. We have developed a new application called CarbonTrak, which is an extension of our PowerTrak technology platform. This solution enables us to track each end user's emissions by mapping their energy consumption with the generation fuel mix in their location. After helping our customers establish a current inventory of their total emissions footprint, we offer strategy development and support for greenhouse gas or renewable energy credit trading activities.


Technology and Operations

    Technology

        Since inception, we have focused on delivering industry-leading, technology-enabled demand response and energy management solutions. Our proprietary technology has been developed to be highly reliable and scalable and to provide a platform on which to design, customize, and implement demand response and energy management solutions. Our proprietary technology infrastructure is built on Linux, JAVA, and Oracle platforms and supports an open, Web services architecture. Our PowerTrak enterprise energy management software platform enables us to efficiently scale our demand response offerings in new geographic regions and rapidly grow the end-use customers in our network. We believe that our technology and strategic vision puts us in a strong position to continue to leverage the synergies between our demand response solutions, that generate recurring cash flows and allow us to collect substantial amounts of data about the energy consumption of our customers, and our expanding portfolio of other energy management solutions.

        Web services connect applications directly with other applications. They do this through a form of "loose coupling" which allows connections to be established across applications without customization. As a result, these connections can be established without regard to technology platform or

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programming language, making it easy to share technology resources across a broad range of users and companies. Web services enable business collaboration at the process level. Process-level collaboration requires software that is architected for communication across firewalls. We believe that business process collaboration over the Internet has wide-reaching implications for the ways in which energy transactions will be performed.

        Our technology can be broken down into three primary components: the Network Operations Center, the EnerNOC Site Server, or ESS, and PowerTrak, our enterprise energy management software.

    Network Operations Center

        Our technology platform enables our NOC to automatically respond to signals sent by grid operators and utilities to deliver real-time demand reductions within targeted geographic regions. We can customize our technology to receive and interpret many types of dispatch signals sent directly from a grid operator or utility to our NOC. Following the receipt of such a signal, our NOC automatically notifies specified end-use customer personnel of the demand response event. After relaying this notification to our commercial, institutional and industrial customers, we remotely initiate processes to reduce their electricity consumption from the electric power grid. These processes may include dimming lights, shifting equipment to power save mode, adjusting heating and cooling set points and activating a backup generator. Demand reduction is monitored remotely with real-time data feeds, the results of which are displayed in our NOC through various data presentment screens. Each participating customer site is monitored for the duration of the demand response event and operations are automatically restored to normal when the event ends. We currently participate in demand response programs across North America, some of which require demand reductions within 10 minutes or less. We have built a comprehensive security infrastructure, including firewalls, intrusion detection systems, and encryption for transmissions over the Internet, and have established fail-over redundancy for the information technology systems that support our NOC. The following diagram illustrates how we use our NOC to reduce electricity consumption from the electric power grid.

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Our Technology Platform and Operational Processes

         LOGO

    The EnerNOC Site Server

        We work directly with end-use customers to ensure that they are able to respond quickly and completely to demand reduction instructions. We install a hardware device, called an EnerNOC Site Server, or ESS, at each end-use customer site to collect and communicate real-time electricity consumption data and, in many cases, enable remote control. The ESS communicates to our NOC through the customer's LAN or through a broadband wireless connection. The ESS is an open, integrated system consisting of a central hardware device residing inside a standard electrical box.

        The ESS serves as a gateway to connect our NOC with a variety of data collection systems and equipment at end-use customer sites. The ESS is typically installed in the electrical room at an end-use customer's site and is equipped to read and record voltage, current, power, and other power quality electrical data of certain customer-owned electrical equipment, along with other important energy usage parameters, including natural gas, chilled water, steam, and compressed air. It includes a Web service software application which enables the secure, bi-directional transfer of data across firewalls and over the Internet. The ESS is used to locally connect into any building management equipment and systems that support LonWorks, BACnet/IP, Modbus RTU, Modbus TCP/IP, and SNMP. The ESS also provides protocol translation so that data from legacy building management systems can be connected directly to our NOC. This advanced connectivity allows us to leverage a customer's existing infrastructure

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investment, lowering our overall cost of enablement and making data available to corporate networks and the Internet through industry standard communication protocols.

    PowerTrak Enterprise Energy Management Software

        PowerTrak is our Web-based enterprise energy management software platform used for power measurement, load control and energy analysis, and is the underlying software that runs our NOC. It utilizes a modular Web services architecture that is designed to allow application modules to be easily integrated into the platform. We believe that a key factor to successfully offering clean and intelligent power solutions is in integrating data from disparate sources and utilizing it to deliver customer-focused solutions utilizing open protocols. The following diagram and description provide an overview of our system architecture.

LOGO

    Energy Intelligence.   This proprietary suite of Web-enabled modules delivers demand response and energy management capabilities by processing real-time and historical data from our data warehouse. Energy intelligence provides actionable energy information to users and offers a way for users to view and manipulate this data. Modules include: Profiling, which enables usage tracking; PowerTrak Analytics, which enables users to do asset performance and emissions tracking, load forecasting, benchmarking and scorecard reporting; Rate Analysis, which enables users to compare utility tariffs with competitive supply offers; Curtailment, which enables us to curtail electricity consumption and dispatch generators based on signals from grid operators; Billing, which enables users to generate energy bills for internal cost allocation purposes; and MyPowerTrak, which is a customizable portal that enables our personnel and our customers to create user-defined dashboards with customized content.

    Enterprise Applications.   This JAVA-based middle layer of the application is where we have defined and implemented our business processes, business rules, and business logic that pertain to global device management, security, messaging, file transfer, scheduling and business process management. These enterprise applications provide the core Web services that coordinate the real-time exchange of data between devices, people, external data sources, and other enterprise applications.

    Data Layer.   The data layer is a relational database that is designed for query, analysis and transaction processing and data collection, processing, aggregation and validation. It contains historical energy data and data from other sources. It separates analysis workload from transaction workload and enables us to consolidate data from several sources. These records

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      include customer demographics, interval energy information (for example, 1-minute, 5-minute and 15-minute), as well as weather, emissions, pricing and aggregated summary data.

        Currently, PowerTrak collects facility consumption data on a 1-minute, 5-minute, 15-minute and hourly basis and integrates that data with real-time, historical and forecasted market variables. We use PowerTrak to measure, manage, benchmark, and optimize end-use customers' energy consumption and facility operations. We use this data to help end-use customers analyze consumption patterns, forecast demand, measure real-time performance during demand response events, continuously monitor building management equipment to optimize system operation, model rates and tariffs and create energy scorecards to benchmark similar facilities. In addition, PowerTrak enables us to track each end-use customer's greenhouse gas emissions by mapping their energy consumption with the fuel mix used for generation in their location, such as the proportion of coal, nuclear, natural gas and fuel oil and other sources used.

        We have generally provided basic PowerTrak functionality as part of the overall service offering to the end-use customers who participate in our demand response programs. As part of our energy management solutions, we plan to further market PowerTrak as an integrated solution coupled with our Energy Services Bureau. We believe that end-use customers will become increasingly aware of their energy costs and consumption and will look to advanced analytics and trusted third-party providers to help them better manage their overall energy expenditures.

    Operations

        As of December 31, 2006, our Operations team consisted of 30 employees. Our Network Operations Group is responsible for establishing and maintaining connectivity between our NOC and our installed base of ESS devices at over 1,000 commercial, institutional and industrial facilities, managing demand response events, and providing customer support. Our Energy Markets Group is responsible for managing our portfolio of demand response resources to maximize revenues and minimize risk of underperformance and penalties, and reconciling event performance and payments from grid operators and utilities.

        To enable us to meet or exceed our commitments to grid operators and utilities, our Energy Markets Group uses portfolio theory to create proprietary process algorithms to forecast how our pooled network of customers will react to dispatch signals. Different customers can curtail different amounts of electrical demand based on a variety of parameters, including the time of day, day of the week, season, ambient air temperature and humidity, and duration of the event. Because we collect real-time interval data from every resource in our network, we are able to adjust our portfolio so that we are able to consistently meet or exceed the commitments that we make to grid operators and utilities with a high degree of reliability. We believe that our proprietary processes and our operational experience, combined with our technology, make our demand response solution as or more reliable than conventional supply-side alternatives. For example, our average performance during demand response events during the summer of 2006, measured as delivered capacity over committed capacity, was greater than 97%.

        Our Operations team has a customer-centric approach and seeks to exceed our customers' expectations through excellence in customer service. Since inception, less than 1% of the end-use customers enabled in our network have opted out of our demand response or energy management solutions.


Sales and Marketing

        As of December 31, 2006, our Sales and Marketing team consisted of 41 employees. We organize our sales efforts by customer type. Our Corporate Development Group sells to grid operators and

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utilities, while our Sales Group sells to commercial, institutional and industrial customers. Our Marketing Group supports both of these sales efforts.

        Our Corporate Development Group is responsible for securing additional long-term contracts from grid operators and utilities. These sales typically take 12 to 18 months to complete and, when successful, typically result in multi-million dollar contracts with terms of between three and 10 years. We actively pursue long-term contracts in both restructured markets and in traditionally regulated markets.

        Our Sales Group sells our demand response and energy management solutions to commercial, institutional and industrial customers. These sales typically take two to four months to complete and have terms of between one and five years. Our Sales Group is located in major electricity regions throughout the United States, including New England, New York, the Mid-Atlantic, and California. In each of these territories, we have a regional sales director, who reports to our Senior Vice President of Marketing and Sales.

        Our Marketing Group is responsible for generating qualified sales leads, building our brand, and raising awareness of EnerNOC as a leading clean and intelligent power solutions provider by leveraging actual customer experiences and benefits. Our marketing programs include a variety of public relations activities and Web-based seminar campaigns targeted at key policy makers, executives, and decision makers for commercial, institutional and industrial organizations.


Customers

    End-Use Customers

        As of December 31, 2006, we managed approximately 411 MW of technology-enabled demand response capacity from nearly 350 different commercial, institutional and industrial customers across more than 1,000 customer sites. The following table lists some of our largest customers by capacity under management as of December 31, 2006 in each of the six key vertical markets that our Sales Group primarily targets:

Technology
  Education
  Food Sales and Storage
AT&T
Level 3 Communications
General Electric
Adobe Systems
Navisite
  University of San Diego
The California State University
Southern Connecticut State University
Western Connecticut State University
New Haven Public Schools
  Albertsons
Raleys
Pathmark
Stop & Shop
Shop Rite

Government

 

Healthcare


 

Manufacturing/Industrial

Suffolk County, NY
City of Stamford, CT
Town of Vernon, CT
City of Brockton, MA
City of New Haven, CT
  Partners Healthcare
Stamford Hospital
Greenwich Hospital
Hartford Hospital
UMass Memorial
  O&G Industries
North American Hoganas
Pfizer
Verso Paper
Cascades

        Supermarkets are a good example of how our technology and solutions function to deliver demand response capacity to energy markets while delivering significant value to the end-use customer. Supermarkets operate with thin margins, and energy savings can significantly increase net income. On average, the supermarket industry generates net income of 1.5% of revenues and electricity comprises approximately 1.7% of the cost of doing business, as a percentage of revenues. This means that even modest savings in electricity costs can result in a disproportionate increase in net income.

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        Supermarkets have a number of measures that can be taken to reduce their electrical demand from the grid. Most supermarkets have a natural gas-fired emergency generator, with an uninterruptible power supply, to ensure that shoppers who are in the checkout line can pay for products in the event of a power disruption. The load on a typical supermarket emergency generator is approximately 30 kW. Supermarkets also have the ability to curtail non-critical electrical loads that do not interfere with shopping. Lighting in a typical 40,000 square foot supermarket consumes approximately 100 kW and most lights are separated into three circuits. Curtailing one-third of the lights (which can consume 30 kW or more) does not impact business continuity. Additionally, air handlers, anti-sweat heaters, and other small ancillary loads can be curtailed, providing approximately 30 kW of additional curtailment. In total, a typical supermarket can achieve 90 kW of demand reduction from the grid.

        Our demand response solutions enable this demand reduction. Our hardware is installed in each store to provide for remote control of devices and collection and communication of real-time electricity consumption information (i.e., metering). Our hardware communicates through the supermarket's LAN or through a broadband wireless connection. Our hardware has the ability to communicate directly with the physical building management system at each supermarket. It also has the ability to communicate directly with discrete lighting panels and automatic transfer switches coupled to emergency generators in the event that a building management system does not exist. From our NOC, depending on the configuration of our curtailment protocol at each supermarket, we are able to send a command over the Internet to reduce electrical consumption. Demand reduction is monitored remotely with real-time data feeds, the results of which are displayed in our NOC through various data presentment screens. Each supermarket is monitored for the duration of the demand response event and operations are automatically restored to normal when the event ends.

    Grid Operator and Utility Customers

        We have rapidly and significantly grown our base of grid operator and utility customers since inception. As of December 31, 2006, our grid operator and utility customer base included ISO New England Inc., The New York Independent System Operator, PJM Interconnection, L.L.C., The Connecticut Light and Power Company, National Grid, Pacific Gas and Electric Company, Southern California Edison Company and San Diego Gas and Electric Company. We currently provide reliability-based demand response, price-based demand response and ancillary services for them. In certain cases, we also provide demand response audit solutions to our grid operator and utility customers.

Competition

        We face competition from other clean and intelligent power solutions providers, advanced metering infrastructure service providers, as well as utilities and competitive electricity suppliers who offer their own demand response and energy management solutions. We also compete with traditional supply-side resources, such as peaking power plants.

        The clean and intelligent power solutions sector is fragmented. In the demand response sector, we compete with various providers on a regional basis. When competing for grid operator and utility customers, we believe that the primary factors on which we compete are pricing of the capacity that is made available, as well as the financial stability, historical performance levels and overall experience of the demand response solutions provider. When competing for commercial, institutional and industrial customers, we believe that the primary factors are the level of capacity payments shared with the end-use customer for their demand response capacity, level of sophistication employed by the demand response service provider to identify and optimize demand response capabilities at their facilities, and ability of the demand response service provider to service multiple sites across different geographic regions and provide additional technology-enabled energy management solutions. Some providers of advanced metering solutions have added, or may add, demand response products and services to their existing business. Some advanced metering infrastructure service providers are substantially larger and

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better capitalized than we are and have the ability to combine advanced metering and demand response solutions into an integrated offering to a large existing customer base. We believe that our operational experience, first mover advantage, leadership in the clean and intelligent power solutions sector, and our established base of customers gives us an advantage when competing for commercial, institutional and industrial customers.

        Utilities and competitive electricity suppliers could and sometimes do also offer their own demand response solutions, which could decrease our base of potential customers and could decrease our revenues and profitability. However, demand response programs, as administered by utilities alone, are bound to standard tariffs to which all end-use customers in the utility's service territory must abide. Utilities must treat all rate class customers equally in order to serve them under public utility commission-approved tariffs. In contrast, we have the flexibility to offer customized solutions to different customers. We believe that we also have technology and operational experience at the facility-level, behind the meter, that both utilities and competitive electricity suppliers lack. Furthermore, we believe that our solutions are complementary to utilities and competitive electricity suppliers' demand response efforts because we can help enlist customers to their existing programs and reduce their workload by serving as a single point of contact for an aggregated pool of customers who choose to participate in their programs. However, utilities and competitive electricity suppliers may offer clean and intelligent power solutions at prices below cost or even for free in order to improve their customer relations or competitive positions, which would decrease our base of potential customers and could decrease our revenues and profitability.

        We also compete with traditional supply-side resources such as natural gas-fired peaking plants. In some cases, utilities have an incentive to invest in these fixed assets rather than develop demand response as they are able to include the cost of fixed assets in their rate base and in turn receive a return on investment. In addition, some utilities have a financial disincentive to invest in demand response and even more so in energy efficiency because reducing demand can have the effect of reducing their sales of electricity. However, we believe that our solutions are gaining substantial regulatory support and will continue to do so as they are faster to market, require no electric power generation, transmission or distribution infrastructure, and are more cost-effective and more environmentally sound.

Intellectual Property

        We utilize a combination of intellectual property safeguards, including patents, copyrights, trademarks and trade secrets, as well as employee and third-party confidentiality agreements, to protect our intellectual property. As of December 31, 2006, in the United States we held one business method patent, which expires in 2022, and we had four pending patent applications, including two pending U.S. applications, and two pending international applications. Our patent applications, and any future patent applications, might not result in a patent being issued with the scope of the claims we seek, or at all, and any patents we may receive may be challenged, invalidated or declared unenforceable. We continually assess appropriate circumstances for seeking patent protection for those aspects of our technology, designs and methodologies and processes that we believe provide significant competitive advantages.

        As of December 31, 2006, we held eight trademarks/service marks in the United States. These are EnerNOC, Get More from Energy, Energy for Education, Capacity on Demand, PowerTrak, Celerity Energy, eNode, and ENTREX. We also have trademark applications pending that correspond to the following marks: The Greenest kWh is the One Never Used, The Greenest Kilowatt-hour is the One Never Used, The Greenest kW is the One Never Built, The Greenest Kilowatt is the One Never Built, the Cleanest kWh is the One Never Used, One-Click Curtailment, Negawatt Network and CarbonTrak.

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        With respect to, among other things, proprietary know-how that is not patentable and processes for which patents are difficult to enforce, we rely on trade secret protection and confidentiality agreements to safeguard our interests. We believe that many elements of our demand response solutions involve proprietary know-how, technology or data that are not covered by patents or patent applications, including technical processes, equipment designs, algorithms and procedures. We have taken security measures to protect these elements. All of our employees have entered into confidentiality and proprietary information agreements with us. These agreements address intellectual property protection issues and require our employees to assign to us all of the inventions, designs, and technologies they develop during the course of employment with us. We also seek confidentiality from our customers and business partners before we disclose any sensitive aspects of our demand response and energy management technology or business strategies. We have not been subject to any material intellectual property claims.

Employees

        As of December 31, 2006, we had 100 full-time employees, including 41 in sales and marketing, 30 in operations, 16 in research and development, and 13 in general and administrative. Of these full-time employees, 73 were located in New England, 11 were located in New York, 9 were located in California, and seven were located in other areas across the United States. We expect to grow our employee base and our future success will depend in part on our ability to attract, retain and motivate highly qualified personnel, for whom competition is intense. Our employees are not represented by any labor unions or covered by a collective bargaining agreement and we have not experienced any work stoppages. We consider our relations with our employees to be good.

Strategic Advisory Board

        Our Strategic Advisory Board consists of individuals with recognized expertise in the energy management, utility, and technology fields who advise us on developing technology standards, business strategy, industry and customer relationships, and anticipating and meeting marketplace needs. The following people were members of our Strategic Advisory Board as of December 31, 2006 are listed below.

    Charles Bayless is President of the West Virginia University Institute of Technology. He is a member of the Board of Directors of the Ontario Power Authority, Primary Energy Inc., Pike Electric, Commerce Energy Group Inc., and Thermon, Inc. He is the retired Chairman and Chief Executive Officer of Illinova Corporation and Chairman and President of its wholly owned subsidiary Illinois Power. He is the former Chairman, President, and Chief Executive Officer of UniSource Energy Corp.

    Daniel Engel is a Senior Consultant of Freeman, Sullivan & Company, a San Francisco-based energy consulting firm providing demand side management, demand response, pricing, and electric industry restructuring services, both in terms of strategic consulting as well as program initiatives. He is a former Vice President of Energy Delivery & Demand Response of Nexant, Inc., a provider of management and technology consulting services for governments, electric and gas utilities, energy producers, oil and gas companies, and energy end-use customers.

    TJ Glauthier is President of TJG Energy Associates, LLC and the former Deputy Secretary and Chief Operating Officer of the United States Department of Energy and a former Associate Director for Natural Resources, Energy and Science at the United States Office of Management and Budget. He is also the former Chief Executive Officer and President of the Electricity Innovation Institute, which was an affiliate of the Electric Power Research Institute, and was the Director of Energy and Climate Change at the World Wildlife Fund. He is a member of the Board of Directors of Union Drilling, Inc., a NASDAQ-listed company.

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    William Hart is an advisor to technology and financial services companies and a Director of Trimble Navigation Limited. He was the Founder and Managing Partner of Technology Partners, a Silicon Valley venture capital firm, which he led for 21 years.

    Brett Perlman is currently President of Vector Advisors, a consulting firm that serves energy and telecommunications clients. From 1999 to 2003, he served as Commissioner on the Public Utility Commission of Texas. Prior to his government service, he was a management consultant at McKinsey & Company, a global management consulting firm, and a former attorney at Akin, Gump, Strauss, Hauer & Feld LLP.

Legal Proceedings

        In the ordinary conduct of our business we are subject to periodic lawsuits, investigations and claims. Although we cannot predict with certainty the ultimate resolution of such lawsuits, investigations and claims against us, we do not believe that any currently pending or threatened legal proceeding or proceedings to which we are a party will have a material adverse effect on our business, results of operations, cash flows or financial condition.

Facilities

        Our corporate headquarters and principal office is located in Boston, Massachusetts, where we occupy 21,965 square feet under a sub-lease agreement expiring in June 2009. We also occupy 3,892 square feet in New York, New York under a sub-lease agreement expiring in September 2008. In addition, we lease space in various locations throughout the United States for local sales, marketing, and field operations personnel. We intend to add new facilities and/or expand existing facilities as we add employees and operate in new geographic areas, and we believe that suitable space will be available as needed to accommodate any such expansion of our operations. We do not own any facilities.

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MANAGEMENT

Executive Officers and Directors

        The following table sets forth certain information concerning our executive officers, key employees, and directors as of January 15, 2007:

Name

  Age
  Position

  Timothy G. Healy   38   Chairman of the Board and Chief Executive Officer
  David B. Brewster   35   President, Chief Operating Officer, Treasurer and Director
  Neal C. Isaacson   45   Chief Financial Officer
  Philip Giudice   51   Senior Vice President of Corporate Development and Director
  Gregg Dixon   34   Senior Vice President of Marketing and Sales
  David M. Samuels   44   Senior Vice President of Strategic Development, General Counsel and Secretary
  Terrence E. Sick   47   Vice President of Product Development and Engineering
  Thomas E. Atkins   48   Senior Vice President of Demand Response Development and Director
  Adam Grosser   46   Director
  Scott M. Johnson   42   Director
  William D. Lese   49   Director

         Timothy G. Healy has served as our Chairman of the Board and Chief Executive Officer since June 2003 and co-founded EnerNOC in 2001. During 2001 Mr. Healy worked in the Energy Technology Laboratory for Northern Power Systems, Inc. (now Distributed Energy Systems Corporation), a firm that integrates hundreds of distributed power systems and related equipment around the globe. Mr. Healy has also held positions with Merrill Lynch, International Fuel Cells (now UTC Fuel Cells, LLC), and Commonwealth Capital Ventures. He also co-founded Student Advantage, which went public in 1999. Mr. Healy holds a Bachelor of Arts in Government and Economics from Dartmouth College and an MBA from the Tuck School of Business at Dartmouth.

         David B. Brewster has served as a Director and as our President and Treasurer since June 2003 and was appointed Chief Operating Officer in February 2007. Mr. Brewster co-founded EnerNOC in 2001. During 2001, Mr. Brewster worked at Beacon Power Corporation, a manufacturer of energy storage and power conversion technologies for the renewable energy and distributed generation markets. Mr. Brewster has also evaluated emerging energy technologies for Winslow Management Company, an environmentally focused investment management firm and developed corporate strategies for SolarBank, a global capital fund for the financing of solar energy systems. Mr. Brewster holds a Bachelor of Arts from Wesleyan University, a Master of Environmental Management from Duke University and an MBA from the Tuck School of Business at Dartmouth.

         Neal C. Isaacson has served as our Chief Financial Officer since February 2006 and prior to that, served as our Vice President of Finance from August 2005 to February 2006. From August 2004 to August 2005, Mr. Isaacson provided financial guidance and direction at Intrusic, Inc. From August 2003 to August 2004, Mr. Isaacson served as the Chief Financial Officer of Ucentric Systems, Inc., and from November 1995 to June 2001, he founded and served as the Chief Financial Officer and director of Cignal Global Communications, Inc. Mr. Isaacson holds a degree in Accounting from the University of Massachusetts and is a member of the American Institute of Certified Public Accountants and Massachusetts Society of Certified Public Accountants.

         Philip Giudice has served as our Senior Vice President of Corporate Development since September 2005 and prior to that served in an advisory role beginning in April 2003. Mr. Giudice has served as a Director since June 2003. From June 1985 to March 2003, Mr. Giudice served as a Vice

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President and Senior Partner at Mercer Management Consulting. Mr. Giudice worked as an exploration geologist at Chevron Corp. from 1976 to 1979 and for Freeport-McMoRan from 1980 to 1983. Mr. Giudice holds a Bachelor of Science in Geology from the University of New Hampshire, a Master of Science in Economic Geology from the University of Arizona and an MBA from the Tuck School of Business at Dartmouth.

         Gregg Dixon has served as our Senior Vice President of Marketing and Sales since February 2007, and prior to that, served as our Vice President of Marketing and Sales since August 2004. From December 2001 to July 2004, Mr. Dixon served as Vice President of Marketing and Sales for Hess Microgen, a leading provider of commercial onsite cogeneration systems and services. From June 1995 to November 2001, Mr. Dixon was also a Partner at Mercer Management Consulting, where he advised global Fortune 1000 technology, consumer products, and energy clients on customer and product strategy, economic choice analysis, and new business model development. Mr. Dixon holds degrees in Business Administration and Computer Science from Boston College and is a Certified Energy Manager.

         David M. Samuels has served as our Senior Vice President of Strategic Development, General Counsel and Corporate Secretary since February 2007, and prior to that, served as our Vice President of Strategic Development, General Counsel and Corporate Secretary since November 2006. From June 2005 to November 2006, Mr. Samuels served as Vice President of Corporate Development and General Counsel at ThingMagic, Inc., a radio frequency identification company. From 2000 to 2001, Mr. Samuels was a director of, and from March 2000 to September 2004 worked as Executive Vice President at, Guardent, Inc., a security services company he co-founded, where he was responsible for strategic financings, mergers and acquisitions, general legal matters and human resources. From November 1999 through March 2000, Mr. Samuels served as Senior Vice President Business Affairs and Deputy General Counsel at Razorfish, Inc. From October 1998 to November 1999, Mr. Samuels served as Vice President of Corporate Development, General Counsel and Corporate Secretary of i-Cube, Inc., which was acquired by Razorfish, Inc. in November 1999. Mr. Samuels holds a Bachelor of Arts in Economics from Brandeis University and a JD from Northeastern University.

         Terrence E. Sick has served as our Vice President of Product Development and Engineering since February 2006. From August 1996 to February 2006, Mr. Sick was President, Chief Executive Officer and Founder of eBidenergy, Inc., a company that integrated real-time metering, monitoring, and control-systems to bring value-added online energy procurement, data acquisition, and data analysis services to its customers. From 1987 to 1996, Mr. Sick worked as an independent utility consultant to Rochester Gas and Electric Corporation, Xerox Corporation, Central Vermont Public Service, Atlantic Electric LLC, and The Public Service of Indiana. Mr. Sick holds a Bachelor of Science in Mechanical Engineering from the Rochester Institute of Technology and is a Certified Energy Manager.

         Thomas E. Atkins has served as our Senior Vice President, Demand Response Development and as a Director since June 2004. From June 2004 to May 2005, Mr. Atkins served as Manager of Pinpoint Power DR LLC. Mr. Atkins has served as the President of Pinpoint Power, LLC since January 2002 and Executive Vice President of Power Development Company from February 1998 to December 2001 where he was responsible for the development of new electric generating facilities in New England. Previously, Mr. Atkins was a partner with R.W. Beck, a consulting engineering firm specializing in the financing of independent power projects. Mr. Atkins currently serves as Vice Chairman of the New England Power Pool and holds a Bachelor of Science in Mechanical Engineering from Cornell University.

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         Adam Grosser has served as a Director since January 2005. Mr. Grosser has served as a general partner of Foundation Capital, LLC, a venture capital firm, since September 2000. From December 1996 to December 1999, Mr. Grosser served as president of Excite@Home's Subscriber Networks Division. From November 1993 to October 1996, Mr. Grosser was a founder, President and Chief Executive Officer of Catapult Entertainment. Mr. Grosser also serves on the boards of directors of Atkino, Inc., Hammerhead Systems, Inc., Synfora, Inc., Conrol4 Inc., SiBEAM, Inc., Silver Spring Networks, Inc., PeakStream, Inc., Rinera Networks, Inc. and Rohati, Inc. Mr. Grosser holds a Bachelor of Applied Science, a Master of Science and an MBA from Stanford University.

         Scott M. Johnson has served as a Director since June 2003. Mr. Johnson co-founded and has served as managing director of Draper Fisher Jurvetson New England since April 2000. From October 1997 to March 2000, Mr. Johnson served as the East Coast partner of the Cambridge Technology Capital Fund. Mr. Johnson also serves on the board of directors of Mok3 Incorporated. Mr. Johnson holds a Bachelor of Science in Operations Research Engineering from Cornell University and an MBA from the Massachusetts Institute of Technology.

         William D. Lese has served as a Director since June 2003. Mr. Lese co-founded and since October 2001 has served as a managing director of Braemer Energy Ventures, LP, a venture capital management company focused exclusively on investing in early to mid-stage energy technology companies in the United States and Canada. He also serves on the board of directors of Celunol Corp., CoalTek, Inc. and Utility Associates, Inc. and is Chairman of the Board of Solicore, Inc. Mr. Lese holds a Bachelor of Arts in Physics and a Master of Science in Energy Sciences from New York University.

Board of Directors

    Board Composition

        Under our amended and restated certificate of incorporation that will be in effect upon the completion of this offering, the authorized number of directors may be changed only by resolution of the board of directors. We currently have seven directors. In accordance with our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon the completion of this offering, our board of directors will be divided into three classes with staggered three year terms. At each annual meeting of stockholders commencing with the meeting in 2008, the successors to the directors whose terms then expire will be elected to serve until the third annual meeting following the election. At the closing of this offering, our directors will be divided among the three classes as follows:

    The Class I directors will be                        , and their terms will expire at the annual meeting of stockholders to be held in 2008;

    The Class II directors will be                        , and their terms will expire at the annual meeting of stockholders to be held in 2009; and

    The Class III directors will be                        , and their terms will expire at the annual meeting of stockholders to be held in 2010.

        Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors.

    Director Independence

        Our board of directors has reviewed the materiality of any relationship between us and any of our directors, either directly or indirectly. Based on this review, the board has determined that Messrs. Grosser, Johnson and Lese are "independent directors" as defined by Nasdaq. The rules of the

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Nasdaq Global Market require that a majority of the board of directors of a listed company consist of independent directors, as defined by the rules of the Nasdaq Global Market. Companies such as us, which are listing on the Nasdaq Global Market in connection with an initial public offering, may have fewer than a majority of independent board members on the date of listing, provided that those companies meet such majority independence requirements within one year of their date of listing. We plan to have a board of directors consisting of a majority of independent directors within one year of our listing on the Nasdaq Global Market.

    Committees of the Board of Directors

        Our board of directors has an audit committee, a compensation committee, and a nominating and governance committee, each of which has the composition and responsibilities described below. The rules of the Nasdaq Global Market require that the audit committee consist of at least three members of the board, each of whom must be independent, as established under the rules of the Nasdaq Global Market and the SEC. Companies such as us, that are listing on the Nasdaq Global Market in connection with an initial public offering, may have fewer than all members of their audit committees comply with the independence requirements on the date of listing, provided that at least one is independent at the time of listing, a majority are independent within 90 days of the date of listing and all are independent within one year of the date of listing.

        Audit committee.     Our audit committee is composed of Messrs.             ,            and            . Our audit committee currently consists of one independent director and two directors who are not independent. As required by the rules of the Nasdaq Global Market, we intend to appoint an additional independent director to our audit committee to replace one of the non-independent members within 90 days of our listing on the Nasdaq Global Market. We intend to appoint a third independent director to the audit committee to replace the final non-independent member within one year of our listing on the Nasdaq Global Market. Our audit committee is authorized to:

    approve and retain the independent auditors to conduct the annual audit of our books and records;

    review the proposed scope and results of the audit;

    review and pre-approve the independent auditor's audit and non-audit services rendered;

    approved the audit fees to be paid;

    review accounting and financial controls with the independent auditors and our financial and accounting staff;

    review and approve transactions between us and our directors, officers and affiliates;

    recognize and prevent prohibited non-audit services;

    establish procedures for complaints received by us regarding accounting matters;

    oversee internal audit functions, if any; and

    prepare the report of the audit committee that SEC rules require to be included in our annual meeting proxy statement.

        Compensation committee.     Our compensation committee is composed of Messrs.                 ,                and                 . All members of our compensation committee are independent. Our compensation committee is authorized to:

    review and recommend the compensation arrangements for management, including the compensation for our President and Chief Executive Officer;

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    establish and review general compensation policies with the objective to attract and retain superior talent, to reward individual performance and to achieve our financial goals;

    administer our stock option and incentive plans; and

    prepare the report of the compensation committee that SEC rules require to be included in our annual meeting proxy statement.

        Nominating and corporate governance committee.     Our nominating and corporate governance committee is composed of Messrs.             ,            and            . All of our nominating and corporate governance committee members are independent. Our nominating and governance committee is authorized to:

    identify and nominate members of the board of directors;

    develop and recommend to the board of directors a set of corporate governance principles applicable to our company; and

    oversee the evaluation of the board of directors and management.

Compensation Committee Interlocks and Insider Participation

        Our compensation committee is composed of Messrs.                 ,                 and        . No member of our compensation committee has at any time been an employee of ours. None of our executive officers serve as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

        Affiliates of each of Messrs.                 ,                 and                have participated in transactions with us. For a detailed description of these transactions, see "Certain Relationships and Related Transactions—Sales of Convertible Preferred Stock."

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EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

        This compensation discussion and analysis describes the material elements of compensation awarded to, earned by, or paid to each of our named executive officers during 2006 and describes our policies and decisions made with respect to the information contained in the following tables, related footnotes and narrative for 2006. We also describe actions regarding compensation taken before or after 2006 when it enhances the understanding of our executive compensation program.

        Our board of directors appoints the members of its compensation committee and delegates to the compensation committee the direct responsibility for overseeing the design and administration of our executive compensation program. The principal elements of our executive compensation program are base salary, annual bonus, long-term equity incentives in the form of stock options, and post-termination severance and acceleration of stock option vesting upon certain termination and/or change of control events. The objectives of our executive compensation program are to position the aggregate of these elements at a competitive level that is commensurate with our size, industry and sustained performance.

        The compensation committee generally makes recommendations to our board of directors based upon management's request and recommendations provided to it by our Chief Executive Officer. Our board of directors considers and has final approval over the recommendations of the compensation committee regarding the compensation of our named executive officers, including the severance terms of their employment agreements. Our compensation committee negotiated the employment agreements with our Chief Executive Officer and President. Our Chief Executive Officer negotiated the employment agreements with our other named executive officers. The goal in negotiating these agreements was to secure and retain talented executives and to ensure stability and structure during our growth stage. The compensation committee negotiated the employment agreements with our Chief Executive Officer and our President with these same goals in mind.

Executive Compensation Program Objectives and Philosophy

        In General.     

        The objectives of our executive compensation program are to:

    attract, motivate and retain talented and dedicated executive officers;

    provide our executive officers with both cash and equity incentives to promote strong performance and the attainment of goals set for them by the compensation committee and our board of directors;

    provide our executive officers with long-term incentives in order to retain their services;

    provide stability during our growth stage; and

    align the interests of our executive officers with those of our stockholders.

        In December of each year, our compensation committee meets to set recommendations for base salaries and the bonus and stock option awards to be paid to our named executive officers. In setting annual recommendations for salaries and bonuses and stock awards, the compensation committee reviews the individual contributions of each executive officer and the achievement of predetermined corporate, departmental and individual performance goals. We grant stock options to provide our executives the opportunity for long-term compensation based upon the performance of our common stock over time.

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        Competitive Market.     We define our competitive market for executive officers to be the energy services and technology industries. To date, we have not engaged in the benchmarking of executive compensation but we may do so in the future. The compensation committee is developing our executive compensation program for 2007 and in doing so plans to utilize publicly available compensation data from national and regional companies of similar size and growth potential in the electric power and technology industries.

Base Salaries

        In General.     Base salary is used to compensate our executive officers based on their experience, skills, knowledge and responsibilities, taking into account competitive market salaries paid by our peer companies for similar positions. We believe that executive base salaries should be targeted at the median of the range of salaries for executives in similar positions with similar responsibilities at our peer companies. However, we believe that the base salaries for our named executives may fall below such target. Salaries for our named executive officers are reviewed by our Chief Executive Officer, other than his own, which is reviewed by the compensation committee, on an annual basis, as well as at the time of promotion or other changes in responsibilities. Base salaries for 2006 were determined by the compensation committee after reviewing a number of factors, including:

    the responsibilities associated with the position and the level of the executive officer's responsibility;

    the seniority of the individual;

    the base salary level of each executive officer in prior years;

    recommendations made by the Chief Executive Officer (except for his own salary); and

    base salary information from our peer companies.

The compensation committee does not assign relative weights or rankings to these factors, but instead makes a subjective determination based upon the consideration of all of these factors.

        The salaries of our named executive officers are set by our compensation committee. In November 2006, the compensation committee increased our Chief Executive Officer's and our President's salaries from $150,000 to $290,000 and $175,000 to $230,000, respectively, due to their contributions to our growth and development, the committee's confidence in their ability to further our corporate goals and the desire to more closely align their salaries with those of executives at our peer companies. These salary increases were approved by our board of directors retroactive to February 1, 2006. Based on the other named executive officers' contributions to our growth and development, the committee's confidence in their ability to further our corporate goals and the desire to more closely align their salaries with those of executives at our peer companies, our compensation committee also approved increases in the annual base salary rates for Mr. Isaacson, from $165,000 in 2006 to $200,000 in 2007; Mr. Giudice, from $165,0000 in 2006 to $200,000 in 2007 and Mr. Dixon from $165,000 in 2006 to $175,000 in 2007.

Annual Bonus

        Our executive compensation program includes eligibility for an annual performance-based cash bonus in the case of all named executive officers. We provide this opportunity as a way to attract and retain highly skilled and experienced executive officers and to motivate them to achieve annual corporate, departmental and individual goals which consist of various revenue, cost and operational targets. Currently, all employees, including executives, are eligible for annual discretionary performance-based cash bonuses. As provided in their employment agreements, our Chief Executive Officer and President are eligible for annual performance-based bonuses beginning in 2007 of up to

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$50,000 and $70,000 respectively. Because we surpassed our corporate goals on virtually all material metrics and departmental and individual goals were generally achieved, our named executive officers, other than Mr. Dixon, were paid at least 15% of their base salary level as bonus. The compensation committee's philosophy is that, due to Mr. Dixon's position as the company's Senior Vice President of Marketing and Sales, a substantial majority of his annual bonus amounts should be based on marketing and sales oriented metrics. The compensation committee implemented Mr. Dixon's bonus plan in 2006 based on our greatly exceeding and/or achieving certain predetermined revenue, gross margin, and other marketing and sales metrics.

        Total Compensation Comparison.     In 2006, bonus award opportunities accounted for approximately 19% of total compensation for our Chief Executive Officer, 22% on average for our other named executive officers excluding Mr. Dixon, and 52% for Mr. Dixon.

Long-term Equity Incentives

        In General.     We provide the opportunity for our named executive officers to earn long-term equity incentive awards. Long-term equity incentive awards provide our executives with the incentive to continue their employment with us for longer periods of time, which in turn, provides us with greater stability during our growth stage. These awards are also less costly to us in the short-term than cash compensation. In 2006, our long-term equity incentive program consisted of grants of stock options.

        Stock Options.     Equity incentive awards, which have been provided in the form of stock option grants, are awarded based on various factors including a review of the equity ownership of our peer companies, the responsibilities of the individual executive officer, his or her past performance, anticipated future contributions, prior option grants (including the vesting schedule of such prior grants) and the executive's total cash compensation. Our equity incentive awards granted to executive officers in 2006 were made by our compensation committee based on these factors as part of a broad-based grant of options to all of our executive employees under our 2003 Stock Plan intended to encourage an ownership culture among our employees. We granted all stock options to our executive officers at exercise prices equal to the fair market value of our common stock on the date of grant. All of these option grants are subject to a four year vesting schedule. We believe that these time-based vesting provisions reward longevity and the commitment of our executive officers. We have not adopted stock ownership guidelines, and our stock compensation plans have provided the principal method for our executive officers to acquire equity or equity-linked interests. We have traditionally used stock options as our form of equity compensation because stock options result in less immediate dilution of existing stockholders' interest and, prior to our adoption of FAS 123(R), resulted in less compensation expense for us relative to other types of equity awards. It is the intention of the compensation committee to award long-term equity incentives to executives on an annual basis, although more frequent awards may be made at the discretion of the compensation committee, such as in the case of promotions or newly hired executives.

        In May 2006, the compensation committee recommended, and our board of directors approved, the grant of stock options to Messrs. Brewster and Giudice in order to reward the contributions they made towards the achievement of our corporate goals, which in turn allowed us to make an upward revision of our 2006 business plan.

        In May 2006, the compensation committee recommended, and our board of directors approved, amendments to all of our outstanding incentive stock option agreements with Messrs. Isaacson, Giudice and Dixon to provide for accelerated vesting of stock awards upon certain change of control events. These change of control provisions are discussed further in "—Severance and Change of Control Benefits" and "—Potential Payments Upon Termination or Change of Control."

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        In September 2006, the compensation committee, following our mid-year review of our sales goals, recommended that our board of directors grant options to Mr. Dixon in order to recognize the contributions he had made towards exceeding our 2006 to-date sales goals.

        In December 2006, the compensation committee, as part of its annual review process, recommended that our board of directors grant stock options to all of our named executive officers in order to align our executives' ownership interests with the long-term interests of our stockholders. In each case, our board of directors approved the option grants recommended by the compensation committee. These grants served multiple purposes, including decreasing the dilutive impact of corporate financing activities and headcount growth and better aligning our executives' ownership interests with those of similarly situated executives at other companies.

        Total Compensation Comparison.     In 2006, long-term equity incentives accounted for approximately 7% of total compensation for our Chief Executive Officer and 6% on average for our other named executive officers. We believe that the amount of long-term equity incentives as a proportion of total compensation for 2006 was lower than it will be in the future due to increased compensation expense resulting from both future stock option grants and accounting charges taken for our December 2006 option grants, only one month of which accounting charges were recorded in 2006.

Executive Benefits and Perquisites

        Our named executive officers receive the same general health and welfare benefits as all of our other employees. We did not provide any personal benefits or perquisites to our named executives officers in 2006.

Severance and Change in Control Benefits

        We provide protections for our named executive officers by including severance and change of control provisions in their employment agreements. We provide these protections in order to attract and retain highly skilled and experienced executive officers, as well as to align the interests of our executives with those of our stockholders. During 2006, certain changes were made to the change of control provisions and severance provisions of our named executive officers in order to create more consistency between the terms of the Chief Executive Officer's and President's employment agreements and the employment agreements of our other named executive officers. If terminated other than for cause, or if terminating their employment for good reason, our Chief Executive Officer and President receive severance payments equal to twelve months of their annual base salary and all accrued but unpaid incentive compensation, as recommended by the compensation committee and approved by our board of directors. Under the same circumstances, our other named executives receive severance payments equal to six months of their annual base salary and all accrued but unpaid incentive compensation, as recommended by the compensation committee and approved by our board of directors. We believe that the increased difficulty of finding comparable employment opportunities at the level of chief executive officer or president requires that companies provide longer terms for severance payments in order to attract and retain highly skilled and experienced individuals for these positions.

        In the event of a change of control, certain provisions of our named executive officers' employment agreements allow for acceleration of equity awards in the event the executive is terminated without cause or the executive terminates their employment for good reason. We refer to this type of arrangement as "double trigger" acceleration. The provisions of our named executive officers' incentive stock option agreements provide for accelerated vesting of a certain number of options in the event of a change of control in which we are valued at $75 million or greater. We believe that this combination of double and single trigger equity vesting acceleration mechanisms incentivize our executive officers to achieve corporate, departmental and individual goals and rewards them for their part in increasing our

89



value, while contemporaneously incentivizing them to maintain their employment after a friendly change of control.

        Our severance and change in control provisions for our named executive officers and the definitions of cause, good reason, and change of control are summarized in "—Potential Payments Upon Termination or Change of Control." Our analysis of our severance and change of control provisions indicates that they are standard and in the range of such terms for similarly situated executives at other companies.

Summary Compensation Table

        The following table shows the compensation paid or accrued during the fiscal year ended December 31, 2006 to (1) our Chief Executive Officer, (2) our Chief Financial Officer and (3) our three most highly compensated executive officers, other than our Chief Executive Officer and our Chief Financial Officer, who earned more than $100,000 during the fiscal year ended December 31, 2006.

Name and Principal Position

  Year
  Salary
($)

  Bonus
($)

  Option Awards
($)(1)

  Total
($)

Timothy G. Healy
Chief Executive Officer
  2006   280,417   70,000   28,526 (2) 378,943

David B. Brewster
President and Chief Operating Officer

 

2006

 

225,417

 

70,000

 

29,772

(3)

325,189

Neal C. Isaacson
Chief Financial Officer

 

2006

 

165,000

 

50,000

 

13,898

(4)

228,898

Philip Giudice
Senior Vice President

 

2006

 

165,000

 

55,000

 

19,253

(5)

239,253

Gregg Dixon
Senior Vice President

 

2006

 

165,000

 

202,500

 

20,296

(6)

387,796

(1)
See Note 1 to our unaudited consolidated financial statements for the nine months ended September 30, 2006 and Note 1 to our audited consolidated financial statements included elsewhere in this prospectus for details as to the assumptions used to determine the fair value of the option awards and Note 1 to our unaudited consolidated financial statements for the nine months ended September 30, 2006 included elsewhere in this prospectus describing all forfeitures during the nine months ended September 30, 2006. See also our discussion of stock-based compensation under "Management's Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies and Use of Estimates—Stock-Based Compensation."

(2)
Consists of $3,644 and $24,882, representing the compensation expense incurred by us in fiscal year 2006 in connection with option grants to Mr. Healy to purchase 86,043 shares of common stock on January 11, 2005 and 60,000 shares of common stock on December 7, 2006, calculated in accordance with SFAS 123R.

(3)
Consists of $3,644, $1,246 and $24,882, representing the compensation expense incurred by us in fiscal year 2006 in connection with option grants to Mr. Brewster to purchase 86,043 shares of common stock on January 11, 2005, 7,000 shares of common stock on May 11, 2006 and 60,000 shares of common stock on December 7, 2006, calculated in accordance with SFAS 123R.

(4)
Consists of $1,159, $1,791 and $10,948, representing the compensation expense incurred by us in fiscal year 2006 in connection with option grants to Mr. Isaacson to purchase 25,000 shares of

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    common stock on August 1, 2005, 36,600 shares of common stock on September 15, 2006 and 26,400 shares of common stock on December 7, 2006, calculated in accordance with SFAS 123R.

(5)
Consists of $383, $720, $345, $974, $445 and $16,386, representing the compensation expense incurred by us in fiscal year 2006 in connection with option grants to Mr. Giudice to purchase 36,140 shares of common stock on August 19, 2003, 17,000 shares of common stock on January 11, 2005, 8,000 shares of common stock on February 9, 2005, 15,625 shares of common stock on December 15, 2005, 2,500 shares of common stock on May 11, 2006 and 39,500 shares of common stock on December 7, 2006, calculated in accordance with SFAS 123R.

(6)
Consists of $551, $280, $2,230, and $17,235, representing the compensation expense incurred by us in fiscal year 2006 in connection with option grants to Mr. Dixon to purchase 30,000 shares of common stock on September 15, 2004, 6,600 shares of common stock on January 11, 2005, 5,000 shares of common stock on September 7, 2006 and 41,600 shares of common stock on December 7, 2006, calculated in accordance with SFAS 123R.

Grants of Plan-Based Awards

        The following table shows information regarding grants of equity awards that we made during the fiscal year ended December 31, 2006 to each of the executive officers named in the Summary Compensation Table.

Name

  Grant Date
  All Other Option
Awards: Number of
Securities
Underlying
Options
(#)

  Exercise or Base
Price of Option
Awards
($/Sh)

  Grant Date Fair Value of
Stock and Option Awards
($)

Timothy G. Healy
Chief Executive Officer
  12/7/06   60,000   1.45   1,456,518

David B. Brewster
President and Chief Operating Officer

 

12/7/06
5/11/06

 

60,000
7,000

 

1.45
1.45

 

1,456,518
7,763

Neal C. Isaacson
Chief Financial Officer

 

12/7/06

 

26,400

 

1.45

 

640,868

Philip Giudice
Senior Vice President

 

12/7/06
5/11/06

 

39,500
2,500

 

1.45
1.45

 

958,874
2,773

Gregg Dixon
Senior Vice President

 

12/7/06
9/7/06

 

41,600
5,000

 

1.45
1.45

 

1,009,852
22,896

        Timothy G. Healy.     We entered into an employment agreement with Mr. Healy, effective as of November 9, 2006, to continue serving as our Chief Executive Officer on an at-will basis. Pursuant to his employment agreement, Mr. Healy's annual base salary is $290,000 per year, and he is eligible to receive discretionary, annual performance bonuses in 2007 and beyond of up to $50,000. These bonuses shall be based on (i) the achievement of performance goals, as identified by us from time to time, and (ii) our overall financial performance during that period. Mr. Healy received a base salary of $280,417 in 2006 and pursuant to his employment agreement, he received a non-discretionary bonus of $70,000. Pursuant to a stock repurchase agreement dated June 17, 2003 and subsequently amended effective as of January 10, 2005, May 16, 2006 and November 9, 2006, if Mr. Healy's employment is terminated by us without cause or by Mr. Healy for good reason, we are required to pay him an amount equal to 100% of his then-current annual base salary over the course of approximately 12 months .

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        Under the 2003 Stock Plan, Mr. Healy received an incentive stock option to purchase 86,043 shares of our common stock and an incentive stock option to purchase 60,000 shares of our common stock. Each option vests as to 25% of the shares on the first anniversary of the date of the respective grant and as to 2.08% of the shares every month thereafter. In May 2006, we amended these incentive stock option agreements to provide for accelerated vesting of 100% of Mr. Healy's then unvested shares upon a change of control in which we are valued at $75 million or greater.

        David B. Brewster.     We entered into an employment agreement with Mr. Brewster, effective as of November 9, 2006, to continue serving as our President on an at-will basis. Pursuant to his employment agreement, Mr. Brewster's annual base salary is $230,000 per year, and he is eligible to receive discretionary, annual performance bonuses in 2007 and beyond of up to $70,000. These bonuses shall be based on (i) the achievement of performance goals, as identified by us from time to time, and (ii) our overall financial performance during that period. Mr. Brewster received a base salary of $225,417 in 2006 and pursuant to his employment agreement, he received a non-discretionary bonus of $70,000. Pursuant to a stock repurchase agreement dated June 17, 2003 and subsequently amended effective as of January 10, 2005, May 16, 2006 and November 9, 2006, if Mr. Brewster's employment is terminated by us without cause or by Mr. Brewster for good reason, we are required to pay him an amount equal to 100% of his then-current annual base salary over the course of approximately 12 months.

        Under the 2003 Stock Plan, Mr. Brewster received an incentive stock option to purchase 86,043 shares of our common stock, an incentive stock option to purchase 7,000 shares of our common stock and an incentive stock option to purchase 60,000 shares of our common stock. Each option vests as to 25% of the shares on the first anniversary of the date of the respective grant and as to 2.08% of the shares every month thereafter. In May 2006, we amended these incentive stock option agreements to provide for accelerated vesting of 100% of Mr. Brewster's then unvested shares upon a change of control in which we are valued at $75 million or greater.

        In the case of each of our other named executive officers, 2006 compensation, including bonus amounts, was recommended by the compensation committee of our board of directors and approved by our full board of directors. The definitions of good reason, cause, and change of control for purposes of Messrs. Healy and Brewster's employment arrangements are set forth below in "—Termination of Employment and Change of Control Arrangements."

    Fiscal Year 2006 Equity Awards

        All of the stock option awards disclosed in the Grants of Plan-Based Awards table were issued under the 2003 Stock Plan and were granted with an exercise price per share equal to the fair market value of our common stock on the date of grant, as determined by our board of directors. Subject to the terms of the 2003 Stock Plan and the option agreements issued in connection with these grants, all of the options granted in 2006 vest as to 25% of the shares on the first anniversary of the grant date and as to an additional 2.08% of the shares per month thereafter. Some of our stock option awards may vest upon a termination following a change of control as discussed below under "—Termination of Employment and Change of Control Arrangements."

    Amendment of Incentive Stock Option Awards

        From August 2003 to May 2006, we granted option awards to certain of our executive officers, including Messrs. Healy, Brewster, Isaacson, Giudice and Dixon under the 2003 Stock Plan and pursuant to incentive stock option agreements. On May 16, 2006, our board of directors approved amendments to these incentive stock option agreements to provide for acceleration of vesting in the event of a change of control in which we are valued at $75 million or greater. These option grants are reflected in the Grants of Plan-Based Awards table and include the incremental fair value of such grants. See "—Termination of Employment and Change of Control Arrangements."

92


Outstanding Equity Awards At Fiscal Year-End

        The following table shows grants of stock options outstanding on the last day of the fiscal year ended December 31, 2006 to each of the executive officers named in the Summary Compensation Table.

Name

  Number of
Securities Underlying
Unexercised Options,
Exercisable
(#)

  Number of Securities
Underlying
Unexercised Options,
Unexercisable
(#)

  Option Exercise
Price
($)

  Option Expiration
Date

Timothy G. Healy
Chief Executive Officer
  0   44,814
60,000
(1)
(2)
1.00
1.45
  1/11/15
12/7/16

David B. Brewster
President and Chief Operating Officer

 

0

 

44,814
7,000
60,000

(1)
(3)
(2)

1.00
1.45
1.45

 

1/11/15
5/11/16
12/7/16

Neal C. Isaacson
Chief Financial Officer

 

763
521

 

23,637
16,146
26,400

(4)
(5)
(6)

1.00
1.00
1.45

 

9/15/15
8/1/15
12/7/16

Philip Giudice
Senior Vice President

 

1,376
354
166
651

 

3,437
8,854
4,167
10,417
2,500
39,500

(7)
(8)
(9)
(10)
(11)
(12)

0.30
1.00
1.00
1.00
1.45
1.45

 

8/19/13
1/11/15
2/9/15
12/15/15
5/11/16
12/7/16

Gregg Dixon
Senior Vice President

 

625

 

11,875
3,437
5,000
41,600

(13)
(14)
(15)
(16)

0.475
1.00
1.45
1.45

 

9/15/14
1/11/15
9/7/16
12/7/16

(1)
The option vested as to 1,789 shares on January 11, 2007 and as to an additional 1,789 shares per month thereafter.

(2)
The option will vest as to 15,000 shares on December 7, 2007 and as to an additional 1,248 shares per month thereafter.

(3)
The option will vest as to 1,750 shares on May 11, 2007 and as to an additional 145 shares per month thereafter.

(4)
The option vested as to 761 shares on January 1, 2007 and as to an additional 761 shares per month thereafter.

(5)
The option vested as to 520 shares on January 1, 2007 and as to an additional 520 shares per month thereafter.

(6)
The option will vest as to 6,600 shares on December 7, 2007 and as to an additional 549 shares per month thereafter.

(7)
The option vested as to 686 shares on January 17, 2007 and as to an additional 686 shares per month thereafter.

(8)
The option vested as to 353 shares on January 11, 2007 and as to an additional 353 shares per month thereafter.

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(9)
The option vested as to 166 shares on January 11, 2007 and as to an additional 166 shares per month thereafter.

(10)
The option vested as to 325 shares on January 1, 2007 and as to an additional 325 shares per month thereafter.

(11)
The option will vest as to 625 shares on July 1, 2007 and as to an additional 52 shares per month thereafter.

(12)
The option will vest as to 9,875 shares on December 7, 2007 and as to an additional 821 shares per month thereafter.

(13)
The option vested as to 624 shares on January 1, 2007 and as to an additional 624 shares per month thereafter.

(14)
The option vested as to 137 shares on January 11, 2007 and as to an additional 137 shares per month thereafter.

(15)
The option will vest as to 1,250 shares on July 1, 2007 and as to an additional 104 shares per month thereafter.

(16)
The option will vest as to 10,400 shares on December 7, 2007 and as to an additional 865 shares per month thereafter.

Option Exercises And Stock Vested

        The following table shows information regarding exercises of options to purchase our common stock and vesting of stock awards held by each executive officer named in the Summary Compensation Table during the fiscal year ended December 31, 2006.

 
  Option Awards
Name

  Number of
Shares
Acquired
on Exercise
(#)

  Value Realized
on Exercise
($)(1)

Timothy G. Healy
Chief Executive Officer
  41,229   18,553

David B. Brewster
President and Chief Operating Officer

 

41,229

 

18,553

Neal C. Isaacson
Chief Financial Officer

 

20,533

 

9,240

Philip Giudice
Senior Vice President

 

48,703

 

44,560

Gregg Dixon
Senior Vice President

 

20,663

 

9,298

(1)
Amounts shown in this column do not represent actual value realized from the sale of the shares acquired upon exercise of options because the shares were not sold on exercise but continue to be held by the executive officer exercising the option. The amounts shown represent the difference between the option exercise price and $1.45, the fair market value on the date of exercise, which is the amount that would have been realized if the shares had been sold immediately upon exercise.

Pension Benefits

        We do not have any qualified or non-qualified defined benefit plans.

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Nonqualified Deferred Compensation

        We do not have any nonqualified defined contribution plans or other deferred compensation plans.

Potential Payments Upon Termination Or Change Of Control

        We have entered into certain agreements and maintain certain plans that may require us to make certain payments and/or provide certain benefits to the executive officers named in the Summary Compensation Table in the event of a termination of employment or a change of control. The following tables summarize the potential payments to each named executive officer assuming that certain termination or change of control events occur. The tables assume that each event occurred on December 31, 2006, the last day of our fiscal year. We have assumed a price per share of our common stock of $            , which represents the mid-point of the range set forth on the cover of this prospectus.

Termination of Employment and Change of Control Arrangements

    Timothy G. Healy, Chief Executive Officer

 
  Termination
  Change of Control
Executive Benefits and
Payments Upon Termination

  Termination by the
Company Without
Cause or by
Employee for
Good Reason

  Change of Control
and EnerNOC
Valued at $75
Million or
Greater

  Change of Control,
Termination by the
Company Without
Cause or by Employee
for Good Reason
Within 1 Year of
Change of Control,
and EnerNOC Valued
at Less Than $75
Million

  Change of Control,
Termination by the
Company Without
Cause or by Employee
for Good Reason
Within 1 Year of
Change of Control,
and EnerNOC Valued
at $75 Million or
Greater

Base Salary   $290,000(1)   $0   $290,000(1)   $290,000(1)

Acceleration of Vesting of Equity

 

0%

 

100% of all unvested options

 

N/A

 

N/A

Number of Stock Options and Value upon Termination(2)

 

0

 

104,814 shares
$

 

N/A

 

N/A

Number of Shares of Vested Stock Received and Value upon Termination

 

N/A

 

N/A

 

All have vested

 

All have vested
 
Total:

 

$290,000


 

$             


 

$290,000


 

$290,000


(1)
Amount equals 100% of annual base salary, as of December 31, 2006.

(2)
Assumes a price per share of our common stock of $        , which represents the mid-point of the range set forth on the cover of this prospectus.

        Pursuant to our employment agreement with Mr. Healy, if Mr. Healy's employment is terminated, he is entitled to payment of his accrued but unpaid base salary, the pro rata portion of his annual bonus amount, an amount equal to the value of his accrued unused vacation days, and reimbursement of any expenses he properly incurred on behalf of us prior to termination. Pursuant to a stock repurchase agreement dated June 17, 2003 and subsequently amended effective as of January 10, 2005, May 16, 2006 and November 9, 2006, if Mr. Healy's employment is terminated by us without cause or by Mr. Healy for good reason, we are required to pay him an amount equal to 100% of his then-current annual base salary over the course of approximately 12 months and all accrued but unpaid incentive compensation, as recommended by the compensation committee and approved by our board

95



of directors. All of our repurchase rights to the restricted shares of common stock purchased by Mr. Healy had lapsed as of December 31, 2006. Pursuant to an incentive stock option agreement dated January 11, 2005, and subsequently amended on May 16, 2006, and an incentive stock option dated December 7, 2006, in the event of a change of control in which we are valued at $75 million or greater, 100% of Mr. Healy's unvested options shall become immediately vested and exercisable.

        Under the stock repurchase agreement, good reason means: (i) a substantial reduction in Mr. Healy's then current base salary, without his consent, or (ii) material and continuing diminution of Mr. Healy's responsibilities, duties and authority in our operation and management, without his consent. Under the stock repurchase agreement, cause means: (i) gross negligence or willful misconduct by Mr. Healy in connection with his employment duties; (ii) failure by Mr. Healy to perform his duties or responsibilities required pursuant to his employment, after written notice and an opportunity to cure; (iii) misappropriation by Mr. Healy for his personal use of our, or our affiliates', assets or business opportunities; (iv) embezzlement or other financial fraud committed by Mr. Healy; (v) Mr. Healy knowingly allowing any third-party to commit any of the acts described in any of the preceding clauses (iii) or (v); or (vi) Mr. Healy's indictment for, conviction of, or entry of a plea of no contest with respect to, any felony.

        Under the incentive stock option agreement, as amended, a change of control means (i) the sale of all or substantially all of our assets or issued and outstanding capital stock; or (ii) our merger or consolidation in which our stockholders immediately before such merger or consolidation do not own immediately after such merger or consolidation capital stock or other equity interests of the surviving corporation or entity representing more than 50% in voting power of capital stock or other equity interest of such surviving corporation or entity outstanding immediately after such merger or consolidation.

    David B. Brewster, President and Chief Operating Officer

 
  Termination
  Change of Control
Executive Benefits and
Payments Upon Termination

  Termination by the
Company Without
Cause or by
Employee for
Good Reason

  Change of Control
and EnerNOC
Valued at $75
Million or
Greater

  Change of Control,
Termination by the
Company Without
Cause or by Employee
for Good Reason
Within 1 Year of
Change of Control,
and EnerNOC Valued
at Less Than $75
Million

  Change of Control,
Termination by the
Company Without
Cause or by Employee
for Good Reason
Within 1 Year of
Change of Control,
and EnerNOC Valued
at $75 Million or
Greater

Base Salary   $230,000(1)   $0   $230,000(1)   $230,000(1)

Acceleration of Vesting of Equity

 

0%

 

100% of all unvested options

 

N/A

 

N/A

Number of Stock Options and Value upon Termination(2)

 

0

 

111,814 shares
$

 

N/A

 

N/A

Number of Shares of Vested Stock Received and Value upon Termination

 

N/A

 

N/A

 

All have vested

 

All have vested
 
Total:

 

$230,000


 

$             


 

$230,000


 

$230,000


(1)
Amount equals 100% of annual base salary, as of December 31, 2006.

(2)
Assumes a price per share of our common stock of $        , which represents the mid-point of the range set forth on the cover of this prospectus.

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        Pursuant to our employment agreement with Mr. Brewster, if Mr. Brewster's employment is terminated, he is entitled to payment of his accrued but unpaid base salary, an amount equal to the value of his accrued unused vacation days, and reimbursement of any expenses he properly incurred on behalf of us prior to termination. Pursuant to a stock repurchase agreement dated June 17, 2003 and subsequently amended effective as of January 10, 2005, May 16, 2006 and November 9, 2006, if Mr. Brewster's employment is terminated by us without cause or by Mr. Brewster for good reason, we are required to pay him an amount equal to 100% of his then-current annual base salary over the course of approximately 12 months and all accrued but unpaid incentive compensation, as recommended by the compensation committee and approved by our board of directors. All of our repurchase rights to the restricted shares of stock purchased by Mr. Brewster had lapsed as of December 31, 2006. Pursuant to an incentive stock option agreement dated January 11, 2005, and subsequently amended on May 16, 2006, and an incentive option agreement dated December 7, 2006, in the event of a change of control in which we are valued at $75 million or greater, 100% of Mr. Brewster's unvested options shall become immediately vested and exercisable.

        Under the stock repurchase agreement good reason means: (i) a substantial reduction in Mr. Brewster's then current base salary, without his consent, or (ii) material and continuing diminution of Mr. Brewster's responsibilities, duties and authority in our operation and management, without his consent. Under the stock repurchase agreement, cause means: (i) gross negligence or willful misconduct by Mr. Brewster in connection with his employment duties; (ii) failure by Mr. Brewster to perform his duties or responsibilities required pursuant to his employment, after written notice and an opportunity to cure; (iii) misappropriation by Mr. Brewster for his personal use of our, or our affiliates assets or business opportunities; (iv) embezzlement or other financial fraud committed by Mr. Brewster; (v) Mr. Brewster knowingly allowing any third-party to commit any of the acts described in any of the preceding clauses (iii) or (v); or (vi) Mr. Brewster's indictment for, conviction of, or entry of a plea of no contest with respect to, any felony.

        Under the incentive stock option agreement, as amended, a change of control means (i) the sale of all or substantially all of the assets or issued and outstanding capital stock; or (ii) our merger or consolidation in which our stockholders immediately before such merger or consolidation do not own immediately after such merger or consolidation capital stock or other equity interests of the surviving corporation or entity representing more than 50% in voting power of capital stock or other equity interest of such surviving corporation or entity outstanding immediately after such merger or consolidation.

    Neal C. Isaacson, Chief Financial Officer

 
  Termination
  Change of Control
 
Executive Benefits and
Payments Upon
Termination

  Termination by
the Company
Without Cause
or by Employee
for Good Reason

  Change of Control
and EnerNOC
Valued at
$75 Million or
Greater

  Change of Control
and Termination
by the Company
Without Cause
or by Employee
for Good Reason

 
Base Salary   $ 82,500 (1) $ 0   $ 82,500 (1)

Acceleration of Vesting of Equity

 

 

N/A

 

 

Immediate vesting of options that would otherwise vest in the six months following change in control

 

 

Immediate vesting of 50% of all stock awards

 

Number of Stock Options and Value upon Termination(2)

 

 

N/A

 


$

7,686 shares

 


$

44,000 shares

 

Post-Term Benefits

 

$

6,183

 

 

N/A

 

$

6,183

 
 
Total:

 

$

88,683

 

$

 

 

$

 

 
   
 
 
 

(1)
Amount equals 50% of annual base salary, as of December 31, 2006.

(2)
Assumes a price per share of our common stock of $                      , which represents the mid-point of the range set forth on the cover of this prospectus.

97


        Pursuant to our severance agreement with Mr. Isaacson, if Mr. Isaacson's employment is terminated by us without cause or by Mr. Isaacson for good reason, we are required to pay him an amount equal to 50% of his then-current annual base salary in six equal monthly installments, as well as all accrued but unpaid base salary, vacation pay and incentive compensation, and reasonable and necessary expenses incurred on behalf of us prior to the termination date. Upon such a termination, and for a period of six months following the termination date, we are also required to maintain, on the same terms, any benefits that Mr. Isaacson was receiving from us as of the termination date. If it is not permissible for us to continue coverage of Mr. Isaacson under any insurance plans, we are required to pay Mr. Isaacson such amount, net of state and federal income taxes, as will be sufficient for him to obtain such insurance coverage on an individual basis. If Mr. Isaacson's employment is terminated by us without cause or by Mr. Isaacson for good reason following a change of control, the number of stock awards equal to 50% of the total stock awards granted to Mr. Isaacson shall become immediately vested and exercisable. Pursuant to incentive stock option agreements dated August 1, 2005 and September 15, 2005, and subsequently amended on May 16, 2006, and an incentive stock option agreement dated December 7, 2006, in the event of a change of control in which we are valued at $75 million or greater, the vesting schedule for all of Mr. Isaacson's unvested options shall be accelerated by six months, subject to the further acceleration provisions of his severance agreement.

    Philip Giudice, Senior Vice President of Corporate Development

 
  Termination
  Change of Control
 
Executive Benefits and
Payments Upon Termination

  Termination by the
Company
Without Cause
or by Employee
for Good Reason

  Change of Control
and EnerNOC
Valued at
$75 Million or
Greater

  Change of Control
and Termination
by the Company
Without Cause
or by Employee
for Good Reason

 
Base Salary   $ 82,500 (1) $ 0   $ 82,500 (1)
Acceleration of Vesting of Equity     N/A     Immediate vesting of options that would otherwise vest in the six months following change in control     Immediate vesting of 50% of all stock awards  
Number of Stock Options and Value upon Termination(2)     N/A  
$
9,188 shares
 
$
60,063 shares
 

Post-Term Benefits

 

$

6,183

 

 

N/A

 

$

6,183

 
  Total:   $ 88,683   $     $    
   
 
 
 

(1)
Amount equals 50% of annual base salary, as of December 31, 2006.

(2)
Assumes a price per share of our common stock of $                      , which represents the mid-point of the range set forth on the cover of this prospectus.

        Pursuant to our severance agreement with Mr. Giudice, if Mr. Giudice's employment is terminated by us without cause or by Mr. Giudice for good reason, we are required to pay him an amount equal to 50% of his then-current annual base salary in six equal monthly installments, as well as all accrued but unpaid base salary, vacation pay and incentive compensation and reasonable and necessary expenses incurred on behalf of us prior to the termination date. Upon such a termination, and for a period of six months following the termination date, we are also required to maintain, on the same terms, any benefits that Mr. Giudice was receiving from us as of the termination date. If it is not permissible for us to continue coverage of Mr. Giudice under any insurance plans, we are required to pay Mr. Giudice such amount, net of state and federal income taxes, as will be sufficient for him to obtain such insurance coverage on an individual basis. If Mr. Giudice's employment is terminated by us without cause or by Mr. Giudice for good reason following a change of control, the number of stock

98



awards equal to 50% of the stock awards granted to Mr. Giudice shall become immediately vested and exercisable. Pursuant to incentive stock option agreements dated August 19, 2003, January 11, 2005, February 9, 2005, December 15, 2005 and May 11, 2006, and subsequently amended on May 16, 2006, and an incentive stock option agreement dated December 7, 2006, in the event of a change of control in which we are valued at $75 million or greater, the vesting schedule for all of Mr. Giudice's unvested options shall be accelerated by six months, subject to the further acceleration provisions of his severance agreement.

    Gregg Dixon, Senior Vice President of Marketing and Sales

 
  Termination
  Change of Control
 
Executive Benefits and
Payments Upon Termination

  Termination by the
Company
Without Cause
or by Employee
for Good Reason

  Change of Control
and EnerNOC
Valued at
$75 Million or
Greater

  Change of Control
and Termination
by the Company
Without Cause
or by Employee
for Good Reason

 
Base Salary   $ 82,500 (1) $ 0   $ 82,500 (1)
Acceleration of Vesting of Equity     N/A     Immediate vesting of options that would otherwise vest in the six months following change in control     Immediate vesting of 50% of all stock awards  
Number of Stock Options and Value upon Termination(2)     N/A  
$
5,192 shares
 
$
41,600 shares
 

Post-Term Benefits

 

$

6,183

 

 

N/A

 

$

6,183

 
  Total:   $ 88,683   $     $    
   
 
 
 

(1)
Amount equals 50% of annual base salary, as of December 31, 2006.

(2)
Assumes a price per share of our common stock of $                      , which represents the mid-point of the range set forth on the cover of this prospectus.

        Pursuant to our severance agreement with Mr. Dixon, if Mr. Dixon's employment is terminated by us without cause or by Mr. Dixon for good reason, we are required to pay him an amount equal to 50% of his then-current annual base salary in six equal monthly installments, as well as all accrued but unpaid base salary, vacation pay and incentive compensation, and reasonable and necessary expenses incurred on behalf of us prior to the termination date. Upon such a termination, and for a period of six months following the termination date, we are also required to maintain, on the same terms, any benefits that Mr. Dixon was receiving from us as of the termination date. If it is not permissible for us to continue coverage of Mr. Dixon under any insurance plans, we are required to pay Mr. Dixon such amount, net of state and federal income taxes, as will be sufficient for him to obtain such insurance coverage on an individual basis. If Mr. Dixon's employment is terminated by us without cause or by Mr. Dixon for good reason following a change of control, the number of stock awards equal to 50% of the unvested stock awards granted to Mr. Dixon shall become immediately vested and exercisable. Pursuant to incentive stock option agreements dated September 15, 2004 and January 11, 2005, and subsequently amended on May 16, 2006, and an incentive stock option agreements dated September 7, 2006 and December 7, 2006, in the event of a change of control in which we are valued at $75 million or greater, the vesting schedule for all of Mr. Dixon's unvested options shall be accelerated by six months, subject to the further acceleration provisions of his severance agreement.

        Under our severance agreements with Messrs. Isaacson, Giudice and Dixon, good reason includes (i) a substantial reduction in the employee's then current base salary, without the employee's consent; or (ii) material and continuing diminution of the employee's responsibilities, duties and authority in our operation and management as compared to such responsibilities, duties and authority on the effective

99



date of the severance agreement, without the employee's consent. Under the agreement, cause includes: (i) willful failure to perform, or gross negligence in the performance of, the employee's duties for us or any of our affiliates; (ii) material breach by the employee of any obligation to us or any of our affiliates with respect to confidential information, non-competition, non-solicitation or the like; (iii) breach of fiduciary duty, fraud, embezzlement or other material dishonesty with respect to us or any of our affiliates; or (iv) conviction of, or plea of nolo contendere to, a felony or any other crime involving moral turpitude.

        Under our severance agreements with Messrs. Isaacson, Giudice and Dixon, change of control includes (i) the sale of all or substantially all of our assets or our issued and outstanding capital stock; or (ii) merger or consolidation involving us in which our stockholders immediately before such merger or consolidation do not own immediately after such merger or consolidation capital stock or other equity interests of the surviving corporation or entity representing more than 50% in voting power of capital stock or other equity interest of such surviving corporation or entity outstanding immediately after such merger or consolidation.

Director Compensation

    Compensation of Directors

        We have not provided cash or equity compensation to directors for their services as directors or members of committees of the board of directors. We have reimbursed and will continue to reimburse our non-employee directors for their reasonable expenses incurred in attending meetings of our board of directors and committees the board of directors. After completion of this offering, we will be adding outside directors to our board of directors and plan to pay our outside directors an annual cash retainer of $    . We may also grant stock options and awards to our outside directors. We plan to pay the chairpersons of the audit committee, compensation committee and nominating and governance committee who are outside directors an additional annual cash retainer.

Employee Benefit Plans

    Stock Plans

    Amended and Restated 2003 Stock Option and Incentive Plan

        Our 2003 Stock Plan was adopted by our board of directors and approved by our stockholders in June 2003. In January 2005, February 2006 and December 2006, our board of directors approved amendments to the 2003 Stock Plan, and in January 2005, May 2006 and December 2006, our stockholders approved amendments to the 2003 Stock Plan. Under this plan, we may grant nonstatutory stock options, incentive stock options, restricted stock and other stock-based awards. A maximum of 1,372,400 shares of common stock are authorized for issuance under the 2003 Stock Plan.

        In accordance with the terms of the 2003 Stock Plan, the plan is administered by our board of directors or a committee of our board of directors.

        Our board of directors or any committee to which the board of directors delegates authority may, with the consent of the affected plan participants, amend outstanding awards consistent with the terms of the 2003 Stock Plan.

        Pursuant to the terms of the 2003 Stock Plan, in the event of (i) a sale of us by merger in which our stockholders in their capacity as such no longer own a majority of our (or our successor's) outstanding equity securities, (ii) any sale of all or substantially all of our assets or capital stock or (iii) any other acquisition of us business, our board of directors, or the board of the surviving entity, must provide that all awards shall be assumed or substituted by the successor entity and, may, in its

100



sole discretion, upon written notice to the effected participants, take any one or more of the following actions pursuant to the 2003 Stock Plan, as to outstanding options:

    provide that one or more options shall become immediately exercisable in full and that such options must be exercised in whole or in part within a specified number of days and at the end of such period the unexercised options shall terminate; or

    provide that one or more options then outstanding shall become immediately exercisable in full and shall terminate in exchange for a cash payment equal to the excess of the fair market value for the shares subject to such options over the exercise price thereof.

        As of January 15, 2007, 228,470 shares have been issued upon the exercise of options and the grant of stock awards under this plan, 850,980 shares are subject to outstanding options under the 2003 Stock Plan, 53,854 shares of restricted stock issued under the 2003 Stock Plan are subject to our lapsing right of repurchase and 237,303 shares are available for future grant under this plan. After completion of this offering, the 2003 Stock Plan will terminate and we will grant no further stock options or other awards under this plan. All outstanding stock options granted and restricted stock issued under the 2003 Stock Plan as of the date of termination will remain outstanding and subject to their respective terms and the terms of the 2003 Stock Plan.

    2007 Stock Option and Incentive Plan

        The 2007 Stock Plan will be adopted by our board of directors in March 2007 and approved by our stockholders in March 2007 and will become effective as of the date of this prospectus. The 2007 Stock Plan will provide for the grant of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards and other stock-based awards. As of                        , 2007,                          shares of common stock were reserved for issuance under the 2007 Stock Plan. In addition, the 2007 Stock Plan contains an "evergreen provision" which allows for an annual increase in the number of shares available for issuance under the plan on the first day of each of our fiscal years during the period beginning in fiscal year 2007 and ending on the second day of fiscal year 2015. The annual increase in the number of shares shall be equal to the lowest of

    shares;

    5% of our outstanding shares on the first day of the fiscal year; and

    an amount determined by our board of directors.

        In accordance with the terms of the 2007 Stock Plan, our board of directors has authorized our compensation committee to administer the 2007 Stock Plan, however, our full board shall retain authority to make grants to our executive officers and members of our board of directors. In accordance with the provisions of the 2007 Stock Plan, our board of directors or compensation committee will determine the terms of options and other awards, including:

    the determination of which employees, directors and consultants will be granted options and other awards;

    the number of shares subject to options and other awards;

    the exercise price of each option which may not be less than fair market value on the date of grant;

    the schedule upon which options become exercisable;

    the termination or cancellation provisions applicable to options; the terms and conditions of other awards, including conditions for repurchase, termination or cancellation, issue price and repurchase price; and

101


    all other terms and conditions upon which each award may be granted in accordance with the 2007 Stock Plan.

        No participant may receive awards for over                        shares of common stock in any fiscal year.

        In addition, our board of directors or any committee to which the board of directors delegates authority may, with the consent of the affected plan participants, reprice or otherwise amend outstanding awards consistent with the terms of the 2007 Stock Plan.

        Upon a merger or other reorganization event, our board of directors, may, in their sole discretion, take any one or more of the following actions pursuant to the 2007 Stock Plan, as to some or all outstanding awards:

    provide that all options shall be assumed or substituted by the successor corporation;

    upon written notice to a participant, provide that the participant's unexercised options will become exercisable in full and will terminate immediately prior to the consummation of such transaction unless exercised by the participant;

    in the event of a merger pursuant to which holders of our common stock will receive a cash payment for each share surrendered in the merger, make or provide for a cash payment to the participants equal to the difference between the merger price times the number of shares of our common stock subject to such outstanding options (at prices not in excess of the merger price), and the aggregate exercise price of all such outstanding options (all options being made fully vested and immediately exercisable prior to their termination), in exchange for the termination of such options; and

    provide that outstanding awards shall be assumed or substituted by the successor corporation, become realizable or deliverable, or restrictions applicable to an award will lapse, in whole or in part, prior to or upon the merger or reorganization event.

401(k) Plan

        We have established a 401(k) Profit Sharing Plan and Trust, or the 401(k) Plan, covering substantially all of our employees. Once our employees have met the eligibility and participation requirements under the 401(k) Plan, employees may contribute a portion of their earnings to the 401(k) Plan to be invested in various savings alternatives. Annually, at the discretion of our Board of Directors, we may make matching contributions to the 401(k) Plan, which vests ratably over periods ranging from one to three years. To date, we have not made any matching contributions to the 401(k) Plan.

Limitation of Officers' and Directors' Liability and Indemnification

        The Delaware General Corporation Law authorizes corporations to limit or eliminate, subject to certain conditions, the personal liability of directors to corporations and their stockholders for monetary damages for breach of their fiduciary duties. Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon completion of this offering limit the liability of our directors to the fullest extent permitted by Delaware law.

        We have obtained director and officer liability insurance to cover liabilities our directors and officers may incur in connection with their services to us, including matters arising under the Securities Act. Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect upon completion of this offering also provide that we will indemnify any of our directors and officers who, by reason of the fact that he or she is one of our officers or directors, is involved in a legal proceeding of any nature. We will repay certain expenses incurred by a director or officer in

102



connection with any civil or criminal action or proceeding, specifically including actions by us or in our name (derivative suits). Such indemnifiable expenses include, to the maximum extent permitted by law, attorneys' fees, judgments, civil or criminal fines, settlement amounts and other expenses customarily incurred in connection with legal proceedings. A director or officer will not receive indemnification if he or she is found not to have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interest. Prior to the completion of this offering, we plan to enter into agreements to indemnify our directors and officers. These agreements, among other things, will indemnify our directors and officers for certain expenses, including attorneys' fees, judgments, fines, and settlement amounts incurred by any such person in any action or proceeding, including any action by us arising out of such person's services as our director or officer, any of our subsidiaries from time to time or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and officers.

        Such limitation of liability and indemnification does not affect the availability of equitable remedies. In addition, we have been advised that in the opinion of the SEC, indemnification for liabilities arising under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable.

        There is no pending litigation or proceeding involving any of our directors, officers, employees or agents in which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding that may result in a claim for such indemnification.

103



CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The following is a description of the transactions we have engaged in since January 1, 2004 with our directors and officers and beneficial owners of more than five percent of our voting securities and their affiliates.

Sales of Convertible Preferred Stock

        The following table summarizes, as of January 15, 2007, our sales of Series A-1 Convertible Preferred Stock, Series B Convertible Preferred Stock, Series B-1 Convertible Preferred Stock and Series C Convertible Preferred Stock to our founders, officers, directors and security holders who beneficially own more than five percent of any class of our voting securities.

Name

  Type of Preferred Shares
  Number of
Shares

  Aggregate
Purchase Price

  Date of
Purchase

Five Percent Stockholders                  
Funds affiliated with Foundation Capital Management Co. IV, LLC(1)   Series B
Series B-1
Series C
Series C
  759,417
194,445
90,449
164,616
  $
$
$
$
5,000,001
2,173,534
5,000,021
9,099,972
  1/11/05
3/16/06
12/29/06
1/5/07

Funds affiliated with Draper Fisher Jurvetson Fund(2)

 

Series A-1
Series B
Series B
Series B-1
Series C

 

414,049
180,986
16,126
38,725
9,045

 

$
$
$
$
$

786,693
1,191,593
106,172
383,363
500,008

 

1/20/04
1/11/05
9/21/05
3/16/06
12/29/06

Draper Fisher Jurvetson New England Fund I (SBIC), L.P.(3)

 

Series A-1
Series B
Series B-1

 

212,267
92,784
19,504

 

$
$
$

403,307
610,890
193,094

 

1/20/04
3/16/06
3/16/06

Braemer Energy Ventures, LP(4)

 

Series A-1
Series B
Series B
Series B-1
Series C

 

268,421
117,330
10,454
25,104
5,427

 

$
$
$
$
$

510,000
772,501
68,830
248,534
300,005

 

1/20/04
1/11/05
9/21/05
3/16/06
12/29/06

Directors and Executive Officers

 

 

 

 

 

 

 

 

 
Philip Giudice(5)   Series A-1   8,948   $ 17,001   1/20/04

(1)
Includes 747,175 shares of Series B Convertible Preferred Stock, 191,310 shares of Series B-1 Convertible Preferred Stock and 250,924 shares of Series C Convertible Preferred Stock held by Foundation Capital IV, L.P., 6,341 shares of Series B Convertible Preferred Stock, 1,624 shares of Series B-1 Convertible Preferred Stock and 2,130 shares of Series C Convertible Preferred Stock held by Foundation Capital IV Principals Fund, LLC, and 5,901 shares of Series B Convertible Preferred Stock, 1,511 shares of Series B-1 Convertible Preferred Stock and 1,982 shares of Series C Convertible Preferred Stock held by FC IV Active Advisors, LLC. Adam Grosser, a member of our board of directors, is a manager of Foundation Capital Management Co. IV, LLC.

(2)
Includes 286,912 shares of Series A Convertible Preferred Stock, 385,066 shares of Series A-1 Convertible Preferred Stock, 183,314 shares of Series B Convertible Preferred Stock, 36,014 shares of Series B-1 Convertible Preferred Stock and 8,412 shares of Series C Convertible Preferred Stock

104


    held by Draper Fisher Jurvetson Fund VI, L.P., 8,021 shares of Series A Convertible Preferred Stock, 10,765 shares of Series A-1 Convertible Preferred Stock, 5,126 shares of Series B Convertible Preferred Stock, 1,007 shares of Series B-1 Convertible Preferred Stock and 235 shares of Series C Convertible Preferred Stock held by Draper Fisher Jurvetson Partners VI, LLC, and 13,575 shares of Series A Convertible Preferred Stock, 18,218 shares of Series A-1 Convertible Preferred Stock, 8,672 shares of Series B Convertible Preferred Stock, 1,704 shares of Series B-1 Convertible Preferred Stock and 398 shares of Series C Convertible Preferred Stock held by Draper Associates, L.P.

(3)
Scott M. Johnson, a member of our board of directors, is a manager and a member of the investment committee of Draper Fisher Jurvetson New England Fund I (SBIC), L.P.

(4)
William D. Lese, a member of our board of directors, is a managing director of Braemer Capital Management, LLC, an affiliate of Braemer Energy Ventures, LP.

(5)
Senior Vice President of Corporate Development and director.

Sales of Restricted Stock

        The following table summarizes, as of January 15, 2007, our sales of restricted shares of common stock to our officers, directors and security holders who beneficially own more than five percent of any class of our voting securities.

Name

  Number of Shares
  Date of Purchase
  Aggregate
Purchase Price

Timothy G. Healy(1)   475,417   6/5/03   $ 475
David B. Brewster(2)   475,417   6/5/03   $ 475

(1)
Chief Executive Officer, Chairman of our Board of Directors and five percent stockholder. As consideration for the shares of common stock, Mr. Healy contributed 475,417 membership interests in EnerNOC, LLC to EnerNOC, Inc. For purposes of the exchange, each membership interest was valued at $0.001.

(2)
President, Chief Operating Officer, director and five percent stockholder. As consideration for the shares of common stock, Mr. Brewster contributed 475,417 membership interests in EnerNOC, LLC to EnerNOC, Inc. For purposes of the exchange, each membership interest was valued at $0.001.

Registration Rights

        On December 29, 2006, we and the holders of substantially all of our shares of our convertible preferred stock entered into the third amended and restated investors' rights agreement. Pursuant to the agreement, the holders of 20% of our convertible preferred stock have the right to demand of us, subject to certain terms and conditions, that, at the earlier of one year from the completion of this offering and June 17, 2009, we register under the Securities Act the shares of common stock issued or issuable upon the conversion of their shares of convertible preferred stock if the anticipated gross receipts from the sales of such shares of common stock are at least $2 million. In addition, if we propose to register any of our capital stock under the Securities Act (except on Forms S-4 or S-8 and other than pursuant to this offering), the holders of all series of our convertible preferred stock will be entitled to customary "piggyback" registration rights.

Indemnification Arrangements

        Under our amended and restated certificate of incorporation that will be in effect upon the completion of this offering, we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In January 2005, in connection with Foundation Capital's purchase of shares of our

105



Series B Convertible Preferred Stock, we entered into an indemnification agreement with Mr. Grosser. In addition, we expect to enter into indemnification agreements with each of our other directors and executive officers prior to completion of the offering. See "Management—Limitation of Officers' and Directors' Liability and Indemnification" for a more detailed description of these indemnification arrangements.

Acquisition Payments

        On June 1, 2005, we purchased 100% of the membership interest in Pinpoint Power DR from Pinpoint Power LLC, an affiliate of Thomas E. Atkins, our Senior Vice President of Demand Response Development and a member of our board of directors. Pursuant to our agreement to purchase the Pinpoint Power DR membership interests, we made payments of cash to Pinpoint Power LLC of approximately $1.7 million in 2006 and issued to Mr. Atkins 92,041 shares of our common stock in 2006. In 2007, we are required to pay Pinpoint Power LLC approximately $2.2 million and issue to Mr. Atkins 65,951 shares of our common stock. In 2008, we are required to pay Pinpoint Power LLC approximately $0.4 million and issue to Mr. Atkins 44,260 shares of our common stock. In the event that ISO New England Inc. exercises its option to extend the term of an agreement with our subsidiary Pinpoint Power DR by one year, we will be obligated to make additional payments to Pinpoint Power LLC of approximately $1.7 million and $0.7 million in 2008 and 2009, respectively, and issue to Mr. Atkins 28,287 shares of our common stock in 2008. In connection with the agreement, we loaned Pinpoint Power DR $1.4 million pursuant to two promissory notes. The promissory notes were paid in full in May 2005.

Assignment and Assumption of Asset Purchase Agreement

        Pursuant to an asset purchase agreement dated May 15, 2006 between Foundation Capital IV, L.P. and Celerity Energy Partners LLC, Foundation agreed to purchase certain assets of Celerity for an aggregate purchase price of $3.0 million. On May 23, 2006, we entered into an assignment and assumption agreement with Foundation, whereby Foundation agreed to assign, and we agreed to assume, all of the rights and obligations to and under the asset purchase agreement between Foundation and Celerity. We made no payments to Foundation as an inducement to enter into the assignment and assumption agreement.

Policy for Approval of Related Person Transactions

        Pursuant to the written charter of our audit committee, the audit committee is responsible for reviewing and approving, prior to our entry into any such transaction, all transactions in which we are a participant and in which any parties related to us has or will have a direct or indirect material interest.

        In reviewing and approving such transactions, the audit committee shall obtain, or shall direct our management to obtain on its behalf, all information that the committee believes to be relevant and important to a review of the transaction prior to its approval. Following receipt of the necessary information, a discussion shall be held of the relevant factors if deemed to be necessary by the committee prior to approval. If a discussion is not deemed to be necessary, approval may be given by written consent of the committee. This approval authority may also be delegated to the chairman of the audit committee in some circumstances. No related person transaction shall be entered into prior to the completion of these procedures.

        The audit committee or its chairman, as the case may be, shall approve only those related person transactions that are determined to be in, or not inconsistent with, the best interests of us and our stockholders, taking into account all available facts and circumstances as the committee or the chairman determines in good faith to be necessary. No member of the audit committee shall participate in any review, consideration or approval of any related person transaction with respect to which the member or any of his or her immediate family members is the related person.

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PRINCIPAL AND SELLING STOCKHOLDERS

        The following table sets forth certain information regarding the beneficial ownership of our common stock and the shares beneficially owned by all selling stockholders as of January 15, 2007, and as adjusted to reflect the sale of our common stock offered by this prospectus by:

    the executive officers named in the summary compensation table;

    each of our directors;

    all of our current directors and executive officers as a group;

    each stockholder known by us to own beneficially more than five percent of our common stock; and

    all selling stockholders.

        Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to the securities. Shares of common stock that may be acquired by an individual or group within 60 days of January 15, 2007, pursuant to the exercise of options or warrants, are deemed to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Percentage of ownership is based on 4,857,834 shares of common stock outstanding on January 15, 2007, which assumes the conversion of all outstanding shares of our Series A Convertible Preferred Stock, Series A-1 Convertible Preferred Stock, Series B Convertible Preferred Stock, Series B-1 Convertible Preferred Stock and Series C Convertible Preferred Stock into 3,355,551 shares of common stock, and                        shares of common stock outstanding after the completion of this offering.

        Except as indicated in footnotes to this table, we believe that the stockholders named in this table have sole voting and investment power with respect to all shares of common stock shown to be beneficially owned by them, based on information provided to us by such stockholders. The address for the directors and executive officers set forth below is 75 Federal Street, Suite 300, Boston, Massachusetts 02110.

 
  Shares Beneficially Owned
Prior to this Offering

   
  Shares Beneficially Owned After
this Offering(1)

 
 
  Shares
Being Sold
in this
Offering(1)

 
Beneficial Owner

 
  Number
  Percent
  Number
  Percent
 
Directors and Executive Officers                      
Timothy G. Healy(2)   527,724     %           %
David B. Brewster(3)   522,017     %           %
Neal C. Isaacson(4)   24,901   *           *  
Philip Giudice(5)   70,093     %           %
Gregg Dixon(6)   23,571   *           *  
Thomas E. Atkins   192,790     %           %
Adam Grosser(7)   1,208,927     %           %
Scott M. Johnson(8)   482,714     %           %
William Lese(9)   626,736     %           %
All directors and executive officers as a group (11 persons)(10)   3,740,827     %           %
                       

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Five Percent Stockholders

 

 

 

 

 

 

 

 

 

 

 
Funds affiliated with Foundation Capital Management Co. IV, LLC(11)
70 Willow Road, Suite 200
Menlo Park, California 94025
 
1,208,927
 

%
       
%
Funds affiliated with Draper Fisher Jurvetson(12)
2882 Sand Hill Road, Suite 150
Menlo Park, California 94025
  967,439     %           %
Draper Fisher Jurvetson New England Fund I (SBIC), L.P.(13)
One Broadway, 14 th Floor
Cambridge, MA 02142
 
482,714
 

%
       

%
Braemer Energy Ventures, LP(14)
360 Madison Avenue, 10 th Floor
New York, New York 10017
  626,736     %           %

*
Indicates beneficial ownership of less than 1% of the total outstanding common stock.

(1)
Assumes exercise of the underwriters' over-allotment option in full.

(2)
Consists of 301,417 shares of common stock and options to purchase 3,578 shares of common stock held by Mr. Healy and 222,729 shares of common stock held by various family members of Mr. Healy and in trusts and custodianships established by Mr. Healy. Mr. Healy holds sole voting power with respect to 473,849 shares of common stock and sole investment power with respect to 354,995 shares of common stock. Mr. Healy disclaims beneficial ownership of the shares identified in this footnote except as to his proportionate pecuniary interest in such shares.

(3)
Consists of 465,439 shares of common stock and options to purchase 3,578 shares of common stock held by Mr. Brewster and 53,000 shares of common stock held by various family members of Mr. Brewster and in a trust established by Mr. Brewster. Mr. Brewster holds sole voting and investment power with respect to 519,017 shares of common stock. Mr. Brewster disclaims beneficial ownership of the shares identified in this footnote except as to his proportionate pecuniary interest in such shares.

(4)
Includes 2,562 shares of common stock Mr. Isaacson has the right to acquire pursuant to outstanding options which are or will be immediately exercisable within 60 days of January 15, 2007.

(5)
Includes 3,060 shares of common stock Mr. Giudice has the right to acquire pursuant to outstanding options which are or will be immediately exercisable within 60 days of January 15, 2007.

(6)
Includes 1,522 shares of common stock Mr. Dixon has the right to acquire pursuant to outstanding options which are or will be immediately exercisable within 60 days of January 15, 2007.

(7)
Consists of the shares described in footnote 11 below. Mr. Grosser disclaims beneficial ownership of the shares owned by the Foundation Funds except to the extent of his pecuniary interest therein.

(8)
Consists of the shares described in footnote 13 below. Mr. Johnson disclaims beneficial ownership of the shares owned by Draper Fisher Jurvetson New England Fund I (SBIC), L.P. except to the extent of his pecuniary interest therein.

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(9)
Consists of the shares described in footnote 14 below. Mr. Lese disclaims beneficial ownership of the shares owned by Braemer Energy Ventures, L.P. except to the extent of his pecuniary interest therein.

(10)
See footnotes (2) through (9). Includes 21,800 shares of common stock issuable upon exercise of options currently exercisable within 60 days of January 15, 2007 and 53,854 shares of common stock subject to a lapsing repurchase right.

(11)
Includes 1,189,438 shares of common stock held by Foundation Capital IV, L.P., 10,095 shares of common stock held by Foundation Capital IV Principals Fund, LLC, and 9,394 shares of common stock held by FC IV Active Advisors, LLC. The voting and disposition of the shares held by Foundation Capital IV, L.P., Foundation Capital IV Principals Fund, LLC and FC IV Active Advisors, LLC is determined by the managers of Foundation Capital Management Co. IV, LLC, which is the manager of each of the Foundation funds. Adam Grosser, a member of our board of directors, is a manager of Foundation Capital Management Co. IV, LLC and shares voting and dispositive power over these shares with the other managers of Foundation Capital Management Co. IV, LLC. Mr. Grosser disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.

(12)
Includes 899,718 shares of common stock held by Draper Fisher Jurvetson Fund VI, L.P., 25,154 shares of common stock held by Draper Fisher Jurvetson Partners VI, LLC, and 42,567 shares of common stock held by Draper Associates, L.P. Tim Draper, John Fisher, and Steve Jurvetson are the managing directors of Draper Fisher Jurvetson Management Co. VI, LLC, which is the general partner of Draper Fisher Jurvetson Fund VI, L.P. On a combined basis, Messrs. Draper, Fisher, and Jurvetson share voting and investment power over the shares owned by Draper Fisher Jurvetson Fund VI, L.P. Messrs. Draper, Fisher, and Jurvetson are also the managing members of Draper Fisher Jurvetson Partners VI, LLC. On a combined basis, Messrs. Draper, Fisher, and Jurvetson share voting and investment power over the shares owned by Draper Fisher Jurvetson Partners VI, LLC. Mr. Draper is the President of Draper Associates, Inc., which is the general partner of Draper Associates, L.P. In this capacity, Mr. Draper has sole voting and investment power over the shares owned by this entity. Messrs. Draper, Fisher, and Jurvetson disclaim beneficial ownership of these shares except to the extent of their respective pecuniary interests therein.

(13)
The voting and disposition of the shares held by Draper Fisher Jurvetson New England Fund I (SBIC), L.P. is determined by the investment committee of Draper Fisher Jurvetson New England Fund I (SBIC), LLC, which is the general partner of Draper Fisher Jurvetson New England Fund I (SBIC), L.P. Scott M. Johnson, a member of our board of directors, is a manager and a member of the investment committee of Draper Fisher Jurvetson New England Fund I (SBIC), L.P. and shares voting and dispositive power over these shares with the other members of the investment committee. Mr. Johnson disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.

(14)
The voting and disposition of the shares held by Braemar Energy Ventures, L.P. is determined by the investment committee of Braemar Partners, LLC, which is the general partner of Braemar Power and Communications Management, L.P., which in turn is the general partner of Braemar Energy Ventures, L.P. William D. Lese, a member of our board of directors, is a managing member of and a member of the investment committee of Braemar Partners, LLC and shares voting and dispositive power over these shares with the other members of the investment committee. Mr. Lese disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein.

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DESCRIPTION OF CAPITAL STOCK

        Under our amended and restated certificate of incorporation that will be in effect upon the completion of this offering, our authorized capital stock will consist of            shares of common stock, $0.001 par value per share, and 5,000,000 shares of undesignated preferred stock, $0.001 par value per share. The following description summarizes the most important terms of our capital stock. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description you should refer to our amended and restated certificate of incorporation and amended and restated bylaws, effective upon completion of this offering, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part, and to the applicable provisions of the Delaware General Corporation Law.

Common Stock

        As of January 15, 2007, we had issued and outstanding 1,502,283 shares of common stock, held by 40 stockholders of record, and there were outstanding options and warrants to purchase 917,333 shares of common stock.

        Holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, and do not have cumulative voting rights. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for dividend payments. All outstanding shares of common stock are fully paid and nonassessable, and the shares of common stock to be issued upon completion of this offering will be fully paid and nonassessable. The holders of common stock have no preferences or rights of conversion, exchange, pre-emption or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. In the event of any liquidation, dissolution or winding-up of our affairs, holders of common stock will be entitled to share ratably in our assets that are remaining after payment or provision for payment of all of our debts and obligations and after liquidation payments to holders of outstanding shares of preferred stock, if any.

Preferred Stock

        As of January 15, 2007, we had issued and outstanding:

    713,118 shares of Series A Convertible Preferred Stock, held by 14 stockholders of record;

    916,212 shares of Series A-1 Convertible Preferred Stock, held by eight stockholders of record;

    1,177,097 shares of Series B Convertible Preferred Stock, held by nine stockholders of record;

    277,778 shares of Series B-1 Convertible Preferred Stock, held by eight stockholders of record; and

    271,346 shares of Series C Convertible Preferred Stock, held by eight stockholders of record.

        Preferred stock, if issued, would have priority over the common stock with respect to dividends and other distributions, including the distribution of assets upon liquidation. Our board of directors has the authority, without further stockholder authorization, to issue from time to time shares of preferred stock in one or more series and to fix the terms, limitations, relative rights and preferences, and variations of each series. Although we have no present plans to issue any shares of preferred stock, the issuance of shares of preferred stock, or the issuance of rights to purchase such shares, could decrease the amount of earnings and assets available for distribution to the holders of common stock, could adversely affect the rights and powers, including voting rights, of the common stock, and could have the effect of delaying, deterring, or preventing a change of control of us or an unsolicited acquisition proposal.

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Registration Rights

        The holders of                         shares of our common stock are entitled to certain registration rights with respect to these securities as set forth in an agreement between us and the holders of these securities. We are generally required to pay all expenses incurred in connection with registrations effected in connection with the following rights, excluding underwriting discounts and commissions, and fees and expenses of counsel to the registering security holders.

        Demand rights.     Beginning on the earlier of one year from the completion of this offering and June 17, 2009, subject to specified limitations, the holders of not less than 20% of these registrable securities may require that we register all or a portion of these securities for sale under the Securities Act, if the anticipated gross receipts from the sale of such securities are at least $2 million. We may be required to effect up to two such registrations. Stockholders with these registration rights who are not part of an initial registration demand are entitled to notice and are entitled to include their shares of common stock in the registration.

        Piggyback rights.     If at any time we propose to register any of our equity securities under the Securities Act, other than in connection with (i) a registration relating solely to our stock option plans or other employee benefit plans; (ii) a registration relating solely to a business combination or merger involving us; or (iii) this offering, the holders of these registrable securities are entitled to notice of such registration and are entitled to include their shares of common stock in the registration. Under certain circumstances, the underwriters, if any, may limit the number of shares included in any such registration. These piggyback registration rights are subject to the limitations set forth in the lock-up agreements entered into by substantially all of the holders of these registrable securities in connection with this offering, as described below in the section entitled "Shares Eligible for Future Sale—Lock-Up Agreements."

        Form S-3 rights.     If we become eligible to file registration statements on Form S-3, subject to specified limitations, a holder of these registrable securities can require us to register all or a portion of its registrable securities on Form S-3, if the reasonably anticipated aggregate offering price of such securities is at least $500,000. We may not be required to effect more than two such registrations in any 12-month period. Stockholders with these registration rights who are not part of an initial registration demand are entitled to notice and are entitled to include their shares of common stock in the registration.

Anti-Takeover Provisions

        The provisions of (1) Delaware law, (2) our amended and restated certificate of incorporation to be effective upon completion of this offering, and (3) our amended and restated bylaws to be effective upon completion of this offering, which are discussed below, could discourage or make it more difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter, transactions that stockholders may otherwise consider to be in their best interests or the best interests of the company. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by the board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control of us. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. Such provisions also may have the effect of preventing changes in our management.

        Delaware statutory business combinations provision.     We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly

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held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. For purposes of Section 203, a "business combination" is defined broadly to include a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and, subject to certain exceptions, an "interested stockholder" is a person who, together with his or her affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock.

        Classified board of directors; removal of directors for cause.     Our amended and restated certificate of incorporation and amended and restated bylaws provide that upon completion of this offering, our board of directors will be divided into three classes, with the term of office of the first class to expire at the first annual meeting of stockholders following the initial classification of directors to be held in 2008, the term of office of the second class to expire at the second annual meeting of stockholders following the initial classification of directors to be held in 2009, and the term of office of the third class to expire at the third annual meeting of stockholders following the initial classification of directors to be held in 2010. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire will be elected for a three year term of office. All directors elected to our classified board of directors will serve until the election and qualification of their respective successors or their earlier resignation or removal. The board of directors is authorized to create new directorships and to fill such positions so created and is permitted to specify the class to which any such new position is assigned. The person filling such position would serve for the term applicable to that class. The board of directors (or its remaining members, even if less than a quorum) is also empowered to fill vacancies on the board of directors occurring for any reason for the remainder of the term of the class of directors in which the vacancy occurred. Members of the board of directors may only be removed for cause and only by the affirmative vote of 80% of our outstanding voting stock. These provisions are likely to increase the time required for stockholders to change the composition of the board of directors. For example, in general, at least two annual meetings will be necessary for stockholders to effect a change in a majority of the members of the board of directors.

        Advance notice provisions for stockholder proposals and stockholder nominations of directors.     Our amended and restated bylaws provide that, for nominations to the board of directors or for other business to be properly brought by a stockholder before a meeting of stockholders, the stockholder must first have given timely notice of the proposal in writing to our Secretary. For an annual meeting, a stockholder's notice generally must be delivered not less than 45 days nor more than 75 days prior to the anniversary of the mailing date of the proxy statement for the previous year's annual meeting. Detailed requirements as to the form of the notice and information required in the notice are specified in the amended and restated bylaws. If it is determined that business was not properly brought before a meeting in accordance with our amended and restated bylaws, such business will not be conducted at the meeting.

        Special meetings of stockholders.     Special meetings of the stockholders may be called only by our board of directors pursuant to a resolution adopted by a majority of the total number of directors.

        No stockholder action by written consent.     Our amended and restated certificate of incorporation and amended and restated bylaws do not permit our stockholders to act by written consent. As a result, any action to be effected by our stockholders must be effected at a duly called annual or special meeting of the stockholders.

        Super-majority stockholder vote required for certain actions.     The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless the corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage.

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Our amended and restated certificate of incorporation requires the affirmative vote of the holders of at least 80% of our outstanding voting stock to amend or repeal any of the provisions discussed in this section of this prospectus entitled "—Anti-Takeover Provisions." This 80% stockholder vote would be in addition to any separate class vote that might in the future be required pursuant to the terms of any preferred stock that might then be outstanding. In addition, an 80% vote is also required for any amendment to, or repeal of, our amended and restated bylaws by the stockholders. Our amended and restated bylaws may be amended or repealed by a vote of a majority of the total number of directors.

Transfer Agent and Registrar

        The transfer agent and registrar for the common stock will be                        , with offices at                        .

Listing

        We intend to apply to list our common stock on the Nasdaq Global Market under the symbol "ENOC."

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SHARES ELIGIBLE FOR FUTURE SALE

        Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect market prices prevailing from time to time. Furthermore, because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as described below, there may be sales of substantial amounts of our common stock in the public market after the restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future.

        Upon completion of this offering, we will have                        shares of common stock outstanding, assuming no exercise of any outstanding options. Of these shares, the                         shares sold in this offering will be freely transferable without restriction or registration under the Securities Act, except for any shares purchased by one of our existing "affiliates," as that term is defined in Rule 144 under the Securities Act. The remaining                        shares of common stock are "restricted shares" as defined in Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 of the Securities Act, as described below. As a result of the contractual 180-day lock-up period described below and the provisions of Rules 144 and 701, these shares will be available for sale into the public market as follows:

Number of Shares

  Date Available for Sale Into the Public Market

    On the date of this prospectus.
On the date 180 days* from the date of this prospectus (subject, in some cases, to volume limitations).
At various times after 180 days* from the date of this prospectus (subject, in some cases, to volume limitations).

*
This 180-day period corresponds to the end of the lock-up period described below in "—Lock-Up Agreements." This lock-up period may be extended as described below.

Rule 144

        In general, under Rule 144 as currently in effect, beginning 90 days after this offering, a person, or persons whose shares are aggregated, who owns shares that were purchased from us, or any affiliate, at least one year previously, is entitled to sell within any three month period a number of shares that does not exceed the greater of (1) 1% of our then-outstanding shares of common stock, which will equal approximately                        shares immediately after this offering, or (2) the average weekly trading volume of our common stock on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice of the sale on Form 144. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements, and the availability of current public information about us. We are unable to estimate the number of shares that will be sold under Rule 144 since this will depend on the market price for our common stock, the personal circumstances of the stockholder and other factors.

Rule 144(k)

        Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the three months preceding a sale, and who owns shares within the definition of "restricted securities" under Rule 144 that were purchased from us, or any affiliate, at least two years previously, would be entitled to sell shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements described above.

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Rule 701

        In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who purchase shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering are entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with the holding period requirements or other restrictions contained in Rule 701.

        The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than "affiliates," as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by "affiliates" under Rule 144 without compliance with its one year minimum holding period requirement.

Registration Rights

        Upon completion of this offering, the holders of                        shares of our common stock will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares held by affiliates and except to the extent subject to the lock-up agreements described below.

Stock Options

        As of January 15, 2007, there were options outstanding to purchase 850,980 shares of common stock, including options to purchase                         shares of common stock granted outside of our stock plans, 53,854 shares of restricted stock issued under the 2003 Stock Plan are subject to our lapsing right of repurchase, and 237,303 shares of common stock have been reserved for future awards under the 2003 Stock Plan and                        shares of common stock have been reserved for future awards under the 2007 Stock Plan, which becomes effective upon completion of this offering.

        Upon completion of this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering all shares of common stock subject to outstanding options or issuable pursuant to our stock plans. Subject to Rule 144 volume limitations applicable to affiliates, shares registered under any registration statements will be available for sale in the open market, except to the extent that the shares are subject to vesting restrictions with us or the contractual restrictions described below.

Lock-Up Agreements

        The holders of substantially all of our currently outstanding stock have agreed, with certain limited exceptions, that, without the prior written consent of Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated on behalf of the underwriters, they will not, during the period ending 180 days after the date of this prospectus, subject to a possible extension as described below:

    offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock;

    enter into any transaction that would have the same effect; or

    enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock

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whether any transaction described above is to be settled by delivery of shares of our common stock or such other securities, in cash or otherwise. Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated do not have any pre-established conditions to waiving the terms of the lock-up agreements. Any determination to release any shares subject to the lock-up agreements would be based on a number of factors at the time of determination, including but not necessarily limited to the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold and the timing, purpose and terms of the proposed sale.

        The lock-up agreements also provide that, if we issue an earnings release or if material news or a material event relating to our company occurs during the last 17 days of the 180-day restricted period or if prior to the expiration of the 180-day restricted period we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restricted period will continue for the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

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MATERIAL U.S. FEDERAL TAX CONSEQUENCES FOR
NON-U.S. HOLDERS OF COMMON STOCK

        The following discussion is a general summary of the material U.S. federal income tax consequences of the ownership and disposition of our common stock applicable to "Non-U.S. Holders." As used herein, a Non-U.S. Holder means a beneficial owner of our common stock that is neither a U.S. person nor a partnership for U.S. federal income tax purposes, and that will hold shares of our common stock as capital assets. For U.S. federal income tax purposes, a U.S. person includes:

    an individual who is a citizen or resident of the United States;

    a corporation (or other business entity treated as a corporation for U.S. federal income tax purposes) created or organized in the United States or under the laws of the United States, any state thereof or the District of Columbia;

    an estate the income of which is includible in gross income regardless of source; or

    a trust that (A) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons, or (B) otherwise has validly elected to be treated as a U.S. domestic trust for U.S. federal income tax purposes.

        If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the U.S. federal income tax treatment of each partner generally will depend on the status of the partner and the activities of the partnership and the partner. Partnerships acquiring our common stock, and partners in such partnerships, should consult their own tax advisors with respect to the U.S. federal income tax consequences of the ownership and disposition of our common stock.

        This summary does not consider specific facts and circumstances that may be relevant to a particular Non-U.S. Holder's tax position and does not consider U.S. state and local or non-U.S. tax consequences. It also does not consider Non-U.S. Holders subject to special tax treatment under the U.S. federal income tax laws (including partnerships or other pass-through entities, banks and insurance companies, dealers in securities, holders of our common stock held as part of a "straddle," "hedge," "conversion transaction" or other risk-reduction transaction, controlled foreign corporations, passive foreign investment companies, companies that accumulate earnings to avoid U.S. federal income tax, foreign tax-exempt organizations, former U.S. citizens or residents, persons who hold or receive common stock as compensation and persons subject to the alternative minimum tax). This summary is based on provisions of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), applicable final, temporary and proposed Treasury regulations, administrative pronouncements of the U.S. Internal Revenue Service ("IRS") and judicial decisions, all as in effect on the date hereof, and all of which are subject to change, possibly on a retroactive basis, and different interpretations.

         This summary is included herein as general information only. Accordingly, each prospective Non-U.S. Holder is urged to consult its own tax advisor with respect to the U.S. federal, state, local and non-U.S. income, estate and other tax consequences of owning and disposing of our common stock.

U.S. Trade or Business Income

        For purposes of this discussion, dividend income and gain on the sale or other taxable disposition of our common stock will be considered to be "U.S. trade or business income" if such income or gain is (i) effectively connected with the conduct by a Non-U.S. Holder of a trade or business within the United States and (ii) in the case of a Non-U.S. Holder that is eligible for the benefits of an income tax treaty with the United States, attributable to a permanent establishment (or, for an individual, a fixed base) maintained by the Non-U.S. Holder in the United States. Generally, U.S. trade or business income is not subject to U.S. federal withholding tax (provided the Non-U.S. Holder complies with

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applicable certification and disclosure requirements); instead, U.S. trade or business income is subject to U.S. federal income tax on a net income basis at regular U.S. federal income tax rates in the same manner as a U.S. person, unless an applicable income tax treaty provides otherwise. Any U.S. trade or business income received by a corporate Non-U.S. holder may be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be specified by an applicable income tax treaty.

Dividends

        Distributions of cash or property that we pay will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). A Non-U.S. Holder generally will be subject to U.S. federal withholding tax at a 30% rate, or, if the Non-U.S. Holder is eligible, at a reduced rate prescribed by an applicable income tax treaty, on any dividends received in respect of our common stock. If the amount of a distribution exceeds our current and accumulated earnings and profits, such excess first will be treated as a tax-free return of capital to the extent of the Non-U.S. Holder's tax basis in our common stock (with a corresponding reduction in such Non-U.S. Holder's tax basis in our common stock), and thereafter will be treated as capital gain. In order to obtain a reduced rate of U.S. federal withholding tax under an applicable income tax treaty, a Non-U.S. Holder will be required to provide a properly executed IRS Form W-8BEN certifying under penalties of perjury its entitlement to benefits under the treaty. Special certification requirements and other requirements apply to certain Non-U.S. Holders that are entities rather than individuals. A Non-U.S. Holder of our common stock that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the IRS on a timely basis. A Non-U.S. Holder should consult its own tax advisor regarding its possible entitlement to benefits under an income tax treaty and the filing of a U.S. tax return for claiming a refund of U.S. federal withholding tax.

        The U.S. federal withholding tax does not apply to dividends that are U.S. trade or business income, as defined and discussed above, of a Non-U.S. Holder who provides a properly executed IRS Form W-8ECI, certifying under penalties of perjury that the dividends are effectively connected with the Non-U.S. Holder's conduct of a trade or business within the United Sates.

Dispositions of Our Common Stock

        A Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax in respect of any gain on a sale or other disposition of our common stock unless:

    the gain is U.S. trade or business income, as defined and discussed above;

    the Non-U.S. Holder is an individual who is present in the United States for 183 or more days in the taxable year of the disposition and meets other conditions; or

    we are or have been a "U.S. real property holding corporation" (a "USRPHC") under section 897 of the Code at any time during the shorter of the five year period ending on the date of disposition and the Non-U.S. Holder's holding period for our common stock.

        In general, a corporation is a USRPHC if the fair market value of its "U.S. real property interests" (as defined in the Code and applicable Treasury regulations) equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. If we are determined to be a USRPHC, the U.S. federal income and withholding taxes relating to interests in USRPHCs nevertheless will not apply to gains derived from the sale or other disposition of our common stock by a Non-U.S. Holder whose shareholdings, actual and constructive, at all times during the applicable period, amount to 5% or less of our common stock, provided that our common stock is regularly traded on an established securities market, within the

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meaning of the applicable Treasury regulations. We are not currently a USRPHC, and we do not anticipate becoming a USRPHC in the future. However, no assurance can be given that we will not be a USRPHC, or that our common stock will be considered regularly traded on an established securities market, when a Non-U.S. Holder sells its shares of our common stock.

Information Reporting and Backup Withholding Requirements

        We must annually report to the IRS and to each Non-U.S. Holder any dividend income that is subject to U.S. federal withholding tax, or that is exempt from such withholding tax pursuant to an income tax treaty. Copies of these information returns also may be made available under the provisions of a specific treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides. Under certain circumstances, the Code imposes a backup withholding obligation (currently at a rate of 28%) on certain reportable payments. Dividends paid to a Non-U.S. Holder of our common stock generally will be exempt from backup withholding if the Non-U.S. Holder provides a properly executed IRS Form W-8BEN or otherwise establishes an exemption.

        The payment of the proceeds from the disposition of our common stock to or through the U.S. office of any broker, U.S. or foreign, will be subject to information reporting and possible backup withholding unless the holder certifies as to its non-U.S. status under penalties of perjury or otherwise establishes an exemption, provided that the broker does not have actual knowledge or reason to know that the holder is a U.S. person or that the conditions of any other exemption are not, in fact, satisfied. The payment of the proceeds from the disposition of our common stock to or through a non-U.S. office of a non-U.S. broker is one that will not be subject to information reporting or backup withholding unless the non-U.S. broker has certain types of relationships with the United States (a "U.S. related person"). In the case of the payment of the proceeds from the disposition of our common stock to or through a non-U.S office of a broker that is either a U.S. person or a U.S. related person, the Treasury regulations require information reporting (but not backup withholding) on the payment unless the broker has documentary evidence in its files that the holder is a Non-U.S. Holder and the broker has no knowledge to the contrary. Non-U.S. Holders should consult their own tax advisors on the application of information reporting and backup withholding to them in their particular circumstances (including upon their disposition of our common stock).

        Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a Non-U.S. Holder will be refunded or credited against the Non-U.S. Holder's U.S. federal income tax liability, if any, if the Non-U.S. Holder provides the required information to the IRS on a timely basis. Non-U.S. Holders should consult their own tax advisors regarding the filing of a U.S. tax return for claiming a refund of such backup withholding.

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UNDERWRITING

        Under the terms and subject to the conditions contained in an underwriting agreement dated                        , 2007, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated are acting as representatives the following respective numbers of shares of common stock:

Underwriter

  Number
of Shares

Credit Suisse Securities (USA) LLC    
Morgan Stanley & Co. Incorporated    
Canaccord Adams Inc.    
Jefferies & Company, Inc.    
   
  Total    
   

        The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

        We and the selling stockholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to            additional shares from us and an aggregate of            additional outstanding shares from the selling stockholders at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.

        The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $            per share. The underwriters and selling group members may allow a discount of $            per share on sales to other broker/dealers. After the initial public offering the representatives may change the public offering price and concession and discount to broker/dealers.

        The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay:

 
  Per Share
  Total
 
  Without
Over-allotment

  With
Over-allotment

  Without
Over-allotment

  With
Over-allotment

Underwriting Discounts and Commissions paid by us   $     $     $     $  
Expenses payable by us   $     $     $     $  
Underwriting Discounts and Commissions paid by selling stockholders   $     $     $     $  
Expenses payable by selling stockholders   $     $     $     $  

        The representatives have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered.

        We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse

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Securities (USA) LLC and Morgan Stanley & Co. Incorporated for a period of 180 days after the date of this prospectus except that we may (i) issue shares of our common stock in the offering; (ii) issue shares of our common stock pursuant to the exercise of options or other equity awards, or grant options or other equity awards pursuant to option plans, in each case existing on the date of this prospectus; or (iii) file with the SEC one or more registration statements on Form S-8 registering the shares of our common stock issuable under our equity compensation plans in effect on the date of this prospectus, in the case of (ii) and (iii) above subject to no further transfer during the "lock-up" period.

        Our officers and directors and the holders of most of our common stock have agreed, with certain limited exceptions, that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated for a period of 180 days after the date of this prospectus. However, in the event that either (1) during the last 17 days of the "lock-up" period, we release earnings results or material news or a material event relating to us occurs or (2) prior to the expiration of the "lock-up" period, we announce that we will release earnings results during the 16-day period beginning on the last day of the "lock-up" period, then in either case the expiration of the "lock-up" will be extended until the expiration of the 18-day period beginning on the date of the release of the earnings results or the occurrence of the material news or event, as applicable, unless Credit Suisse Securities (USA) LLC and Morgan Stanley & Co. Incorporated waive, in writing, such an extension.

        We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities under the Securities Act, or contribute to payments that the underwriters may be required to make in that respect.

        We intend to apply to list the shares of common stock on the Nasdaq Global Market.

        In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions, and penalty bids in accordance with Regulation M under the Exchange Act.

    Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

    Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market.

    Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more

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      shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

    Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

        These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Global Market or otherwise and, if commenced, may be discontinued at any time.

        Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the representatives. Among the factors to be considered in determining the initial public offering price were our future prospects and those of our industry in general, our financial operating information in recent periods, and market prices of securities and financial and operating information of companies engaged in activities similar to ours.

        A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make Internet distributions on the same basis as other allocations.

        In the ordinary course, the underwriters and their affiliates have provided, and may in the future provide, investment banking, commercial banking, investment management, or other financial services to us and our affiliates for which they have received compensation and may receive compensation in the future.

        Each underwriter has represented, warranted and agreed that:

    it has not offered and will not make an offer of the common stock to the public in the United Kingdom prior to the publication of a prospectus in relation to the common stock and the approval of the offer by the Financial Services Authority ("FSA") or, where appropriate, approval in another Member State and notification to the FSA, all in accordance with the Prospectus Directive, except that it may make an offer of the stock to persons who fall within the definition of "qualified investor" as that term is defined in Section 86(1) of the Financial Services and Markets Act 2000 ("FSMA") or otherwise in circumstances which do not result in an offer of transferable securities to the public in the United Kingdom within the meaning of the FSMA;

    it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any stock in circumstances in which Section 21(1) of the FSMA does not apply to us or to persons who have professional experience in matters relating to investments falling within Article 19(5) of the FSMA; and

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    it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the stock in, from or otherwise involving the United Kingdom.

We will not offer to sell any common stock to any member of the public in the Cayman Islands.

        The common stock may not be offered or sold in Hong Kong, by means of any document, other than to persons whose ordinary business is to buy or sell stock or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32) of Hong Kong. No advertisement, invitation or document relating to the common stock, whether in Hong Kong or elsewhere, may be issued, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to common stock which are or are intended to be disposed of only to persons outside Hong Kong or only to "professional investors" within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.

        The common stock have not been and will not be registered under the Securities and Exchange Law of Japan (Law No. 235 of 1948 as amended) (the "Securities Exchange Law") and disclosure under the Securities Exchange Law has not been and will not be made with respect to the common stock. Accordingly, the common stock may not be, directly or indirectly, offered or sold in Japan or to, or for the benefit of, any resident of Japan or to others for re-offering or re-sale, directly or indirectly in Japan or to, or for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities Exchange Law and other relevant laws, regulations and ministerial guidelines of Japan. As used in this paragraph, "resident of Japan" means any person residing in Japan, including any corporation or other entity organized under the laws of Japan.

        This prospectus has not been and will not be registered as a prospectus with the Monetary Authority of Singapore under the Securities and Futures Act (Cap. 289) of Singapore, or the Securities and Futures Act. Accordingly, the common stock may not be offered or sold or made the subject of an invitation for subscription or purchase nor may this prospectus or any other document or material in connection with the offer or sale, or invitation for subscription or purchase of such common stock be circulated or distributed, whether directly or indirectly, to the public or any members of the public in Singapore other than: (1) to an institutional investor or other person falling within Section 274 of the Securities and Futures Act, (2) to a sophisticated investor, and in accordance with the conditions specified in Section 275 of the Securities and Futures Act or (3) pursuant to, and in accordance with the conditions of any other applicable provision of the Securities and Futures Act.

        In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), and effective as of the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date), no common stock have been offered to the public in that Relevant Member State prior to the publication of a prospectus in relation to the common stock which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and brought to the attention of the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive. Notwithstanding the foregoing, an offer of common stock may be made effective as of the Relevant Implementation Date to the public in that Relevant Member State at any time:

            (1)   to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

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            (2)   to any legal entity which has two or more of (a) an average of at least 250 employees during the last financial year; (b) a total balance sheet of more than €43,000,000 and (c) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or

            (3)   in any other circumstances which do not require the publication by the issuer of a prospectus pursuant to Article 3 of the Prospectus Directive. For the purposes of this paragraph, the expression an "offer of common stock to the public" in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the common stock to be offered so as to enable an investor to decide to purchase or subscribe the common stock, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

        The common stock have not been registered under the Korean Securities and Exchange Law. Each of the underwriters has represented and agreed that it has not offered, sold or delivered and will not offer, sell or deliver, directly or indirectly, any common stock in Korea or to, or for the account or benefit of, any resident of Korea, except as otherwise permitted by applicable Korean laws and regulations; and any securities dealer to whom it sells common stock will agree that it will not offer any common stock, directly or indirectly, in Korea or to any resident of Korea, except as permitted by applicable Korean laws and regulations, or to any other dealer who does not so represent and agree.

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NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

        The distribution of the shares in Canada is being made only on a private placement basis exempt from the requirement that we and the selling stockholders prepare and file a prospectus with the securities regulatory authorities in each province where trades of shares are made. Any resale of the shares in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the shares.

Representations of Purchasers

        By purchasing the shares in Canada and accepting a purchase confirmation a purchaser is representing to us, the selling stockholders and the dealer from whom the purchase confirmation is received that:

    the purchaser is entitled under applicable provincial securities laws to purchase the shares without the benefit of a prospectus qualified under those securities laws,

    where required by law, that the purchaser is purchasing as principal and not as agent,

    the purchaser has reviewed the text above under Resale Restrictions, and

    the purchaser acknowledges and consents to the provision of specified information concerning its purchase of the shares to the regulatory authority that by law is entitled to collect the information.

        Further details concerning the legal authority for this information is available on request.

Rights of Action—Ontario Purchasers Only

        Under Ontario securities legislation, certain purchasers who purchase a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the shares, for rescission against us and the selling stockholders in the event that this prospectus contains a misrepresentation without regard to whether the purchaser relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the shares. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the shares. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us or the selling stockholders. In no case will the amount recoverable in any action exceed the price at which the shares were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we and the selling stockholders, will have no liability. In the case of an action for damages, we and the selling stockholders will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the shares as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

Enforcement of Legal Rights

        All of our directors and officers as well as the experts named herein and the selling stockholders may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to

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effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Taxation and Eligibility for Investment

        Canadian purchasers of shares should consult their own legal and tax advisors with respect to the tax consequences of an investment in the shares in their particular circumstances and about the eligibility of the shares for investment by the purchaser under relevant Canadian legislation.


LEGAL MATTERS

        The validity of the issuance of the common stock offered by us in this offering will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. Davis Polk & Wardwell, Menlo Park, California, has acted as counsel for the underwriters in connection with certain legal matters related to this offering. As of the date of this prospectus, persons and entities affiliated with Mintz Levin own an aggregate of 1,809 shares of our Series C Convertible Preferred Stock.


EXPERTS

        The consolidated financial statements of EnerNOC, Inc. at December 31, 2004 and 2005, and for each of the three years in the period ended December 31, 2005 appearing in this prospectus and related registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

        The financial statements of Pinpoint Power DR LLC at December 31, 2004 and May 31, 2005 and for the period from May 20, 2004 (date of inception) to December 31, 2004 and the period from January 1, 2005 to May 31, 2005 included in this prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.


WHERE YOU CAN FIND MORE INFORMATION

        We have filed with the SEC a registration statement on Form S-1 under the Securities Act, with respect to the common stock offered by this prospectus. This prospectus, which is part of the registration statement, omits certain information, exhibits, schedules, and undertakings set forth in the registration statement. For further information pertaining to us and our common stock, reference is made to the registration statement and the exhibits and schedules to the registration statement. Statements contained in this prospectus as to the contents or provisions of any documents referred to in this prospectus are not necessarily complete, and in each instance where a copy of the document has been filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matters involved.

        You may read and copy all or any portion of the registration statement without charge at the public reference room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Copies of the registration statement may be obtained from the SEC at prescribed rates from the public reference room of the SEC at such address. You may obtain information regarding the operation of the public reference room by calling 1-800-SEC-0330. In addition, registration statements and certain other filings made with the SEC electronically are publicly available through the SEC's website at http: //www.sec.gov. The registration statement, including all exhibits and amendments to the registration statement, has been filed electronically with the SEC.

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        Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act and, accordingly, will file annual reports containing financial statements audited by an independent public accounting firm, quarterly reports containing unaudited financial data, current reports, proxy statements and other information with the SEC. You will be able to inspect and copy such periodic reports, proxy statements, and other information at the SEC's public reference room, and the website of the SEC referred to above.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

        

 
Annual Consolidated Financial Statements of EnerNOC, Inc.:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2005
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2004 and 2005
Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity for the Years Ended December 31, 2003, 2004 and 2005
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2004 and 2005
Notes to Consolidated Financial Statements

Interim Consolidated Financial Statements of EnerNOC, Inc.:
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2006
Unaudited Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2005 and 2006
Unaudited Condensed Consolidated Statement of Changes in Redeemable Convertible Preferred Stock and Stockholders' Equity for the Nine Months Ended September 30, 2006
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2006
Notes to Unaudited Condensed Consolidated Financial Statements

Financial Statements of Business Acquired
Financial Statements of Pinpoint Power DR LLC:
Report of Independent Auditors
Balance Sheets as of December 31, 2004 and May 31, 2005
Statements of Income from May 20, 2004 (Inception) to December 31, 2004 and or the Five Months Ended May 31, 2005
Statements of Changes in Members' Equity from May 20, 2004 (Inception) to December 31, 2004 and for the Five Months Ended May 31, 2005
Statements of Cash Flows from May 20, 2004 (Inception) to December 31, 2004 and for the Five Months Ended May 31, 2005
Notes to Consolidated Financial Statements

Unaudited Pro Forma Financial Statements
Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2004
Unaudited Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 2005

F-1



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of EnerNOC, Inc.:

        We have audited the accompanying consolidated balance sheets of EnerNOC, Inc. as of December 31, 2005 and 2004, and the related consolidated statements of operations, changes in redeemable convertible preferred stock and stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EnerNOC, Inc. as of December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.


 

 

/s/  
ERNST & YOUNG LLP       

Boston, Massachusetts
February 8, 2007

F-2



EnerNOC, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 
  December 31,
 
 
  2004
  2005
 
Assets              
Current assets              
  Cash and cash equivalents   $ 213   $ 9,719  
  Accounts receivable     509     965  
  Related-party receivable     1,155      
  Prepaid expenses and other current assets     91     176  
   
 
 
    Total current assets     1,968     10,860  
Property and equipment, net     443     1,739  
Intangible assets, net         6,688  
Other assets     365     364  
   
 
 
    Total assets   $ 2,776   $ 19,651  
   
 
 
Liabilities and Stockholders' Equity              
Current liabilities              
  Accounts payable   $ 287   $ 397  
  Related-party payable         372  
  Accrued capacity payments     71     2,266  
  Current portion of deferred related-party acquisition payments         1,822  
  Accrued payroll and related expenses     158     583  
  Accrued expenses and other current liabilities     86     587  
  Deferred revenue     95     257  
  Current portion of long-term debt         813  
   
 
 
    Total current liabilities     697     7,097  
Long-term liabilities              
  Long-term debt, net of current portion     1,750     1,176  
  Deferred related-party acquisition payments, net of current portion         2,367  
  Contingent consideration provision         2,252  
  Deferred revenue     245     515  
  Other liabilities     33     143  
   
 
 
    Total long-term liabilities     2,028     6,453  
Commitments and contingencies (Note 7)              
Redeemable convertible preferred stock              
  Series A Redeemable Convertible Preferred Stock, $0.001 par value; 713,118 shares authorized, issued, and outstanding at December 31, 2004 and 2005, at redemption value     810     819  
  Series A-1 Redeemable Convertible Preferred Stock, $0.001 par value; 916,212 shares authorized, issued, and outstanding at December 31, 2004 and 2005, at redemption value     1,738     1,739  
  Series B Redeemable Convertible Preferred Stock, $0.001 par value; 1,188,487 shares authorized, 1,177,097 issued and outstanding at December 31, 2005, at redemption value         7,663  
Stockholders' equity              
  Common stock, $0.001 par value; 5,219,318 shares authorized, 1,000,001 and 1,130,293 shares issued and outstanding at December 31, 2004 and 2005, respectively     1     1  
Additional paid-in capital     11     124  
Accumulated deficit     (2,509 )   (4,245 )
   
 
 
  Total redeemable convertible preferred stock and stockholders' equity     51     6,101  
   
 
 
  Total liabilities, redeemable convertible preferred stock and stockholders' equity   $ 2,776   $ 19,651  
   
 
 

See accompanying notes.

F-3



EnerNOC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 
  Year Ended December 31,
 
 
  2003
  2004
  2005
 
Revenues   $ 15   $ 819   $ 9,826  
Cost of revenues     9     362     4,190  
   
 
 
 
Gross profit     6     457     5,636  
   
 
 
 
Operating expenses:                    
  Selling and marketing expenses     58     751     2,228  
  General and administrative expenses     254     835     4,211  
  Research and development expenses     271     778     981  
   
 
 
 
      583     2,364     7,420  
   
 
 
 
Loss from operations     (577 )   (1,907 )   (1,784 )
Other income (expenses):                    
  Interest income         110     291  
  Interest expense         (96 )   (213 )
   
 
 
 
    Net loss   $ (577 ) $ (1,893 ) $ (1,706 )
   
 
 
 
Net loss per share                    
  Basic and diluted   $ (0.58 ) $ (1.89 ) $ (1.29 )
   
 
 
 
  Weighted average number of shares used in computation     1,000,001     1,000,001     1,318,615  
   
 
 
 

See accompanying notes.

F-4


EnerNOC, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
(in thousands, except share data)

 
  Series A
Redeemable
Convertible
Preferred Stock

  Series A-1
Redeemable
Convertible
Preferred
Stock

  Series B
Redeemable
Convertible
Preferred
Stock

  Common Stock
  Additional
Paid-in
Capital

  Accumulated
Deficit

  Total
 
 
  Number of
Shares

  Amount
  Number of
Shares

  Amount
  Number of
Shares

  Amount
  Number of
Shares

  Amount
   
   
   
 
Balances as of December 31, 2002     $     $     $     $   $   $ (25 ) $ (25 )
Conversion from limited liability company to a C corporation                     1,000,001     1     4         5  
Issuance of Series A Redeemable Convertible Preferred Stock   682,668     760                               760  
Contribution of notes payable into Series A Redeemable Convertible Preferred Stock   30,450     36                               36  
Accretion of issuance costs       5                           (5 )    
Net loss                                 (577 )   (577 )
   
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2003   713,118     801               1,000,001     1     4     (607 )   199  
Issuance of Series A-1 Redeemable Convertible Preferred Stock, net of issuance costs         916,212     1,738                         1,738  
Stock-based compensation expense related to issuance of stock options to nonemployees                             1         1  
Issuance of warrants in connection with note payable                             6         6  
Accretion of issuance costs       9                           (9 )    
Net loss                                 (1,893 )   (1,893 )
   
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2004   713,118     810   916,212     1,738         1,000,001     1     11     (2,509 )   51  
Issuance of stock upon exercise of stock options                     29,543         11         11  
Issuance of common shares in connection with the acquisition of Pinpoint Power DR LLC                     100,749         101         101  
Stock-based compensation expense related to issuance of stock options to nonemployees                             1         1  
Issuance of Series B Redeemable Convertible Preferred Stock, net of issuance costs               1,177,097     7,643                   7,643  
Accretion of issuance costs       9       1       20               (30 )    
Net loss                                 (1,706 )   (1,706 )
   
 
 
 
 
 
 
 
 
 
 
 
Balances as of December 31, 2005   713,118   $ 819   916,212   $ 1,739   1,177,097   $ 7,663   1,130,293   $ 1   $ 124   $ (4,245 ) $ 6,101  
   
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes.

F-5



EnerNOC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Year Ended December 31,
 
 
  2003
  2004
  2005
 
Cash flows from operating activities                    
Net loss   $ (577 ) $ (1,893 ) $ (1,706 )
Adjustments to reconcile net loss to net cash used in operating activities                    
  Depreciation     5     50     302  
  Amortization of intangibles             1,167  
  Loss on disposal of property and equipment             14  
  Stock-based compensation expense         1     1  
  Increase (decrease) in cash from changes in assets and liabilities:                    
    Accounts receivable     (34 )   (475 )   617  
    Deferred revenue     50     290     432  
    Prepaid expenses and other assets     (54 )   (396 )   639  
    Other liabilities         33     110  
    Accounts payable and accrued expenses     58     523     922  
   
 
 
 
      Net cash (used in) provided by operating activities     (552 )   (1,867 )   2,498  

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 
Proceeds from repayment of related-party notes receivable         245     1,155  
Purchase of Pinpoint Power DR LLC, net of cash acquired             (428 )
Issuance of related-party notes receivable         (1,400 )    
Purchase of property and equipment     (78 )   (420 )   (1,612 )
   
 
 
 
      Net cash used in investing activities     (78 )   (1,575 )   (885 )

Cash flows from financing activities

 

 

 

 

 

 

 

 

 

 
Proceeds from exercise of stock options             11  
Proceeds from issuance of common stock     1          
Proceeds from borrowings         1,750     750  
Repayment of borrowings     (1 )       (511 )
Proceeds from the issuance of preferred stock, net of issuance costs     760     1,738     7,643  
Proceeds from the issuance of notes payable     36          
   
 
 
 
      Net cash provided by financing activities     796     3,488     7,893  
Net change in cash and cash equivalents     166     46     9,506  
Cash and cash equivalents at beginning of year     1     167     213  
   
 
 
 
Cash and cash equivalents at end of year   $ 167   $ 213   $ 9,719  
   
 
 
 
Supplemental disclosure of cash flow information                    
Cash paid for interest   $   $ 63   $ 146