EnerNOC, Inc.
ENERNOC INC (Form: 10-Q, Received: 07/27/2009 16:11:04)

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, 2009

 

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

 

(IRS Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

101 Federal Street

 

 

Suite 1100

 

 

Boston, Massachusetts

 

02110

(Address of Principal Executive Offices)

 

(Zip Code)

 

(617) 224-9900

(Registrant’s 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   o   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 the 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  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

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

 

There were 20,539,925 shares of the registrant’s common stock, $.001 par value per share, outstanding as of July 24, 2009.

 

 

 



Table of Contents

 

EnerNOC, Inc.

 

Index to Form 10-Q

 

 

 

Page

 

 

 

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets at June 30, 2009 and December 31, 2008

3

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

5

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

Item 2.

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

14

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

 

 

 

Item 4.

Controls and Procedures

23

 

 

 

Part II - Other Information

 

 

 

 

Item 1.

Legal Proceedings

24

 

 

 

Item 1A.

Risk Factors

24

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

24

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

25

 

 

 

Item 6.

Exhibits

25

 

Signatures

27

 

Exhibit Index

28

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

EnerNOC, Inc.

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except par value and share data)

 

 

 

June 30, 2009

 

December 31, 2008

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

43,526

 

$

60,782

 

Restricted cash

 

177

 

1,419

 

Marketable securities

 

 

2,000

 

Trade accounts receivable, net of allowance for doubtful accounts of $54 and $37 at June 30, 2009 and December 31, 2008, respectively

 

13,540

 

11,150

 

Unbilled revenue

 

16,344

 

11,585

 

Prepaid expenses, deposits and other current assets

 

5,064

 

3,250

 

Total current assets

 

78,651

 

90,186

 

Property and equipment, net

 

31,661

 

26,975

 

Goodwill

 

15,046

 

13,395

 

Intangible assets, net

 

5,350

 

5,140

 

Deposits and other assets

 

1,926

 

998

 

Total assets

 

$

132,634

 

$

136,694

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

307

 

$

1,171

 

Accrued capacity payments

 

23,233

 

18,643

 

Accrued payroll and related expenses

 

6,582

 

6,309

 

Accrued expenses and other current liabilities

 

4,616

 

3,822

 

Deferred revenue

 

2,380

 

1,057

 

Current portion of long-term debt

 

41

 

47

 

Total current liabilities

 

37,159

 

31,049

 

Long-term liabilities

 

 

 

 

 

Long-term debt, net of current portion

 

4,500

 

4,516

 

Deferred tax liability

 

713

 

362

 

Other liabilities

 

1,598

 

1,547

 

Total long-term liabilities

 

6,811

 

6,425

 

Commitments and contingencies (Note 8 and Note 12)

 

 

 

Stockholders’ equity

 

 

 

 

 

Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued

 

 

 

Common stock, $0.001 par value; 50,000,000 shares authorized, 20,545,349 and 20,254,548 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

 

20

 

20

 

Additional paid-in capital

 

177,356

 

169,800

 

Accumulated other comprehensive income (loss)

 

65

 

(86

)

Accumulated deficit

 

(88,777

)

(70,514

)

Total stockholders’ equity

 

88,664

 

99,220

 

Total liabilities and stockholders’ equity

 

$

132,634

 

$

136,694

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

42,402

 

$

23,686

 

$

60,825

 

$

42,298

 

Cost of revenues

 

24,267

 

14,815

 

34,792

 

26,957

 

Gross profit

 

18,135

 

8,871

 

26,033

 

15,341

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling and marketing expenses

 

9,212

 

7,678

 

17,879

 

14,189

 

General and administrative expenses

 

11,395

 

10,558

 

21,097

 

20,478

 

Research and development expenses

 

1,876

 

1,256

 

3,413

 

2,993

 

Total operating expenses

 

22,483

 

19,492

 

42,389

 

37,660

 

Loss from operations

 

(4,348

)

(10,621

)

(16,356

)

(22,319

)

Other income (expense)

 

189

 

489

 

(95

)

1,524

 

Interest expense

 

(1,403

)

(231

)

(1,464

)

(484

)

Loss before income tax expense

 

(5,562

)

(10,363

)

(17,915

)

(21,279

)

Provision for income tax expense

 

(167

)

(73

)

(348

)

(158

)

Net loss

 

$

(5,729

)

$

(10,436

)

$

(18,263

)

$

(21,437

)

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share

 

$

(0.29

)

$

(0.54

)

$

(0.91

)

$

(1.11

)

Weighted average number of basic and diluted shares

 

20,034,562

 

19,434,228

 

19,983,803

 

19,302,329

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

EnerNOC, Inc.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2009

 

2008

 

Cash flow from operating activities

 

 

 

 

 

Net loss

 

$

(18,263

)

$

(21,437

)

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

 

 

 

 

 

Depreciation

 

5,104

 

3,568

 

Amortization of acquired intangible assets

 

332

 

645

 

Stock-based compensation expense

 

6,074

 

4,881

 

Unrealized foreign exchange transaction loss

 

132

 

 

Deferred tax provision

 

351

 

158

 

Other, net

 

46

 

90

 

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

 

 

 

 

 

Accounts receivable

 

(2,387

)

310

 

Unbilled revenue

 

(4,760

)

(3,781

)

Prepaid expenses and other current assets

 

12

 

(834

)

Other assets

 

(2,765

)

(43

)

Other noncurrent liabilities

 

60

 

124

 

Deferred revenue

 

1,309

 

(1,484

)

Accrued capacity payments

 

4,565

 

3,999

 

Accrued payroll and related expenses

 

809

 

683

 

Accounts payable and accrued expenses

 

(838

)

2,492

 

Net cash used in operating activities

 

(10,219

)

(10,629

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of marketable securities

 

 

(10,642

)

Sales and maturities of marketable securities

 

2,000

 

22,732

 

Payments made for acquisitions of businesses, net of cash acquired

 

(984

)

(7,503

)

Purchases of property and equipment

 

(9,763

)

(8,125

)

Decrease in restricted cash and deposits for customer programs

 

1,242

 

7,127

 

Net cash (used in) provided by investing activities

 

(7,505

)

3,589

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from exercises of stock options

 

471

 

319

 

Repayment of borrowings and payments under capital leases

 

(22

)

(1,190

)

Net cash provided by (used in) financing activities

 

449

 

(871

)

Effects of exchange rate changes on cash

 

19

 

 

Net change in cash and cash equivalents

 

(17,256

)

(7,911

)

Cash and cash equivalents at beginning of period

 

60,782

 

70,242

 

Cash and cash equivalents at end of period

 

$

43,526

 

$

62,331

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Non-cash financing and investing activities

 

 

 

 

 

Issuance of common stock in connection with acquisitions

 

$

501

 

$

1,791

 

Issuance of common stock in satisfaction of bonuses

 

$

500

 

$

844

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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 builds upon its position as a leading demand response solutions provider by using its Network Operations Center and scalable technology platform to also deliver a portfolio of additional energy management solutions to its customers, including the Company’s monitoring-based commissioning services, energy procurement services and emissions tracking and trading support. 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.

 

The preparation of these unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  The most significant estimates reflected in these financial statements include stock-based compensation.  Actual results could differ from those estimates.

 

Reclassifications

 

Certain reclassifications have been made to the June 30, 2008 statements of operations to conform to the June 30, 2009 presentation. The reclassifications primarily consist of costs related to facilities, information technology, human resources and certain employee-related expenses, such as employee benefits. These reclassifications were determined on a headcount-based allocation. These amounts, which were previously included in general and administrative expenses, have been allocated among cost of revenues, selling and marketing expenses and research and development expenses. The Company believes that by allocating these costs in this manner it better represents the expenses associated with each of these activities.

 

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 the periods presented.

 

The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results expected for the full fiscal year ending December 31, 2009 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 fiscal year ended December 31, 2008 and the footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission (SEC) on March 16, 2009.

 

Comprehensive Loss

 

Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income , establishes standards for reporting and displaying comprehensive income and comprehensive loss and its components in the consolidated financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is composed of net income (loss), unrealized gains and losses on marketable securities and cumulative foreign currency translation adjustments.

 

Comprehensive loss for the three and six months ended June 30, 2009 and 2008 was as follows:

 

6



Table of Contents

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net loss

 

$

(5,729

)

$

(10,436

)

$

(18,263

)

$

(21,437

)

Change in unrealized gain on marketable securities

 

4

 

 

 

 

Foreign currency translation adjustments

 

(153

)

 

151

 

 

Total comprehensive loss

 

$

(5,878

)

$

(10,436

)

$

(18,112

)

$

(21,437

)

 

Impairment of Long-Lived Assets

 

Consistent with SFAS No. 144, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of , when impairment indicators exist, the Company evaluates its long-lived assets for potential impairment.  The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Recoverability of these assets is measured by comparison of their carrying amount to the future undiscounted cash flows the assets are expected to generate over their remaining economic lives. If such assets are considered to be impaired, the impairment is recognized in earnings and equals the amount by which the carrying value of the assets exceeds their fair market value determined by either a quoted market price, if any, or a value determined by utilizing a discounted cash flow technique. If such assets are not impaired, but their useful lives have decreased, the remaining net book value is amortized over the revised useful life. For the six months ended June 30, 2009, there were no indicators of impairment.

 

2. Acquisitions

 

eQuilibrium Solutions Corporation

 

In June 2009, the Company acquired substantially all of the assets of eQuilibrium Solutions Corporation (eQ), a software company specializing in the development of enterprise sustainability management products and services.  The total purchase price paid by the Company at closing was approximately $751, of which $250 was paid in cash and the remainder of which was paid by the issuance of 21,464 shares of the Company’s common stock that had a value of approximately $501.  These shares were measured as of the acquisition date using the closing price of the Company’s common stock, as reported on The NASDAQ Global Market on June 11, 2009. The Company believes its acquisition of eQ strengthens its position in a nascent yet growing market committed to helping energy and sustainability leaders plan their own response to reach energy efficiency and emissions goals.

 

The eQ acquisition has been accounted for as a business combination under SFAS No. 141(R), Business Combinations (SFAS No. 141(R)). Under SFAS No. 141(R), all of the assets acquired in the transaction are recognized at their acquisition-date fair values, which are preliminary at June 30, 2009.  Transaction costs related to the business combination have been expensed as incurred. The Company’s consolidated financial statements reflect eQ’s results of operations from June 11, 2009 forward.

 

For purposes of the condensed consolidated balance sheets, the Company has made preliminary allocations of the purchase price for eQ to the net tangible and intangible assets and goodwill.  However, the Company is in the process of completing its valuation of certain intangible assets.  The difference between the aggregate purchase price and the fair value of assets acquired is allocated to goodwill.  The final allocation of the purchase price to intangible assets and goodwill may differ materially from the information presented herein.

 

The following table summarizes the preliminary estimate of fair values of the assets acquired at the acquisition date:

 

Property and equipment

 

$

26

 

Customer relationships

 

480

 

Trade name

 

50

 

Non-compete agreements

 

12

 

Goodwill

 

183

 

Total

 

$

751

 

 

Pro forma information has not been provided for this acquisition since the impact to the financial statements was not material.

 

7



Table of Contents

 

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 $5,524, which consisted of $3,603 in cash, $174 in related 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, which will be recognized as additional purchase price when earned. The earnout payments have been and will be based on the achievement of certain minimum revenue-based milestones of SRC and have been and will be paid in a combination of cash and shares of the Company’s common stock. These additional earnout payments have been and will be recorded as additional purchase price. The earnout payment related to the May 1, 2008 to April 30, 2009 earnout period amounted to $1,468, of which $734 was paid in cash during the second quarter of 2009 and the remainder of which will be paid by the issuance of 44,776 shares of the Company’s common stock.  The earnout payment, if any, related to May 1, 2009 through April 30, 2010 will be determined during the second quarter of 2010.

 

Mdenergy, LLC

 

In September 2007, the Company acquired 100% of the 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 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.

 

Pursuant to the merger agreement, the Company was also obligated to pay to certain employees of MDE a cash bonus payment of up to $300 in the first quarter of 2008 and up to $600 in the first quarter of 2009 upon the achievement of certain revenue-based milestones during 2007 and 2008, respectively. The amounts actually earned by, and paid to, the MDE employees in connection with the achievement of the revenue-based milestones during 2007 and 2008 were $300 and $500, respectively, and were charged to operations.

 

3. Goodwill and Other Intangible Assets

 

The Company accounts for goodwill and other intangible assets under SFAS No. 141(R), Business Combinations , and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 141(R) replaces SFAS No. 141, Business Combinations , but retains the requirement that the purchase method of accounting for acquisitions be used for all business combinations.  Under SFAS No. 142, purchased goodwill and intangible assets with indefinite lives are not amortized, but instead tested for impairment at least annually and whenever events or changes in circumstances indicate the carrying value may not be recoverable. Intangible assets with finite lives continue to be amortized over their useful lives. The Company performs its annual impairment test during the fourth quarter. This test will include the two-step approach described in SFAS No. 142.  Step one of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill.  If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is not required.  If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test will be performed to measure the amount of impairment loss, if any. Based on the Company’s most recent analysis, there has been no impairment of goodwill or other intangible assets.

 

The following table shows the change of the carrying amount of goodwill from December 31, 2008 to June 30, 2009:

 

Balance at December 31, 2008

 

$

13,395

 

Additions during the period

 

1,651

 

Balance at June 30, 2009

 

$

15,046

 

 

The additions of $1,651 during the period related to $183 for the eQ acquisition and $1,468 for the SRC earnout payment.

 

The following table provides the gross carrying amount and related accumulated amortization of intangible assets as of June 30, 2009 and December 31, 2008:

 

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Table of Contents

 

 

 

As of June 30, 2009

 

As of December 31, 2008

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Customer contracts

 

$

4,217

 

$

(974

)

$

4,217

 

$

(767

)

Employment agreements and non-compete agreements

 

182

 

(78

)

170

 

(53

)

Software

 

 

 

33

 

(31

)

Customer relationships

 

2,200

 

(247

)

1,720

 

(149

)

Trade name

 

50

 

 

 

 

Total

 

$

6,649

 

$

(1,299

)

$

6,140

 

$

(1,000

)

 

The decrease in software from December 31, 2008 to June 30, 2009 was due to the write-off of fully amortized intangible assets.  Total amortization expense was $163 and $129 for the three months ended June 30, 2009 and 2008, respectively.  Total amortization expense was $332 and $645 for the six months ended June 30, 2009 and 2008, respectively.

 

4.  Recent Accounting Pronouncements

 

SFAS No. 165, Subsequent Events

 

In May 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 165, Subsequent Events .  The standard does not require significant changes regarding recognition or disclosure of subsequent events, but does require disclosure of the date through which subsequent events have been evaluated for disclosure and recognition.  The standard is effective for financial statements issued after June 15, 2009.  The implementation of this standard did not have a significant impact on the financial statements of the Company.  Subsequent events through the filing date of this Quarterly Report on Form 10-Q have been evaluated for disclosure and recognition.

 

5. 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 adjusted for unvested restricted stock, shares held in escrow and contingently issuable shares. 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. The calculation of dilutive weighted average shares outstanding does not include the following potentially dilutive shares as their effect would be antidilutive.

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Outstanding options, restricted stock and warrants

 

1,423,590

 

1,548,039

 

1,131,242

 

1,277,183

 

Shares held in escrow

 

122,599

 

95,111

 

121,307

 

65,111

 

Dilutive weighted average shares outstanding

 

1,546,189

 

1,643,150

 

1,252,549

 

1,342,294

 

 

Included in the weighted average number of common shares outstanding at June 30, 2009 was 44,776 contingently issuable shares of common stock issuable in connection with the acquisition of SRC.  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, 2009 excludes 120,000 and 15,767 shares issued in the SRC and eQ acquisitions, respectively, that are held in escrow.  The weighted average common shares outstanding at June 30, 2008 excludes the 35,114 shares issued in the MDE acquisition that were held in escrow.  These shares have been excluded since the escrow agreement contains restrictions on issuance.

 

6. Fair Value Measurements

 

SFAS No. 157 , Fair Value Measurements, 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:

 

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·                          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 the Company’s 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, 2009:

 

 

 

Fair Value Measurement at June 30, 2009 Using

 

 

 

Totals

 

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

 

Significant Other
Observable Inputs (Level 2)

 

Unobservable Inputs (Level 3)

 

Money market funds (1)

 

$

30,525

 

$

30,525

 

$

 

$

 

Total

 

$

30,525

 

$

30,525

 

$

 

$

 

 


(1)  Included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheet.

 

At June 30, 2009, the Company had restricted cash of approximately $177 invested in certificates of deposit. 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.

 

7 . Financing Arrangements

 

On August 5, 2008, the Company and one of its subsidiaries entered into a $35,000 secured revolving credit and term loan facility with Silicon Valley Bank (SVB) pursuant to a loan and security agreement, which was subsequently amended on May 29, 2009.  Pursuant to the terms of the SVB loan and security agreement, as amended, SVB 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 revolving credit loan accrues at interest rates based upon either SVB’s prime rate or the 30, 60 or 90-day LIBOR plus 2.25%, at the Company’s election.  The interest on the Company’s term loan accrues at SVB’s prime rate plus 0.50% or the 30, 60 or 90-day LIBOR plus 2.75%, at the Company’s election.  The term advance is payable in thirty-six consecutive equal monthly installments of principal, calculated by SVB, based upon the amount of the term advance and an amortization schedule equal to thirty-six months.  All unpaid principal and accrued interest is due and payable in full on August 5, 2010, which is the maturity date.  In connection with the issuance or renewal of letters of credit for the Company’s account, the Company is charged a letter of credit fee of 1.25%. The Company expenses the interest and letter of credit fees, as applicable, in the period incurred.

 

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 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 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.  The Company was in compliance with all financial covenants under the SVB credit facility at December 31, 2008 and June 30, 2009.

 

As of June 30, 2009, the SVB revolving credit and term loan facility was fully drawn. Unless earlier payment is required by an event of default, all principal and unpaid interest will be due and payable on August 5, 2010. The Company is also required to pay an unused line fee on the daily unused amount of its facility at a per annum rate of 0.25%. The Company incurred financing costs of $120 in connection with the SVB credit facility, which was deferred and is being amortized to interest expense over the life of the debt. At June 30, 2009, the Company had borrowings of $4,442 accruing interest at 4.0% and letters of credit of $30,539 outstanding under the SVB credit and term loan facility.

 

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8. Commitments and Contingencies

 

The Company is subject to certain performance guarantee requirements under certain customer contracts and open market bidding program participation rules. The Company had deposits held by certain customers of $2,047 and $2,386, respectively, at June 30, 2009 and December 31, 2008. 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.

 

In connection with the Company’s participation in an open market bidding program, the Company entered into an arrangement with a third party to bid capacity into the program and provide the corresponding financial assurance required in connection with the bid. The arrangement included an up-front payment by the Company equal to $2,000, of which $1,200 is being expensed as interest expense and $800 is being deferred in accordance with FASB Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Costs .  In addition, the Company will be required to pay the third party an additional contingent fee, up to a maximum of $3,000, based on the revenue that the Company expects to earn in 2012 in connection with the bid.  This additional fee will be recognized as earned.

 

9. Stock-Based Compensation

 

Stock Options

 

The Company’s Amended and Restated 2003 Stock Option and Incentive Plan (2003 Plan) and the 2007 Employee, Director and Consultant Stock Plan (the 2007 Plan, and collectively with the 2003 Plan, the Plans) provide for the grant of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards and other stock-based awards 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. The 2003 Plan expired upon the Company’s initial public offering in May 2007. Any forfeitures after May 2007 under the 2003 Plan are available for future grant under the 2007 Plan.

 

For stock options granted prior to January 1, 2009, the fair value of each option was estimated at the date of grant using a Black-Scholes option-pricing model. For stock options granted on or after January 1, 2009, the fair value of each option has been and will be estimated on the date of grant using a trinomial valuation model. The trinomial model considers characteristics of fair value option pricing that are not available under the Black-Scholes model. Similar to the Black-Scholes model, the trinomial model takes into account variables such as expected volatility, dividend yield rate, and risk free interest rate. However, in addition, the trinomial model considers the contractual term of the option, the probability that the option will be exercised prior to the end of its contractual life, and the probability of termination or retirement of the option holder in computing the value of the option. For these reasons, the Company believes that the trinomial model provides a fair value that is more representative of actual experience and future expected experience than that value calculated using the Black-Scholes model.

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

Risk-free interest rate

 

2.86

%

2.91

%

Expected term of options, in years (1)

 

 

6.25

 

Vesting term, in years (1)

 

2.16

 

 

Expected annual volatility

 

86

%

87

%

Expected dividend yield

 

%

%

Exit rate pre-vesting

 

4.88

%

4.88

%

Exit rate post-vesting (1)

 

10.89

%

%

 


(1) Change in assumptions reflects the Company’s use of a trinomial valuation model as of January 1, 2009.

 

If the Company had continued using the Black-Scholes option pricing model in 2009, stock-based compensation expense would not have been materially different for the three and six months ended June 30, 2009.

 

In December 2008, the Company’s board of directors approved a one-time offer to the Company’s employees, including its executive officers, and directors to exchange option grants that had an exercise price per share that was equal to or greater than the higher of $12.00 or the closing price of the Company’s common stock as reported on The NASDAQ Global Market on January 21, 2009 (the Exchange). The Exchange closed on January 21, 2009, and the Company exchanged options that had exercise prices equal to or greater than $12.00 per share. As a result, an aggregate of 744,401 options, with exercise prices ranging from $12.27 to $48.54 per share, were exchanged for 424,722 options with an exercise price per share of $8.63 for employees who are not also executive officers of the Company, 142,179 options with an exercise price per share of $11.47 for executive officers who are not also directors of the Company and 45,653 options with an exercise price per share of $12.94 for the Company’s directors. On the date of the Exchange, the estimated fair value of the new options did not exceed the fair value of the exchanged stock options calculated immediately prior to the Exchange.  As such, there is no incremental fair value of the new options, and the Company will not record additional compensation expense related to the Exchange.  The Company will continue to recognize the remaining compensation expense related to the exchanged options over the remaining vesting period of the original options.

 

The following is a summary of the Company’s stock option activity as of June 30, 2009 and the stock option activity for all stock option plans during the six months ended June 30, 2009:

 

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Six Months Ended June 30, 2009

 

 

 

Number of Shares
Underlying Options

 

Exercise Price
Per Share

 

Weighted-Average
Exercise Price Per
Share

 

Aggregate
Intrinsic
Value(1)

 

Outstanding at beginning of period

 

2,746,835

 

$0.11 - $48.54

 

$

13.88

 

 

 

Granted

 

915,354

 

 

 

11.10

 

 

 

Exercised

 

(207,002

)

 

 

2.26

 

$

1,308

 

Cancelled

 

(856,382

)

 

 

28.39

 

 

Outstanding at end of period

 

2,598,805

 

$0.11 - $48.54

 

8.65

 

35,629

 

Remaining contractual life in years: 7.1

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

836,154

 

$0.11 - $48.54

 

$

7.19

 

$

12,904

 

Remaining contractual life in years: 7.4

 

 

 

 

 

 

 

 

 

 


(1)  The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on the date of exercise or June 30, 2009, as appropriate, and the exercise price of the underlying options.

 

The Company recognized stock-based compensation expense of $6,074 and $4,881 during the six months ended June 30, 2009 and 2008, respectively.  The amount of unrecognized stock-based compensation expense that may be recognized for outstanding unvested options as of June 30, 2009 was $18,123, which is to be recognized over a weighted average period of 2.3 years.  For restricted stock at June 30, 2009, the Company had $3,632 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.7 years.

 

During the first quarter of 2009, certain of the Company’s executives received their performance-based bonus awards in shares of fully-vested common stock of the Company.  The shares issued totaled 45,085 and had an approximate value of $500.

 

During the second quarter of 2009, the Company granted to certain members of its board of directors an aggregate of 24,000 fully-vested options to purchase shares of the Company’s common stock and 16,000 shares of the Company’s common stock, which had an estimated combined fair value of $718.

 

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 $182 and $73, respectively, related to tax deductible goodwill for the three months ended June 30, 2009 and 2008. The Company has recorded a deferred tax provision for $351 and $158, respectively, related to tax deductible goodwill for the six months ended June 30, 2009 and 2008. Amounts due to various states for excise taxes are included in general and administrative expenses, accrued expenses and other current liabilities as of June 30, 2009 and December 31, 2008.

 

11. 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.

 

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During the three and six months ended June 30, 2009 and 2008, 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,

 

 

 

2009

 

2008

 

 

 

Revenues

 

% of Total Revenues

 

Revenues

 

% of Total Revenues

 

Customer 1

 

$

23,125

 

54.5

%

$

6,640

 

28.0

%

Customer 2

 

12,441

 

29.3

%

8,411

 

35.5

%

Customer 3

 

*

 

*

 

4,646

 

19.6

%

Total

 

$

35,566

 

83.8

%

$

19,697

 

83.1

%

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

 

 

Revenues

 

% of Total Revenues

 

Revenues

 

% of Total Revenues

 

Customer 1

 

$

23,167

 

38.1

%

$

19,495

 

46.1

%

Customer 2

 

26,959

 

44.3

%

7,514

 

17.8

%

Customer 3

 

*

 

*

 

8,632

 

20.4

%

Total

 

$

50,126

 

82.4

%

$

35,641

 

84.3

%

 


*Less than 10% of total revenues.

 

12. 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 condition, 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 (the Court) against the Company, several of its officers and directors (the individual defendants), and certain of the underwriters of the Company’s November 2007 follow-on public offering of its common stock. The three class action complaints were consolidated by the Court into a single action and an amended consolidated complaint was filed on September 24, 2008. The lead plaintiff in the consolidated class action claimed to represent two purported classes: (i) an “Exchange Act Class” consisting of persons who purchased shares of the Company’s common stock from November 1, 2007 through February 27, 2008 and (ii) a “Securities Act Class” consisting of persons who purchased shares of the Company’s common stock pursuant or traceable to the follow-on public offering. The lead plaintiff alleged, among other things, that the defendants made false and misleading statements and failed to disclose material information in various SEC filings and other public statements. The amended consolidated class action complaint asserted, on behalf of the purported Securities Act Class, various claims under the Securities Act of 1933, as amended (Securities Act), against all defendants and, on behalf of the purported Exchange Act Class, various claims under the Securities Exchange Act of 1934, as amended, and Rule 10b-5 against the Company and the individual defendants. The amended consolidated class action complaint sought, among other relief, class certification, unspecified damages, fees, and such other relief as the Court may have deemed just and proper. The defendants filed a motion to dismiss the amended consolidated complaint on October 27, 2008 and a hearing on the motion was held on January 8, 2009. The Court took defendants’ motion under advisement following the hearing. On February 10, 2009, the lead plaintiff voluntarily dismissed all claims against the underwriter defendants.  On May 13, 2009, the Court granted the Company’s and the individual defendants’ motion to dismiss and dismissed the lead plaintiff’s remaining claims without leave to replead.  On June 9, 2009, the Court endorsed a joint stipulation in which the lead plaintiff abandoned any right of appeal and the parties agreed not to pursue sanctions in connection with the suit.

 

In addition, in May 2008, a complaint was filed derivatively on the Company’s behalf in the Court against several of the Company’s officers and directors and certain of the underwriters of the Company’s follow-on public offering. The derivative complaint alleged various common law and equitable claims, including, among other things, breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets and unjust enrichment, in connection with purported false and misleading statements and failures to disclose material information in certain SEC filings and other public statements from November 1, 2007 to May 14, 2008. The derivative plaintiff sought, among other relief, unspecified damages, injunctive relief, restitution, disgorgement, fees and such other relief as the Court may have deemed 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’ motion to dismiss the amended consolidated class action complaint. On June 25, 2009, following dismissal of the amended consolidated class action complaint, the derivative plaintiff voluntarily dismissed the action without prejudice.

 

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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 condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited financial statements for the fiscal year ended December 31, 2008 and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, as filed with the Securities and Exchange Commission, or the SEC, on March 16, 2009. 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, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “target” and variations of those terms 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 results of operations, operating 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 fiscal year ended December 31, 2008. 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 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, provide cost-efficient alternatives to traditional generation resources and drive cost-savings for our customers. 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. To date, we have received substantially all of our revenues from these 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.

 

We build upon our position as a leading demand response solutions provider by using our NOC and scalable technology platform to also deliver a portfolio of additional energy management solutions to our customers, including our monitoring-based commissioning services, or MBCx solutions, energy procurement services, or EPS solutions, and emissions tracking and trading support. Our MBCx solutions combine advanced metering applications, energy analytics and control to provide our end-use customers with the ability to identify energy efficiency opportunities through the continuous analysis of those end-use customers’ real-time energy data. Our EPS solutions provide our commercial, institutional and industrial customers located in restructured or deregulated markets throughout the United States with the ability to more effectively manage the energy supplier selection process, including energy supply product procurement and implementation.

 

Since inception, our business has grown substantially. With approximately 2,400 commercial, institutional and industrial customers across approximately 5,450 customer sites in our demand response network and over 3,150 megawatts, or MW, of demand response capacity under our management as of June 30, 2009, we believe that we are the largest national demand response solutions provider focused on the commercial, institutional and industrial market.

 

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 $88.8 million from inception to June 30, 2009. Our net losses were $5.7 million and $18.2 million, respectively, for the three and six months ended June 30, 2009.

 

Significant Recent Developments

 

In May 2009, the United States District Court for the District of Massachusetts dismissed without leave to replead the consolidated securities class action lawsuit filed against us and certain of our officers and directors.  In June 2009, following dismissal of the securities class action lawsuit, the plaintiff in a derivative lawsuit filed against certain of our officers and directors and certain of the underwriters of our follow-on public offering voluntarily dismissed the lawsuit without prejudice.  Please refer to Part II, Item 1 of this Quarterly Report on Form 10-Q entitled “Legal Proceedings” for a detailed description of the dismissal of the consolidated securities class action lawsuit.

 

In June 2009, we acquired substantially all of the assets of eQuilibrium Solutions Corporation, or eQ, a software company specializing in the development of enterprise sustainability management products and services, for a purchase price equal to approximately $0.8 million consisting of both cash and shares of our common stock.  We believe that the acquisition of eQ strengthens our position in a nascent yet growing market committed to helping energy and sustainability leaders plan their own response to reach energy efficiency and emissions goals.

 

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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. 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 hour, day, month, bidding period or supplemental, new or modified programs. 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.  Revenues have historically increased in our second and third fiscal quarters compared to other quarters in our fiscal year due to seasonal demand related to the demand response market.

 

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. 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. 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 and we recognize revenue over the applicable delivery period, even where payments are made over a different period. 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 a demand response event.

 

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, delivery has occurred, 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 contract or open market program. Committed capacity is verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenues are recognized and future revenues become fixed or determinable and are recognized monthly until the next verification event.  In subsequent verification events, if our verified capacity is below the previously verified amount, the grid operator or utility customer will reduce future payments based on the adjusted verified capacity amounts. The payments received from the grid operator or utility customer can be decreased or increased, up to the committed capacity amounts under the contract or open market program, in connection with subsequent verification events.

 

We account for incremental direct costs incurred related to the acquisition or origination of a contract in a transaction that results in the deferral or delay of revenue recognition in accordance with paragraph 4 of Financial Accounting Standards Board Technical Bulletin 90-1, Accounting for Separately Priced Extended Warranty and Product Maintenance Costs .  We had deferred contract origination costs of approximately $0.9 million as of June 30, 2009 and $0.0 million as of December 31, 2008. These deferred expenses would not have been incurred without our participation in an open market bidding program and will be expensed in proportion to the related revenue being recognized. We believe that this accounting treatment appropriately matches expenses with the associated revenue.

 

As of June 30, 2009, we had over 3,150 MW under management in our demand response network, meaning that we had entered into definitive contracts with our commercial, institutional and industrial customers with respect to over 3,150 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 Interconnection, or PJM, forward capacity market, which is a market in which we materially increased our participation beginning in the first quarter of 2008 and in which we expect to continue to increase our participation and derive revenues for the foreseeable future. Because PJM operates on a June to May program-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 revenue recognition lag time in our end-use customer portfolio from the point in time when we consider a MW to be under management to when we earn revenues from the MW.

 

Our portfolio of additional energy management solutions includes our EPS and MBCx solutions and emissions tracking and trading support.  Our EPS solutions provide our end-use customers located in restructured or deregulated markets throughout the United States with the ability to more effectively manage the energy supplier selection process, including energy supply product procurement and implementation. We receive a monthly fee from the competitive electricity provider based upon the actual consumption of electricity used by our end-use customers or a consulting fee from the end-use customer directly. Our MBCx solutions combine advanced metering applications and energy analytics and control to provide our end-use customers with the ability to identify energy efficiency opportunities through the continuous analysis of those end-use customers’ real-time energy data.   We also use our PowerTrak platform to deliver emissions tracking and trading support.  We generally receive either a subscription-based fee or a percentage savings fee for these energy management solutions.  Revenues derived from our energy management solutions increased from $2.8 million to $3.1 million, respectively, for the six months ended June 30, 2008 and 2009.

 

Revenues generated from open market sales to PJM, a grid operator customer, accounted for 55% and 28%, respectively, of our total revenues in each of the three months ended June 30, 2009 and 2008 and 38% and 46%, respectively, of our total revenues in each of the six months ended June 30, 2009 and 2008.

 

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 29% and 36%, respectively, of our total revenues in each of the three months ended June 30, 2009 and 2008 and 44% and 18%, respectively, of our total revenues in each of the six months ended June 30, 2009 and 2008. Our two fixed price contracts with ISO-NE expired on May 31, 2008.  In addition, 0% and 20%, respectively, of our total revenues for each of the three months ended June 30, 2009 and 2008 and 0% and 20%, respectively, of our total revenues for each of the six months ended June 30, 2009 and 2008 were generated under a fixed price contract with The Connecticut Light and Power Company, or CL&P, which expired on December 31, 2008.  We have enrolled a significant portion of the MW represented by our expired fixed price contracts with ISO-NE and CL&P in other available demand response programs. 

 

15



  Table of Contents

 

Cost of Revenues

 

Cost of revenues for our demand response solutions consists primarily of payments that we make to our commercial, institutional and industrial customers for their participation in our demand response network. We generally enter into three 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 reflected in cost of revenues. We also include in cost of revenues the monthly telecommunications and data costs we incur as a result of being connected to our commercial, institutional and industrial sites and our internal payroll and related costs specifically allocated to a customer site. Cost of revenues for energy management solutions include third party services, equipment depreciation and the wages and associated benefits that we pay to our project managers for the performance of their 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 and regions and expand deeper into markets we already serve.  In addition, gross profit will be affected by the way in which we manage our portfolio of demand response capacity in certain supplemental demand response programs and capacity arrangements in which we participate, in order to maximize payments that we receive for that capacity.  These supplemental programs and capacity arrangements are administered by grid operators and utilities in certain regions to augment existing open market bidding programs and are designed to create higher incentives for participants to locate capacity in certain geographic areas and to account for changes in supply or demand forecast within a specific region.

 

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 314 full-time employees at June 30, 2008 to 358 full-time employees at June 30, 2009. 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, (d) depreciation and amortization and (e) other related overhead. We expect general and administrative expenses to continue to increase in absolute dollar terms for the foreseeable future as we invest in infrastructure to support our continued growth. We expect general and administrative expenses to decrease as a percentage of total annual revenues as we leverage our current infrastructure and employee base.

 

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Table of Contents

 

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, 2009, we capitalized internal software and development costs of $0.6 million and $1.2 million, respectively, in accordance with Statement of Position 98-1, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use, and the amount is included as software in property and equipment at June 30, 2009. During the three and six months ended June 30, 2008, we capitalized internal software and development costs of $0.7 million and $0.7 million, respectively. 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

 

Stock-based compensation is recognized in accordance with Statement of Financial Accounting Standards, or SFAS, No. 123(R), Share Based Payment, or SFAS No. 123(R). SFAS No. 123(R) addresses all forms of share-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123(R) requires us to expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. For the three and six months ended June 30, 2009, we recorded expenses of approximately $3.3 million and $6.1 million, respectively, in connection with share-based payment awards to employees and non-employees. With respect to grants through June 30, 2009, a future expense of non-vested options of approximately $18.1 million is expected to be recognized over a weighted average period of 2.3 years and a future expense of restricted stock awards of approximately $3.6 million is expected to be recognized over a weighted average period of 2.7 years. For stock options granted prior to January 1, 2009, the fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model and for stock options granted on or after January 1, 2009, the fair value of each award is estimated on the date of grant using a trinomial valuation model. If we had continued using the Black-Scholes option pricing model in 2009, stock-based compensation expense would not have been materially different for the three and six months ended June 30, 2009.

 

In December 2008, our board of directors approved a one-time offer to our employees, including our executive officers, and directors to exchange option grants that had an exercise price per share that was equal to or greater than the higher of $12.00 or the closing price of our common stock as reported on The NASDAQ Global Market on January 21, 2009, which we refer to as the exchange. The exchange closed on January 21, 2009, and we exchanged options that had exercise prices equal to or greater than $12.00 per share. As a result, an aggregate of 744,401 options, with exercise prices ranging from $12.27 to $48.54 per share, were exchanged for 424,722 options with an exercise price per share of $8.63 for employees who are not also our executive officers, 142,179 options with an exercise price per share of $11.47 for executive officers who are not also our directors and 45,653 options with an exercise price per share of $12.94 for our directors.  On the date of the exchange, the estimated fair value of the new options did not exceed the fair value of the exchanged options calculated immediately prior to the exchange.  As such, there is no incremental fair value of the new options, and we will not record additional compensation expense related to the exchange.  We will continue to recognize the remaining compensation expense related to the exchanged options over the remaining vesting period of the original options.

 

Other Income and Expense

 

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

 

Interest Expense

 

Interest expense consists of interest on our debt facilities and fees associated with issuing letters of credit.

 

Consolidated Results of Operations

 

Three and Six Months Ended June 30, 2009 Compared to the Three and Six Months Ended June 30, 2008

 

Revenues

 

The following table summarizes our revenues for the three and six months ended June 30, 2009 and 2008 (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Percentage

 

 

 

2009

 

2008

 

Change

 

Revenues:

 

 

 

 

 

 

 

Demand response solutions

 

$

40,904

 

$

21,868

 

87.0

%

Energy management solutions

 

1,498

 

1,818

 

(17.6

)%

Total revenues

 

$

42,402

 

$

23,686

 

79.0

%

 

 

 

Six Months Ended June 30,

 

Percentage

 

 

 

2009

 

2008

 

Change

 

Revenues:

 

 

 

 

 

 

 

Demand response solutions

 

$

57,704

 

$

39,476

 

46.2

%

Energy management solutions

 

3,121

 

2,822

 

10.6

%

Total revenues

 

$

60,825

 

$

42,298

 

43.8

%

 

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During the three and six months ended June 30, 2009, our demand response solutions revenues increased by $19.0 million and $18.2 million, respectively, from the same periods in 2008. The increase in our demand response solutions revenues was primarily attributable to an increase in our MW under management in the following operating areas:

 

 

 

June 30, 2009

 

 

 

3 months ended

 

6 months ended

 

PJM

 

$

16,418

 

$

15,619

 

Tennessee Valley Authority

 

930

 

1,185

 

Tampa Electric Company

 

535

 

1,351

 

Other

 

1,153

 

73

 

Total

 

$

19,036

 

$

18,228

 

 

During the three months ended June 30, 2009, our energy management solutions revenues decreased by $0.3 million, or 18%, as compared to the three months ended June 30, 2008. The decrease was primarily due to a $0.2 million reduction in energy efficiency audits performed during the period. During the six months ended June 30, 2009, our energy management solutions revenues increased by $0.3 million, or 11%, as compared to the six months ended June 30, 2008. The increase primarily resulted from our acquisition in May 2008 of South River Consulting, LLC, or SRC, an energy procurement and risk management services provider. During the six months ended June 30, 2009, we recognized revenue of $1.5 million related to the SRC acquisition compared to $0.6 million during the six months ended June 30, 2008.  This increase was partially offset by a reduction in energy efficiency audits performed during the period.

 

We currently expect our revenues to increase in 2009 compared to 2008 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.

 

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, 2009 and 2008 (dollars in thousands):

 

Three Months Ended June 30,

 

2009

 

2008

 

Gross Profit

 

Gross Margin

 

Gross Profit

 

Gross Margin

 

$

18,135

 

42.8

%

$

8,871

 

37.5

%

 

Six Months Ended June 30,

 

2009

 

2008

 

Gross Profit

 

Gross Margin

 

Gross Profit

 

Gross Margin

 

$

26,033

 

42.8

%

$

15,341

 

36.3

%

 

Our gross profit increased during the three and six months ended June 30, 2009 when compared to the three and six months ended June 30, 2008 primarily due to the increase in our MW under management in the ELRP during the first half of 2009.  The increase in gross profit was also attributable to an increase in our MW under management in all of our operating regions, including PJM, from 1,643 at June 30, 2008 to over 3,150 at June 30, 2009, as well as more favorable contract terms with our commercial, institutional and industrial customers.

 

Our gross margin increased during the three and six months ended June 30, 2009 as compared to the three and six months ended June 30, 2008 primarily due to the way in which we managed our portfolio of demand response capacity in certain supplemental demand response programs and capacity arrangements in which we participate, in order to maximize payments that we receive for that capacity.  These supplemental programs and capacity arrangements are administered by grid operators and utilities in certain regions to augment existing open market bidding programs and are designed to create higher incentives for participants to locate capacity in certain geographic areas and to account for changes in supply or demand forecast within a specific region.  The increase in gross margin during the three and six months ended June 30, 2009 as compared to the same periods in 2008 was also attributable to more favorable contract terms with our commercial, institutional and industrial customers. Overall, the percentage increase in revenues was higher than the percentage increase in cost of revenues, and therefore our gross margin percentage increased.

 

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Table of Contents

 

Operating Expenses

 

The following tables summarize our operating expenses for the three and six months ended June 30, 2009 and 2008 (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Operating Expenses:

 

 

 

 

 

 

 

Selling and marketing expenses

 

$

9,212

 

$

7,678

 

20.0

%

General and administrative expenses

 

11,395

 

10,558

 

7.9

%

Research and development expenses

 

1,876

 

1,256

 

49.4

%

Total

 

$

22,483

 

$

19,492

 

15.3

%

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Operating Expenses:

 

 

 

 

 

 

 

Selling and marketing expenses

 

$

17,879

 

$

14,189

 

26.0

%

General and administrative expenses

 

21,097

 

20,478

 

3.0

%

Research and development expenses

 

3,413

 

2,993

 

14.0

%

Total

 

$

42,389

 

$

37,660

 

12.6

%

 

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 314 full-time employees at June 30, 2008 to 358 full-time employees at June 30, 2009. 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 revenue recognition lag time across our end-use customer portfolio from the point in time when we consider a MW to be under management to when we earn revenues from that MW. Because we incur selling and marketing and operational expenses, including salaries and related personnel costs, at the time of enablement, we believe there may be a trend of higher up-front costs than we have incurred historically.

 

Selling and Marketing Expenses

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

6,263

 

$

5,259

 

19.1

%

Stock-based compensation

 

795

 

909

 

(12.5

)%

Other

 

2,154

 

1,510

 

42.6

%

Total

 

$

9,212

 

$

7,678

 

20.0

%

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

11,933

 

$

9,930

 

20.2

%

Stock-based compensation

 

1,820

 

1,711

 

6.4

%

Other

 

4,126

 

2,548

 

61.9

%

Total

 

$

17,879

 

$

14,189

 

26.0

%

 

The increase in selling and marketing expenses for the three and six months ended June 30, 2009 compared to the same periods in 2008 was primarily driven by the costs associated with an increase in the number of selling and marketing full-time employees from 105 at June 30, 2008 to 130 at June 30, 2009. Also contributing to the increase in selling and marketing expenses for the three and six months ended June 30, 2009 compared to the same periods in 2008 was an increase in sales commissions payable to certain members of our sales force, which is reflective of the increase in MW under management and increase in gross profit for the three and six months ended June 30, 2009, as well as the timing associated with our hiring new full-time employees during 2009 as compared to 2008. The increase in other selling and marketing expenses for the three months ended June 30, 2009 as compared to the same period in 2008 was primarily due to increases in professional services of $0.2 million and allocated facility costs of $0.5 million. The increase in other selling and marketing expenses for the

 

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Table of Contents

 

six months ended June 30, 2009 as compared to the same period in 2008 was primarily due to increases in professional services of $0.4 million, marketing expenses of $0.2 million and allocated facility costs of $0.9 million.

 

General and Administrative Expenses

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

5,663

 

$

5,412

 

4.6

%

Stock-based compensation

 

2,301

 

1,636

 

40.6

%

Other

 

3,431

 

3,510

 

(2.3

)%

Total

 

$

11,395

 

$

10,558

 

7.9

%

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

10,638

 

$

10,451

 

1.8

%

Stock-based compensation

 

3,928

 

2,940

 

33.6

%

Other

 

6,531

 

7,087

 

(7.8

)%

Total

 

$

21,097

 

$

20,478

 

3.0

%

 

The increase in general and administrative expenses for the three and six months ended June 30, 2009 compared to the same periods in 2008 was primarily due to the grant of fully-vested options to purchase shares of our common stock and the grant of shares of our common stock to certain members of our board of directors. General and administrative full-time employees increased from 170 at June 30, 2008 to 180 at June 30, 2009, which also contributed to the increase in general and administrative expenses. The increase in wages associated with the increase in full-time employees was offset by the reallocation of certain employee-related expenses to selling and marketing expenses and research and development expenses and the allocation of internal payroll and related costs specifically related to customer sites to cost of goods sold.

 

Research and Development Expenses

 

 

 

Three Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

998

 

$

755

 

32.2

%

Stock-based compensation

 

158

 

149

 

6.0

%

Other

 

720

 

352

 

104.5

%

Total

 

$

1,876

 

$

1,256

 

49.4

%

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

1,846

 

$

2,059

 

(10.3

)%

Stock-based compensation

 

326

 

230

 

41.7

%

Other

 

1,241

 

704

 

76.3

%

Total

 

$

3,413

 

$

2,993

 

14.0

%

 

The increase in research and development expenses for the three and six months ended June 30, 2009 compared to the same periods in 2008 was primarily driven by the costs associated with an increase in the number of research and development full-time employees from 39 at June 30, 2008 to 48 at June 30, 2009. This was partially offset by capitalized internal software and development costs of $0.6 million and $1.2 million, respectively, for the three and six months ended June 30, 2009 as compared to $0.7 million and $0.7 million, respectively, for the same periods in 2008. The increase in other research and development expenses was primarily due to an increase in facility, human resources and information technology expenses of $0.2 million and $0.3 million, respectively, as well as professional fees of $0.1 million and $0.1 million, respectively, for the three and six months ended June 30, 2009.

 

Other Income and Expense

 

Other income for the three months ended June 30, 2009 was $0.2 million as compared to $0.5 million for the three months ended June 30, 2008. Other expense for the six months ended June 30, 2009 was $0.1 million as compared to other income of $1.5 million for the six months ended June 30, 2008.  The change in other income and expense for the three and six months ended June 30, 2009 as compared to the

 

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Table of Contents

 

same periods in 2008 was primarily due to the global change in interest rates, which has affected the yields on our investments and, to a lesser extent, lower average investment balances and the recognition of a net foreign currency transaction loss.

 

Interest Expense

 

Interest expense for the three months ended June 30, 2009 and 2008 was $1.4 million and $0.2 million, respectively. Interest expense for the six months ended June 30, 2009 and 2008 was $1.5 million and $0.5 million, respectively. Interest expense includes interest on our outstanding debt, letters of credit origination fees, and amortization of deferred financing fees.  The increase in interest expense for the three and six months ended June 30, 2009 as compared to the same periods in 2008 was primarily due to an increase in outstanding letters of credit, which resulted in additional interest expense of $1.2 million, which was related to the arrangement that we entered into with a third party in May 2009 in connection with bidding capacity into a certain open market bidding program , and $1.0 million, respectively.

 

Income Taxes

 

We had a provision for income taxes of $0.2 million and $0.1 million, respectively, for the three months ended June 30, 2009 and 2008.  We had a provision for income taxes of $0.4 million and $0.2 million, respectively, for the six months ended June 30, 2009 and 2008.  The provision for income taxes 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, 2009.

 

Liquidity and Capital Resources

 

Overview

 

Since inception, we have generated significant losses. As of June 30, 2009, we had an accumulated deficit of $88.8 million and our principal sources of liquidity were cash and cash equivalents totaling $43.5 million, a decrease of $17.3 million from the December 31, 2008 balance of $60.8 million. We are contingently liable for $30.5 million in connection with outstanding letters of credit under the SVB credit facility.

 

Included in the June 30, 2009 and December 31, 2008 restricted cash balances are amounts used to collateralize outstanding letters of credit in the amount of $0.2 million and $1.4 million, respectively.

 

As of June 30, 2009, we no longer have investments in marketable securities.  This is a result of a bond that matured in the second quarter of 2009. Our holdings of marketable securities as of December 31, 2008 were $2.0 million, of which $1.5 million was invested in commercial paper and $0.5 million was invested in government securities.

 

We believe our existing cash and cash equivalents at June 30, 2009 and our anticipated cash flows from operating activities will be sufficient to meet our anticipated cash needs, including investing activities, for at least the next 12 months. Our future working capital requirements will depend on many factors, including, without limitation, the rate at which we sell our demand response solutions to utilities and grid operators and the increasing rate at which letters of credit or security deposits are required by those utilities and grid operators, the introduction and market acceptance of new demand response and energy management solutions, the expansion of our sales and marketing and research and development activities, and the geographic expansion of our business operations.  We also may raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products, although we have no current understandings, commitments or agreements with respect to any such acquisition.  To the extent that our cash and cash equivalents and our anticipated cash flows from operating activities, as well as our $35.0 million credit facility with SVB, which was fully drawn as of June 30, 2009, are insufficient to fund our future activities or planned future acquisitions, we may be required to raise additional funds through bank credit arrangements or public or private equity or debt financings.  In addition, we may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. Accordingly, we intend to file a shelf registration statement with the SEC to register shares of our common stock and other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate at prices and on terms to be determined at the time of any such offerings.  Any equity or equity-linked financing could be dilutive to existing stockholders.  In the event we require additional cash resources, we may not be able to obtain bank credit arrangements or effect any equity or debt financing on terms acceptable to us or at all.

 

Cash Flows

 

The following table summarizes our cash flows for the six months ended June 30, 2009 and 2008 (dollars in thousands):

 

 

 

Six Months Ended June 30,

 

 

 

2009

 

2008

 

Cash flows used in operating activities

 

$

(10,219

)

$

(10,629

)

Cash flows (used in) provided by investing activities

 

(7,505

)

3,589

 

Cash flows provided by (used in) financing activities

 

449

 

(871

)

Effects of exchange rate changes on cash

 

19

 

 

Net decrease in cash and cash equivalents

 

$

(17,256

)

$

(7,911

)

 

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Table of Contents

 

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 for the six months ended June 30, 2009 was $10.2 million and consisted of an $18.2 million net loss, $4.0 million of net cash used for working capital and other activities offset by $12.0 million of non-cash items, primarily consisting of depreciation and amortization, unrealized foreign exchange transaction loss, deferred tax provision, stock-based compensation charges and other miscellaneous items. Cash used for working capital and other activities consisted of an increase of $4.8 million in unbilled revenues relating to the PJM demand response market, an increase in accounts receivable of $2.4 million due to the timing of cash receipts under the demand response programs in which we participate, an increase in other assets of $2.8 million due to increases in prepaid expenses, and a decrease of $0.8 million in accounts payable and accrued expenses due to the timing of payments. These amounts were partially offset by cash provided by working capital and other activities, which reflected a $1.3 million increase in deferred revenue, a $4.6 million increase in accrued capacity payments, the majority of which was related to the PJM demand response market, a $0.8 million increase in accrued payroll and related expenses, and a $0.1 million increase in other noncurrent liabilities.

 

Cash used in operating activities for 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 by working capital and other activities and by $9.3 million of non-cash items, consisting primarily of depreciation and amortization, deferred tax provision, stock-based compensation charges and other miscellaneous items. Cash provided by 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 and 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 Flows (Used in) Provided by Investing Activities

 

Cash used in investing activities for the six months ended June 30, 2009 was $7.5 million. Our principal cash investments during this period related to installation services used to build out and expand our demand response and energy management solutions and purchases of property and equipment. Cash provided by the sales of available-for-sale securities was $2.0 million and we had a decrease in restricted cash of $1.2 million primarily as a result of our financing arrangement with SVB, which allows for the issuance of letters of credit in connection with demand response programs in which we may participate. During the six months ended June 30, 2009, we also incurred $9.7 million in capital expenditures primarily related to office equipment, demand response equipment and other miscellaneous expenditures. Additionally, our cash investments included the cash portion of the earnout payment due in connection with our acquisition of SRC of $0.7 million and $0.3 million of cash used for our acquisition of eQ.

 

Cash provided by investing activities for the six months ended June 30, 2008 was $3.6 million. 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 during this period related to installation services used to build out and expand our demand response programs, purchases of property and equipment, and the cash payments made for acquisitions of businesses totaling $7.5 million. During the six months ended June 30, 2008, we decreased our restricted cash and deposits for customer programs by $7.1 million and incurred $8.1 million in capital expenditures primarily related to office equipment, demand response equipment and other miscellaneous expenditures.

 

Cash Flows Provided by (Used in) Financing Activities

 

Cash provided by financing activities was $0.4 million for the six months ended June 30, 2009. Cash used in financing activities was $0.9 million for the six months ended June 30, 2008. Cash provided by financing activities consisted of the following:

 

Equity Financing Activities

 

We received approximately $0.5 million and $0.3 million, respectively, from exercises of options to purchase shares of our common stock during the six months ended June 30, 2009 and June 30, 2008.

 

Credit Facility Borrowings

 

In August 2008, we and one of our subsidiaries entered into a $35.0 million secured revolving credit and term loan facility with SVB pursuant to a loan and security agreement, which was subsequently amended in May 2009.  Pursuant to the terms of the SVB loan and security agreement, as amended, SVB will, among other things, make revolving credit and term loan advances and issue letters of credit for our account. This credit facility replaced our credit facility with BlueCrest Capital Finance, L.P.  All unpaid principal and accrued interest is due and payable in full on August 5, 2010, which is the maturity date. 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 contains customary terms and conditions for credit facilities of this type. In addition, we are required to meet certain financial covenants customary with this type of facility, including maintaining a minimum specified tangible net worth and a minimum modified quick ratio. This credit facility contains customary events of default. If a default occurs and is not cured within any applicable cure period or is not waived, our obligations under the credit facility may be accelerated. We were in compliance

 

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with all financial covenants under this credit facility at June 30, 2009. As of June 30, 2009, our SVB credit facility was fully drawn, as we had borrowings of $4.4 million outstanding under the SVB credit and term loan facility, in addition to an aggregate of $30.5 million in letters of credit issued for our account. For additional information regarding the credit and term loan facility with SVB, see Note 7 to our unaudited consolidated financial statements contained herein.

 

During the six months ended June 30, 2009, we made scheduled payments on our outstanding debt and capital lease obligations of $0.1 million. During the six months ended June 30, 2008, we made scheduled payments on our outstanding debt and capital lease obligations of $1.2 million.

 

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 $9.8 million and $8.1 million, respectively, during the six months ended June 30, 2009 and 2008. As we continue to grow, we expect our capital expenditures for 2009 to increase as compared to 2008.

 

Contractual Obligations

 

As of June 30, 2009, our contractual obligations disclosure contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which we filed with the SEC on March 16, 2009, has not materially changed.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2009, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. We have issued letters of credit in the ordinary course of our business in order to participate in certain demand response programs. As of June 30, 2009, we had outstanding letters of credit totaling $30.5 million.

 

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, 2009.  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 fiscal year ended December 31, 2008, which we filed with the SEC on March 16, 2009.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

At June 30, 2009, there had not been a material change in the interest rate risk information and foreign exchange risk information disclosed in the “Quantitative and Qualitative Disclosures about Market Risk” subsection of the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which we filed with the SEC on March 16, 2009.

 

Item 4.  Controls and Procedures.

 

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, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under 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

 

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to allow timely decisions regarding required disclosure. 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.  Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their desired control objectives. Based on the evaluation of our disclosure controls and procedures as of June 30, 2009, 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, 2009, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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 condition, 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, or the Court, against us, several of our officers and directors, whom we refer to as the individual defendants, and certain of the underwriters of our November 2007 follow-on public offering of our common stock. The three class action complaints were consolidated by the Court into a single action and an amended consolidated complaint was filed on September 24, 2008. The lead plaintiff in the consolidated class action claimed to represent two purported classes: (i) an “Exchange Act Class” consisting of persons who purchased shares of our common stock from November 1, 2007 through February 27, 2008 and (ii) a “Securities Act Class” consisting of persons who purchased shares of our common stock pursuant or traceable to the follow-on public offering. The lead plaintiff alleged, among other things, that the defendants made false and misleading statements and failed to disclose material information in various SEC filings and other public statements. The amended consolidated class action complaint asserted, on behalf of the purported Securities Act Class, various claims under the Securities Act against all defendants and, on behalf of the purported Exchange Act Class, various claims under the Exchange Act and Rule 10b-5 against us and the individual defendants. The amended consolidated class action complaint sought, among other relief, class certification, unspecified damages, fees, and such other relief as the Court may have deemed just and proper. The defendants filed a motion to dismiss the amended consolidated complaint on October 27, 2008 and a hearing on the motion was held on January 8, 2009. The Court took defendants’ motion under advisement following the hearing. On February 10, 2009, the lead plaintiff voluntarily dismissed all claims against the underwriter defendants.  On May 13, 2009, the Court granted our motion and the motion of the individual defendants to dismiss and dismissed the lead plaintiff’s remaining claims without leave to replead.  On June 9, 2009, the Court endorsed a joint stipulation in which the lead plaintiff abandoned any right of appeal and the parties agreed not to pursue sanctions in connection with the suit.

 

In addition, on May 14, 2008, a complaint was filed derivatively on our behalf in the Court against several of our officers and directors and certain of the underwriters of our follow-on public offering. The derivative complaint alleged various common law and equitable claims, including, among other things, breach of fiduciary duty, gross mismanagement, abuse of control, waste of corporate assets and unjust enrichment, in connection with purported false and misleading statements and failures to disclose material information in certain SEC filings and other public statements from November 1, 2007 to May 14, 2008. The derivative plaintiff sought, among other relief, unspecified damages, injunctive relief, restitution, disgorgement, fees and such other relief as the Court may have deemed proper. On August 12, 2008, the Court stayed our obligation to respond to the derivative complaint pending a denial, if any, of the defendants’ motion to dismiss the amended consolidated class action complaint.  On June 25, 2009, following dismissal of the amended consolidated class action complaint, the derivative plaintiff voluntarily dismissed the action without prejudice.

 

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 under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which we filed with the SEC on March 16, 2009.   During the three months ended June 30, 2009, there were no material changes to the risk factors that were disclosed in Part I — Item 1A under the heading “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

 

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

 

(a)           Unregistered Sales of Equity Securities

 

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We offered, issued and/or sold the following unregistered securities during the three months ended June 30, 2009:

 

(i)           On June 11, 2009, with respect to our previous acquisition of 100% of the membership interests of SRC, we became obligated to issue 44,776 shares of our common stock in connection with an earnout payment due to the former holders of SRC membership interests.

 

(ii)        On June 12, 2009, in connection with the acquisition of substantially all of the assets of eQ, we issued 21,464 shares of our common stock.

 

The issuance of the 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 these 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. Such recipients received written disclosures that the securities have not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of these securities are deemed restricted securities for the purposes of the Securities Act. 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 initial public offering, or 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, 2009, approximately $29.4 million of the proceeds from our IPO has been used to fund the operations of our business and for general corporate purposes, approximately $31.3 million has been used to purchase and install equipment, approximately $2.7 million has been used to repay indebtedness and approximately $13.4 million has been used to fund acquisitions and make payments outstanding on prior acquisitions. 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 Wednesday, June 3, 2009, in Boston, Massachusetts, at which the following matters were submitted to a vote of the stockholders:

 

(a)                                Votes regarding the election of each of the persons named below as class II members 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

 

Richard Dieter

 

15,188,345

 

2,945,335

 

TJ Glauthier

 

15,133,828

 

2,945,483

 

 

After the meeting, Timothy G. Healy and David B. Brewster continued to serve as our class III directors with terms that expire in 2010 and Adam Grosser, Arthur W. Coviello, Jr. and James L. Turner continued to serve as our class I directors with terms that expire in 2011.

 

(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

 

18,047,157

 

25,691

 

60,979

 

 

Item 6.  Exhibits.

 

10.1@

 

Amended and Restated EnerNOC, Inc. Non-Employee Director Compensation Policy.

 

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10.2

 

First Loan Modification Agreement, dated as of May 29, 2009, by and among Silicon Valley Bank, EnerNOC, Inc. and EnerNOC Securities Corporation.

 

 

 

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.

 

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SIGNATURES

 

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

 

 

 

EnerNOC, Inc.

 

 

Date: July 27, 2009

By:

/s/ Timothy G. Healy

 

 

Timothy G. Healy

 

 

Chief Executive Officer

 

 

(principal executive officer)

 

 

 

Date: July 27, 2009

By:

/s/ Neal C. Isaacson

 

 

Neal C. Isaacson

 

 

Chief Financial Officer

 

 

(principal financial and accounting officer)

 

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Exhibit Index

 

Exhibit Number

 

Description

 

 

 

10.1@

 

Amended and Restated EnerNOC, Inc. Non-Employee Director Compensation Policy.

 

 

 

10.2

 

First Loan Modification Agreement, dated as of May 29, 2009, by and among Silicon Valley Bank, EnerNOC, Inc. and EnerNOC Securities Corporation.

 

 

 

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.

 

28


Exhibit 10.1

 

ENERNOC, INC.

AMENDED AND RESTATED NON-EMPLOYEE DIRECTOR COMPENSATION POLICY

 

The Board of Directors of EnerNOC, Inc. (the “Company”) has approved the following policy which establishes compensation to be paid to non-employee directors of the Company, to provide an inducement to obtain and retain the services of qualified persons to serve as members of the Company’s Board of Directors.  Each such director will receive as compensation for his or her services (i) a equity grant upon his or her initial appointment or election to the Board of Directors of the Company and (ii) an annual fee payable in cash and/or stock, all as further set forth herein.

 

Applicable Persons

 

This Policy shall apply to each director of the Company who (a) is not an employee of the Company or any Affiliate, (b) is not associated with the Company’s principal stockholders, and (c) does not receive compensation as a consultant to the Company or any Affiliate unless such compensation is received solely for services provided as a member of the Scientific Advisory Board (each, an “Outside Director”).  Affiliate shall mean a corporation which is a direct or indirect parent or subsidiary of the Company, as determined pursuant to Section 424 of the Internal Revenue Code of 1986, as amended.

 

Equity Grant Upon Initial Appointment or Election as a Director

 

Number of Shares

 

Each new Outside Director on the date of his or her initial appointment or election to the Board of Directors, shall be granted (i) such number of restricted shares of the Company’s common stock (rounded down to the nearest whole number so that no fractional shares shall be issued) equal the quotient of (x) $100,000 divided by (y) the value of a share of the Company’s common stock on the date of grant as determined in accordance with the trinomial valuation model and (ii) a non-qualified stock option to purchase such number of shares of the Company’s common stock (rounded down to the nearest whole number so that no fractional shares shall be issued) equal to the quotient of (x) $100,000 divided by (y) the value of a share of the Company’s common stock on the date of grant as determined in accordance with the trinomial valuation model.

 

Vesting Provision

 

The restricted shares and option vest over a three-year period, at a rate of thirty-three percent (33%) on each anniversary of the grant.

 

Exercise Price and Term of Option

 

Each option granted shall have an exercise price per share equal to the Fair Market Value (as defined in the Company’s then applicable stockholder approved stock plan (the “Stock Plan”)) of the shares of common stock of the Company on the date of grant of the option, have a term of ten (10) years and shall be subject to the terms and conditions of the Stock Plan.  Each such option grant shall be evidenced by the issuance of a non-qualified stock option agreement.

 

Effect on Stock Grants of Early Termination of Service

 

If an Outside Director:

 

a.                                        ceases to be a member of the Board of Directors for any reason other than death or disability, all restricted shares that remain subject to forfeiture provisions shall be immediately forfeited to the Company; or

 



 

b.                                       ceases to be a member of the Board of Directors by reason of his or her death or disability, all restricted shares that remain subject to forfeiture provisions shall be immediately forfeited to the Company; provided, however, that in the event such forfeiture provisions lapse periodically, such provisions shall lapse to the extent of a pro rata portion of the restricted shares subject to such grant through the date of his or her death or disability as would have lapsed had he or she not died or become disabled.

 

Effect on Options of Early Termination of Service

 

If an Outside Director:

 

a.                                        ceases to be a member of the Board of Directors for any reason other than death or disability, any then vested and unexercised options granted to such Outside Director may be exercised by the director within a period of three (3) months after the date the director ceases to be a member of the Board of Directors and in no event later than the expiration date of the option; or

 

b.                                       ceases to be a member of the Board of Directors by reason of his or her death or disability, any then vested and unexercised options granted to such director may be exercised by the director (or by the director’s personal representative, or the director’s survivors) within a period of one (1) year after the date the director ceases to be a member of the Board of Directors and in no event later than the expiration date of the option.

 

Annual Fee

 

Each Outside Director shall be compensated on an annual basis for providing services to the Company and will receive each year he or she is in office:

 

·                   a fully vested restricted stock award of the Company’s common stock (rounded down to the nearest whole number so that no fractional shares shall be issued) equal to the quotient of (i) $50,000 divided by (ii) the value of a share of the Company’s common stock on the date of grant as determined in accordance with the trinomial valuation model;

 

·                   a fully vested non-qualified stock option to purchase such number of shares of the Company’s common stock (rounded down to the nearest whole number so that no fractional shares shall be issued) equal to the quotient of (i) $50,000 divided by (ii) the value of a share of the Company’s common stock on the date of grant as determined in accordance with the trinomial valuation model.  Each such stock option will terminate on the earlier of ten (10) years from the date of grant or three (3) months after the recipient ceases to serve as a director, except in the case of death or disability, in which event the option will terminate one (1) year from the date of the director’s death or disability.  The exercise price per share of these options will be equal to the Fair Market Value of the shares of common stock of the Company on the date of grant of the option;

·                   a $30,000 annual cash retainer paid in quarterly installments, provided that if an Outside Director dies, resigns or is removed during any quarter, he or she shall be entitled to a cash payment on a pro rata basis through his or her last day of service; and

·                   a fee of $1,000 for each board meeting attended in person and a fee of $500 for each board meeting attended by telephone or by other means of communication.

 



 

Board Committee Compensation

 

The chairman and members of the Company’s audit, compensation and nominating and governance committees will receive annual fees payable in quarterly installments as follows:

 

 

 

Chairman

 

Other Members

 

Audit committee:

 

$

20,000

 

$

10,000

 

Compensation committee:

 

$

15,000

 

$

7,500

 

Nominating and Governance committee:

 

$

10,000

 

$

5,000

 

 

Expenses

 

Upon presentation of documentation of such expenses reasonably satisfactory to the Company, each Outside Director shall be reimbursed for his or her reasonable out-of-pocket business expenses incurred in connection with attending meetings of the Board of Directors, Committees thereof or in connection with other Board related business.

 

Amendments

 

The Board of Directors shall review this Policy from time to time to assess whether any amendments in the type and amount of compensation provided herein should be adjusted in order to fulfill the objectives of this Policy.

 


Exhibit 10.2

 

FIRST LOAN MODIFICATION AGREEMENT

 

This First Loan Modification Agreement (this “Loan Modification Agreement’) is entered into as of May 29, 2009 by and among (a)  SILICON VALLEY BANK , a California corporation with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462 (“ Bank ”), and (b)  ENERNOC, INC. , a Delaware corporation (“ EnerNOC ”), and ENERNOC SECURITIES CORPORATION , a Massachusetts corporation (“ EnerNOC Securities ”) (hereinafter, EnerNOC and EnerNOC Securities are jointly and severally, individually and collectively, referred to as “ Borrower ”).

 

1.             DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS . Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of August 5, 2008, evidenced by, among other documents, a certain Loan and Security Agreement dated as of August 5, 2008 between Borrower and Bank (collectively, the “ Loan Agreement ”).  Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement.

 

2.             DESCRIPTION OF COLLATERAL .  Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement. The Loan Agreement, together with any other loan documents entered into by Borrower pursuant to which collateral security has been or will be granted to Bank, are referred to herein as the “ Security Documents ”; the Security Documents, together with all other documents evidencing or securing the Obligations are referred to herein as the “ Existing Loan Documents ”.

 

3.             DESCRIPTION OF CHANGE IN TERMS .

 

Modifications to Loan Agreement .

 

A. The Loan Agreement is hereby amended by deleting Section 2.5(c) thereof in its entirety and substituting the following text therefor:

 

“(c)         Letter of Credit Fee .  Bank’s customary fees and expenses for the issuance or renewal of Letters of Credit, including, without limitation, a Letter of Credit Fee of one and one-quarter of one percent (1.25%) per annum of the face amount of each Letter of Credit issued (other than the Letter of Credit # SVBSF005826 issued by Bank in May, 2009, with respect to which a Letter of Credit Fee of one and three-quarters of one percent (1.75%) per annum of the face amount of such Letter of Credit shall apply), upon the issuance, each anniversary of the issuance, and the renewal of each Letter of Credit by Bank;”

 

B. The Loan Agreement is hereby amended by deleting Section 6.7(a) thereof in its entirety and substituting the following text therefor:

 

“(a)         Quick Ratio . A Quick Ratio of at least (i) 1.85 to 1.0 for each month ending after the Effective Date through and including the month ending April 30, 2009, (ii) 1.40 to 1.0 for the month ending May 31, 2009, and (iii)  1.85 to 1.0 for the month ending June 30, 2009 and each month thereafter.”

 

C.  The Loan Agreement is hereby amended by adding a new Section 6.7(c) thereto reading as follows:

 

“(c) At some point during the period commencing on May 31, 2009 and ending on June 10, 2009, Borrower shall have unrestricted cash and/or Cash Equivalents on deposit at Bank of at least $30,000,000.”

 

D.  The Loan Agreement is hereby amended by deleting the definition of “Quick Assets” in Section 13.1thereof in its entirety and substituting the following text therefor:

 



 

““ Quick Assets ” is, on any date, the sum of (i) Borrower’s unrestricted cash, plus (ii) Borrower’s net accounts receivable, plus (iii) unbilled amounts on Borrower’s balance sheet that are contractually owing to Borrower from PJM and that are payable within the next twelve (12) months in an amount not to exceed the lesser of (A) Thirty Five Million Dollars ($35,000,000.00) and (B) sixty percent (60%) of Borrower’s unrestricted cash plus net accounts receivable,  plus (iv) marketable securities that are immediately available for sale (but specifically excluding any auction rate securities other than an amount equal to fifty percent (50.0%) of the value of the Permitted Auction Rate Securities up to One Million Four Hundred Fifty Thousand Dollars ($1,450,000.00)), determined according to GAAP.”

 

E. The Loan Agreement is hereby amended by deleting Exhibit B thereto in its entirety and substituting the Exhibit B in the form attached hereto as Schedule 1 therefor.

 

4.             FEES .  Borrower shall pay to Bank an amendment fee equal to Twenty Thousand Dollars ($20,000.00) (the “Amendment Fee”), which shall be due on the date hereof and shall be deemed fully earned as of the date hereof; provided, however, that in the event that Borrower terminates the Letter of Credit # SVBSF005826 issued by Bank in May, 2009 and replaces such Letter of Credit with another Letter of Credit (the “Replacement Letter of Credit”) on or prior to June 30, 2009, Bank will credit the Amendment Fee against the Letter of Credit Fee payable upon the issuance of the Replacement  Letter of Credit.  In addition, Borrower shall also reimburse Bank for all reasonable legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents.

 

5.             RATIFICATION OF PERFECTION CERTIFICATES . Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and disclosures contained in certain Perfection Certificate dated as of August 5, 2008   and acknowledges, confirms and agrees the disclosures and information provided to Bank in the Perfection Certificate has not changed, as of the date hereof.

 

6.             CONSISTENT CHANGES .  The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

 

7.             RATIFICATION OF LOAN DOCUMENTS .  Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations.

 

8.             NO DEFENSES OF BORROWER .  Borrower hereby acknowledges and agrees that Borrower has no offsets, defenses, claims, or counterclaims against Bank with respect to the Obligations, or otherwise, and that if Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against Bank, whether known or unknown, at law or in equity, all of them are hereby expressly WAIVED and Borrower hereby RELEASES Bank from any liability thereunder.

 

9.             CONTINUING VALIDITY .  Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents.  Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect.  Bank’s agreement to modifications to the existing Obligations pursuant to this  Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations.  Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations.  It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing.  No maker will be released by virtue of this Loan Modification Agreement.

 



 

10.           JURISDICTION/VENUE .  Borrower accepts for itself and in connection with its properties, unconditionally, the exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth  of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth  of Massachusetts, then venue shall lie in Santa Clara County, California.  NOTWITHSTANDING THE FOREGOING,  THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK’S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY.

 

11.           COUNTERSIGNATURE .  This Loan Modification Agreement shall become effective only when it shall have been executed by Borrower and Bank.

 

[ signature page follows ]

 



 

IN WITNESS WHEREOF , the parties hereto have caused this Loan Modification Agreement to be executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date above written.

 

 

 

BORROWER:

 

 

 

ENERNOC, INC.

 

 

 

By:

/s/ Neal C. Isaacson

 

Name:

Neal C. Isaacson

 

Title:

CFO

 

 

 

 

 

ENERNOC SECURITIES CORPORATION

 

 

 

By:

/s/ Neal C. Isaacson

 

Name:

Neal C. Isaacson

 

Title:

CFO

 

 

 

 

 

BANK:

 

 

 

SILICON VALLEY BANK

 

 

 

By:

/s/ Dave Rodriguez

 

Name:

Dave Rodriguez

 

Title:

SVP

 

 



 

SCHEDULE 1

 

EXHIBIT B

 

COMPLIANCE CERTIFICATE

 

TO:

SILICON VALLEY BANK

Date:

 

FROM:

ENERNOC, INC. and ENERNOC SECURITIES CORPORATION

 

 

The undersigned authorized officer of ENERNOC, INC. and ENERNOC SECURITIES CORPORATION (individually and collectively, jointly and severally, “Borrower”) certifies that under the terms and conditions of the Loan and Security Agreement between Borrower and Bank (as amended, the “Agreement”), (1) Borrower is in complete compliance for the period ending                            with all required covenants except as noted below, (2) there are no Events of Default, (3) all representations and warranties in the Agreement are true and correct in all material respects on this date except as noted below; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, (4) Borrower, and each of its Subsidiaries, has timely filed all required tax returns and reports, and Borrower has timely paid all foreign, federal, state and local taxes, assessments, deposits and contributions owed by Borrower except as otherwise permitted pursuant to the terms of Section 5.8 of the Agreement, and (5) no Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Bank.  Attached are the required documents supporting the certification.  The undersigned certifies that these are prepared in accordance with GAAP consistently applied from one period to the next except as explained in an accompanying letter or footnotes.  The undersigned acknowledges that no borrowings may be requested at any time or date of determination that Borrower is not in compliance with any of the terms of the Agreement, and that compliance is determined not just at the date this certificate is delivered.  Capitalized terms used but not otherwise defined herein shall have the meanings given them in the Agreement.

 

Please indicate compliance status by circling Yes/No under “Complies” column.

 

Reporting Covenant

 

Required

 

Complies

 

 

 

 

 

Quarterly Financial Statements on Form 10-Q

 

Quarterly within 45 days

 

Yes   No

Monthly Compliance Certificate

 

Monthly within 45 days

 

Yes   No

Annual financial statements (CPA Audited) on 10-K together with an unqualified audited opinion

 

FYE within 90 days

 

Yes   No

8-K, 10-Q and 10-K filings

 

Within 5 days after SEC filing

 

Yes   No

A/R and A/P agings and statement of account balances

 

As requested by Bank

 

Yes   No

Board projections

 

60 days after FYE

 

Yes   No

 

 

 

 

 

Contracts entered into during month by Borrower restricting grant of security interest to Bank pursuant to Section 5.2 of the Agreement:

 

 

 

 

 

Financial Covenant

 

Required

 

Actual

 

Complies

 

 

 

 

 

 

 

Quick Ratio (monthly)

 

1.85 : 1.0 (1.40 : 1.0 at 5/31/09)

 

: 1.0

 

Yes  No

Tangible Net Worth (quarterly)

 

$

              *

 

$

 

Yes   No

 


*As set forth in Section 6.7(b) of the Loan and Security Agreement.

 



 

The following financial covenant analyses and information set forth in Schedule 1 attached hereto are true and accurate as of the date of this Certificate.

 

The following are the exceptions with respect to the certification above:  (If no exceptions exist, state “No exceptions to note.”)

 

 

ENERNOC, INC.

BANK USE ONLY

ENERNOC SECURITIES CORPORATION

 

 

Received by:

 

By:

 

 

AUTHORIZED SIGNER

Name:

 

 

Date:

 

Title:

 

 

Verified:

 

 

AUTHORIZED SIGNER

 

Date:

 

 

Compliance Status:         Yes     No

 



 

Schedule 1 to Compliance Certificate

Financial Covenants of Borrower

 

Dated:

 

 

 

In the event of a conflict between this Schedule and the Loan Agreement, the terms of the Loan Agreement shall control.

 

I.                                          Quick Ratio (Section 6.7(a))

 

Required:                                              1.85 : 1.00 (1.40 : 1.0 at 5/31/09)

 

Actual:                          : 1.00

 

A.

Aggregate value of the unrestricted cash of Borrower

 

$

 

 

 

 

B.

Aggregate value of the net accounts receivable of Borrower plus unbilled amounts on Borrower’s balance sheet that are contractually owing to Borrower from PJM and that are payable within the next twelve (12) months in an amount not to exceed the lesser of (i)  T hirty Five Million Dollars ($ 35 ,000,000.00) and (ii) sixty percent (60%) of Borrower’s unrestricted cash plus net accounts receivable.

 

$

 

 

 

 

C.

Marketable securities that are immediately available for sale (but specifically excluding any auction rate securities other than an amount equal to fifty percent (50.0%) of the value of the Permitted Auction Rate Securities up to One Million Four Hundred Fifty Thousand Dollars ($1,450,000.00))

 

$

 

 

 

 

D.

Quick Assets (the sum of lines A, B and C)

 

$

 

 

 

 

E.

Aggregate value of obligations and liabilities of Borrower to Bank, including Letters of Credit

 

$

 

 

 

 

F.

Quick Ratio (line D divided by line E)

 

 

 

Is line F equal to or greater than 1.85 : 1.00 (1.40 : 1.0 at 5/31/09) ?

 

o   No, not in compliance                                                                                      o   Yes, in compliance

 

II.                                      TANGIBLE NET WORTH (Section 6.7(b))

 

Required:                                              $                                   (see Section 6.7(b))

 

Actual:                                                          $

 

Is Tangible Net Worth at least $                                     (see Section 6.7(b))?

 

o   No, not in compliance                                                                                      o   Yes, in compliance

 


Exhibit 31.1

 

CERTIFICATIONS

 

I, Timothy G. Healy, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of EnerNOC, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 27, 2009

 

 

By:

/s/ Timothy G. Healy

 

 

Timothy G. Healy

 

 

Chief Executive Officer

 

 

(principal executive officer)

 


Exhibit 31.2

 

CERTIFICATIONS

 

I, Neal C. Isaacson, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of EnerNOC, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 27, 2009

 

 

By:

/s/ Neal C. Isaacson

 

 

Neal C. Isaacson

 

 

Chief Financial Officer

 

 

(principal financial and accounting officer)

 


Exhibit 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

 PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of EnerNOC, Inc. (the “Company”), for the quarter ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Timothy G. Healy, Chief Executive Officer of the Company, and Neal C. Isaacson, Chief Financial Officer of the Company, do hereby certify, to such officer’s knowledge, pursuant to Section 1350 of Chapter 63 of Title 18, United States Code, that:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: July 27, 2009

 

By:

/s/ Timothy G. Healy

 

 

Timothy G. Healy

 

Chief Executive Officer

 

(principal executive officer)

 

 

 

 

By:

/s/ Neal C. Isaacson

 

 

Neal C. Isaacson

 

Chief Financial Officer

 

(principal financial and accounting officer)