EnerNOC, Inc.
ENERNOC INC (Form: 10-Q, Received: 11/09/2009 15:08:37)

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 September 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 23,980,016 shares of the registrant’s common stock, $0.001 par value per share, outstanding as of November 4, 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 September 30, 2009 and December 31, 2008

3

 

 

 

 

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

4

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 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

15

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

26

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

Part II - Other Information

 

 

 

 

Item 1.

Legal Proceedings

27

 

 

 

Item 1A.

Risk Factors

27

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

Item 6.

Exhibits

30

 

Signatures

31

 

Exhibit Index

32

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

EnerNOC, Inc.

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except par value and share data)

 

 

 

September 30, 2009

 

December 31, 2008

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

129,926

 

$

60,782

 

Restricted cash

 

7,874

 

1,419

 

Marketable securities

 

 

2,000

 

Trade accounts receivable, net allowance for doubtful accounts of $52 and $37 at September 30, 2009 and December 31, 2008, respectively

 

20,267

 

11,150

 

Unbilled revenue

 

64,842

 

11,585

 

Prepaid expenses, deposits and other current assets

 

3,807

 

3,250

 

Total current assets

 

226,716

 

90,186

 

Property and equipment, net

 

32,167

 

26,975

 

Goodwill

 

15,016

 

13,395

 

Intangible assets, net

 

5,199

 

5,140

 

Deposits and other assets

 

3,273

 

998

 

Total assets

 

$

282,371

 

$

136,694

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

853

 

$

1,171

 

Accrued capacity payments

 

54,413

 

18,643

 

Accrued payroll and related expenses

 

11,466

 

6,309

 

Accrued expenses and other current liabilities

 

2,538

 

3,822

 

Deferred revenue

 

2,500

 

1,057

 

Current portion of long-term debt

 

4,480

 

47

 

Total current liabilities

 

76,250

 

31,049

 

Long-term liabilities

 

 

 

 

 

Long-term debt, net of current portion

 

49

 

4,516

 

Deferred tax liability

 

627

 

362

 

Other liabilities

 

1,731

 

1,547

 

Total long-term liabilities

 

2,407

 

6,425

 

Commitments and contingencies (Note 8 and Note 13)

 

 

 

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, 23,976,265 and 20,254,548 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively

 

23

 

20

 

Additional paid-in capital

 

265,821

 

169,800

 

Accumulated other comprehensive income (loss)

 

10

 

(86

)

Accumulated deficit

 

(62,140

)

(70,514

)

Total stockholders’ equity

 

203,714

 

99,220

 

Total liabilities and stockholders’ equity

 

$

282,371

 

$

136,694

 

 

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

 

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Table of Contents

 

EnerNOC, Inc.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

103,117

 

$

44,152

 

$

163,942

 

$

86,450

 

Cost of revenues

 

51,440

 

25,792

 

86,232

 

52,748

 

Gross profit

 

51,677

 

18,360

 

77,710

 

33,702

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling and marketing

 

11,602

 

9,525

 

29,481

 

23,714

 

General and administrative

 

12,155

 

10,041

 

33,252

 

30,519

 

Research and development

 

2,111

 

1,567

 

5,524

 

4,560

 

Total operating expenses

 

25,868

 

21,133

 

68,257

 

58,793

 

Income (loss) from operations

 

25,809

 

(2,773

)

9,453

 

(25,091

)

Other income (expense)

 

89

 

319

 

(6

)

1,843

 

Interest expense

 

(47

)

(584

)

(1,511

)

(1,068

)

Income (loss) before income taxes

 

25,851

 

(3,038

)

7,936

 

(24,316

)

Benefit from (provision for) income taxes

 

786

 

(22

)

438

 

(180

)

Net income (loss)

 

$

26,637

 

$

(3,060

)

$

8,374

 

$

(24,496

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

1.21

 

$

(0.16

)

$

0.40

 

$

(1.26

)

Diluted earnings (loss) per common share

 

$

1.12

 

$

(0.16

)

$

0.38

 

$

(1.26

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

21,938,427

 

19,606,287

 

20,703,779

 

19,406,811

 

Diluted

 

23,689,477

 

19,606,287

 

22,154,745

 

19,406,811

 

 

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

 

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Table of Contents

 

EnerNOC, Inc.

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(in thousands)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

Cash flow from operating activities

 

 

 

 

 

Net income (loss)

 

$

8,374

 

$

(24,496

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

Depreciation

 

8,059

 

5,601

 

Amortization of acquired intangible assets

 

514

 

853

 

Stock-based compensation expense

 

9,996

 

7,390

 

Impairment of equipment

 

 

288

 

Unrealized foreign exchange transaction loss

 

71

 

 

Deferred tax liability

 

265

 

180

 

Non-cash interest expense

 

45

 

505

 

Loss on disposal of equipment

 

19

 

 

Other, net

 

14

 

 

Changes in operating assets and liabilities, net of effects of acquisitions:

 

 

 

 

 

Accounts receivable, trade

 

(9,119

)

(5,270

)

Unbilled revenue

 

(53,257

)

(18,643

)

Prepaid expenses and other current assets

 

(1,744

)

507

 

Other assets

 

(1,615

)

(318

)

Other noncurrent liabilities

 

217

 

449

 

Deferred revenue

 

1,410

 

(2,169

)

Accrued capacity payments

 

35,760

 

15,609

 

Accrued payroll and related expenses

 

5,655

 

3,969

 

Accounts payable and accrued expenses

 

(1,622

)

1,063

 

Net cash provided by (used in) operating activities

 

3,042

 

(14,482

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchase of marketable securities

 

 

(12,142

)

Sales and maturities of marketable securities

 

2,000

 

22,742

 

Payments made for acquisitions of businesses, net of cash acquired

 

(984

)

(7,523

)

Purchases of property and equipment

 

(13,236

)

(11,086

)

Change in restricted cash and deposits for customer programs

 

(5,946

)

6,665

 

Net cash used in investing activities

 

(18,166

)

(1,344

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Proceeds from public offering of common stock, net of issuance costs

 

83,485

 

 

Proceeds from exercises of stock options

 

792

 

368

 

Repayment of borrowings and payments under capital leases

 

(34

)

(1,516

)

Net cash provided by (used in) financing activities

 

84,243

 

(1,148

)

Effects of exchange rate changes on cash

 

25

 

 

Net change in cash and cash equivalents

 

69,144

 

(16,974

)

Cash and cash equivalents at beginning of period

 

60,782

 

70,242

 

Cash and cash equivalents at end of period

 

$

129,926

 

$

53,268

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

 

 

Non-cash financing and investing activities

 

 

 

 

 

Issuance of common stock in connection with acquisitions

 

$

1,235

 

$

1,791

 

Issuance of common stock in satisfaction of bonuses

 

$

500

 

$

844

 

 

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

 

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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 services, energy efficiency, or monitoring-based commissioning, services, energy procurement services and emissions tracking and trading services. The Company uses its Network Operations Center (NOC) and PowerTrak enterprise software platform to remotely manage and reduce electricity consumption across a network of commercial, institutional and industrial customer sites, making demand response capacity available to grid operators and utilities on demand while helping end-users of electricity achieve energy savings, environmental benefits and improved financial results. The Company builds upon its position as a leading demand response services provider by using its NOC and scalable PowerTrak technology platform to also deliver a portfolio of additional energy management services to its customers, including cross-selling of these energy management services to existing end-use customers.  These additional services include the Company’s monitoring-based commissioning services, energy procurement services and emissions tracking and trading services. The Company’s demand response and energy management services 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.  Actual results could differ from those estimates.

 

Reclassifications

 

Certain reclassifications have been made to the September 30, 2008 statements of operations to conform to the September 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 nine months ended September 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 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.

 

We evaluated subsequent events through November 9, 2009, the date on which the Company filed this quarterly report on Form 10-Q with the SEC.

 

Comprehensive Income (Loss)

 

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 income (loss) for the three and nine months ended September 30, 2009 and 2008 was as follows:

 

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Table of Contents

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income (loss)

 

$

26,637

 

$

(3,060

)

$

8,374

 

$

(24,496

)

Foreign currency translation adjustments

 

(55

)

 

96

 

 

Total comprehensive income (loss)

 

$

26,582

 

$

(3,060

)

$

8,470

 

$

(24,496

)

 

Impairment of Property and Equipment

 

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 these 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 these assets are not impaired, but their useful lives have decreased, the remaining net book value is amortized over the revised useful life. For the nine months ended September 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.

 

Transaction costs related to the business combination have been expensed as incurred. The Company’s unaudited consolidated financial statements reflect eQ’s results of operations from June 11, 2009 forward.

 

The financial information below reflects the final allocation of the purchase price, which was based on preliminary information as of June 30, 2009.  During the three months ended September 30, 2009, the Company allocated $120 to software which had previously been recorded as goodwill as of June 30, 2009.  Additionally, the Company reduced the allocation of customer relationships to $390 from $480, a $90 reduction which was recorded as goodwill.

 

Property and equipment

 

$

26

 

Customer relationships

 

390

 

Trade name

 

50

 

Software

 

120

 

Non-compete agreements

 

12

 

Goodwill

 

153

 

Total

 

$

751

 

 

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 incurred a contingent obligation 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 would be recognized as additional purchase price when earned. The earnout payments are based on the achievement of certain minimum revenue-based milestones of SRC and are paid in a combination of cash and shares of the Company’s common stock. These additional earnout payments, if any, are recorded as additional purchase price. The

 

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additional purchase price recorded in the second quarter of 2009, which was related to the May 1, 2008 to April 30, 2009 earnout period, totaled $1,468, of which $734 was paid in cash during the second quarter of 2009 and the remainder of which was paid by the issuance of 44,776 shares of the Company’s common stock during the third quarter of 2009.  The final earnout payment, if any, related to the May 1, 2009 through April 30, 2010 earnout period 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 that had a value of approximately $4,399 as of the closing date.  In addition to the amounts paid at closing, the Company was obligated to pay to the former holders of MDE membership interests an earnout payment 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 payment in the amount of approximately $3,357 was paid in January 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

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company’s chief decision maker is considered to be the team comprised of the chief executive officer and the executive management team. The Company views its operations and manages its business as one operating segment.

 

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 using a two-step approach. 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, and 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 September 30, 2009:

 

Balance at December 31, 2008

 

$

13,395

 

Additions during the period

 

1,621

 

Balance at September 30, 2009

 

$

15,016

 

 

The additions of $1,621 during the nine months ended September 30, 2009 consisted of $153 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 September 30, 2009 and December 31, 2008:

 

 

 

As of September 30, 2009

 

As of December 31, 2008

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Customer contracts

 

$

4,217

 

$

(1,077

)

$

4,217

 

$

(767

)

Employment agreements and non-compete agreements

 

182

 

(92

)

170

 

(53

)

Software

 

120

 

(13

)

33

 

(31

)

Customer relationships

 

2,110

 

(298

)

1,720

 

(149

)

Trade name

 

50

 

 

 

 

Total

 

$

6,679

 

$

(1,480

)

$

6,140

 

$

(1,000

)

 

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The increase in software from December 31, 2008 to September 30, 2009 was due to the allocation of purchase price related to the eQ acquisition, offset by the write-off of fully amortized intangible assets in the first half of 2009.  The increase in customer relationships and trade name from December 31, 2008 to September 30, 2009 was due to the allocation of purchase price related to the eQ acquisition.  Total amortization expense was $182 and $208 for the three months ended September 30, 2009 and 2008, respectively.  Total amortization expense was $514 and $853 for the nine months ended September 30, 2009 and 2008, respectively.

 

4.  Recent Accounting Pronouncements

 

Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force

 

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, which amends Accounting Standards Codification (ASC) 605, Revenue Recognition (ASC 605) , to require companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not available.  ASU 2009-13 is effective beginning January 1, 2011.  Earlier application is permitted.  The Company is currently evaluating both the timing and the impact of the pending adoption of ASU 2009-13 on its consolidated financial statements.

 

The FASB Accounting Codification and the Hierarchy of Generally Accepted Accounting Principle

 

In July 2009, the FASB issued ASC 105, The FASB Accounting Codification and the Hierarchy of Generally Accepted Accounting Principle (ASC 105) ASC 105 will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, ASC 105 superseded all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in ASC 105 will become nonauthoritative.  ASC 105 is effective for interim and annual periods ending after September 15, 2009.   All references made to GAAP in the Company’s condensed consolidated financial statements now use the new codification referencing system.  ASC 105 does not change or alter GAAP; therefore, the adoption did not impact the Company’s financial position or results of operations.

 

Subsequent Events

 

In May 2009, the Subsequent Events Topic (ASC 855) was issued.   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.  Earnings (Loss) Per Common Share

 

The following represents a reconciliation of shares used to compute basic and diluted earnings (loss) per share:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

26,637

 

$

(3,060

)

$

8,374

 

$

(24,496

)

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

21,938

 

19,606

 

20,704

 

19,407

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Shares held in escrow

 

136

 

 

126

 

 

Incremental shares pursuant to stock options and restricted stock

 

1,615

 

 

1,325

 

 

Weighted average common shares outstanding assuming dilution

 

23,689

 

19,606

 

22,155

 

19,407

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

$

1.21

 

$

(0.16

)

$

0.40

 

$

(1.26

)

Diluted earnings (loss) per common share

 

$

1.12

 

$

(0.16

)

$

0.38

 

$

(1.26

)

 

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Included in the weighted average number of common shares outstanding at September 30, 2009 were 44,776 shares of common stock issued in connection with the acquisition of SRC. 

 

For the three and nine months ended September 30, 2009, 120,000 shares related to the SRC acquisition and 15,767 related to the eQ acquisition were excluded from the basic earnings per common share calculation, however these shares were included in the diluted earnings per common share calculation.  These shares for the three and nine months ended September 30, 2008 were excluded from both the basic and diluted loss per common share calculations.

 

During the three months ended September 30, 2009, options to purchase 201,988 shares of the Company’s common stock and 100,991 shares of the Company’s restricted stock were outstanding but not included in the computation of diluted earnings per share because the options’ exercise price or unamortized compensation expense per share was greater than the average market price of the common shares for this respective period, thus making them anti-dilutive. 

 

During the nine months ended September 30, 2009, options to purchase 365,241 shares of the Company’s common stock and 101,991 shares of the Company’s restricted stock were outstanding but not included in the computation of diluted earnings per share because the options’ exercise price or unamortized compensation expense per share was greater than the average market price of the common shares for this respective period, thus making them anti-dilutive.

 

6. Fair Value Measurements

 

The Fair Value Measurements and Disclosures Topic (ASC 820) establishes a fair value hierarchy that requires the use of observable market data, when available, and prioritizes the inputs to valuation techniques used to measure fair value in the following categories:

 

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

 

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

 

·                       Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect 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 September 30, 2009:

 

 

 

Fair Value Measurement at September 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)

 

$

100,527

 

$

100,527

 

$

 

$

 

 

 

$

100,527

 

$

100,527

 

$

 

$

 

 


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

 

At September 30, 2009, the Company had restricted cash of approximately $7,874 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.

 

The carrying amounts of cash and cash equivalents, restricted cash, trade accounts receivable, accounts payable, and accrued expenses included in the condensed consolidated balance sheets approximate fair value given the short-term nature of these financial instruments.

 

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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 (the Credit Facility).  Pursuant to the terms of the Credit Facility, 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 the Credit Facility are secured by all of the assets of the Company and its subsidiaries, excluding any intellectual property.  The 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 credit facility, including maintaining a minimum specified tangible net worth and a minimum specified ratio of current assets to current liabilities.  The 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 Credit Facility at December 31, 2008 and September 30, 2009.

 

As of September 30, 2009, the Credit 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 Credit Facility, which were deferred and are being amortized to interest expense over the life of the debt. At September 30, 2009, the Company had borrowings of $4,442 accruing interest at 4.0% and letters of credit of $30,539 outstanding under the Credit Facility.

 

On October 29, 2009, the Company repaid the outstanding borrowings of $4,442 under the Credit Facility.

 

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 $9,572 and $2,386, respectively, at September 30, 2009 and December 31, 2008. These amounts primarily represent up-front payments required by utility and grid operator customers as a condition of participation in certain demand response programs and to ensure that the Company will deliver its committed capacity amounts in the applicable demand response programs. 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 customer contracts and open market bidding programs and has determined the likelihood of default 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 during the second quarter of 2009 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 $1,100 was expensed as interest expense during the second quarter of 2009 and $900 was deferred.   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,

 

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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 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:

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

Risk-free interest rate

 

3.18

%

2.30-3.60

%

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 (1)

 

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 nine months ended September 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 was 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:

 

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Nine Months Ended September 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

 

1,093,454

 

 

 

13.55

 

 

 

Exercised

 

(327,447

)

 

 

3.73

 

$

5,678

 

Cancelled

 

(937,049

)

 

 

26.11

 

 

Outstanding at end of period

 

2,575,793

 

$0.11 - $48.54

 

10.07

 

59,176

 

Remaining contractual life in years: 7.0

 

 

 

 

 

 

 

 

 

Exercisable at end of period

 

859,301

 

$0.11 - $48.54

 

$

7.51

 

$

22,220

 

Remaining contractual life in years: 7.2

 

 

 

 

 

 

 

 

 

 


(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 September 30, 2009, as appropriate, and the exercise price of the underlying options.

 

The Company recognized stock-based compensation expense of $9,996 and $7,390 during the nine months ended September 30, 2009 and 2008, respectively.  The amount of unrecognized stock-based compensation expense that may be recognized for outstanding unvested options as of September 30, 2009 was $17,596, which is to be recognized over a weighted average period of 2.3 years.  For restricted stock at September 30, 2009, the Company had $4,489 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.3 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.

 

During the third quarter of 2009, the Company granted to its former chief financial officer an acceleration of a certain portion of options to purchase shares of common stock, which had an estimated fair value of $441.

 

During the third quarter of 2009, the Company granted to its newly-hired chief financial officer an aggregate of 80,000 options to purchase shares of the Company’s common stock and 20,000 shares of the Company’s common stock, which had an estimated combined fair value of $1,761.

 

10. Equity Financing

 

During the third quarter of 2009, the Company completed an underwritten public offering of 3,963,889 shares of common stock at an offering price of $27.00 per share, which includes the exercise of the underwriters’ over-allotment option to purchase 213,889 shares and the sale of 709,026 shares by certain selling stockholders. After deducting underwriting discounts and commissions and offering expenses payable by the Company, the Company received net proceeds of approximately $83.5 million from the offering.

 

11. Income Taxes

 

No current provision for federal or state income taxes has been recorded, as the Company has incurred cumulative net operating losses for each tax year since inception.  The Company has recorded a deferred benefit from income taxes related to tax amortization of indefinite lived intangibles of $786 and $438, respectively, for the three and nine months ended September 30, 2009.  The Company has recorded a deferred tax provision for $22 and $180, respectively, related to tax deductible goodwill for the three and nine months ended September 30, 2008. Amounts due to various states for excise taxes are included in general and administrative expenses, accrued expenses and other current liabilities as of September 30, 2009 and December 31, 2008.

 

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12. Industry Segment Information

 

The Company operates within one reportable segment.

 

During the three and nine months ended September 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 September 30,

 

 

 

2009

 

2008

 

 

 

Revenues

 

% of Total
Revenues

 

Revenues

 

% of Total
Revenues

 

PJM

 

$

75,029

 

72.8

%

$

22,067

 

50.0

%

ISO-NE

 

12,390

 

12.0

%

7,999

 

18.1

%

CL&P

 

*

 

*

 

*

 

*

 

Total

 

$

87,419

 

84.8

%

$

30,066

 

68.1

%

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

 

 

Revenues

 

% of Total 
Revenues

 

Revenues

 

% of Total 
Revenues

 

PJM

 

$

98,216

 

59.9

%

$

29,580

 

34.2

%

ISO-NE

 

37,045

 

22.6

%

27,490

 

31.8

%

CL&P

 

*

 

*

 

12,036

 

14.0

%

Total

 

$

135,261

 

82.5

%

$

69,106

 

80.0

%

 


*Less than 10% of total revenues and not included in totals.

 

Accounts receivable from these customers was approximately $7,999 and $9,121 at September 30, 2009 and December 31, 2008, respectively. Unbilled revenue from these customers was $64,842 and $11,585 for the periods ended September 30, 2009 and December 31, 2008, respectively.

 

13. Legal Proceedings

 

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not expect the ultimate costs to resolve these matters to have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

 

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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 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, which include demand response services, energy efficiency, or monitoring-based commissioning, services, energy procurement services and emissions tracking and trading services. These solutions help optimize the balance of electric supply and demand, provide cost-efficient alternatives to traditional power generation, transmission and distribution resources, and drive significant cost-savings for our customers. Our customers are commercial, institutional and industrial end-users of energy, as well as electric power grid operators and utilities.

 

We believe that we are the largest national demand response service provider for commercial, institutional and industrial customers. As of September 30, 2009, we had over 3,250 megawatts, or MW, under management in our demand response network across an end-use customer base of approximately 2,500 accounts and 5,600 customer sites throughout multiple electric power grids. Demand response is an alternative to traditional power generation and transmission infrastructure projects that enables grid operators and utilities to reduce the likelihood of service disruptions, such as brownouts and blackouts, during periods of peak electricity demand, and otherwise manage the electric power grid during short-term imbalances of supply and demand. We use our Network Operations Center, or NOC, and PowerTrak enterprise software platform to remotely manage and reduce electricity consumption across a growing network of commercial, institutional and industrial customer sites, making demand response capacity available to grid operators and utilities on demand while helping end-users of electricity achieve energy savings, environmental benefits and improved financial results. To date, we have received substantially all of our revenues from grid operators and utilities, who make recurring payments to us for managing demand response capacity that we share with end-users of electricity in exchange for such end-users reducing their power consumption when called upon.

 

We build on our position as a leading demand response services provider by using our NOC and scalable PowerTrak technology platform to also deliver a portfolio of additional energy management services to our customers, including cross-selling of these energy management services to existing end-use customers.  These additional solutions include our monitoring-based commissioning, or MBCx, services, energy procurement services and emissions tracking and trading services. Our MBCx services combine advanced metering, building management systems, and energy analytics software applications to identify energy efficiency opportunities in large buildings. Our energy procurement services 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. Our emissions tracking and trading services include a comprehensive, software-based accounting system for our commercial, institutional and industrial customers to effectively monitor, mitigate and monetize their greenhouse gas emissions in response to existing and pending greenhouse gas reporting requirements.

 

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 $62.1 million from inception to September 30, 2009. Our net income was $26.6 million and $8.4 million, respectively, for the three and nine months ended September 30, 2009.

 

Significant Recent Developments

 

In July 2009, we and Neal C. Isaacson, our then-current chief financial officer and treasurer, agreed that Mr. Isaacson would resign as chief financial officer and treasurer effective as of the close of business on July 30, 2009.  Also in July 2009, we entered into

 

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an employment offer letter to hire and retain Timothy Weller as our chief financial officer and treasurer.  Mr. Weller’s employment with our company commenced on July 31, 2009.

 

In August 2009, we completed an underwritten public offering of 3,963,889 shares of our common stock at an offering price of $27.00 per share, which includes the exercise of the underwriters’ over-allotment option to purchase 213,889 shares and the sale of 709,026 shares by certain of our selling stockholders. After deducting underwriting discounts and commissions and offering expenses payable by us, we received net proceeds of approximately $83.5 million from the offering.

 

Revenues and Expense Components

 

Revenues

 

We derive recurring revenues from the sale of our demand response and energy management services. Our revenues from our demand response services 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.  We generally 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 during a demand response event; we call this an energy payment.

 

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. 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 defer incremental direct costs incurred related to the acquisition or origination of a contract or open market program in a transaction that results in the deferral or delay of revenue recognition.  We had deferred contract origination costs of approximately $0.9 million as of September 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 September 30, 2009, we had over 3,250 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 3,250 MW of demand response capacity. 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. Certain other markets in which we currently participate or choose to participate in the future may operate in a manner similar to the PJM forward capacity market, which would create a delay in recognizing revenue from the MW that we enable in those markets.

 

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Our portfolio of additional energy management solutions includes our MBCx services, energy procurement services, and emissions tracking and trading services.  Our MBCx services combine advanced metering, building management systems, and energy analytics software applications to identify energy efficiency opportunities in large buildings.  Our energy procurement services 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 also use our PowerTrak platform to deliver emissions tracking and trading services, which include a comprehensive, software-based accounting system for our commercial, institutional and industrial customers to enable them to more effectively monitor, mitigate and monetize their greenhouse gas emissions in response to existing and pending greenhouse gas reporting requirements.  We generally receive either a subscription-based or consulting fee or a percentage savings fee for these energy management solutions.  Revenues derived from our energy management solutions increased from $4.8 million to $5.0 million, respectively, for the nine months ended September 30, 2008 and 2009.

 

Revenues generated from open market sales to PJM, a grid operator customer, accounted for 73% and 50%, respectively, of our total revenues in each of the three months ended September 30, 2009 and 2008 and 60% and 34%, respectively, of our total revenues in each of the nine months ended September 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 12% and 18%, respectively, of our total revenues in each of the three months ended September 30, 2009 and 2008 and 23% and 32%, respectively, of our total revenues in each of the nine months ended September 30, 2009 and 2008. Our two fixed price contracts with ISO-NE expired on May 31, 2008.  In addition, 0% and 14% of our total revenues for each of the nine months ended September 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.

 

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 and Gross Margin

 

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 our demand response business we match obligation, in the form of MW that we agree to deliver to our utility and grid operator customers, with supply, in the form of MW that we are able to curtail from the electric power grid.  We increase, and occasionally decrease, our obligation through open market bidding programs and auctions, open program registrations and bilateral contracts.  We increase our ability to curtail demand from the electric power grid by deploying a sales team to contract with our commercial, institutional and industrial customers and by installing our equipment at these customers’ sites to connect them to our network. When we are called upon by our utility or grid operator customers to deliver MW, we use our software application to dispatch this network to meet the demands of these utility and grid operator customers. We refer to the above activities as managing our portfolio of demand response capacity.  In some of our arrangements, we collect additional revenues for successful performance or we pay penalties for underperformance. Our outcomes in negotiating favorable contracts with our commercial, institutional and industrial customers, as well as with our utility and grid operator customers, and managing our portfolio of demand response capacity are the primary determinants of our gross profit and margin.

 

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 335 full-time employees at September 30, 2008 to 370 full-time employees at September 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

 

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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.

 

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 nine months ended September 30, 2009, we capitalized internal software and development costs of $0.5 million and $1.7 million, respectively, and the amount is included as software in property and equipment at September 30, 2009. During the three and nine months ended September 30, 2008, we capitalized internal software and development costs of $0.4 million and $1.1 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 and measured at fair value. For the three and nine months ended September 30, 2009, we recorded expenses of approximately $3.9 million and $10.0 million, respectively, in connection with share-based payment awards to employees and non-employees. With respect to grants through September 30, 2009, a future expense of non-vested options of approximately $17.6 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 $4.5 million is expected to be recognized over a weighted average period of 2.3 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 nine months ended September 30, 2009.

 

In July 2009, we and Neal C. Isaacson, our then-current chief financial officer and treasurer, agreed that Mr. Isaacson would resign as chief financial officer and treasurer effective as of the close of business on July 30, 2009.  In connection with Mr. Isaacson’s resignation, the vesting of a certain portion of his outstanding options to purchase shares of our common stock was accelerated.  Also in July 2009, we entered into an employment offer letter to hire and retain Timothy Weller as our chief financial officer and treasurer.   As part of this employment offer letter, we granted Mr. Weller an aggregate of 80,000 options to purchase shares of our common stock and 20,000 shares of our common stock.

 

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

 

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did not exceed the fair value of the exchanged options calculated immediately prior to the exchange.  As such, there was 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 credit facility and fees associated with issuing letters of credit.

 

Consolidated Results of Operations

 

Three and Nine Months Ended September 30, 2009 Compared to the Three and Nine Months Ended September 30, 2008

 

Revenues

 

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

 

 

 

Three Months Ended September 30,

 

Dollar

 

Percentage

 

 

 

2009

 

2008

 

Change

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

Demand response solutions

 

$

101,227

 

$

42,186

 

$

59,041

 

140.0

%

Energy management solutions

 

1,890

 

1,966

 

(76

)

(3.9

)%

Total revenues

 

$

103,117

 

$

44,152

 

$

58,965

 

133.6

%

 

 

 

Nine Months Ended September 30,

 

Dollar 

 

Percentage 

 

 

 

2009

 

2008

 

Change

 

Change

 

Revenues:

 

 

 

 

 

 

 

 

 

Demand response solutions

 

$

158,931

 

$

81,699

 

$

77,232

 

94.5

%

Energy management solutions

 

5,011

 

4,751

 

260

 

5.5

%

Total revenues

 

$

163,942

 

$

86,450

 

$

77,492

 

89.6

%

 

During the three and nine months ended September 30, 2009, our demand response solutions revenues increased by $59.0 million and $77.2 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:

 

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September 30, 2009

 

 

 

Three Months Ended

 

Nine Months Ended

 

PJM

 

$

52,608

 

$

68,239

 

Tennessee Valley Authority

 

1,877

 

3,062

 

California

 

1,326

 

2,016

 

New York

 

574

 

86

 

New England

 

556

 

3,481

 

Other

 

2,100

 

348

 

Total

 

$

59,041

 

$

77,232

 

 

During the three months ended September 30, 2009, our energy management solutions revenues decreased by $0.1 million, or 4%, as compared to the three months ended September 30, 2008. The decrease was primarily due to a $0.1 million reduction in energy efficiency audits performed during the period. During the nine months ended September 30, 2009, our energy management solutions revenues increased by $0.3 million, or 6%, as compared to the nine months ended September 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 nine months ended September 30, 2009, we recognized revenue of $2.2 million related to the SRC acquisition compared to $1.3 million during the nine months ended September 30, 2008.  This increase was partially offset by a reduction in energy efficiency audits performed during the period.

 

We currently expect our revenues to continue 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 nine months ended September 30, 2009 and 2008 (dollars in thousands):

 

Three Months Ended September 30,

 

2009

 

2008

 

Gross Profit

 

Gross Margin

 

Gross Profit

 

Gross Margin

 

$

51,677

 

50.1

%

$

18,360

 

41.6

%

 

Nine Months Ended September 30,

 

2009

 

2008

 

Gross Profit

 

Gross Margin

 

Gross Profit

 

Gross Margin

 

$

77,710

 

47.4

%

$

33,702

 

39.0

%

 

Our gross profit increased during the three and nine months ended September 30, 2009 when compared to the three and nine months ended September 30, 2008 primarily due to the substantial increase in our revenues, as well as the effective management of our portfolio of demand response capacity and strong demand response event performance, particularly in the PJM region from which we derive a substantial portion of our revenues.

 

Our gross margin increased during the three and nine months ended September 30, 2009 as compared to the three and nine months ended September 30, 2008 primarily due to the effective management of our portfolio of demand response capacity, as well as the substantial increase in our revenues and strong demand response event performance, particularly in the PJM region from which we derive a substantial portion of our revenues. We currently expect that our gross margin for the third quarter of 2009 will be the highest gross margin among our four quarterly reporting periods in 2009, consistent with our gross margin pattern in 2008, and that there will also be a trend in 2010 of increased gross margin in our third fiscal quarter as compared to the other quarters in our fiscal year.

 

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Operating Expenses

 

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

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Operating Expenses:

 

 

 

 

 

 

 

Selling and marketing

 

$

11,602

 

$

9,525

 

21.8

%

General and administrative

 

12,155

 

10,041

 

21.1

%

Research and development

 

2,111

 

1,567

 

34.7

%

Total

 

$

25,868

 

$

21,133

 

22.4

%

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Operating Expenses:

 

 

 

 

 

 

 

Selling and marketing

 

$

29,481

 

$

23,714

 

24.3

%

General and administrative

 

33,252

 

30,519

 

9.0

%

Research and development

 

5,524

 

4,560

 

21.1

%

Total

 

$

68,257

 

$

58,793

 

16.1

%

 

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 335 full-time employees at September 30, 2008 to 370 full-time employees at September 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.

 

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Selling and Marketing Expenses

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

 

 

 

 

 

 

 

 

Payroll and related costs

 

$

7,938

 

$

6,512

 

21.9

%

Stock-based compensation

 

1,181

 

945

 

25.0

%

Other

 

2,483

 

2,068

 

20.1

%

Total

 

$

11,602

 

$

9,525

 

21.8

%

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

19,872

 

$

16,442

 

20.9

%

Stock-based compensation

 

3,001

 

2,656

 

13.0

%

Other

 

6,608

 

4,616

 

43.2

%

Total

 

$

29,481

 

$

23,714

 

24.3

%

 

The increase in selling and marketing expenses for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was primarily driven by the payroll and related costs associated with an increase in the number of selling and marketing full-time employees from 108 at September 30, 2008 to 138 at September 30, 2009.  The increase in payroll and related costs for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was primarily attributable to an increase in sales commissions payable to certain members of our sales force, as well as the timing associated with our hiring new full-time employees during 2009 as compared to 2008. The increase in stock-based compensation for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was primarily due to costs related to granting stock options to certain existing and newly-hired employees.  The increase in other selling and marketing expenses for the three months ended September 30, 2009 as compared to the same period in 2008 was primarily due to increases in marketing and facility costs. The increase in other selling and marketing expenses for the nine months ended September 30, 2009 as compared to the same period in 2008 was primarily due to increases in professional services, marketing expenses and facility costs.

 

General and Administrative Expenses

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

6,561

 

$

5,411

 

21.3

%

Stock-based compensation

 

2,567

 

1,407

 

82.4

%

Other

 

3,027

 

3,223

 

(6.1

)%

Total

 

$

12,155

 

$

10,041

 

21.1

%

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

17,199

 

$

15,862

 

8.4

%

Stock-based compensation

 

6,494

 

4,347

 

49.4

%

Other

 

9,559

 

10,310

 

(7.3

)%

Total

 

$

33,252

 

$

30,519

 

9.0

%

 

The increase in general and administrative expenses for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was primarily driven by payroll and related costs due to an increase in executive compensation.  The increase in payroll and related costs for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was attributable to an increase in full-time employees from 183 at September 30, 2008 to 184 at September 30, 2009.  Additionally, payroll and related costs increased as a result of the timing associated with our hiring new full-time employees, coupled with the payment of bonuses to certain of our employees and an increase in certain employees’ salaries.  The increase in stock-based compensation for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was primarily due to stock-based compensation expenses associated with our current and former chief financial officer and other officers and

 

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directors, including the costs related to accelerating the vesting of a certain portion of our former chief financial officer’s options to purchase shares of our common stock.  The decrease in other for the three and nine months ended September 30, 2009 compared to the same periods in 2008 was due to a reduction in professional services.

 

Research and Development Expenses

 

 

 

Three Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

1,205

 

$

942

 

27.9

%

Stock-based compensation

 

174

 

157

 

10.8

%

Other

 

732

 

468

 

56.4

%

Total

 

$

2,111

 

$

1,567

 

34.7

%

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2009

 

2008

 

Percentage Change

 

Payroll and related costs

 

$

3,051

 

$

3,001

 

1.7

%

Stock-based compensation

 

501

 

387

 

29.5

%

Other

 

1,972

 

1,172

 

68.3

%

Total

 

$

5,524

 

$

4,560

 

21.1

%

 

The increase in research and development expenses for the three and nine months ended September 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 44 at September 30, 2008 to 48 at September 30, 2009. This increase was partially offset by capitalized internal software and development costs of $0.5 million and $1.7 million, respectively, for the three and nine months ended September 30, 2009 as compared to $0.4 million and $1.1 million, respectively, for the same periods in 2008. The increase in other research and development expenses for the periods presented was primarily due to an increase in professional services and facility costs.

 

Other Income and Expense

 

Other income for the three months ended September 30, 2009 was $0.1 million as compared to $0.3 million for the three months ended September 30, 2008. Other expense for the nine months ended September 30, 2009 was $0.0 million as compared to other income of $1.8 million for the nine months ended September 30, 2008.  The change in other income and expense for the three and nine months ended September 30, 2009 as compared to the s ame 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 net foreign currency transactions.

 

Interest Expense

 

Interest expense for the three months ended September 30, 2009 and 2008 was $0.0 million and $0.6 million, respectively. Interest expense for the nine months ended September 30, 2009 and 2008 was $1.5 million and $1.1 million, respectively. Interest expense includes interest on our outstanding debt, letters of credit origination fees, and amortization of deferred financing fees.  The decrease in interest expense for the three months ended September 30, 2009 as compared to the same period in 2008 was primarily due to a decrease in letter of credit origination fees.

 

The increase in interest expense for the nine months ended September 30, 2009 as compared to the same period in 2008 was due to a $1.1 million increase in fees associated with outstanding letters of credit, primarily attributable 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 .  This was offset by a $0.4 million decrease in fees associated with our outstanding debt due to the replacement in August 2008 of our BlueCrest Capital Finance, L.P., or BlueCrest, debt facility with our revolving credit and term loan facility with Silicon Valley Bank, or SVB.

 

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Income Taxes

 

We recorded a deferred tax benefit of $0.8 million and $0.4 million, respectively, for the three and nine months ended September 30, 2009 due to tax amortization for indefinite lived intangibles.  We had a provision for income taxes of $0.0 million and $0.2 million, respectively, for the three and nine months ended September 30, 2008.  The provision for income taxes related to the amortization of tax deductible goodwill, which generated 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 September 30, 2009.

 

Liquidity and Capital Resources

 

Overview

 

Since inception, we have generated significant losses. As of September 30, 2009, we had an accumulated deficit of $62.1 million and our principal sources of liquidity were cash and cash equivalents totaling $129.9 million, an increase of $69.1 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 September 30, 2009 and December 31, 2008 restricted cash balances are amounts used to collateralize outstanding letters of credit in the amount of $7.9 million and $1.4 million, respectively.

 

As of September 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 September 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 services 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 September 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 have filed 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 nine months ended September 30, 2009 and 2008 (dollars in thousands):

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

Cash flows provided by (used in) operating activities

 

$

3,042

 

$

(14,482

)

Cash flows used in investing activities

 

(18,166

)

(1,344

)

Cash flows provided by (used in) financing activities

 

84,243

 

(1,148

)

Effects of exchange rate changes on cash

 

25

 

 

Net change in cash and cash equivalents

 

$

69,144

 

$

(16,974

)

 

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Cash Flows Provided by (Used in) Operating Activities

 

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

 

Cash provided by operating activities for the nine months ended September 30, 2009 was $3.0 million and consisted of $8.4 million of net income and $18.9 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, offset by $24.3 million of net cash used for working capital and other activities.  Cash used for working capital and other activities consisted of an increase of $53.3 million in unbilled revenues relating to the PJM demand response market, an increase in accounts receivable of $9.1 million due to the timing of cash receipts under the demand response programs in which we participate, an increase in other assets of $3.4 million due to increases in prepaid expenses, and a decrease of $1.6 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 $1.4 million increase in deferred revenue, a $35.8 million increase in accrued capacity payments, the majority of which was related to the PJM demand response market, a $5.7 million increase in accrued payroll and related expenses, and an increase of $0.2 million in other noncurrent liabilities.

 

Cash used in operating activities for the nine months ended September 30, 2008 was $14.5 million and consisted of a $24.5 million net loss and $4.8 million of net cash used for working capital purposes and other activities partially offset by $14.8 million of non-cash items, consisting primarily of depreciation and amortization, impairment of fixed assets, interest expense, a deferred tax liability and stock-based compensation charges. Cash used for working capital and other activities primarily reflected a $18.6 million increase in unbilled revenues relating to the PJM demand response market, a $5.3 million increase in trade accounts receivable and a $2.2 million decrease in deferred revenues. These amounts were partially offset by a $15.6 million increase in accrued capacity payments, the majority of which was related to the PJM demand response market, an increase of $4.1 million in payroll and related expenses, an increase of $1.1 million in accounts payable and accrued expenses, and an increase of $0.5 million in other noncurrent liabilities.

 

Cash Flows Used in Investing Activities

 

Cash used in investing activities for the nine months ended September 30, 2009 was $18.1 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 during this period was $2.0 million, and we had an increase in restricted cash and deposits for customer programs resulting in a reduction of cash of $5.9 million primarily as a result of our cash deposits made in connection with demand response programs in which we participate. During the nine months ended September 30, 2009, we also incurred $13.2 million in capital expenditures primarily related to the purchase of 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 eQuilibrium Solutions Corporation, or eQ.

 

Cash used in investing activities for the nine months ended September 30, 2008 was $1.3 million. For the nine months ended September 30, 2008, purchases of available-for-sale securities were approximately $12.1 million and sales of available-for-sale maturities were $22.7 million.  Our principal cash investments related to installation services used to build out and expand our demand response programs, purchases of property and equipment, and cash payments made for acquisitions of businesses totaling $7.5 million.  During the nine months ended September 30, 2008, we decreased our restricted cash and deposits for customer programs by $6.7 million.  During the nine months ended September 30, 2008, we incurred $11.1 million in capital expenditures primarily related to the purchase of office equipment, demand response equipment and other miscellaneous expenditures.

 

Cash Flows Provided by (Used in) Financing Activities

 

Cash provided by financing activities was $84.2 million for the nine months ended September 30, 2009. Cash used in financing activities was $1.1 million for the nine months ended September 30, 2008. Cash provided by financing activities consisted of the following:

 

Equity Financing Activities

 

In August 2009, we completed an underwritten public offering of 3,963,889 shares of our common stock at an offering price of $27.00 per share, which includes the exercise of the underwriters’ over-allotment option to purchase 213,889 shares and the sale of 709,026 shares by certain of our stockholders. Net proceeds to us from the offering were approximately $83.5 million.

 

We received approximately $0.8 million and $0.4 million, respectively, from exercises of options to purchase shares of our common stock during the nine months ended September 30, 2009 and September 30, 2008.

 

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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.  We refer to this as the SVB credit facility.  Pursuant to the terms of the SVB credit facility, SVB will, among other things, make revolving credit and term loan advances and issue letters of credit for our account. The SVB credit facility replaced our credit facility with BlueCrest.  All unpaid principal and accrued interest is due and payable in full on August 5, 2010, which is the maturity date. Our obligations under the SVB credit facility are secured by all of our assets and the assets of our subsidiaries, excluding any intellectual property. The SVB 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. The SVB 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 SVB credit facility may be accelerated. We were in compliance with all financial covenants under the SVB credit facility at September 30, 2009. As of September 30, 2009, the SVB credit facility was fully drawn, as we had borrowings of $4.4 million outstanding under the SVB credit facility, in addition to an aggregate of $30.5 million in letters of credit issued for our account. For additional information regarding the SVB credit facility, see Note 7 to our unaudited consolidated financial statements contained herein.

 

During the nine months ended September 30, 2009, we made scheduled payments on our outstanding debt and capital lease obligations of $0.1 million. During the nine months ended September 30, 2008, we made scheduled payments on our outstanding debt and capital lease obligations of $1.5 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 $13.2 million and $11.1 million, respectively, during the nine months ended September 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 September 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 September 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 September 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 September 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 September 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.

 

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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 September 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 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 September 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 September 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.

 

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, or our 2008 Form 10-K, which we filed with the SEC on March 16, 2009.   During the three months ended September 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 2008 Form 10-K, other than as set forth below:

 

The risk factors titled “ We are currently subject to securities class action litigation, the unfavorable outcome of which may have a material adverse effect on our financial condition, results of operation and cash flows ” and “ Our investments in marketable securities are subject to market risks which may cause losses and affect the liquidity of these investments ” are deleted in their entirety from the risk factors set forth in our 2008 Form 10-K.

 

The following risk factors replace and supersede the corresponding risk factors set forth in our 2008 Form 10-K:

 

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

 

During the years ended December 31, 2006, 2007 and 2008 and the nine months ended September 30, 2009, revenues generated from open market sales to PJM, a grid operator customer, accounted for 1%, 4%, 28% and 60%, respectively, of our total revenues. The PJM forward capacity market 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. The modification or termination of our sales relationship with PJM, or the modification or termination of any of PJM’s open market programs in which we participate, could significantly reduce our future revenues and have a material adverse effect on our results of operations and financial condition and delay or prevent our future profitability. In addition, recent open market auctions of capacity in the PJM market have achieved prices that have been significantly lower than those achieved in prior periods. Accordingly, our revenues and operating margins would be adversely affected to the extent such low pricing continues.

 

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Revenues generated from two fixed price contracts with, and open market sales to ISO-NE, a grid operator customer, accounted for 65%, 60%, 36% and 23%, respectively, of our total revenues for the years ended December 31, 2006, 2007 and 2008 and the nine months ended September 30, 2009. Our fixed price contracts with ISO-NE expired on May 31, 2008. We have enrolled a significant portion of the MW represented by our expired fixed price contracts with ISO-NE in other available demand response programs. The modification or termination of our sales relationship with ISO-NE, or the modification or termination of any of ISO-NE’s open market programs in which we participate, could significantly reduce our future revenues and have a material adverse effect on our results of operations and financial condition and delay or prevent our future profitability.

 

In addition, 19%, 21% and 15%, respectively, of our total revenues for the years ended December 31, 2006, 2007 and 2008 were generated under a fixed price contract with CL&P, a grid operator customer, which expired on December 31, 2008, although we have already enrolled a significant portion of the MW represented by this fixed price contract in other available demand response programs.

 

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

 

While the electric power markets in which we operate are regulated, most of our business is not directly subject to the regulatory framework applicable to the generation and transmission of electricity. However, we may become directly subject to the regulation of the Federal Energy Regulatory Commission, or FERC, to the extent we own, operate, or control generation used to make wholesale sales of power. In addition, our subsidiary, Celerity Energy Partners San Diego, LLC, or Celerity, is subject to direct regulation by FERC because Celerity exports power to the electric power grid for resale pursuant to a contract with San Diego Gas & Electric Co., or SDG&E.

 

The installation of devices used in providing our solutions and electric generators sometimes installed or activated when providing demand response solutions may be subject to governmental oversight and regulation under state and local ordinances relating to building codes, public safety regulations pertaining to electrical connections and local and state licensing requirements. In a relatively few instances, we have agreed to own and operate a back-up generator at a commercial, institutional or industrial customer location for a period of time and to activate the generator when capacity is called for dispatch so that the commercial, institutional or industrial customer can reduce its consumption of electricity from the electric power grid. These generators are ineligible to participate in demand response programs in certain regions, and in others they may become ineligible to participate in the future or may be compensated less for such participation, thereby reducing our revenues and adversely affecting our financial condition. In addition, certain of our contracts and expansion of existing contracts with grid operators and utility customers are subject to approval by federal, state, provincial or local regulatory agencies. There can be no assurance that such approvals will be obtained or be issued on a timely basis, if at all.

 

Additionally, federal, state, provincial or local governmental entities may seek to change existing regulations, impose additional regulations or change their interpretation of the applicability of existing regulations. Any modified or new government regulation applicable to our current or future solutions, whether at the federal, state, provincial or local level, may negatively impact the installation, servicing and marketing of those solutions and increase our costs and the price of our solutions.

 

We may incur significant penalties and fines if found to be in non-compliance with any applicable State or Federal regulation.

 

While the electric power markets in which we operate are regulated, most of our business is not directly subject to the regulatory framework applicable to the generation and transmission of electricity. However, regulations by FERC related to market design, market rules, tariffs, and bidding rules impact how we can interact with our grid operator and utility customers. In addition, our subsidiary Celerity exports some power to the electric power grid and is thus subject to direct regulation by FERC and its regulations related to the sale of wholesale power at market based rates. Despite our efforts to manage compliance with such regulations, we may be found to be in non-compliance with such regulations and therefore subject to penalties or fines.

 

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

 

The growth of our business will depend on substantial amounts of additional capital for posting financial assurances in order to enter into contracts and open market bidding programs with utilities and grid operators, and marketing and product development of our demand response and energy management solutions. Our capital requirements will depend on many factors, including the rate of our revenue and sales growth, our introduction of new solutions and enhancements to existing solutions, and our expansion of sales and marketing and product development activities. In addition, we may consider strategic acquisitions of complementary businesses or technologies to grow our business, such as our acquisitions of SRC in May 2008 and eQ in June 2009, which could require significant capital and could increase our capital expenditures related to future operation of the acquired business or technology. Because of our losses, we do not fit traditional credit lending criteria. Moreover, the current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a reduction in the availability of credit in the credit markets, which will likely adversely affect our ability to obtain additional funding. We may not be able to obtain loans or additional capital on acceptable terms or at all. Moreover, our SVB credit facility contains restrictions on our ability to incur additional indebtedness, which, if not waived, could prevent us from obtaining needed capital. Any future credit facilities would likely contain similar restrictions. In the event additional funding is required, we may not be able to obtain bank credit arrangements or effect an equity or debt financing on terms acceptable to us or at all. A failure to obtain additional financing when needed could adversely affect our ability to maintain and grow our business.

 

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Our ability to provide security deposits or letters of credit is limited and could negatively affect our ability to bid on or enter into significant long-term agreements or arrangements with utilities or grid operators.

 

We are increasingly required to provide security deposits in the form of cash to secure our performance under long-term contracts or open market bidding programs with our grid operator and utility customers. In addition, some of our utility or grid operator customers also require collateral in the form of letters of credit to secure performance or to fund possible damages or true-up payments as the result of a failure to make available capacity at agreed levels or an event of default under our contracts or open market bidding programs with them. Our ability to obtain such letters of credit primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and external factors beyond our control, including the overall capacity of the credit market. Events that affect credit markets generally may result in letters of credit becoming more difficult to obtain in the future, or being available only at a significantly greater cost. As of September 30, 2009, we had $30.5 million of letters of credit outstanding, leaving no room under our SVB credit facility for additional letters of credit. We may be required, from time to time, to seek alternative sources of security deposits or letters of credit, which may be expensive and difficult to obtain, if available at all. For example, because we had no additional credit available under our SVB credit facility, we entered into a credit arrangement with a third-party in May 2009 in connection with bidding capacity into a certain open market bidding program. The arrangement included an up-front payment of $2.0 million, and we will be required to pay the third party an additional contingent fee, up to a maximum of $3.0 million, based on the revenue that we expect to earn and recognize in 2012 in connection with the bid. Our inability to obtain letters of credit and, as a result, to bid or enter into significant long-term agreements or arrangements with utilities or grid operators, could have a material adverse effect on our future revenues and business prospects. In addition, in the event that we default under long-term contracts or open market bidding programs with our grid operator and utility customers pursuant to which we have posted collateral, we may lose a portion or all of such collateral, which could have a material adverse effect on our financial condition and results of operations.

 

The following risk factor is added to the risk factors included in our 2008 Form 10-K:

 

We face risks related to our potential expansion into international markets.

 

We intend to expand our addressable market by pursuing opportunities to provide demand response and energy management solutions in international markets. We have had no experience operating in markets outside of the United States and Canada. Accordingly, new markets may require us to respond to new and unanticipated regulatory, marketing, sales and other challenges. There can be no assurance that we will be successful in responding to these and other challenges we may face as we enter and attempt to expand in international markets. International operations also entail a variety of other risks, including:

 

·                   unexpected changes in legislative or regulatory requirements of foreign countries;

·                   currency exchange fluctuations;

·                   longer payment cycles and greater difficulty in accounts receivable collection; and

·                   significant taxes or other burdens of complying with a variety of foreign laws.

 

International operations are also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. One or more of these factors could adversely affect any international operations and result in lower revenue than we expect and could significantly affect our profitability.

 

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

 

(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.  From the effective date of our registration statement through September 30, 2009, we used approximately $95.2 million to fund our operating expenses and for general corporate purposes, including purchases of equipment, repayment of indebtedness and funding acquisitions.  As of September 30, 2009, all proceeds from our IPO had been utilized.

 

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Item 6.  Exhibits.

 

10.1

 

Offer Letter, dated as of July 27, 2009, between EnerNOC, Inc. and Timothy Weller, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 2009 (File No. 001-33471), is hereby incorporated by reference as Exhibit 10.1.

 

 

 

10.2

 

Severance Agreement, dated as of July 27, 2009, by and between EnerNOC, Inc. and Timothy Weller, filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed July 31, 2009 (File No. 001-33471), is hereby incorporated by reference as Exhibit 10.1.

 

 

 

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.

 

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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: November 9, 2009

By:

/s/ Timothy G. Healy

 

 

Timothy G. Healy

 

 

Chief Executive Officer

 

 

(principal executive officer)

 

 

 

Date: November 9, 2009

By:

/s/ Timothy Weller

 

 

Timothy Weller

 

 

Chief Financial Officer

 

 

(principal financial officer)

 

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Exhibit Index

 

Exhibit Number

 

Description

 

 

 

10.1

 

Offer Letter, dated as of July 27, 2009, between EnerNOC, Inc. and Timothy Weller, filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 31, 2009 (File No. 001-33471), is hereby incorporated by reference as Exhibit 10.1.

 

 

 

10.2

 

Severance Agreement, dated as of July 27, 2009, by and between EnerNOC, Inc. and Timothy Weller, filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed July 31, 2009 (File No. 001-33471), is hereby incorporated by reference as Exhibit 10.1.

 

 

 

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.

 

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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: November 9, 2009

 

 

By:

/s/ Timothy G. Healy

 

 

Timothy G. Healy

 

 

Chief Executive Officer

 

 

(principal executive officer)

 


Exhibit 31.2

 

CERTIFICATIONS

 

I, Timothy Weller, 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: November 9, 2009

 

 

By:

/s/ Timothy Weller

 

 

Timothy Weller

 

 

Chief Financial Officer

 

 

(principal financial 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 September 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 Timothy Weller, 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: November 9, 2009

 

By:

/s/ Timothy G. Healy

 

 

Timothy G. Healy

 

 

Chief Executive Officer

 

 

 

 

 

 

 

By:

/s/ Timothy Weller

 

 

Timothy Weller

 

 

Chief Financial Officer