EnerNOC, Inc.
ENERNOC INC (Form: 10-Q, Received: 08/13/2008 17:15:34)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

For the quarterly period ended June 30, 2008

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from              to             

 

Commission File Number: 001-33471

 

EnerNOC, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

87-0698303

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer
Identification No.)

 

 

 

75 Federal Street
Suite 300
Boston, Massachusetts

 

02110

(Address of Principal Executive Offices)

 

(Zip Code)

 

(617) 224-9900

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer  o

 

 

 

Non-accelerated filer x

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

Yes       o    No       x

 

There were 20,041,225 shares of the registrant’s common stock, $.001 par value per share, outstanding as of August 11, 2008.

 

 

 



Table of Contents

 

EnerNOC, Inc.

 

Index to Form 10-Q

 

 

 

Page

 

 

 

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

24

 

 

 

Item 4T.

Controls and Procedures

24

 

 

 

Part II - Other Information

 

 

 

 

Item 1.

Legal Proceedings

25

 

 

 

Item 1A.

Risk Factors

25

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

26

 

 

 

Item 6.

Exhibits

26

 

Signatures

28

 

Exhibit Index

29

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

EnerNOC, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share data)

 

 

 

June 30,
2008

 

December 31,
2007

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

62,331

 

$

70,242

 

Restricted cash

 

600

 

1,248

 

Marketable securities

 

3,410

 

15,500

 

Trade accounts receivable, net allowance for doubtful accounts of $68 and $368

 

9,956

 

10,134

 

Unbilled revenue

 

3,781

 

 

Deposits, current

 

631

 

1,955

 

Prepaid expenses and other current assets

 

3,202

 

2,315

 

 

 

 

 

 

 

Total current assets

 

83,911

 

101,394

 

Property and equipment, net

 

27,811

 

23,195

 

Goodwill and other intangible assets, net

 

18,889

 

16,421

 

Restricted cash—non current

 

1,894

 

1,770

 

Deposits, non-current

 

7,217

 

12,496

 

Other assets

 

261

 

308

 

 

 

 

 

 

 

Total assets

 

$

139,983

 

$

155,584

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

2,627

 

$

2,112

 

Accrued capacity payments

 

13,068

 

9,069

 

Current portion of deferred related-party acquisition payments

 

 

431

 

Accrued payroll and related expenses

 

4,730

 

4,902

 

Accrued Mdenergy, LLC earn-out

 

 

3,357

 

Accrued expenses and other current liabilities

 

3,663

 

1,586

 

Deferred revenue

 

919

 

2,403

 

Contingent consideration provision

 

 

2,247

 

Current portion of long-term debt

 

4,758

 

2,451

 

 

 

 

 

 

 

Total current liabilities

 

29,765

 

28,558

 

Long-term liabilities

 

 

 

 

 

Long-term debt, net of current portion

 

142

 

3,640

 

Deferred tax liability

 

258

 

100

 

Other liabilities

 

993

 

869

 

 

 

 

 

 

 

Total long-term liabilities

 

1,393

 

4,609

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $0.001 par value; 50,000,000 shares authorized, 20,038,221 and 19,180,504 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively

 

20

 

19

 

Additional paid-in capital

 

164,094

 

156,250

 

Accumulated deficit

 

(55,289

)

(33,852

)

 

 

 

 

 

 

Total stockholders’ equity

 

108,825

 

122,417

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

139,983

 

$

155,584

 

 

See accompanying notes.

 

3



Table of Contents

 

EnerNOC, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except share and per share data)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2008

 

2007

 

2008

 

2007

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

23,686

 

$

12,015

 

$

42,298

 

$

21,987

 

Cost of revenues

 

14,815

 

7,910

 

26,957

 

14,974

 

Gross profit

 

8,871

 

4,105

 

15,341

 

7,013

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling and marketing expenses

 

6,914

 

4,372

 

12,740

 

7,478

 

General and administrative expenses

 

11,657

 

7,907

 

22,488

 

11,337

 

Research and development expenses

 

921

 

498

 

2,432

 

839

 

Total operating expenses

 

19,492

 

12,777

 

37,660

 

19,654

 

Loss from operations

 

(10,621

)

(8,672

)

(22,319

)

(12,641

)

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

489

 

558

 

1,524

 

828

 

Interest expense

 

(231

)

(92

)

(484

)

(207

)

 

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

(10,363

)

(8,206

)

(21,279

)

(12,020

)

Provision for income tax expense

 

(73

)

 

(158

)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(10,436

)

$

(8,206

)

$

(21,437

)

$

(12,020

)

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

 

Basic and diluted (restated) (1)

 

$

(0.54

)

$

(0.74

)

$

(1.11

)

$

(1.56

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of basic and diluted shares (restated) (1)

 

19,434,228

 

11,156,858

 

19,302,329

 

7,687,756

 

 


(1) See Note 4.

 

See accompanying notes.

 

4



Table of Contents

 

EnerNOC, INC.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2008

 

2007

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

(21,437

)

$

(12,020

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

3,568

 

918

 

Amortization of intangibles

 

645

 

1,099

 

Stock-based compensation expense

 

4,881

 

4,320

 

Deferred tax liability

 

158

 

 

Non-cash interest expense

 

90

 

87

 

Increase (decrease) in cash from changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable, trade

 

310

 

(3,634

)

Deferred revenue

 

(1,484

)

1,221

 

Unbilled revenue

 

(3,781

)

 

Prepaid expenses and other current assets

 

(834

)

(1,331

)

Other noncurrent assets

 

(43

)

53

 

Other noncurrent liabilities

 

124

 

(5

)

Accrued capacity payments

 

3,999

 

2,149

 

Accrued payroll and related expenses

 

683

 

972

 

Accounts payable and accrued expenses

 

2,492

 

2,980

 

 

 

 

 

 

 

Net cash used in operating activities

 

(10,629

)

(3,191

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of marketable securities

 

(10,642

)

 

Sales and maturities of marketable securities

 

22,732

 

 

Purchase of South River Consulting, LLC

 

(3,757

)

 

Purchase of Mdenergy, LLC

 

(3,357

)

 

Purchase of Pinpoint Power DR LLC

 

(389

)

(355

)

Purchases of property and equipment

 

(8,125

)

(10,818

)

Increase (decrease) in restricted cash and deposits for customer programs

 

7,127

 

(2,043

)

 

 

 

 

 

 

Net cash (used in) provided by investing activities

 

3,589

 

(13,216

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from the issuance of common stock, net of issuance costs

 

 

95,159

 

Proceeds from exercises of stock options

 

319

 

84

 

Proceeds from borrowing

 

 

2,500

 

Repayment of borrowings and payments under capital leases

 

(1,190

)

(488

)

Proceeds from the issuance of preferred stock, net of issuance costs

 

 

9,990

 

Repurchase of treasury stock

 

 

(395

)

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(871

)

106,850

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(7,911

)

90,443

 

Cash and cash equivalents at beginning of period

 

70,242

 

9,184

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

62,331

 

$

99,627

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Non-cash financing and investing activities

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock to South River Consulting LLC

 

$

1,747

 

$

 

 

 

 

 

 

 

Deferred related party stock issuance for Pinpoint Power DR LLC

 

$

44

 

$

66

 

 

 

 

 

 

 

Conversion and net exercise into common stock of preferred stock warrant

 

$

 

$

606

 

 

 

 

 

 

 

Issuance of common stock as bonus payments

 

$

844

 

$

 

 

 

 

 

 

 

Issuance of common stock to a related party

 

$

 

$

395

 

 

 

 

 

 

 

Accretion of preferred stock issuance costs

 

$

 

$

216

 

 

See accompanying notes.

 

5



Table of Contents

 

EnerNOC, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

 

1. Description of Business and Basis of Presentation

 

Description of Business

 

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

 

In May 2007, the Company completed its initial public offering (IPO) of 4,312,500 shares of common stock at a price of $26.00 per share, which included the exercise of the underwriters’ over-allotment option to purchase 562,500 shares and the sale of 225,000 shares by certain of the Company’s stockholders. Net proceeds to the Company from the IPO were approximately $95,200. In November 2007, the Company completed a follow-on public offering of 2,500,000 shares of its common stock at a price of $43.00 per share. Of the 2,500,000 shares, the Company sold 500,000 shares and selling stockholders sold 2,000,000 shares. This transaction resulted in net proceeds to the Company of $19,446.

 

Reclassifications

 

Certain amounts in prior periods have been reclassified to conform to the 2008 presentation. These reclassifications have no material impact on previously reported results of operations or stockholders’ equity. The reclassifications made related to the balance sheet account groupings and did not change the total current assets or current liabilities.

 

Basis of Consolidation

 

The unaudited condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). Intercompany transactions and balances are eliminated upon consolidation. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for this period.

 

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

 

Unbilled Revenue

 

A significant portion of the Company’s revenue is derived from long-term contracts and open market bidding programs with grid operators and utilities pursuant to which a monthly capacity payment is made to the Company for agreeing to provide relief in the form of curtailment of energy usage during times of high energy demand.  The Company records these payments as revenue over the period during which the Company is required to perform under these contracts and programs.  Under certain contracts and programs, the period during which the Company is obligated to perform may be shorter than the period over which it receives payments under that contract or program.  In these cases, the Company records revenue over the mandatory performance obligation period, and a portion of the revenue is recorded and accrued as unbilled revenue because the revenue has been earned but is not billable.  As of June 30, 2008, the Company had unbilled revenue of $3,781.

 

2. Acquisitions

 

South River Consulting, LLC

 

 In May 2008, the Company acquired 100% of the membership interests of South River Consulting, LLC (SRC), an energy procurement and risk management services provider, for a purchase price equal to $5,504, which consisted of $3,603 in cash, $154 in related

 

6



Table of Contents

 

expenses and 120,000 shares of the Company’s common stock that had a value of approximately $1,747 as of the closing date.   In addition to the amounts paid at closing, the Company may be obligated to pay to the former holders of SRC membership interests an earnout amount equal to 50% to 60% of the revenues of SRC’s business during each twelve-month period from May 1, 2008 through April 30, 2010. The earnout payments will be based on the achievement of certain minimum revenue-based milestones of SRC and will be paid in a combination of cash and shares of the Company’s common stock. The acquisition of SRC strengthens the Company’s position in a growing energy procurement services market and provides a local presence for the Company in the PJM Interconnection service region.

 

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

 

The aggregate purchase price of $5,504 consists of the following:

 

Cash

 

$

3,603

 

Common stock

 

1,747

 

Acquisition related expenses

 

154

 

Total purchase price

 

$

5,504

 

 

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

 

Total purchase price

 

$

5,504

 

Accounts receivable

 

$

132

 

Prepaids and other current assets

 

53

 

Customer contracts

 

710

 

Fixed assets

 

59

 

Employment agreements

 

80

 

Accrued expenses

 

(40

)

Accounts payable

 

(60

)

Net assets acquired

 

$

934

 

Excess purchase price over the fair value of assets acquired

 

$

4,570

 

 

The financial information above reflects a preliminary allocation of the purchase price. The estimated fair values of the assets acquired and liabilities assumed are not yet complete and are subject to future adjustments. In addition to the amounts paid at closing, the Company may be obligated to pay the former holders of SRC membership interests an earnout payment, as described above. These amounts will be assessed if additional purchase price is deemed probable. The customer contracts will be amortized over a period of ten years, and the employment agreement will be amortized over a period of three years.

 

Mdenergy, LLC

 

On September 13, 2007, the Company acquired all of the outstanding membership interests of Mdenergy, LLC (MDE), an energy procurement service provider, pursuant to the terms of a merger agreement. The total purchase price paid by the Company at closing was

 

7



Table of Contents

 

approximately $7,900, of which $3,501 was paid in cash and the remainder of which was paid by the issuance of 139,056 shares of the Company’s common stock.

 

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

 

Supplemental Information

 

The following unaudited pro forma combined financial information is presented for comparative purposes for the three and six months ended June 30, 2008 and June 30, 2007 and gives effect to certain adjustments, including amortization of the definite life intangible assets as if the acquisitions occurred on January 1, 2007. The information below is not necessarily indicative of the results of operations that would have actually been reported had the purchase occurred at the beginning of the period presented, nor is it necessarily indicative of future financial position or results of operations:

 

 

 

Three months
ended

 

Six months
ended

 

 

 

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

 

Revenues

 

$

23,895

 

$

13,398

 

$

43,160

 

$

24,539

 

Net loss

 

$

(10,379

)

$

(7,885

)

$

(21,278

)

$

(11,520

)

Pro forma net loss per share – basic

 

$

(0.53

)

$

(0.70

)

$

(1.10

)

$

(1.47

)

 

3.  Recent Accounting Pronouncements

 

SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles

 

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

 

SFAS No. 141R, Business Combinations

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141R). SFAS No. 141R will significantly change the accounting for and reporting of business combination transactions in consolidated financial statements. SFAS No. 141R retains the fundamental requirements in SFAS No. 141, Business Combinations, while providing additional definitions, such as the definition of the acquirer in a purchase and improvements in the application of how the acquisition method is applied. SFAS No. 141R becomes effective January 1, 2009. Early adoption is not permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements.

 

4. Net Loss Per Share

 

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed using the weighted average number of common shares outstanding and, when dilutive, potential common shares from options and warrants using the treasury stock method, and from convertible securities using the as-converted method. The calculation of dilutive weighted average shares outstanding does not include the following potentially dilutive shares as their effect would be antidilutive.

 

8



Table of Contents

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

 

Redeemable Convertible Preferred Stock

 

 

4,906,539

 

 

7,186,800

 

Outstanding options, restricted stock and warrants

 

1,548,039

 

2,854,176

 

1,277,183

 

2,706,569

 

Shares held in escrow

 

95,111

 

 

65,111

 

 

Dilutive weighted average shares outstanding

 

1,643,150

 

7,760,715

 

1,342,294

 

9,893,369

 

 

Included in the calculation of the weighted average number of common shares outstanding at June 30, 2007 are 110,211 contingently issuable shares of common stock. These shares were issuable in connection with the Company’s acquisition of Pinpoint Power DR LLC (PPDR) in 2005. These shares have been included in the calculation as there are no restrictions for issuance except for the passage of time.

 

The weighted average common shares outstanding at June 30, 2008 did not include 35,114 shares issued in the MDE acquisition or 120,000 shares issued in the SRC acquisition that are held in escrow. These shares are included in the calculation of diluted shares outstanding as if the contingency period ended on June 30, 2008.  These shares contain restrictions which require the holder to return all or a portion of the shares if specific conditions are not met.

 

5. Marketable Securities

 

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

 

As of June 30, 2008, all of the Company’s $2,910 par value ARS were subject to failed auctions, and none of the ARS succeeded in an auction during the six months ended June 30, 2008 or subsequent to June 30, 2008.  As a result of these failed auctions, the Company has the potential to benefit from a penalty feature in its interest rates, which allows it to earn an additional 5.1% to 14.0% of interest on these securities until the next auction is set to occur.  The Company will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, or the securities mature.  The Company believes that it will be able to liquidate the investments at par within a reasonable time period, and that the issuers of the securities are currently able and will continue to make interest payments at the maximum rate.  The investments were classified as a current asset on the Condensed Consolidated Balance Sheet as of June 30, 2008 as it is believed that the Company will be able to liquidate these securities within one year.  If in the future the Company no longer believes that it will be able to liquidate these securities within one year, the investments may need to be reclassified as long-term assets or the Company may be required to write down these securities to fair value based on future market conditions. The Company has not made any additional investments in ARS since June 30, 2008.

 

The following is a summary of the Company’s available-for-sale marketable securities as of June 30, 2008 and December 31, 2007:

 

 

 

Gross unrealized

 

As of June 30, 2008

 

Cost

 

Gains

 

Losses

 

Fair value

 

Auction rate securities

 

$

2,910

 

$

 

$

 

$

2,910

 

Fixed income securities

 

500

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

3,410

 

$

 

$

 

$

3,410

 

 

 

 

 

Gross unrealized

 

As of December 31, 2007

 

Cost

 

Gains

 

Losses

 

Fair value

 

Auction rate securities

 

$

5,600

 

$

 

$

 

$

5,600

 

State and municipal bonds

 

9,900

 

 

 

 

 

9,900

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

15,500

 

$

 

$

 

$

15,500

 

 

The following is a summary of the cost and fair value of current available-for-sale marketable securities at June 30, 2008, by contractual maturity:

 

 

 

Cost

 

Fair value

 

Due within one year

 

$

500

 

$

500

 

Due after ten years

 

2,910

 

2,910

 

Total

 

$

3,410

 

$

3,410

 

 

9



Table of Contents

 

At June 30, 2008, the Company had restricted cash of approximately $2,494 invested in certificates of deposit with original maturities greater than 90 days at acquisition.  All certificates of deposit have contractual maturities of twelve months or less. The Company’s investments in certificates of deposit have a fair value that approximates cost.

 

Fair Value Measurements

 

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

 

SFAS No. 157 establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

 

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

 

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

 

·                        Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions market participants would use in pricing the asset or liability.

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at June 30, 2008:

 

 

 

 

 

Fair Value Measurements at June 30, 2008 Using

 

 

 

Totals

 

Quoted
Prices in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Unobservable
Inputs
(Level 3)

 

Auction rate securities

 

$

2,910

 

$

 

$

2,910

 

 

Fixed income securities

 

500

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,410

 

$

500

 

$

2,910

 

 

 

6. Property and Equipment

 

Property and equipment as of June 30, 2008 and December 31, 2007 consisted of the following:

 

 

 

Estimated Useful
Life (Years)

 

June 30,
2008

 

December 31,
2007

 

 

 

 

 

 

 

 

 

Computers and office equipment

 

3

 

$

7,685

 

$

3,870

 

Software

 

3

 

4,298

 

2,499

 

Demand response equipment

 

Lesser of useful life or contract term

 

7,554

 

4,523

 

Back-up generators

 

5-10

 

12,077

 

13,976

 

Furniture and fixtures

 

5

 

814

 

777

 

Leasehold improvements

 

Lesser of the useful life or lease term

 

1,251

 

902

 

Assets under capital lease

 

Lesser of the useful life or lease term

 

222

 

200

 

Construction-in-progress

 

 

 

1,863

 

833

 

 

 

 

 

 

 

 

 

 

 

 

 

35,764

 

27,580

 

Accumulated depreciation

 

 

 

(7,953

)

(4,385

)

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

 

$

27,811

 

$

23,195

 

 

10



Table of Contents

 

Depreciation expense was $1,923 and $624 , respectively, for the three months ended June 30, 2008 and 2007.  Depreciation expense was $3,568 and $918, respectively, for the six months ended June 30, 2008 and 2007.  For the three months ended June 30, 2008 and 2007, $730 and $317, respectively, were included in cost of revenues and $1,193 and $307, respectively, was included in general and administrative expenses.  For the six months ended June 30, 2008 and 2007, $1,465 and $411, respectively, was included in cost of revenues and $2,103 and $407, respectively, were included in general and administrative expenses.

 

Software development costs of $663 for both the three and six months ended June 30, 2008 have been capitalized in accordance with Statement of Position No. 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use .  Capitalized software development costs for the three and six months ended June 30, 2007 were $279 and $677, respectively.   The capitalized amounts are included as software in property and equipment at June 30, 2008 and December 31, 2007. Construction-in-progress consists principally of demand response equipment and back-up generators that have not been placed in service. Construction-in-progress at June 30, 2008 and December 31, 2007 consisted of the following:

 

 

 

June 30,
2008

 

December 31,
2007

 

Demand response equipment

 

$

1,863

 

 

$

778

 

 

Capitalized interest

 

 

55

 

 

 

$

1,863

 

 

$

833

 

 

 

7. Commitments and Contingencies

 

The Company is subject to certain performance guarantee requirements under certain customer contacts and open market bidding program participation rules. The Company had deposits held by certain customers of $7,848 and $14,451 , respectively, at June 30, 2008 and December 31, 2007. These amounts primarily represent up-front payments required by customers to participate in certain programs and ensure that the Company will deliver its committed capacity amounts. If the Company fails to meet its minimum enrollment requirements, a portion or all of the deposit may be forfeited. The Company assessed the probability of default under these agreements and has determined it to be remote.

 

The Company is contingently liable under unused letters of credit. Restricted cash balances in the amount of $2,494 and $3,018 , respectively, collateralize certain unused letters of credit at June 30, 2008 and December 31, 2007.

 

As of June 30, 2008, the Company had $4,758 outstanding under its term loan facility with Bluecrest Capital Partners, L.P.  The entire balance is classified as the current portion of long-term debt in the accompanying balance sheet.

 

8. Stockholders’ Equity

 

Stock Split

 

In May 2007, the Company effected a 2.831 for one split of its common stock. All financial information in the financial statements presented retroactively reflects the impact of this split.

 

9. Stock-Based Compensation

 

Stock Options

 

The Company’s Amended and Restated 2003 Stock Option and Incentive Plan and the 2007 Employee, Director and Consultant Stock Plan (the Plans) provide for the grant of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards and other stock-based awards to eligible employees, directors and consultants of the Company. Options granted under the Plans are exercisable for a period determined by the Company, but in no event longer than ten years from the date of the grant. Options generally vest ratably over four years.

 

In order to estimate the fair value of options granted during the six months ended June 30, 2008 and June 30, 2007, the Company utilized the Black-Scholes option pricing model, utilizing the following assumptions (weighted averages based on grants during the period):

 

11



Table of Contents

 

 

 

Six months ended

 

 

 

June 30, 2008

 

June 30, 2007

 

Risk-free interest rate

 

2.91

%

4.57

%

Expected term of options, in years

 

6.25

 

6.25

 

Expected annual volatility

 

87

%

87

%

Expected dividend yield

 

0

%

0

%

 

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

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30, 2008

 

June 30, 2007

 

June 30, 2008

 

June 30, 2007

 

Stock option expense (employees)

 

$

1,933

 

$

1,235

 

$

3,839

 

$

1,786

 

Stock option expense (non-employees)

 

493

 

96

 

598

 

127

 

Restricted stock

 

270

 

93

 

444

 

107

 

Executive common stock

 

 

2,300

 

 

2,300

 

Total

 

$

2,696

 

$

3,724

 

$

4,881

 

$

4,320

 

 

The following is a summary of the Company’s stock option activity as of June 30, 2008 and the stock option activity for all stock option plans during the six months ended June 30, 2008:

 

 

 

Six Months Ended June 30, 2008

 

 

 

 

 

Number of
Shares
Underlying
Options

 

Exercise Price
Per Share

 

Weighted-Average
Exercise Price
Per Share

 

Aggregate
Intrinsic
Value(1)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at beginning of period

 

2,882,445

 

$

0.11-$48.54

 

$

9.18

 

 

 

Granted

 

387,360

 

 

 

$

22.25

 

 

 

Exercised

 

(488,996

)

 

 

$

0.65

 

 

 

Cancelled

 

(43,257

)

 

 

$

15.89

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at end of period

 

2,737,552

 

$

0.11-$48.54

 

$

12.46

 

$

27,321

 

Remaining contractual life in years

 

8.57

 

 

 

 

 

 

 

Exercisable at end of period

 

601,115

 

$

0.11-$48.54

 

$

8.27

 

$

6,891

 

Remaining contractual life in years

 

8.37

 

 

 

 

 

 

 

 


(1)  The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on June 30, 2008 of $17.95 and the exercise price of the underlying options.

 

Of the stock options outstanding as of June 30, 2008, 66,086 options were held by non-employees and 2,671,466 options were held by employees. The amount of unrecognized stock-based compensation expense that may be recognized for outstanding unvested options as of June 30, 2008 was $23,406, which is to be recognized over a weighted average period of 3.0 years. The amount that may be recognized into expense over the next four years is as follows:

 

2008

 

$

4,081

 

2009

 

7,969

 

2010

 

7,646

 

2011

 

3,564

 

2012

 

146

 

 

 

$

 23,406

 

 

12



Table of Contents

 

During the first quarter of 2008, certain of the Company’s executives elected to take their bonuses in shares of fully vested common stock.  The shares issued totaled 26,961 and had an approximate value of $844.

 

During the second quarter of 2008, the Company granted fully vested options to certain members of its Board of Directors to purchase an aggregate of 39,193 shares of its common stock, which had an estimated fair value of $511.

 

Restricted Stock

 

The following table summarizes restricted stock activity during the three months ended June 30, 2008:

 

 

 

Number of
Shares

 

Weighted
Average
Grant Date
Fair Value
Per Share

 

Unvested at December 31, 2007

 

152,460

 

$

0.51

 

Granted

 

177,500

 

$

15.48

 

Vested

 

(29,057

)

$

14.13

 

Cancelled

 

(750

)

$

13.76

 

 

 

 

 

 

 

Unvested at June 30, 2008

 

300,153

 

$

 13.82

 

 

All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. The shares typically vest ratably over a four year period from the date of issuance, with certain exceptions. The fair value of the restricted stock is expensed ratably over the vesting period. The shares of restricted stock have been issued at no cost to the recipients, except for 152,460 shares of restricted stock granted in 2006 that were purchased for $0.51 per share. The Company records the proceeds received for unvested shares in accrued expenses. The amount is amortized into additional paid-in capital as the shares vest. If the employee who received the restricted stock leaves the Company prior to the vesting date for any reason, the shares of restricted stock will be forfeited and returned to the Company. For restricted stock at June 30, 2008, the Company had $3,511 of stock-based compensation expense, which is expected to be recognized over a weighted average period of 3.4 years.

 

10. Income Taxes

 

No current provision for federal or state income taxes has been recorded, as the Company has incurred cumulative net operating losses since inception.  The Company has recorded a deferred tax provision for $73 and $158 , respectively, related to tax deductible goodwill for the three and six months ended June 30, 2008.  Amounts due to various states for excise taxes are included in general and administrative expense and accrued expenses and other current liabilities as of June 30, 2008 and December 31, 2007.

 

11. Related Party Transactions

 

Deferred Acquisition Payments

 

On June 1, 2005, the Company acquired all of the outstanding membership interests in PPDR from the sole member of PPDR (the Sole Member) in a purchase business combination pursuant to a purchase agreement (the Purchase Agreement). Under the Purchase Agreement, the Company was required to (i) make fixed payments of $5,925 and (ii) issue 303,001 shares of the Company’s common stock to the Sole Member. As part of the Purchase Agreement, the Company acquired a demand response contract that contained a one-year option to extend, as of May 31, 2008, at the sole discretion of a certain customer. If exercised, the Company would have been obligated to make an additional payment of $2,366 and issue an additional 28,287 shares of the Company’s common stock in connection with the Purchase Agreement. In February 2008, the customer informed the Company that it elected not to exercise the one-year option to extend; therefore, no additional payments, including the contingent consideration of $2,247, or shares will be due to the Sole Member. This amount had been recorded as a liability at December 31, 2007 and was reversed, along with a corresponding reduction to intangible assets during the first quarter of 2008.

 

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

 

12. Industry Segment Information

 

Based on qualitative and quantitative criteria established by SFAS No. 131 Disclosures about Segments of an Enterprise and Related Information , the Company operates within one reportable segment.

 

13



Table of Contents

 

During the three and six months ended June 30, 2008 and 2007, respectively, the Company had certain customers whose revenue individually represented 10% or more of the Company’s total revenues as follows:

 

 

 

Three Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

Revenues

 

% of Total
Revenues

 

Revenues

 

% of Total
Revenues

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

$

8,411

 

35.5

%

$

6,223

 

51.8

%

Customer 2

 

4,646

 

19.6

%

3,276

 

27.3

%

Customer 3

 

6,640

 

28.0

%

409

 

3.4

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

19,697

 

83.1

%

$

9,908

 

82.5

%

 

 

 

 

Six Months Ended June 30,

 

 

 

2008

 

2007

 

 

 

Revenues

 

% of Total
Revenues

 

Revenues

 

% of Total
Revenues

 

 

 

 

 

 

 

 

 

 

 

Customer 1

 

$

19,495

 

46.1

%

$

13,530

 

61.5

%

Customer 2

 

8,632

 

20.4

%

5,365

 

24.4

%

Customer 3

 

7,514

 

17.8

%

477

 

2.2

%

 

 

 

 

 

 

 

 

 

 

Total

 

$

35,641

 

84.3

%

$

19,372

 

88.1

%

 

13. Legal Proceedings

 

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not expect the ultimate costs to resolve these matters to have a material adverse effect on its consolidated financial position, results of operations or cash flows. In addition to ordinary-course litigation, the Company is a party to the litigation described below.

 

In March 2008, three purported class action lawsuits were filed in the United States District Court for the District of Massachusetts against the Company, several of its officers and directors, and certain of the underwriters from the Company’s November 2007 follow-on public offering of its common stock. The three class action complaints have been consolidated by the Court into a single action and an amended consolidated complaint is currently due on September 12, 2008. The plaintiffs in the class actions claim to represent those persons who purchased shares of the Company’s common stock from November 1, 2007 through February 27, 2008 and/or those persons who purchased shares of the Company’s common stock in connection with its follow-on public offering. The plaintiffs allege, among other things, that the defendants made false and misleading statements and failed to disclose material information in various SEC filings, press releases and other public statements. The class action complaints allege various claims under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The class action complaints seek, among other relief, class certification, unspecified damages, fees, and such other relief as the court may deem just and proper.

 

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

 

The Company believes that it and the other defendants have substantial legal and factual defenses to the claims and allegations contained in the class action and derivative suit complaints, and the Company intends to pursue these defenses vigorously. There can be no assurance, however, that the Company will be successful, and an adverse resolution of any of the lawsuits could have a material adverse effect on the Company’s consolidated financial position and results of operations in the period in which a lawsuit is resolved. In addition, although the Company carries insurance for these types of claims, a judgment significantly in excess of the Company’s insurance coverage could materially and adversely affect the Company’s financial condition, results of operations and cash flows. The Company is not presently able to reasonably estimate potential losses, if any, related to the lawsuits.

 

14. Subsequent Events

 

On August 5, 2008, the Company and one of its subsidiaries entered into a $35 million secured revolving credit and term loan facility with a bank, under which the bank will, among other things, make revolving credit and term loan advances and issue letters of credit for the Company’s account.  The interest on loans under the Company’s credit facility will accrue at interest rates based upon either the bank’s prime rate or LIBOR, at the Company’s election. The Company’s obligations under this credit facility are secured by all of the assets of the Company and its subsidiaries, excluding any intellectual property.  This credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on the Company’s ability to incur additional indebtedness, create liens, enter into transactions with affiliates, transfer assets, pay dividends or make distributions on, or repurchase, the Company’s stock,  consolidate or merge with other entities, or suffer a change

 

14



Table of Contents

 

in control.  In addition, the Company is required to meet certain financial covenants customary with this type of agreement, including maintaining a minimum specified tangible net worth and a minimum specified ratio of current assets to current liabilities.  This credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, the Company’s obligations under the credit facility may be accelerated.  This credit facility replaced the Company’s credit facility with Bluecrest Capital, L.P that existed as of June 30, 2008.

 

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

 

The following discussion should be read in conjunction with our unaudited financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as the audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended December 31, 2007, included in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission, or the SEC, on March 28, 2008. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “target” and variations of these terms or the negatives of those terms and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding our contracted revenues, results of operations, selling and marketing expenses, general and administrative expenses, research and development expenses, and the sufficiency of our cash for future operations. We assume no obligation to revise or update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth below under this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as well as in our Annual Report on Form 10-K for the year ended December 31, 2007. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC.

 

Overview

 

We are a leading developer and provider of clean and intelligent energy solutions. We use our Network Operations Center, or NOC, to remotely manage and reduce electricity consumption across a network of commercial, institutional and industrial customer sites to enable a more information-based and responsive, or intelligent, electric power grid. Our customers are electric power grid operators and utilities, as well as commercial, institutional and industrial end-users of electricity. Our demand response and energy management solutions help optimize the balance of electric supply and demand and create a lower risk and more environmentally sound alternative to building additional power plants and transmission lines. Grid operators and utilities pay us a stream of recurring cash flows for managing demand response capacity that we share with participating end-use customers. We receive most of our revenues from grid operators and utilities, and we make payments to end-users of electricity for both contracting to reduce electricity usage and actually doing so when called upon. In doing so, we establish a base of installed users for an expanding portfolio of our technology-enabled energy management solutions.

 

Our customer base has grown from 19 commercial, institutional and industrial customers with 70 sites in our network as of December 31, 2004 to 1,252 end-use customers for our demand response solutions with 3,067 sites in our demand response network as of June 30, 2008. The demand response capacity we manage through our network has grown from 10 megawatts, or MW, as of December 31, 2004 to 1,643 MW as of June 30, 2008.   We continue to devote substantially all of our efforts toward the sale of our demand response and energy management solutions. We have incurred cumulative net losses of $55.3 million from inception to June 30, 2008. Our net losses were $10.4 million and $21.4 million, respectively, for the three and six months ended June 30, 2008.

 

Significant Recent Developments

 

In May 2008, we acquired 100% of the membership interests of South River Consulting, LLC, or SRC, an energy procurement and risk management services provider, for a purchase price equal to approximately $5.5 million, which consisted of approximately $3.6 million in cash, $0.2 million of acquisition related expenses, and 120,000 shares of our common stock that had an aggregate value of approximately $1.75 million as of the closing date, plus certain earn-out payments contingent on SRC attaining specific revenue and gross margin targets over a 24-month period. The acquisition of SRC strengthens our position in a growing energy procurement services market and provides a local presence for us in the PJM Interconnection, or PJM, service region.

 

 In June 2008, Arthur W. Coviello, Jr. was elected to serve as a member of our board of directors.  In addition, Mr. Coviello was appointed to the audit committee of our board of directors.

 

On August 5, 2008, we and a subsidiary of ours entered into a $35 million secured revolving credit and term loan facility with Silicon Valley Bank, which provides for, among other things,  revolving credit and term loan advances and letters of credit for our account. Our obligations under this credit facility are secured by all of our assets and the assets of our subsidiaries, excluding any intellectual property. This credit facility replaced our credit facility with Bluecrest Capital, L.P. that existed as of June 30, 2008.

 

15



Table of Contents

 

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 primarily consist 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 that we make available in open market programs, which are open market bidding opportunities established by grid operators or utilities. In these open market programs, grid operators and utilities generally seek bids from companies such as ours to provide demand response capacity based on prices offered in competitive bidding. These opportunities are generally characterized by flexible capacity commitments and prices that vary by month.

 

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 an additional payment for the amount of energy usage that we actually curtail from the grid; we call this an energy payment. The energy payment is based upon the amount of energy usage that we actually reduce from the electricity grid in kilowatt hours during the demand response event.

 

Our energy management solutions include energy procurement services where we evaluate our end-use customers’ energy purchasing needs and assist them in procuring more cost effective electricity. We receive a monthly fee from the competitive electricity provider based upon the actual consumption of electricity used by our end-use customers. Demand response audits are services 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 contractually specified 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 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.

 

In accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, or 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, services have been provided, the fee is fixed or determinable, and we deem collection to be probable. As program rules may differ for each contract and/or region where we operate, we assess whether or not we have met the specific service requirements under the program rules and recognize or 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 or at the end of the service delivery period. 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, revenues become fixed or determinable and are recognized over the delivery service period. Under certain contracts and programs rules, if our verified capacity is below the previously verified amount, the customer will reduce future payments based on the adjusted verified capacity amounts. Revenues recognized between demand response events or tests are not subject to customer refund.  Under certain contracts and programs, the period during which we are required to perform may be shorter than the period over which we receive payments under that contract or program.  In these cases, we record revenue over the mandatory performance obligation period, and a portion of the revenue is recorded and accrued as unbilled revenue because the revenue has been earned but is not billable.

 

As of June 30, 2008, we had 1,643 MW under management in our demand response network, meaning that we had entered into definitive contracts with our commercial, institutional and industrial customers with respect to 1,643 MW of demand response capacity. In most of the markets in which we originally focused our growth, we generally begin earning revenues from our MW under management within approximately one month from the date on which we “enable” the MW, or the date on which we can reduce the MW from the electricity grid if called upon to do so. An exception is the PJM forward capacity market, which is a market in which we materially increased our participation during the first quarter of 2008 and in which we expect to continue to increase our participation and derive revenues. Because PJM operates on a June to May fiscal year basis, a MW that we enable after June of each year may not begin earning revenue until June of the following year. This results in a longer average lag time in our portfolio from the point in time when we consider a MW to be under management to when we earn revenues from the MW.

 

Contracted revenues represent our estimate of total payments that we currently expect to earn in connection with providing demand response solutions to grid operators and utilities over the course of long-term contracts and pursuant to open market bidding programs, as well as providing energy management solutions to our commercial, institutional and industrial end-use customers. In July 2008, we announced that we had surpassed $500 million in contracted revenues. We currently expect approximately 90% of this contracted revenue to be earned by May 31, 2012 and the remainder to be earned through 2018. Approximately 10% of the contracted revenue referenced in this paragraph relates to contracts that we entered into with utility customers that are currently subject to regulatory approval.  For a discussion of the risks and uncertainties regarding our contracted revenues, please see the section entitled “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

Revenues generated from two fixed price contracts with, and open market sales to, ISO New England Inc., or ISO-NE, a grid operator customer, accounted for 35.5% and 51.8%, respectively, of our total revenues in each of the three months ended June 30, 2008 and June 30, 2007. For the six months ended June 30, 2008 and June 30, 2007, this customer accounted for 46.1% and 61.5%, respectively, of our total revenues.

 

16



Table of Contents

 

Specifically, an aggregate of 4.0% and 5.8% , respectively, of our total revenues for the three and six months ended June 30, 2008 were generated under two fixed price contracts with ISO-NE, both of which expired on May 31, 2008.  In addition, 19.6% and 27.3%, respectively, of our total revenues for the three months ended June 30, 2008 and June 30, 2007 were generated under a fixed price contract with The Connecticut Light and Power Company, or CL&P, which expires on December 31, 2008.  For the six months ended June 30, 2008 and June 30, 2007, this customer accounted for 20.4% and 24.4%, respectively, of our total revenues.  Although we entered into a new 170 MW fixed price contract with CL&P in February 2008, which we expected to partially offset the impact of the expiration of our fixed price contracts with ISO-NE and CL&P on our revenues, this new contract was denied regulatory approval by the Connecticut Department of Public Utility Control, or the DPUC, in April 2008.  We intend to enroll a significant portion of the MW represented by our fixed price contracts with ISO-NE and CL&P in other available demand response programs, which other programs could provide significantly lower capacity payments than our expired or expiring fixed price contracts with ISO-NE and CL&P. For example, capacity payments currently available under ISO-NE’s Real-Time Demand Response program are significantly lower than the capacity payments available under these fixed price contracts.

 

During the three and six months ended June 30, 2008, revenues generated from open market sales to PJM, a grid operator customer, accounted for 28.0% and 17.8%, respectively, of our total revenues.

 

Cost of Revenues

 

Cost of revenues for our demand response solutions consists of payments that 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, for fixed contracts, or the estimated useful life of the equipment and this depreciation is also reflected in cost of revenues. We also include the monthly telecommunications/data costs we incur as a result of being connected to our commercial, institutional and industrial sites. Cost of revenues for energy management solutions include the wages and associated benefits that we pay to our project managers for the performance of those services.

 

Gross Profit

 

Gross profit consists of our total revenues less our cost of revenues. Our gross profit has been, and will be, affected by many factors, including (a) 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 energy 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 314 employees at June 30, 2008. We expect to continue to hire employees to support our growth for the foreseeable future. In addition, we incur significant up-front costs associated with the expansion of the number of MW under our management, which we expect to continue for the foreseeable future. Although we expect our overall operating expenses to increase in absolute dollar terms for the foreseeable future as we grow our MW under management and further increase our headcount, we expect our overall annual operating expenses to decrease as a percentage of total annual revenues as we leverage our existing employee base and continue generating revenues from our MW under management.

 

Selling and Marketing

 

Selling and marketing expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards, (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 an 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 annual selling and marketing expenses to decrease as a percentage of total annual revenues as we leverage our current sales and marketing personnel.

 

General and Administrative

 

General and administrative expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards, 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 annual revenues for the foreseeable future as we invest in infrastructure to

 

17



Table of Contents

 

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

 

Research and development expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards, 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. During the three and six months ended June 30, 2008, we capitalized $0.7 million of software and development costs in accordance with SOP 98-1, Accounting for the Cost of Computer Software Developed or Obtained f or Internal Use, and the amount is included as software in property and equipment at June 30, 2008. During the three and six months ended June 30, 2007, we capitalized software and development costs of $0.3 million and $0.7 million , respectively . 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.

 

Stock-Based Compensation

 

Effective as of January 1, 2006, we adopted the requirements of Statement of Financial Accounting Standards (SFAS) No. 123R, Share Based Payment (SFAS No. 123(R)) using the modified prospective method. 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. For the three and six months ended June 30, 2008, we recorded expenses of approximately $2.7 million and $4.9 million, respectively, in connection with share-based payment awards to employees and non-employees. With respect to grants through June 30, 2008, a future expense of non-vested options of approximately $23.4 million is expected to be recognized over a weighted average period of 3.0 years and a future expense of restricted stock awards of approximately $3.5 million is expected to be recognized over a weighted average period of 3.4 years.

 

Interest and Other Income

 

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

 

Interest Expense

 

Interest expense consists of interest on our debt facilities.

 

Consolidated Results of Operations

 

Three and Six Months Ended June 30, 2008 Compared to the Three and Six Months Ended June 30, 2007

 

Revenues

 

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

 

 

 

Three Months
Ended
June 30, 2008

 

Three Months
Ended
June 30, 2007

 

Percentage
Change

 

Revenues:

 

 

 

 

 

 

 

Demand response solutions

 

$

21,868

 

$

11,910

 

83.6

%

Energy management solutions

 

1,818

 

105

 

1631.4

%

Total revenues

 

$

23,686

 

$

12,015

 

97.1

%

 

 

 

Six Months
Ended
June 30, 2008

 

Six Months
Ended
June 30, 2007

 

Percentage
Change

 

Revenues:

 

 

 

 

 

 

 

Demand response solutions

 

$

39,476

 

$

21,514

 

83.5

%

Energy management solutions

 

2,822

 

473

 

496.6

%

Total revenues

 

$

42,298

 

$

21,987

 

92.4

%

 

18



Table of Contents

 

Demand Response Solutions Revenues

 

During our first year of participation in the PJM Emergency Load Response Program, or the ELRP, which extended from June 2007 through May 2008, and in accordance with a ccounting principles generally accepted in the United States, or GAAP, and SAB 104, we recognized capacity-based revenue from the ELRP over a twelve-month period due to our lack of operating experience in the ELRP.  Beginning with the new PJM fiscal year in June 2008, we recognize capacity-based revenue from the ELRP over its delivery period of June through September, consistent with GAAP, SAB 104 and how we recognize capacity-based revenue in other demand response programs.  As a result, during the three and six months ended June 30, 2008, we were able to recognize additional revenue of approximately $3.8 million, approximately $3.3 million of which was attributable to new megawatts enrolled in the ELRP in June 2008. We continue to recognize energy-based revenue from the ELRP during the month in which the energy is delivered.  The remaining increase in demand response solutions revenues of approximately $6.1 million and $14.1 million, respectively, during the three and six months ended June 30, 2008 was due to an increase in our MW under management in all operating regions and the enrollment of new end-use customers in our demand response programs.

 

Energy Management Solutions Revenues

 

During the three and six months ended June 30, 2008, the increase in our energy management solutions revenues compared to the same period in 2007 was primarily due to our acquisition of Mdenergy, LLC, or MDE, an energy procurement services provider, our acquisition of SRC, an energy procurement and risk management services provider, and to end-use customers continuing to utilize our energy procurement services offering, under which offering we evaluate our end-use customers’ energy purchasing needs and assist them in procuring more cost effective electricity. During the three and six months ended June 30, 2008, we also received revenues from our demand response audits, pursuant to which 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 currently expect our revenues to increase in 2008 compared to 2007 as we seek to further increase our MW under management in all operating regions, enroll new end-use customers in our demand response programs, continue to sell our energy management solutions to our new and existing demand response customers and pursue more favorable pricing opportunities. In February 2008, ISO-NE notified us that it will not extend our two fixed price contracts representing approximately 80 MW that expired on May 31, 2008. In February 2008, we entered into a new 170 MW fixed price contract with CL&P, which we expected to partially offset the impact of the expiration of these ISO-NE contracts and our fixed price contract with CL&P, which represents approximately 110 MW and which expires on December 31, 2008, on our revenues. However, on April 2, 2008, we were notified by the DPUC that this new contract was denied regulatory approval.  We intend to enroll a significant portion of the MW represented by our fixed price contracts with ISO-NE and CL&P in other available demand response programs, which other programs could provide significantly lower capacity payments than our expired or expiring fixed price contracts with ISO-NE and CL&P. As a result, our revenues may be significantly and adversely affected.

 

Gross Profit and Gross Margin

 

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

 

Three Months Ended June 30,

 

2008

 

2007

 

Gross Profit

 

Gross Margin

 

Gross Profit

 

Gross Margin

 

$

8,871

 

37.5

%

$

4,105

 

34.2

%

 

Six Months Ended June 30,

 

2008

 

2007

 

Gross Profit

 

Gross Margin

 

Gross Profit

 

Gross Margin

 

$

15,341

 

36.3

%

$

7,013

 

31.9

%

 

Our gross profit increased during the three and six months ended June 30, 2008 when compared to the same periods in 2007 primarily due to our continued growth and more favorable contract terms with our commercial, institutional and industrial customers. In 2008, we expect our gross margin percentage to increase as we seek to sell higher gross margin energy management solutions to our existing demand response customers and seek to achieve more favorable contract terms with our commercial, institutional and industrial customers.

 

As discussed  under “Revenues” above and in connection with our increased participation in the PJM ELRP, as a result of recognizing capacity-based revenue over the four month delivery period of June through September, we recognized additional gross profit of approximately $1.3 million during the three and six months ended June 30, 2008.

 

19



Table of Contents

 

Operating Expenses

 

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

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2008

 

2007

 

Percentage
Change

 

Operating Expenses:

 

 

 

 

 

 

 

Selling and marketing expenses

 

$

6,914

 

$

4,372

 

58.1

%

General and administrative expenses

 

11,657

 

7,907

 

47.4

%

Research and development expenses

 

921

 

498

 

84.9

%

Total

 

$

19,492

 

$

12,777

 

52.6

%

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2008

 

2007

 

Percentage
Change

 

Operating Expenses:

 

 

 

 

 

 

 

Selling and marketing expenses

 

$

12,740

 

$

7,478

 

70.4

%

General and administrative expenses

 

22,488

 

11,337

 

98.4

%

Research and development expenses

 

2,432

 

839

 

189.9

%

Total

 

$

37,660

 

$

19,654

 

91.6

%

 

Personnel-related costs are the most significant component of each of these expense categories, including costs associated with share-based payment awards. We grew from 161 employees at June 30, 2007 to 314 employees at June 30, 2008. In 2008, we expect to increase our headcount by approximately 45% to 50% over headcount at the end of 2007, when we had 253 employees, and we expect to continue to hire employees to support our growth for the foreseeable future. In addition, we incur significant up-front costs associated with the expansion of the number of MW under our management, which we expect to continue for the foreseeable future. Although we expect our overall operating expenses to increase in absolute dollar terms for the foreseeable future as we grow our MW under management and further increase our headcount, we expect our overall operating expenses to decrease as a percentage of total annual revenues as we leverage our existing employee base and continue generating revenues from our MW under management.

 

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

 

Selling and Marketing Expenses

 

The increase in selling and marketing expenses was primarily due to an increase in employee related costs, excluding stock based compensation, from $2.6 million for the three months ended June 30, 2007 to $5.3 million for the three months ended June 30, 2008. For the six months ended June 30, 2008, employee related costs were $9.9 million compared to $4.2 million for the same period in 2007.  During the three and six months ended June 30, 2008 and in connection with our revised sales commission policy, selling and marketing expenses related to the payment of up-front commission fees to certain of our selling and marketing employees decreased as compared to the same periods in 2007, which decrease was offset by an increase in the number of selling and marketing employees and an increase in the base salaries of certain of these employees.  The number of selling and marketing employees increased from 59 at June 30, 2007 to 105 at June 30, 2008. Stock-based compensation expense related to selling and marketing employees for the three months ended June 30, 2008 increased to $0.9 million compared to $0.4 million for the same period in 2007.  For the six months ended June 30, 2008, stock-based compensation expense related to selling and marketing employees was $1.8 million, compared to $0.7 million for the same period in 2007.

 

General and Administrative Expenses

 

The increase in general and administrative expenses was primarily due to an increase in employee related costs, excluding stock based compensation, from $2.5 million for the three months ended June 30, 2007 to $5.5 million for the three months ended June 30, 2008, as well as to greater costs associated with being a public company. For the six months ended June 30, 2008, employee related costs were $10.6 million compared to $4.0 million for the same period in 2007. The number of general and administrative employees, including employees in our operations group, increased from 81 at June 30, 2007 to 170 at June 30, 2008. Stock-based compensation expense related to general and administrative employees for the three months ended June 30, 2008 was $1.6 million compared to $3.3 million for the same period in 2007.  For the six months ended June 30, 2008, stock-based compensation expense related to general and administrative employees was $2.8 million, compared to $3.5 million for the same period in 2007.  Included within the 2007 stock-based compensation amounts is $2.3 million in compensation expense associated with a grant that we made to certain of our executives which was recognized in full as compensation expense during these respective periods.

 

20



Table of Contents

 

Research and Development Expenses

 

The increase in research and development expenses was primarily due to an increase in employee related costs, excluding stock based compensation, from $0.4 million for the three months ended June 30, 2007 to $0.5 million for the three months ended June 30, 2008. For the six months ended June 30, 2008, employee related costs were $1.9 compared to $0.7 million for the same period in 2007. The number of research and development employees increased from 21 at June 30, 2007 to 39 at June 30, 2008. Stock-based compensation expense related to research and development employees for the three months ended June 30, 2008 and 2007 was $0.1 million for both periods.  For the six months ended June 30, 2008, stock-based compensation expense related to research and development employees was $0.3 million, compared to $0.1 million for the same period in 2007.  The increase in research and development expenses for the three and six months ended June 30, 2008 was slightly offset by capitalized software and development costs of $0.7 million.

 

Interest and Other Income (Expense), Net

 

Net interest and other income was $0.3 million for the three months ended June 30, 2008, compared to net interest and other expense of $0.5 million for the three months ended June 30, 2007.  Net interest and other income was $1.0 million for the six months ended June 30, 2008, compared to net interest and other expense of $0.6 million for the six months ended June 30, 2007.

 

Interest and other income in the three months ended June 30, 2008 was $0.5 million as compared to $0.6 million at June 30, 2007.  The decrease was primarily due to a change in the mix of investment vehicles.  For the six months ended June 30, 2008, interest and other income was $1.5 million compared to $0.8 million for the six months ended June 30, 2007.  This increase was due to investment of our initial public offering, or IPO, and follow-on offering proceeds over the period.

 

Interest expense for the three months ended June 30, 2008 was $0.2 million compared to $0.1 million for the same period in 2007.  For the six months ended June 30, 2008, interest and other income was $0.5 million compared to $0.2 million for the six months ended June 30, 2007.  The increases were primarily due to a higher average outstanding debt balance during both the three and six months ended June 30, 2008. In addition, for the three and six months ended June 30, 2007, we capitalized interest related to construction in progress projects totaling approximately $0.3 million and $0.7 million, respectively.

 

Income Taxes

 

We had a provision for income taxes of $0.1 million and $0.2 million, respectively, for the three and six months ended June 30, 2008.  There was no provision for the three and six months ended June 20, 2007. The provision for the three and six months ended June 30, 2008 relates to the amortization of tax deductible goodwill, which generates a deferred tax liability that cannot be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature. 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 June 30, 2008.

 

Liquidity and Capital Resources

 

Overview

 

Revenues generated from two fixed price contracts with, and open market sales to, ISO-NE accounted for 35.5% and 46.1% , respectively, of our total revenues for the three and six months ended June 30, 2008.  For the three and six months ended June 30, 2007, these amounts accounted for 51.8% and 61.5%, respectively. Specifically, an aggregate of 4.0% and 5.8%, respectively, of our total revenues for the three and six months ended June 30, 2008 were generated under two fixed price contracts with ISO-NE, both of which expired on May 31, 2008.  In addition, 19.6% and 27.3%, respectively, of our total revenues for the three months ended June 30, 2008 and June 30, 2007 were generated under a fixed price contract with CL&P, which expires on December 31, 2008. For the six months ended June 30, 2008 and June 30, 2007, CL&P accounted for 20.4% and 24.4%, respectively, of our total revenues. We do not currently expect the expiration of our fixed price contracts with ISO-NE and CL&P to have a material impact on our liquidity.

 

As of June 30, 2008, we had cash, cash equivalents, and marketable securities totaling $65.7 million, of which $62.3 million represented cash and cash equivalents, a decrease of $20.0 million from the December 31, 2007 balance of $85.7 million.  This decrease includes the effect of posting $10.0 million of financial assurances to satisfy certain demand response market requirements.  As of June 30, 2008, we had restricted cash of $2.5 million and financial assurance deposits of $7.8 million, totaling $10.3 million compared to $17.5 million as of December 31, 2007, a decrease of $7.1 million primarily due to the release of deposits during the second quarter of 2008.  As we fulfill our obligations and enroll capacity in certain markets, a portion or all of these deposits will be released.  We believe that our existing cash and cash equivalents and marketable securities at June 30, 2008, our anticipated net cash flows from operating activities and amounts available under our credit facility will be sufficient to meet our anticipated cash needs, including investing activities, for at least the next 24 months.

 

Contracted revenues represent our estimate of total payments that we currently expect to earn in connection with providing demand response solutions to grid operators and utilities over the course of long-term contracts and pursuant to open market bidding programs, as well as providing energy management solutions to our commercial, institutional and industrial end-use customers.  In July 2008, we announced that we had surpassed approximately $500 million in contracted revenues. We currently expect approximately 90% of this contracted revenue to be earned by May 31, 2012 and the remainder to be earned through 2018.  Approximately 10% of the contracted revenue referenced in this paragraph relates to contracts that we entered into with utility customers that are currently subject to regulatory approval. For a discussion of the risks and uncertainties regarding our contracted revenues, please see the section entitled “Risk Factors” contained in Part II, Item 1A of this Quarterly Report on Form 10-Q.

 

Our investments in securities include auction-rate securities, or ARS, and state and municipal bonds. The securities we typically invest in are AAA-rated government-backed securities with interest rates typically ranging from 6.5% to 6.8% that have approximate contractual maturities of at least 26 years. However, because of the short-term nature of our investment in these ARS, they have been classified as available-for-sale and included in short-term investments on our consolidated balance sheet. Our holdings of ARS as of June 30, 2008 and December 31, 2007 were $2.9 million and $5.6 million, respectively.

 

21



Table of Contents

 

As of June 30, 2008, we had $2.9 million par value ARS that were subject to failed auctions, and none of the ARS succeeded in an auction during the six months ended June 30, 2008 or subsequent to June 30, 2008.  As a result of these failed auctions, we have the potential to benefit from a penalty feature in our interest rates, which allows us to earn an additional 5.1% to 14.0% of interest on these securities until the next auction is set to occur.  We will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, or the securities mature.  We believe that we will be able to liquidate the investments at par within a reasonable time period, and that the issuers of the securities are currently able and will continue to make interest payments at the maximum rate.  The investments were classified as current assets in our condensed consolidated balance sheet as of June 30, 2008 based on our current expectations regarding liquidity.  If in the future we no longer believe that we will be able to liquidate these securities within one year, the investments may need to be reclassified as long-term assets or may require a write down to fair value based on future market conditions .

 

We are contingently liable under unused letters of credit. Included in the June 30, 2008 and December 31, 2007 restricted cash balances are amounts used to collateralize unused letters of credit in the amount of $2.5 million and $3.0 million, respectively.

 

Cash Flows

 

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

 

 

 

Six Months
Ended June 30,

 

 

 

2008

 

2007

 

 

 

 

 

 

 

Cash flows used in operating activities

 

$

(10,629

)

$

(3,191

)

Cash flows provided by (used in) investing activities

 

3,589

 

(13,216

)

Cash flows (used in) provided by financing activities

 

(871

)

106,850

 

Net (decrease) increase in cash and cash equivalents

 

$

(7,911

)

$

90,443

 

 

Cash Flows Used in Operating Activities

 

Cash used in 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 six months ended June 30, 2008 was $10.6 million and consisted of a $21.4 million net loss offset by approximately $1.5 million of net cash provided for working capital purposes and other activities and by $9.4 million of non-cash items, consisting primarily of depreciation and amortization, interest expense, deferred tax liability and stock-based compensation charges. Cash used for working capital and other activities primarily reflected a $4.0 million increase in accrued capacity payments, the majority of which was related to the PJM demand response market, an increase of $2.5 million in accounts payable an accrued expenses, an increase of $0.7 million in payroll and related expenses, an increase of $0.1 million in other noncurrent liabilities and a $0.3 million decrease in trade accounts receivable. These amounts were partially offset by an increase of $3.8 million in unbilled revenue relating to the PJM demand response market, a decrease of $1.5 million in deferred revenues, and an increase of $0.8 million in prepaid and other assets.

 

Cash used in operating activities in the six months ended June 30, 2007 was $3.2 million and consisted of a $12.0 million net loss partially offset by $2.4 million of net cash provided by working capital and other activities and by $6.4 million of non-cash items, consisting primarily of depreciation and amortization and stock-based compensation charges. Cash provided by working capital and other activities primarily reflected a $3.0 million increase in accounts payable and accrued expenses as our operations continued to grow, an increase in accrued capacity payments of $2.1 million, an increase of $1.2 million in deferred revenues and an increase of $1.0 million in accrued payroll and related expenses.  These amounts were offset by a $3.6 million increase in accounts receivable attributable to the significant increase in revenues, a $0.6 million increase in prepaid and other noncurrent assets and an increase in deferred cost of sales of $0.7 million.

 

Cash Flows Provided by (Used in) Investing Activities

 

Cash provided by investing activities was $3.6 million for the six months ended June 30, 2008. For the six months ended June 30, 2008, purchases of available-for-sale securities were approximately $10.6 million and sales of available-for-sale maturities were $22.7 million.  Our principal cash investments related to installation services used to build out and expand our demand response programs, purchases of property and equipment, the cash portion earn-out for our acquisition of MDE of $3.4 million, and $3.8 million of the cash used for the acquisition of SRC. During the six months ended June 30, 2008, we decreased our restricted cash and deposits for customer programs by $7.1 million.  During the six months

 

22



Table of Contents

 

ended June 30, 2008, we incurred $8.1 million in capital expenditures primarily related to office equipment, demand response equipment and other miscellaneous expenditures.

 

For the six months ended June 30, 2007, cash used in investing activities was $13.2 million. Our principal cash investments during this period related to purchases of equipment, furniture and fixtures, 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.

 

Cash Flows (Used in) Provided by Financing Activities

 

Cash flows used in financing activities were $0.9 million for the six months ended June 30, 2008. Cash flows provided by financing activities were $106.9 million for the six months ended June 30, 2007. Cash flows (used in) provided by financing activities consisted of the following:

 

Equity Financing Activities

 

During the six months ended June 30, 2007, we increased our restricted cash by $2.0 million.

 

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

 

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

 

In May 2007, we completed an IPO of 4,312,500 shares of common stock at a price of $26.00 per share, which included the exercise of the underwriters’ over-allotment option to purchase 562,500 shares and the sale of 225,000 shares by certain of our stockholders. Net proceeds to us from the offering were approximately $95.2 million.

 

In addition, we received approximately $0.3 million and $84,000, respectively, from exercises of common stock options during the six months ended June 30, 2008 and June 30, 2007.

 

Credit Facility Borrowings

 

During the six months ended June 30, 2008, we made scheduled payments on our outstanding debt and capital lease obligations of $1.2 million.   During the six months ended June 30, 2007, we borrowed $2.5 million under our loan and security agreement and made scheduled payments on our outstanding debt and capital lease obligations of $0.5 million.

 

On August 5, 2008, we and a subsidiary of ours entered into a $35 million secured revolving credit and term facility with Silicon Valley Bank, which provides for, among other things, revolving credit and term loan advances and letters of credit for our account. This credit facility replaced our credit facility with Bluecrest Capital, L.P. that existed as of June 30, 2008.

 

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 $8.1 million and $10.8 million, respectively, for the six months ended June 30, 2008 and 2007.

 

Contractual Obligations

 

In June 2008, we entered into a sublease agreement pursuant to which we leased approximately 8,766 square feet of space located in San Francisco, California.  We will incur operating lease obligations of approximately $0.2 million, $0.3 million, $0.4 million, $0.4 million and $0.2 million, respectively, in 2008, 2009, 2010, 2011 and 2012 under this sublease agreement.

 

Other than as set forth above, as of June 30, 2008, our contractual obligations disclosure contained in our Annual Report on Form 10-K for the year ended December 31, 2007, which we filed with the SEC on March 28, 2008, has not materially changed.

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies and Use of Estimates

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. 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 during the three months ended June 30, 2008.  For a detailed explanation of the judgments made in these areas, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within our Annual Report on Form 10-K for the year ended December 31, 2007, which we filed with the SEC on March 28, 2008.

 

23



Table of Contents

 

Item 3.  Quantitative and Qualitative Disclosure About Market Risk .

 

Foreign Exchange Risk

 

We face minimal exposure to adverse movements in foreign currency exchange rates.

 

Interest Rate Risk

 

As of June 30, 2008, all of our $4.9 million of outstanding debt was at fixed interest rates; therefore, there was no significant impact from changes in interest rates.

 

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

 

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

 

As of June 30, 2008, we had $2.9 million par value ARS that were subject to failed auctions, and none of the ARS succeeded in an auction during the six months ended June 30, 2008 or subsequent to June 30, 2008.  As a result of these failed auctions, we have the potential to benefit from a penalty feature in our interest rates, which allows us to earn an additional 5.1% to 14.0% of interest on these securities until the next auction is set to occur.  We will not be able to liquidate the investments until a successful auction occurs, a buyer is found outside the auction process, the securities are called or refinanced by the issuer, or the securities mature.  We believe that we will be able to liquidate the investments at par within a reasonable time period, and that the issuers of the securities are currently able and will continue to make interest payments at the maximum rate.  The investments were classified as current assets in our condensed consolidated balance sheet as of June 30, 2008 based on our current expectations regarding liquidity.  However, the investments may need to be reclassified as long-term assets in the future or may require a write down to fair value based on future market conditions if the liquidity of the investments does not improve.

 

Item 4T.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Internal Control over Financial Reporting

 

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

 

24



Table of Contents

 

PART II — OTHER INFORMATION

 

Item 1.    Legal Proceedings.

 

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. We do not expect the ultimate costs to resolve these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows. In addition to ordinary-course litigation, we are a party to the litigation described below.

 

In March 2008, three purported class action lawsuits were filed in the United States District Court for the District of Massachusetts against us, several of our officers and directors and certain of the underwriters from the November 2007 follow-on public offering of our common stock. The three class action complaints have been consolidated by the Court into a single action and an amended consolidated complaint is currently due on September 12, 2008. The plaintiffs in the class actions claim to represent those persons who purchased shares of our common stock from November 1, 2007 through February 27, 2008 and/or those persons who purchased shares of our common stock in connection with our follow-on public offering. The plaintiffs allege, among other things, that the defendants made false and misleading statements and failed to disclose material information in various SEC filings, press releases and other public statements. The class action complaints allege various claims under the Securities Act of 1933, as amended, or the Securities Act, the Exchange Act, and Rule 10b-5 promulgated thereunder. The class action complaints seek, among other relief, class certification, unspecified damages, fees and such other relief as the court may deem just and proper.

 

In addition, on May 14, 2008, a complaint was filed derivatively on our behalf in the United States District Court for the District of Massachusetts against several of our officers and directors and certain of the underwriters from our follow-on public offering.  The derivative complaint alleges various common law and equitable claims, including breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets and unjust enrichment, in connection with purported false and misleading statements and failures to disclose material information in certain SEC filings, press releases and other public statements from November 1, 2007 to May 14, 2008.  The derivative plaintiff seeks, among other relief, unspecified damages, injunctive relief, restitution, disgorgement, fees and such other relief as the Court may deem proper. On August 12, 2008, the Court stayed our obligation to respond to the derivative complaint pending a denial, if any, of the defendants’ anticipated motion to dismiss the amended consolidated class action complaint.

 

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

 

Item 1A.  Risk Factors.

 

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control.  In addition to the other information set forth in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2007.  There are no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2007, other than changes set forth in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2008 and the addition of a risk factor entitled “We may not receive the revenues anticipated by our long-term contracts, open market bidding programs and/or our provision of energy management solutions, which may result in actual revenues earned in future periods differing from management’s current estimate of contracted revenues to be earned” to reflect recent developments in our growth strategy.  Additional risks and uncertainties not presently known to us, which we currently deem immaterial or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations.

 

We may not receive the revenues anticipated by our long-term contracts, open market bidding programs and/or our provision of energy management solutions, which may result in actual revenues earned in future periods differing from management’s current estimate of contracted revenues to be earned.

 

Contracted revenues represent our estimate of total payments that we currently expect to earn in connection with providing demand response solutions to grid operators and utilities over the course of long-term contracts and pursuant to open market bidding programs, as well as providing energy management solutions to our commercial, institutional and industrial end-use customers.  Our estimated contracted revenues from these long-term contracts, open market bidding programs and our provision of energy management solutions are based on contractual terms, open market bidding program rules and a number of assumptions, including:

 

·                   our ability to provide our utility and grid operator customers the capacity that we have committed to provide under long-term contracts and pursuant to open market bidding programs;

·                   our contracts with utility and grid operator customers, and commercial, institutional and industrial end-use customers not being terminated, modified or delayed or becoming subject to governmental regulation that could materially and adversely affect our interests;

·                   the rules and assumed pricing of the various open market bidding programs in which we participate remaining unchanged in all material respects;

·                   the rate of termination of our commercial, institutional and industrial end-use customers under our long-term contracts remaining consistent with our historical average;

·                   the electricity consumption of our commercial, institutional and industrial end-use customers remaining consistent with historical use throughout the term of our contracts with such customers; and

·                   our ability to obtain regulatory approval for our long-term contracts with certain utility customers.

 

Any differences in these assumptions, other factors and our actual experiences may result in actual revenues earned in future periods being significantly lower than management’s current estimate of contracted revenues to be earned and could have a material adverse effect on our business, financial condition and results of operations.

 

25



Table of Contents

 

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

 

(a)      Unregistered Sales of Equity Securities

 

We offered, issued and/or sold the following unregistered securities during the quarter ended June 30, 2008:

 

(i)       On June 1, 2008, in connection with our acquisition of 100% of the membership interests of Pinpoint Power DR, LLC, we issued 44,260 shares of our common stock to Thomas E. Atkins.

 

(ii)      On May 1, 2008, in connection with the acquisition of 100% of the membership interests of SRC, we issued 120,000 shares of our common stock.

 

The issuance of securities described in (i) and (ii) above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. The sales of these securities were made without general solicitation or advertising.

 

(b)      Use of Proceeds

 

We registered shares of our common stock in connection with our IPO under the Securities Act. The registration statement on Form S-1 (File No. 333-140632) filed in connection with our IPO was declared effective by the SEC on May 17, 2007. Including shares sold pursuant to the exercise by the underwriters of their over-allotment option, 4,087,500 shares of our common stock were registered and sold in the IPO by us and an additional 225,000 shares of common stock were registered and sold by the selling stockholders named in the registration statement. All the shares were sold at a price to the public of $26.00 per share. The net offering proceeds received by us, after deducting underwriting discounts and commissions and expenses incurred in connection with the offering, were approximately $95.2 million.  Through June 30, 2008, approximately $11.9 million of the proceeds from our IPO have been used to fund the operations of our business and for general corporate purposes, approximately $14.3 million have been used to purchase and install equipment, approximately $1.9 have been used to repay indebtedness and approximately $8.2 million have been used to fund acquisitions and make payments outstanding on prior acquisitions. As of June 30, 2008, $10.3 million was posted as financial assurance deposits and letter of credit collateral.  The remainder of the net proceeds from the IPO are invested in short-term investment grade securities and money market accounts. There has been no material change in the planned use of proceeds from our IPO as described in our final prospectus filed with the SEC on May 18, 2007 pursuant to Rule 424(b).

 

Item 4.  Submission of Matters to a Vote of Security Holders.

 

Our annual meeting of stockholders was held on Friday, May 9, 2008, in Boston, Massachusetts, at which the following matters were submitted to a vote of the stockholders:

 

(a)

 

Votes regarding the election of the person named below as a class I member to the board of directors for a three-year term and until his successor has been duly elected and qualified or until his earlier resignation or removal were as follows:

 

 

 

For

 

Withheld

 

Adam Grosser

 

16,309,729

 

293,087

 

 

(b)

 

Votes regarding ratification of the appointment of the accounting firm of Ernst & Young LLP as our independent registered public accounting firm for the current fiscal year were as follows:

 

For

 

Against

 

Abstentions

 

16,578,615

 

12,278

 

11,922

 

 

Item 6.  Exhibits.

 

10.1

 

Sub-Sublease Agreement by and between Prosodie Interactive California and EnerNOC, Inc., dated May 30, 2008.

 

 

 

10.2@

 

Form of Restricted Stock Unit Agreement under the EnerNOC, Inc. 2007 Employee, Director and Consultant Stock Plan.

 

 

 

10.3@

 

EnerNOC, Inc. Non-Employee Director Compensation Policy.

 

26



Table of Contents

 

31.1

 

Certification of Chief Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

 

 

31.2

 

Certification of Chief Financial Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

 

 

32.1

 

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

 


 @ Management contract, compensatory plan or arrangement.

 

27



Table of Contents

 

SIGNATURES

 

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

 

 

 

EnerNOC, Inc.

 

 

 

Date: August 13, 2008

By:

/s/ Timothy G. Healy

 

 

Timothy G. Healy

 

 

Chief Executive Officer

 

 

(principal executive officer)

 

 

 

Date: August 13, 2008

By:

/s/ Neal C. Isaacson

 

 

Neal C. Isaacson

 

 

Chief Financial Officer

 

 

(principal financial and accounting officer)

 

28



Table of Contents

 

Exhibit Index

 

Number

 

Description of Exhibit

10.1

 

Sub-Sublease Agreement by and between Prosodie Interactive California and EnerNOC, Inc., dated May 30, 2008.

 

 

 

10.2@

 

Form of Restricted Stock Unit Agreement under the EnerNOC, Inc. 2007 Employee, Director and Consultant Stock Plan.

 

 

 

10.3@

 

EnerNOC, Inc. Non-Employee Director Compensation Policy.

 

 

 

31.1

 

Certification of Chief Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

 

 

31.2

 

Certification of Chief Financial Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

 

 

 

32.1

 

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

 


@ Management contract, compensatory plan or arrangement.

 

29


Exhibit 10.1

 

SUB-SUBLEASE AGREEMENT

 

THIS SUB-SUBLEASE AGREEMENT (“Sub-sublease”) is made this 30th day of May, 2008, by and between PROSODIE INTERACTIVE CALIFORNIA, INC., (“Sub-sublandlord”) and Enernoc, Inc.  (“Sub-Sub-Tenant”)

 

1.   Premises . Sub-sublandlord agrees to Sub-sublease to Sub-subtenant, and Sub-subtenant agrees to Sub-sublease from Sub-sublandlord, approximately 8,766 rentable square feet  (“RSF”) of space located on the eastern side of the 4 th floor of the building located at 500 Howard Street, San Francisco, CA 94105, as shown on the floor plan attached hereto as Exhibit A (“Premises”).

 

2.   Master Lease, Sublease and Other Agreements . Except as specifically set forth herein, this Sub-sublease is subject and subordinate to all of the terms and conditions of the Master Sublease, dated October 31, 2006, between Sun Microsystems, Inc., (‘‘Master Sublessor”) and Sub-sublandlord and the lease dated November 3, 2000 as amended (“Master Lease”) between Utah State Retirement Investment Fund, as the “Lessor” (“Master Lessor”), and Master Sublessor.   A copy of the Master Sublease is attached hereto as Exhibit B and incorporated herein by this reference except that the following sections of the Master Sublease are not incorporated herein: Sections 1.1 through 1.19; Sections 2.1 and 2.3; Article 3; the first sentence of Section 4.1; Sections 4.2 and 4.3;Section 4.6; Sections 5.1 through 5.3; Article 6; Sections 7.1 and 7.2; Article 12; Section 13.2.1; Sections 14.1 and 14.4; Article 15; Article 16; Section 18.3; Section 18.4; Section 18.5;  Section 18.7 and Section 18,9.  Where incorporated into this Sub-sublease, the terms “Sublandlord”, “Subtenant”, “Premises” and “Sublease” in the Master Sublease shall refer to “Sub-sublandlord”, “Sub-subtenant”, “Premises” and “Sub-sublease”.  A copy of the Master Lease is attached hereto as Exhibit C and is incorporated herein by this reference to the extent incorporated into the Master Sublease by Section 13.1 of the Master Sublease. Sub-sublandlord represents and warrants to Sub-subtenant that (i) the Master Sublease is in full force and effect and has not been amended, (ii) the Expiration Date of the Master Sublease is March 31, 2012, and (iii) Sub-sublandlord is not aware of any default (or the occurrence of any events which would constitute a default with the passage of time) on the part of (A) Sub-sublandlord or Master Sublessor under the Master Sublease or (B) Master Sublessor or Master Lessor under the Master Lease.

 

Notwithstanding anything to the contrary in the Master Sublease or the Master Lease, in no event shall Sub-subtenant have any liability, or responsibility, for the removal or restoration for any alterations, improvements, or additions that are in existence as of the date of this Sub-sublease.  In addition, Sub-subtenant shall not be obligated to (i) pay the Rent to be paid by Sub-sublandlord under the Sublease, (ii) cure any default of Sub-sublandlord under the Sublease, (iii) perform any obligation of Sub-sublandlord under the Sublease which arose prior to the Commencement Date and Sub-sublandlord failed to perform, (iv) repair any damage to the Premises, or cure any violation of law, caused by Sub-sublandlord or existing prior to the Commencement Date, (v) indemnify Master Lessor or Master Sublessor with respect to any act, omission, negligence or willful misconduct of Sub-sublandlord, its agents employees or contractors, (vi) pay late fees, interest or damages due under the Master Sublease which relate to the acts, omissions, willful misconduct, negligence or default of Sub-sublandlord under the Master Sublease, (vii) separately meter the Premises for utility service, (viii) provide its own janitorial services .

 

Sub-sublandlord agrees not to voluntarily terminate the Master Sublease before the expiration of the Term (as defined below). With respect to the, Sub-subtenant shall be entitled to all utilities, repairs and services furnished by Master Lessor under the Master Lease and Master

 



 

Sublessor under the Master Sublease.  Sub-sublandlord agrees to make reasonable and diligent efforts to enforce Master Lessor’s obligations under the Master Lease and Master Sublessor’s obligations under the Master Sublease, to the extent that Sub-Subtenant is a beneficiary thereof.  Whenever the consent of the Landlord is required under the Master Lease and/or consent of the Sublandlord under the Sublease, and whenever the Landlord fails to perform its obligations under the Master Lease or Sublandlord fails to perform its obligations under the Sublease, Sub-Sublandlord agrees to use its reasonable, good faith efforts to obtain that consent or performance on behalf of Sub-Subtenant.

 

3.   Commencement Date .  The Commencement Date of the Sub-sublease shall be upon the later of (i) delivery of possession of the Premises to Sub-subtenant in the condition required hereunder and (ii) receipt by Sub-subtenant of the written consent of both the Sub-Landlord (Sun MicroSystems, Inc.) and the Master Landlord (Utah State Retirement Investment Fund) (the “Consents”) estimated to be on or about June 1, 2008.  If Sub-sublandlord is unable to deliver possession of the Premises and the Consents by July 31, 2008, Sub-subtenant shall have the option to terminate the Sub-sublease.

 

4.   Term .

 

(a)  The term of this Sub-sublease (“the Term”) shall be for a period the Commencement Date, and shall expire on February 28, 2012 (the “Expiration Date”) unless sooner terminated pursuant to any provision of the Master Sublease or Master Lease applicable to the Premises (the “Expiration Date”).

 

(b) Early Access .   Sub-subtenant shall have the right of early access to the Premises, rent free, beginning on June 1, 2008, for the purpose of inspecting and planning the configuration and installation of its IT and telephone equipment, wiring, etc.  Sub-subtenant shall not be charged for rent, electricity or any other service during the Early Access period, provided special building services are not requested in order for Sub-subtenant to perform their own work.

 

5.   Rent.  Rent shall commence thirty (30) days from Commencement Date.

 

(a) Sub-subtenant shall pay to Sub-sublandlord each month during the Term of this Sub-sublease, base rent (“Base Rent”) as follows:

 

Year 1:

 

$38.00 PSF

 

$ 27,759.00 per month

Year 2:

 

$39.00 PSF

 

$ 28,489.50 per month

Year 3:

 

$40.00 PSF

 

$ 29,220.00 per month

Year 4:

 

$41.00 PSF

 

$ 29,950.50 per month

 

(b)     Base Rent shall be abated for the first full calendar month of the Term.  Monthly Base Rent is due and payable on or before the first of each month thereafter. If the Commencement Date is not the first day of the month, then Sub- subtenant shall pay the prorated Base Rent for the first partial month on the Commencement Date. The rent shall be paid to Sub-sublandlord at the address set forth in Section 16 of this Sub-sublease, or at such other place as Sub-sublandlord may designate, in advance, on the first day of each and every month throughout the term of this Sub-sublease without any notice, set off, or deduction whatsoever except as permitted hereunder.

 

(c)     Operating Costs and Taxes.  Sub-subtenant shall receive a 2008 Base Year and commencing January 1, 2009, shall pay its proportionate share of all Operating Costs and Taxes outlined in the underlying Sublease and Master Lease in excess of Operating Costs and

 

2



 

Taxes for the 2008 Base Year. Sub-subtenant’s proportionate share shall be the ratio which the rentable area of the Premises bears to the rentable area of the Master Premises, which ratio is agreed to be 3.91% as of the date of this Sub-sublease based on 8,766 rentable square feet of the Premises and 223,681 rentable square feet of the Master Premises. Said sums (including any estimates of such sums) shall be paid to Sub-sublandlord at the times required pursuant to the terms and conditions of the Master Sublease. Sub-sublandlord shall provide Sub-subtenant with full and complete copies of Master Lessor’s annual reconciliation statements of Operating Costs and Taxes provided to Sub-sublandlord under the Master Sublease promptly following Sub-sublessor’s receipt of the same from Master Sublessor. Sub-subtenant shall have the ability to request and receive after-hours HVAC in the Premises and Sub-sublandlord shall pursue such request with Master Sublessor upon Sub-subtenants request. Current building hours are Monday to Friday from 7:00 am until 6:00 pm and Saturday from 9:00 am to 1:00 pm. After-hours HVAC cost is currently $150 per hour with a 4 hour minimum; 72 hours notice required.

 

(d) Late Charge. If any rent is not paid within seven (7) days after the due date, Sub-Subtenant shall pay a late charge to Sub-sublandlord equal to 2% of the overdue payment and interest on such amount at the Interest Rate (as defined in the Master Lease).  Neither demand for, nor receipt of, any late charge called for under this sub-sublease will: (i) operate to waive any obligation to pay Rent; or (ii) limit the exercise of any other right or remedy Sub-sublandlord may have under this Sub-sublease in case of Sub-subtenant’s Default.

 

6.   Security Deposit and Prepaid Rent .   Sub-subtenant shall pay a one (1) month security deposit to Sub-sublandlord in the form of check in the amount of Twenty Seven Thousand, Seven Hundred Fifty Nine ($27,759.00) Dollars.  Sub-subtenant shall not be paid any interest on such deposit.  Security deposit shall be returned to Sub-subtenant upon the expiration of the Sub-sublease term, provided the Premises is returned in acceptable condition; normal wear and tear expected.

 

7.   Use of Premises; Parking; Improvements. Sub-subtenant shall use the Premises only for general office use and any other use currently permitted by the Master Lease. Sub-subtenant shall properly observe and comply with all laws with respect to Sub-subtenant’s use of the Premises to the extent required under the Master Sublease.

 

(a)  Furniture, Fixtures & Equipment (FF&E) Sub-subtenant shall have the right to use the existing FF&E in the Premises throughout the term of the Sub-sublease.  Sub-subtenant shall also have the right to purchase the existing FF&E in the Premises at the end of the lease term at a price to be negotiated within six (6) months but in no event two (2) months from Sub-sublease expiration.  Sub-subtenant shall provide Sub-sublandlord with written notice of its intent to purchase or not purchase the furniture.  The existing furniture inventory will exclude Sub-sublandlord’s Aeron chairs.  A final inventory list is attached hereto as Exhibit D.

 

(b)  Voice and Data: Sub-subtenant shall be allowed to use and reconfigure the existing voice and data network wiring during the term of the Sub-sublease. To the best of Sub-sublandlord’s knowledge, the voice and data wiring are in good and operable condition.  Sub-subtenant shall be responsible for any and all repairs and maintenance associated with such wiring and systems that affect the Premises throughout the term of this Sub-sublease.

 

(c)  Parking Rights: Sub-subtenant shall have the right to use seven (7) parking spaces in the Building’s parking garage.

 

(d)   24 Hour Access: Sub-subtenant shall have access to the Building and the Premises, seven (7) days a week, twenty four (24) hours per day, with electric service being provided at all times. Sub-subtenant shall be responsible for any charges associated with its

 

3



 

request for and usage of any after-hours HVAC and utilities for the Premises.

 

(e)     Signage: Sub-subtenant shall have the right to the building lobby directory, elevator lobby and suite signage per Master Lessor’s standard signage program at Sub-sub-subtenant’s cost.

 

8.     Alterations .  Subject to the terms of the underlying Sublease and of the Master Lease, Sub-subtenant shall be permitted to make alterations to the Premises with the prior approval of Sub-sublandlord, Master Sublessor and Master Landlord’s approval.  Sub-subtenant shall be responsible for the removal of any alterations installed by Sub-subtenant upon expiration of the Sub-sublease term which will be determined at the time of granting consent.

 

9.     Assignment; Subletting. Subject to the terms of the Master Sublease and Master Lease, Sub-subtenant shall be permitted to Sub-sub-sublease the Premises with Sub-sublandlord’s, Master Sublessor’s and Master Lessor’s prior written approval which would not be unreasonably withheld or delayed.

 

10.   Insurance . Sub-subtenant shall maintain the insurance required of the “tenant” under Section 11.1 in the Master Lease, provided, however, that all rights and benefits specified for Master Lessor pursuant to the Master Lease shall apply to and inure to the benefit of Master Lessor, Master Sublessor and Sub-sublandlord.

 

11 .   Condition and Delivery of Premises . Sub-sublandlord shall deliver the Premises on the Commencement Date vacant of all occupants and clean and free of debris.

 

12 .   Relocation . Subject to and in accordance with the terms of Section 18.3 of the Master Sublease, in the event that the Sub-sublandlord is required to move to a Substitute Premises (as defined in the Master Sublease), Sub-sublandlord will notify Sub-subtenant immediately upon receiving notice from Master Sublessor of any possible relocation of the Premises. Such relocation shall not entitle Sub-subtenant to terminate this Sub-sublease so long as Master Sublessor or Sub-sublandlord agrees to pay the costs of Sub-subtenant in relocating the Premises in accordance with Section 18.3 of the Master Sublease.  Such space shall be of similar quality, size and attributes of the Premises.  Sub-sublandlord shall pay all relocation costs, including without limitation, those identified in Section 18.3 of the Master Sublease.

 

13.   Default . The occurrence of any of the following shall constitute a material breach of this Sub-sublease and a default by Sub-subtenant (a “Default”):

 

(a)  Sub-subtenant’s failure to pay any installment of Base Rent, Additional Rent or any other payment due hereunder within ten (10) days after receipt of notice from Sub-sublandlord specifying such failure;

 

(b)   Sub-subtenant’s failure to comply with any term, provision or covenant of this Sub- sublease, Sublease or the Master Lease (other than the payment of Base Rent, Additional Rent or any other payment due hereunder) for a period of ten (10) days after written notice thereof; provided that the default cannot reasonably be cured within a ten (10) day period, Sub-sub-subtenant shall have a reasonable time to cure the default before Sub-sublandlord exercises its rights under this Sub-sublease, provided that Sub-subtenant has begun affirmative and reasonable efforts to cure the default within the initial ten (10) day period and diligently pursues cure to completion;

 

4



 

(c)   Sub-subtenant becomes insolvent, transfers any property in fraud of Subtenant’s creditors, or assigns its assets for the benefit of creditors;

 

(d)   Sub-subtenant files a petition under any section of the Federal Bankruptcy Code, as amended, or under any similar law or statute of the United States of any State thereof; or Sub-subtenant is adjudicated a debtor or insolvent in proceedings filed against Sub-subtenant under any laws or statutes;

 

(e)   If any court appoints a receiver or trustee for all or substantially all of Sub-sub-subtenant’s assets; or

 

(f)   The Sub-sublandlord may exercise, without limitation of any other rights and remedies available to it hereunder or at law or in equity, and all rights and remedies of Landlord set forth in the Master Lease in the event of a default by the tenant hereunder. No receipt of moneys by Sub-sublandlord from Sub-subtenant after the exercise by Sub-sublandlord of its rights and remedies in the event of a default hereunder (including, without limitation, the termination of this Sub-sublease) shall in any way extend the term of this Sub-sublease or Sub-subtenant’s right of possession hereunder, nor shall the giving of any notice thereafter reinstate, continue, or extend the term or affect any notice given to Sub-subtenant or any suit commenced or judgment entered prior to receipt of such monies, except to the extent expressly agreed to by Sub-sublessor.

 

14.   Consent of Master Sub-sublandlord and Master Lessor . The Master Lease and Master Sublease requires that Sub-sublandlord obtain the consent of Master Lessor and Master Sublessor to any subletting by Sub-sublandlord. This Sub-sublease shall not be effective unless and until Master Lessor and Master Sublessor sign a consent to this subletting satisfactory to Sub-sublandlord and Sub-subtenant. Sub-sublessor agrees that the consent of the Master Lessor must contain an acknowledgement of the parking rights granted to Sub-subtenant under Section 7(c) below.  If either Master Lessor or Master Sublessor fails to consent to this Sub-sublease, including the parking rights, by July 31, 2008, then Sub-subtenant may terminate this Sub-sublease by written notice to Sub-sublandlord and in such event neither party shall have any obligations to the other party under this Sub-sublease.

 

15.   Subtenant’s Insurance and Indemnity . Sub-subtenant hereby waives claims against Master Lessor, Master Sublessor and Sub-sublessor for death, injury, loss or damage of every kind and nature, if and to the extent that Sub-sublandlord waives or releases such claims against Master Sublessor under the Master Sublease or Master Lessor under the Master Lease. Sub-sublandlord and Sub-subtenant shall each procure an appropriate clause in or endorsement to any property insurance covering the Premises (and the premises subleased under the Master Sublease) and personal property, fixtures and equipment located therein, wherein the insurer waives subrogation or consents to a waiver of right of recovery, and, notwithstanding anything to the contrary contained herein, Sub-sublandlord and Sub-subtenant agree not to make any claim against, or seek to recover from, the other for any loss or damage to its property or the property of others resulting from fire or other hazards to the extent of coverage by such property insurance; provided, however, that the release, discharge, exoneration and covenant not to sue contained herein and in the Master Lease shall be limited by and be coextensive with the terms and provisions of the waiver of subrogation or waiver of right of recovery. Sub-subtenant acknowledges that Sub-sublandlord shall not carry insurance for and shall not be responsible for Sub-subtenant’s furniture, fixtures, equipment or other property, and any loss suffered by Sub- Sub-subtenant due to the interruption of Sub-subtenant’s business.

 

Sub-subtenant shall indemnify, defend and hold Sub-sublandlord harmless against

 

5



 

any claims, demands, judgments and awards, losses, liabilities and expenses, including reasonable attorneys fees and costs, resulting from (i) the negligence or willful misconduct of Sub-subtenant, its employees, agents and invitees in the Building (ii) any act, omission or negligence of Sub-subtenant, its employees, agents and invitees in the Premises, (iii) any alterations or improvements made to the Premises, whether Sub- sublessor gave its consent thereto or not (iv) any violations of applicable law by Sub-subtenant; and (v) any Default. Sub-subtenant’s obligation to indemnify and hold Sub-sublandlord harmless shall not extend to any portion of a loss, judgment or award directly attributable to Sub- sublessor or its agents, contractors’ or employees’ gross or active negligence or willful misconduct provided that Sub-sublandlord give Sun-subtenant prompt written notice of any such claim or threatened claim, and Sub-subtenant cooperates (at no expense to Sub-subtenant) in any defense or settlement of such claim. Sub-sublandlord’s and Sub-subtenant’s obligations under this Section shall survive the expiration or termination of this Sub-sublease.

 

Sub-sublandlord shall indemnify, defend and hold Sub-subtenant harmless against any claims, demands, judgments and awards, losses, liabilities and expenses, including reasonable attorneys fees and costs, resulting from (i) the negligence or willful misconduct of Sub-sublandlord, its employees, agents and invitees in the Building (ii) any act, omission or negligence of Sub-subtenant, its employees, agents and invitees in the remainder to the premises subleased to Sub-sublandlord under the Master Sublease, and (iii) any default by Sub-sublandlord under, or early termination of, the Master Sublease.

 

To the fullest extent allowed by applicable law, in the event of any breach of this Sub- Sublease by either party, each party shall not be liable for any punitive, exemplary or consequential damages, including, without limitation, any business interruption damages or loss of income or profit there from, and all such remedies or damages are expressly waived.

 

16.   Notice . Any notice, approval, request, consent, bill, statement, or other communication required or permitted to be given, rendered, or made by either party hereto, shall be deemed given five (5) days from when sent when received or personally refused, shall be in writing, and shall be sent to the parties hereto by certified U.S. mail, postage prepaid, return receipt requested, or a recognized overnight delivery service such as Federal Express, at the following addresses:

 

If to Sub-sublandlord:

 

 

 

 

 

PROSODIE INTERACTIVE CALIFORNIA, INC.

 

 

855 SW 78 th  Avenue

 

 

Suite 100

 

 

Plantation, FL 33324

 

 

 

 

 

Attention:

Arlene Matthews

 

 

Telephone:

954 671-6558

 

 

Fax:

954 671-6558

 

 

 

 

 

If to Sub-subtenant:

 

 

 

 

 

ENERNOC, INC.

 

 

75 Federal Street, Suite 300

 

 

Boston, MA 02110

 

 

 

6



 

Attention:

Julia Regan

 

 

Telephone:

617 398-2202

 

 

Fax:

617-227-9910

 

 

 

 

 

With copy to:

 

 

 

 

 

EnerNOC, Inc

 

 

500 Howard Street,

 

 

San Francisco, CA 94105

 

 

 

 

 

Attention:

Kiera Gilhooly

 

 

Telephone:

415.343.9510

 

 

Fax:

415.343.9559

 

 

 

Each party shall have the right to designate by notice, in writing, any other address to which such party’s notice is to be sent.

 

17.   Surrender . On the date upon which the term hereof shall expire or come to an end, whether on the Expiration Date, by lapse of time, or otherwise, at Sub-subtenant’s sole cost and expense, Sub-subtenant agrees to surrender the Premises to Sub-sublandlord, vacant of all occupants and personal property belonging to Sub-subtenant, clean and free of debris, with ordinary wear and tear expected at the end of the sublease term.

 

18 .   Holding Over . Sub-subtenant has no right to occupy the Premises or any portion thereof after the expiration of the Term or earlier termination of this Sub-sublease.

 

In the event Sub-subtenant or any party claiming by, through or under Sub-subtenant holds over, Sub-sublandlord may exercise any and all remedies available to it at law or in equity to recover possession of the Premises, and to recover damages, including without limitation, all damages payable by Sub-sublandlord to Master Sublessor by reason of such holdover. Without limiting the damages recoverable under the foregoing sentence, for each and every month or partial month that Sub-subtenant or any party claiming by, through or under Sub-subtenant remains in occupancy of all or any portion of the Premises after the expiration of the Term or earlier termination of this Sub-sublease, Sub-subtenant must pay a holdover rent of 150% of the then existing Base Rent for the first two (2) months of holdover. Beyond the initial two (2) month period, Sub-subtenant’s holdover rent shall increase to 200% of its then Base Rent for the Premises as minimum damages and not as a penalty. The acceptance by Sub-sublandlord of any lesser sum will be construed as payment on account and not in satisfaction of damages for such holding over.

 

19.   Severability . If any terms or provisions of this Sub-sublease or the application thereof to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Sub-sublease or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby; and each term and provision of this Sub-sublease shall be valid and be enforceable to the fullest extend permitted by law.

 

20.   Broker’s Commission . Studley, as Sub-subtenant’s exclusive representative, shall be paid a commission equal to One Dollar and fifty cents ($1.50) per RSF, per leased year.  Staubach, as Sub-sublandlord’s broker, shall be paid a commission equal to Seventy five cents ($0.75) per RSF, per leased year. Said commission shall be paid by Sub-sublandlord fifty (50%) percent upon lease execution and fifty (50%) percent upon the Lease

 

7



 

Commencement.

 

21.   Governing Law . The validity, construction, interpretation, and performance of the covenants and conditions contained herein shall be governed by and construed in accordance with the domestic laws of the State of California, excluding, however, such laws as pertain to conflicts of law.

 

22.   Force Majeure . In no event shall  Sub-sublandlord be liable for failure to perform any obligation under this Sub-sublease in the event that Sub-sublandlord is prevented from so performing by strike, lockout, breakdown, accident, order or regulation of or by any governmental authority, or failure of supply, or because of war or other emergency, or for any similar dissimilar cause beyond Sub-sublandlords reasonable control or for any cause due to any act or neglect of Sub-subtenant or its servants, agents, employees, licensees, or any person claiming by, through or under Sub-subtenant.

 

23.   Attorneys’ Fees . If either party hereto commences an action against the other to enforce any obligation hereunder, upon the conclusion of such action, the prevailing party will be entitled to recover from the nonprevailing party, the prevailing party’s costs for such action, including, but not limited to, reasonable attorney’s fees and court costs.

 

24.   Entire Agreement . This Sub-sublease contains the entire agreement between the parties, and no rights are created in favor of either party other than as specified or expressly contemplated in this Sub-sublease, and the Master Sublease and Master Lease, to the extent such is incorporated herein. In addition, no agreement shall be effective to change or modify this Sub-sublease in whole or in part unless in writing and duly signed by the party against whom enforcement of such change or modification is sought.

 

IN WITNESS WHEREOF, the parties have hereto executed this Sub-sublease on the date above written.

 

SUB-SUBLANDLORD

SUB-SUBTENANT

PROSODIE INTERACTIVE CALIFORNIA, INC.

ENERNOC, INC.

 

 

 

 

BY:

/S/ Marie Curtis

 

By:

/S/ Neal Isaacson

 

 

TITLE: Chief Financial Officer

TITLE: Chief Financial Office

 

8



 

EXHIBIT A

 

PREMISES

 

9



 

EXHIBIT B

 

SUBLEASE

500 Howard Street, San Francisco CA

 

This Sublease (“Sublease”), dated October 31, 2006 (the “Effective Date”), is entered into by and between SUN MICROSYSTEMS, INC., a Delaware corporation (“Sublandlord”), and PROSODIE INTERACTIVE, CALIFORNIA, a Delaware Corporation (“Subtenant”).

 

1.                BASIC SUBLEASE PROVISIONS

 

Premises : The Premises under this Sublease initially consist of approximately seventeen thousand, nine hundred forty-five (17,945) rentable square feet on floor 4 (the “Premises”), in the building commonly known as Foundry Square IV, 500 Howard Street, San Francisco, California (“Building”). The Premises demised hereunder consist of a portion of those certain premises (“Master Premises”) consisting of approximately two hundred twenty-three thousand six hundred eighty-one (223,681) retable square feet, which is demised pursuant to the Master Lease. The Premises are depicted on Exhibit A to this Sublease. The final rentable square feet of the Premises shall be determined by Sublandlord’s architect using the “Standard Measure for Measuring Floor Area in Office Buildings” published by the Secretariat, Building Owners and Managers Association International (ANSI/BOMA Z65.1-1996), approved June 7, 1996.

 

Master Landlord : Utah State Retirement Investment Fund/Cottonwood.

 

Master Lease : Lease Agreement dated November 3, 2000, entered into by Sublandlord, as tenant, and K3 First Street Associates, LLC, a California limited liability company, predecessor-in-interest to Master Landlord, as lessor (therein refereed to as “Landlord”), as subsequently amended by Amendment No. 1 dated November 30,2000 (“First Amendment”), Second Amendment to Lease Agreement dated March 29,2002 (“Second Amendment”), Third Amendment to Lease Agreement dated July 1, 2002 (“Third Agreement”), Fourth Amendment to Lease Agreement dated February 26,2004 (“Fourth Amendment”), and Fifth Amendment to Lease Agreement dated February_, 2005 (“Fifth Amendment”) with respect to certain property commonly known as 500 Howard Street, San Francisco, California (the “Property”). The Lease Agreement, First Amendment, Second Amendment, Third Amendment, Fourth Amendment and Fifth Amendment are attached hereto as Exhibit B and are hereinafter collectively refereed to as the “Master Lease.”

 

Term : Approximately sixty (60) months beginning on the Commencement Date and ending on the Expiration Date, unless terminated earlier in accordance with the terms and conditions of this Sublease.

 

Estimated Commencement Date : Upon Substantial Completion of Sublandlord work, but in no event later than One Hundred Thirty Five (135) days after the Effective Date of this Sublease, subject to Force Majeure.

 

Commencement Date : This Sublease shall be effective for all purposes upon mutual execution and the Term shall begin on the Commencement Date, which shall be the date upon which both of the following events have occurred; (i) the date Sublandlord’s Work is Substantially Complete (as both such terms are defined in the Work Letter); and (ii) the date the Master Landlord delivers its written consent to this Sublease. In the event that the Sublandlord is unable to deliver the Premises within One Hundred (100) days after the Estimated Commencement Date, unless due to Subtenant Delay (as defined in the Work Letter) or Force Majeure, then Subtenant shall have the right to terminate this Sublease by giving written notice thereof to Sublandlord, at no cost or penalty to Subtenant. In the event the Sublease terminates pursuant to this Section 1.6, Sublandlord shall return Subtenant’s Security Deposit and any Rent held by Sublandlord held within forty-five (45) days of the Sublease termination.

 

Rent Commencement Date : Three (3) months after the Commencement Date.

 

10



 

Expiration Date : The last day of the calendar month in which falls the fifth (5 th ) anniversary of the Commencement Date. Thus, if the Commencement Date is the Estimated Commencement Date in Section 1.5 above, the Expiration Date will be December 31, 2011.

 

Base Rent : The Base Rent for the Premises shall be:

 

Period

 

Annual Rate Per
Square Foot

 

Annual Base Rent

 

Monthly Base Rent

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtenant’s Share : 8.02%

 

Improvement Allowance : NONE. See Work Letter attached as Exhibit C to this Sublease.

 

Permitted Uses : General office use and any other use currently permitted by the Master Lease.

 

Security Deposit : One (1) month of Base Rent based on an annual rental rate of $35.50, totaling Fifty Three Thousand, Eighty Seven dollars and 29/100 ($53,087.29).

 

Address Payment of Rent :

 

 

 

Jones Lang LaSalle

 

 

C/o Sun Microsystems, Inc.

 

 

525 William Penn Way, 20 th  Floor

 

 

Pittsburg, PA 15259

 

 

Attn.: Lease Administration

Sublandlord’s Notice Address:

 

 

 

 

Jones Lang LaSalle

 

 

C/o Sun Microsystems, Inc.

 

 

525 William Penn Way, 20 th Floor

 

 

Pittsburg, PA 15259

 

 

Attn.: Lease Administration

With a copy to: