EnerNOC, Inc.
ENERNOC INC (Form: 10-Q, Received: 11/07/2011 17:22:30)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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
(State or Other Jurisdiction of
Incorporation or Organization)
  87-0698303
(IRS Employer
Identification No.)
     
101 Federal Street
Suite 1100
Boston, Massachusetts

(Address of Principal Executive Offices)
  02110
(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 þ     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 þ     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 þ   Accelerated filer o   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 þ
     There were 26,792,090 shares of the registrant’s common stock, $0.001 par value per share, outstanding as of November 3, 2011.
 
 

 


 

EnerNOC, Inc.
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  EX-2.1
  EX-10.1
  EX-31.1
  EX-31.2
  EX-32.1
  EX-101 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT
  EX-101 DEFINITION LINKBASE DOCUMENT

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EnerNOC, Inc.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)
                 
    September 30,     December 31,  
    2011     2010  
ASSETS
               
Current assets
               
Cash and cash equivalents
  $ 77,420     $ 153,416  
Restricted cash
    93       1,537  
Trade accounts receivable, net of allowance for doubtful accounts of $249 and $150 at September 30, 2011 and December 31, 2010, respectively
    45,327       22,137  
Unbilled revenue
    101,595       73,144  
Inventory
    323        
Prepaid expenses, deposits and other current assets
    11,037       6,707  
 
           
Total current assets
    235,795       256,941  
Property and equipment, net of accumulated depreciation of $47,676 and $36,309 at September 30, 2011 and December 31, 2010, respectively
    38,495       34,690  
Goodwill
    75,023       24,653  
Customer relationship intangible assets, net
    30,075       2,494  
Other definite-lived intangible assets, net
    7,050       3,329  
Indefinite-lived intangible assets
    530       920  
Deposits and other assets
    16,258       2,872  
 
           
Total assets
  $ 403,226     $ 325,899  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities
               
Accounts payable
  $ 439     $ 111  
Accrued capacity payments
    88,896       65,792  
Accrued payroll and related expenses
    12,230       11,135  
Accrued expenses and other current liabilities
    12,156       9,307  
Accrued acquisition contingent consideration
          1,500  
Deferred revenue
    7,340       5,540  
Current portion of long-term debt
    7       37  
 
           
Total current liabilities
    121,068       93,422  
Long-term liabilities
               
Deferred acquisition consideration
    4,218        
Accrued acquisition contingent consideration, long-term
    303        
Deferred tax liability
    2,155       1,141  
Deferred revenue, long-term
    6,428       4,696  
Other liabilities
    481       514  
 
           
Total long-term liabilities
    13,585       6,351  
Commitments and contingencies (Note 8 and Note 12)
           
Stockholders’ equity
               
Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued
           
Common stock, $0.001 par value; 50,000,000 shares authorized, 26,785,657 and 25,155,067 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    27       25  
Additional paid-in capital
    323,257       293,942  
Accumulated other comprehensive loss
    (1,578 )     (75 )
Accumulated deficit
    (53,133 )     (67,766 )
 
           
Total stockholders’ equity
    268,573       226,126  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 403,226     $ 325,899  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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EnerNOC, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share and per share data)
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2011     2010     2011     2010  
Revenues
  $ 169,183     $ 162,798     $ 259,849     $ 257,467  
Cost of revenues
    84,351       85,062       142,079       141,164  
 
                       
Gross profit
    84,832       77,736       117,770       116,303  
Operating expenses:
                               
Selling and marketing
    14,591       12,487       39,798       33,132  
General and administrative
    15,960       14,254       48,172       41,155  
Research and development
    3,310       3,197       9,892       7,748  
 
                       
Total operating expenses
    33,861       29,938       97,862       82,035  
 
                       
Income from operations
    50,971       47,798       19,908       34,268  
Other (expense) income, net
    (2,471 )     42       (2,485 )     31  
Interest expense
    (397 )     (195 )     (798 )     (686 )
 
                       
Income before income tax
    48,103       47,645       16,625       33,613  
Provision for income tax
    (1,225 )     (3,779 )     (1,992 )     (2,869 )
 
                       
Net income
  $ 46,878     $ 43,866     $ 14,633     $ 30,744  
 
                       
 
                               
Income per common share
                               
Basic
  $ 1.83     $ 1.76     $ 0.57     $ 1.25  
 
                       
Diluted
  $ 1.77     $ 1.67     $ 0.55     $ 1.18  
 
                       
 
                               
Weighted average number of common shares outstanding
                               
Basic
    25,683,177       24,864,755       25,491,362       24,650,453  
Diluted
    26,538,278       26,215,766       26,498,620       26,013,402  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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EnerNOC, Inc.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
                 
    Nine Months Ended September 30,  
    2011     2010  
Cash flows from operating activities
               
Net income
  $ 14,633     $ 30,744  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    11,976       10,684  
Amortization of acquired intangible assets
    4,533       1,109  
Impairment of acquired intangible assets
    241          
Stock-based compensation expense
    10,488       11,668  
Impairment of equipment
    508       1,308  
Unrealized foreign exchange transaction loss
    2,717       17  
Deferred taxes
    998       1,250  
Non-cash interest expense
    126        
Accretion of fair value of deferred purchase price consideration related to acquisition
    293        
Accretion of fair value of contingent purchase price consideration related to acquisition
    23        
Other, net
    235       118  
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable, trade
    (18,725 )     (16,573 )
Unbilled revenue
    (30,137 )     (73,831 )
Prepaid expenses and other current assets
    (1,052 )     1,040  
Inventory
    114        
Other assets
    (2,904 )     3  
Other noncurrent liabilities
    (159 )     1,879  
Deferred revenue
    3,412       218  
Accrued capacity payments
    23,273       48,641  
Accrued payroll and related expenses
    1,576       2,793  
Accounts payable and accrued expenses and other current liabilities
    (5,403 )     7,594  
 
           
Net cash provided by operating activities
    16,766       28,662  
 
               
Cash flows from investing activities
               
Payments made for acquisitions of businesses, net of cash acquired
    (67,492 )     (2,001 )
Payments made for contingent consideration related to acquisitions
    (1,500 )      
Purchases of property and equipment
    (15,172 )     (15,283 )
Change in restricted cash and deposits
    (9,394 )     6,740  
Change in long-term assets
    (530 )      
 
           
Net cash used in investing activities
    (94,088 )     (10,544 )
 
               
Cash flows from financing activities
               
Proceeds from exercises of stock options
    1,891       3,500  
Repayment of borrowings and payments under capital leases
    (30 )     (27 )
 
           
Net cash provided by financing activities
    1,861       3,473  
Effects of exchange rate changes on cash
    (535 )     (9 )
 
           
Net change in cash and cash equivalents
    (75,996 )     21,582  
Cash and cash equivalents at beginning of period
    153,416       119,739  
 
           
Cash and cash equivalents at end of period
  $ 77,420     $ 141,321  
 
           
 
               
Non-cash financing and investing activities
               
Issuance of common stock in connection with acquisitions
  $ 16,498     $ 1,066  
 
           
Issuance of common stock in satisfaction of bonuses
  $ 440     $ 775  
 
           
Increase in deferred acquisition consideration
  $ 3,925     $  
 
           
Increase in accrued acquisition contingent consideration
  $ 309     $  
 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

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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 clean and intelligent energy management applications and services for the smart grid, which include comprehensive demand response, data-driven energy efficiency, energy price and risk management, and enterprise carbon management applications and services. The Company’s energy management applications and services enable cost effective energy management strategies for its commercial, institutional and industrial end-users of energy (C&I customers) and its electric power grid operator and utility customers by reducing real-time demand for electricity, increasing energy efficiency, improving energy supply transparency, and mitigating emissions. The Company uses its Network Operations Center (NOC) and comprehensive demand response application, DemandSMART, to remotely manage and reduce electricity consumption across a growing network of C&I customer sites, making demand response capacity available to electric power grid operators and utilities on demand while helping C&I customers achieve energy savings, improved financial results and environmental benefits. To date, the Company has received substantially all of its revenues from electric power grid operators and utilities, who make recurring payments to the Company for managing demand response capacity that it shares with its C&I customers in exchange for those C&I customers reducing their power consumption when called upon.
     The Company builds on its position as a leading demand response services provider by using its NOC and energy management application platform to deliver a portfolio of additional energy management applications and services to new and existing C&I, electric power grid operator and utility customers. These additional energy management applications and services include its EfficiencySMART, SupplySMART and CarbonSMART applications and services. EfficiencySMART is its data-driven energy efficiency suite that includes commissioning and retro-commissioning authority services, energy consulting and engineering services, a persistent commissioning application and an enterprise energy management application for managing energy across a portfolio of sites. SupplySMART is its energy price and risk management application that provides its C&I 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, budget forecasting, and utility bill information management. CarbonSMART is its enterprise carbon management application that supports and manages the measurement, tracking, analysis, reporting and management of greenhouse gas emissions.
Reclassifications
     The Company has reclassified certain costs in its unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2010 totaling $406 and $1,041, respectively, previously included in selling and marketing expenses as general and administrative expenses to more appropriately reflect the nature of these costs.
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.
     On January 3, 2011, the Company acquired all of the outstanding capital stock of Global Energy Partners, Inc. (Global Energy) in a purchase business combination. Accordingly, the results of Global Energy subsequent to that date are included in the Company’s unaudited condensed consolidated statements of income.
     On January 25, 2011, the Company acquired all of the outstanding capital stock of M2M Communications Corporation (M2M) in a purchase business combination. Accordingly, the results of M2M subsequent to that date are included in the Company’s unaudited condensed consolidated statements of income.

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     On July 1, 2011, the Company acquired all of the outstanding stock of Energy Response Holdings Pty Ltd (Energy Response) in a purchase business combination. Accordingly, the results of Energy Response subsequent to that date are included in the Company’s unaudited condensed consolidated statements of income.
Subsequent Events Consideration
     The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required.
     There were no material recognizable subsequent events recorded or requiring disclosure in the September 30, 2011 unaudited condensed consolidated financial statements.
Use of Estimates in Preparation of Financial Statements
     The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, and include all adjustments (consisting of normal, recurring adjustments) necessary for the fair presentation of the Company’s financial position at September 30, 2011 and the statements of income for the three and nine months ended September 30, 2011 and 2010 and statements of cash flows from the nine months ended September 30, 2011 and 2010. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending December 31, 2011.
     The preparation of these unaudited condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, valuations and purchase price allocations related to business combinations, fair value of deferred acquisition consideration, fair value of accrued acquisition contingent consideration, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance.
     Although the Company regularly assesses these estimates, actual results could differ materially. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience or other assumptions prove not to be substantially accurate, even if such assumptions are reasonable when made.
     The Company is subject to a number of risks similar to those of other companies of similar and different sizes both inside and outside of its industry, including, but not limited to, rapid technological changes, competition from similar energy management applications and services provided by larger companies, customer concentration, government regulations, market or program rule changes, protection of proprietary rights and dependence on key individuals.
Revenue Recognition
     The Company recognizes revenues in accordance with Accounting Standards Codification (ASC) 605, Revenue Recognition (ASC 605). In all of the Company’s arrangements, it does not recognize any revenues until it can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and it deems collection to be reasonably assured. In making these judgments, the Company evaluates these criteria as follows:
    Evidence of an arrangement. The Company considers a definitive agreement signed by the customer and the Company or an arrangement enforceable under the rules of an open market bidding program to be representative of persuasive evidence of an arrangement.

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    Delivery has occurred. The Company considers delivery to have occurred when service has been delivered to the customer and no significant post-delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved.
 
    Fees are fixed or determinable. The Company considers the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment and the Company cannot reliably estimate this amount, the Company recognizes revenues when the right to a refund or adjustment lapses. If offered payment terms exceed the Company’s normal terms, the Company recognizes revenues as the amounts become due and payable or upon the receipt of cash.
 
    Collection is reasonably assured. The Company conducts a credit review at the inception of an arrangement to determine the creditworthiness of the customer. Collection is reasonably assured if, based upon evaluation, the Company expects that the customer will be able to pay amounts under the arrangement as payments become due. If the Company determines that collection is not reasonably assured, revenues are deferred and recognized upon the receipt of cash.
     The Company enters into contracts and open market bidding programs with utilities and electric power grid operators to provide demand response applications and services. Demand response revenues consist of two elements: revenue earned based on the Company’s ability to deliver committed capacity to its electric power grid operator and utility customers, which the Company refers to as capacity revenue; and revenue earned based on additional payments made to the Company for the amount of energy usage actually curtailed from the grid during a demand response event, which the Company refers to as energy event revenue.
     The Company recognizes demand response revenue when it has provided verification to the electric power grid operator or utility of its ability to deliver the committed capacity which entitles the Company to payments under the contract or open market program. Committed capacity is generally verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenue is recognized and future revenue becomes fixed or determinable and is recognized monthly until the next demand response event or test. In subsequent verification events, if the Company’s verified capacity is below the previously verified amount, the electric power grid operator or utility customer will reduce future payments based on the adjusted verified capacity amounts. Ongoing demand response revenue recognized between demand response events or tests that are not subject to penalty or customer refund are recognized in revenue. If the revenue is subject to refund and the amount of refund cannot be reliably estimated, the revenue is deferred until the right of refund lapses. Based on the evaluation of the factors in ASC 605-45-45, including the fact that the Company is the primary obligor and bears both the performance and credit risk related to its arrangements with electric power grid operators and utility customers, the Company has determined that it is the principal in these arrangements. Therefore, the Company records demand response revenues gross of the amounts billed to the electric power grid operators and utility customers and records the amounts paid to C&I customers as cost of revenues.
     In one of the open market programs in which the Company participates, the program year operates on a June to May basis and performance is measured based on the aggregate performance during the months of June through September. As a result, fees received for the month of June could potentially be subject to adjustment or refund based on performance during the months of July through September. The Company concluded that it could reliably estimate the amount of fees potentially subject to adjustment or refund and recorded a reserve for this amount in the month of June. As of June 30, 2011, the Company recorded an estimated reserve of $9,260 related to potential subsequent performance adjustments. The fees under this program were fixed as of September 30, 2011 and based on final performance during the three months ended September 30, 2011, the Company recorded a reduction in the estimated reserve totaling $3,690, which resulted in final performance adjustments of $5,570. For the three months ended September 30, 2011 the impact of this change in estimate on income before income tax and net income was $3,690 and $3,572, respectively, and the impact of this change in estimate on diluted income per common share was $0.13 per share. This change in estimate had no impact on the nine months ended September 30, 2011 nor will it impact any future periods. The Company’s performance estimates which provided the basis for the estimated reserve as of June 30, 2011 were reasonably consistent with the actual performance during events and test events during the three months ended September 30, 2011. The primary driver of the change in estimate from June 30, 2011 to September 30, 2011 was due to the differences based on the number and type of events by which performance is measured, which is not within the Company’s control. The Company is in the process of re-evaluating its ability to reliably estimate the amount of fees potentially subject to adjustment or refund for the year ending December 31, 2012 (fiscal 2012) on a prospective basis based on its consideration of its actual performance during the months of June 2011 through September 2011, as well as, additional guidance issued by the customer regarding its interpretation of certain program rules that will impact performance calculations on a prospective basis. As there are no revenues recognized related to this open market program during the fourth quarter of the Company’s fiscal year, any change in the Company’s evaluation of its ability to reliably estimate the amount of fees potentially subject to adjustment or refund would have no impact on the results of operations for the three months ending December 31, 2011.

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     As a result of contractual amendments entered into during the three months ended March 31, 2011 and the three months ended September 30, 2011 to amend certain refund provisions included in one of the Company’s contracts with a utility customer, the Company concluded that it could reliably estimate the fees potentially subject to refund and, therefore, the fees under this arrangement were fixed or determinable. As a result, during the three months ended March 31, 2011, and the three months ended September 30, 2011 the Company recognized as revenues $3,025 and $2,294, respectively, of fees that had been previously deferred. As of September 30, 2011, there were no deferred revenues related to this contractual arrangement.
     Certain of the forward capacity programs in which the Company participates may be deemed derivative contracts under ASC 815, Derivatives and Hedging (ASC 815). In such situations, the Company believes it meets the scope exception under ASC 815 as a normal purchase, normal sale as that term is defined in ASC and, accordingly, the arrangement is not treated as a derivative contract.
     Energy event revenues are recognized when earned. Energy event revenue is deemed to be substantive and represents the culmination of a separate earnings process and is recognized when the energy event is initiated by the electric power grid operator or utility customer and the Company has responded under the terms of the contract or open market program.
     Under certain of the Company’s arrangements, in particular those arrangements entered into by the Company’s wholly-owned subsidiary, M2M, the Company sells proprietary equipment to C&I customers that is utilized to provide the ongoing services that the Company delivers. Currently, this equipment has been determined to not have stand-alone value. As a result, the Company defers the fees associated with the equipment and the Company begins recognizing those fees ratably over the expected C&I customer relationship period (generally 3 years), once the C&I customer is receiving the ongoing services from the Company. In addition, the Company capitalizes the associated direct and incremental costs, which primarily represent the equipment and third-party installation costs, and recognizes such costs over the expected C&I customer relationship period.
     In September 2009, the Financial Accounting Standards Board (FASB) ratified ASC Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13). ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of ASC Subtopic 605-25, which is the revenue recognition guidance for multiple-element arrangements. ASU 2009-13 provides for three significant changes to the existing multiple-element revenue recognition guidance as follows:
    deletes the requirement to have objective and reliable evidence of fair value for undelivered elements in an arrangement. This may result in more deliverables being treated as separate units of accounting;
 
    modifies the manner in which the arrangement consideration is allocated to the separately identified deliverables. ASU 2009-13 requires an entity to allocate revenue in an arrangement using its best estimate of selling prices (ESP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE), if VSOE is not available. Each separate unit of accounting must have a selling price, which can be based on management’s estimate when there is no other means (VSOE or TPE) to determine the selling price of that deliverable. The arrangement consideration is allocated based on the elements’ relative selling prices; and
 
    eliminates use of the residual method and requires an entity to allocate revenue using the relative selling price method, which results in the discount in the transaction being evenly allocated to the separate units of accounting.
     As required, the Company adopted ASU 2009-13 at the beginning of its first quarter of the fiscal year ending December 31, 2011 (fiscal 2011) on a prospective basis for transactions originating or materially modified on or after January 1, 2011. ASU 2009-13 generally does not change the units of accounting for the Company’s revenue transactions. The impact of adopting ASU 2009-13 was not material to the Company’s financial statements during the nine months ended September 30, 2011, and if it was applied in the same manner to the fiscal year ending December 31, 2010 (fiscal 2010) would not have had a material impact to revenue for the nine months ended September 30, 2010. The Company does not expect the adoption of ASU 2009-13 to have a significant impact on the timing and pattern of revenue recognition in the future due to the Company’s limited number of multiple element arrangements. The key impact that the Company expects the adoption of ASU 2009-13 to have relates to certain EfficiencySMART service arrangements with C&I customers who also provide curtailment of capacity as part of the Company’s demand response arrangements. Historically, the Company recorded the fees recognized under these arrangements as a reduction of cost of revenues as evidence of fair value did not exist for certain EfficiencySMARTservices due to the limited history of selling these separately and lack of availability of TPE. As previously stated, the impact of ASU 2009-13 has not been and is not expected to be material.
     The Company typically determines the selling price of its services based on VSOE. Consistent with its methodology under previous accounting guidance, the Company determines VSOE based on its normal pricing and discounting practices for the specific service when sold on a stand-alone basis. In determining VSOE, the Company’s policy is to require a substantial majority of selling

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prices for a product or service to be within a reasonably narrow range. The Company also considers the class of customer, method of distribution, and the geographies into which its products and services are sold into when determining VSOE. The Company typically has had VSOE for its products and services.
     In certain circumstances, the Company is not able to establish VSOE for all deliverables in a multiple element arrangement. This may be due to the infrequent occurrence of stand-alone sales for an element, a limited sales history for new services or pricing within a broader range than permissible by the Company’s policy to establish VSOE. In those circumstances, the Company proceeds to the alternative levels in the hierarchy of determining selling price. TPE of selling price is established by evaluating largely similar and interchangeable competitor products or services in stand-alone sales to similarly situated customers. The Company is typically not able to determine TPE and has not used this measure since the Company has been unable to reliably verify standalone prices of competitive solutions. ESP is established in those instances where neither VSOE nor TPE are available, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing information gathered from experience in customer negotiations, market research and information, recent technological trends, competitive landscape and geographies. Use of ESP is limited to a very small portion of the Company’s services, principally certain EfficiencySMART services.
Foreign Currency Translation
     The financial statements of the Company’s international subsidiaries are translated in accordance with ASC 830, Foreign Currency Matters (formerly SFAS No. 52, Foreign Currency Translation ) (ASC 830), into the Company’s reporting currency, which is the United States dollar. The functional currencies of the Company’s subsidiaries in Canada, the United Kingdom, Australia and New Zealand are the Canadian dollar, the British pound, the Australian dollar and the New Zealand dollar, respectively. Assets and liabilities are translated to the United States dollar from the local functional currency at the exchange rate in effect at each balance sheet date. Before translation, the Company re-measures foreign currency denominated assets and liabilities, including certain inter-company accounts receivable and payable that have been determined to not be of a “long-term investment” nature, as defined by ASC 830, into the functional currency of the respective entity, resulting in unrealized gains or losses recorded in the consolidated statement of income. Revenues and expenses are translated using average exchange rates during the respective period.
     Foreign currency translation adjustments are recorded as a component of other comprehensive income and included in accumulated other comprehensive loss within stockholders’ equity. Losses arising from transactions denominated in foreign currencies and the remeasurement of certain intercompany receivables and payables are included in other (expense) income, net in the unaudited condensed consolidated statements of income and were $2,648 and $2,848 for the three and nine months ended September 30, 2011, respectively. Gains arising from transactions denominated in foreign currencies were $13 for the three months ended September 30, 2010. Losses arising from transactions denominated in foreign currencies were $17 for the nine months ended September 30, 2010, respectively. The significant increase in losses arising from transactions denominated in foreign currencies for the three and nine months ended September 30, 2011 as compared to the comparable periods of 2010 is due to the significant increase of foreign denominated intercompany receivables held by the Company from one of its Australian subsidiaries primarily as a result of the funding provided to complete the acquisition of Energy Response (see Note 2) and the strengthening of the United States dollar as compared to the Australian dollar during the three months ended September 30, 2011. During the three and nine months ended September 30, 2011 and 2010, there were no material realized gains or losses incurred related to transactions denominated in foreign currencies. As of September 30, 2011, the Company had an intercompany receivable from its Australian subsidiary that is denominated in Australia dollars and not deemed to be of a “long-term investment” nature totaling $31,965 ($32,640 Australian).
     In addition, a portion of the funding provided by the Company to one of its Australian subsidiaries to complete the acquisition of Energy Response (see Note 2) was deemed to be of a “long-term investment nature” and therefore, the resulting translation adjustments are being recorded as a component of stockholders’ equity within accumulated other comprehensive loss. As of September 30, 2011, the intercompany funding that is denominated in Australia dollars and deemed to be of a “long-term investment” nature totaled $21,671 ($20,364 Australian).
Comprehensive Income
     Comprehensive income is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from non-owner sources. Comprehensive income is composed of net income and foreign currency translation adjustments. As of September 30, 2011 and 2010, accumulated other comprehensive loss was comprised solely of cumulative foreign currency translation adjustments. The Company presents its components of other comprehensive income, net of related tax effects, which have not been material to date.

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     Comprehensive income for the three and nine months ended September 30, 2011 and 2010 was as follows:
                                 
    Three months ended September 30,     Nine months ended September 30,  
    2011     2010     2011     2010  
Net income
  $ 46,878     $ 43,866     $ 14,633     $ 30,744  
Foreign currency translation adjustments
    (1,532 )     (47 )     (1,503 )     (15 )
 
                       
Total comprehensive income
  $ 45,346     $ 43,819     $ 13,130     $ 30,729  
 
                       
Software Development Costs
     The Company applies the provisions of ASC 350-40, Internal-Use Software (ASC 350-40) . ASC 350-40 requires computer software costs associated with internal use software to be expensed as incurred until certain capitalization criteria are met, and it also defines which types of costs should be capitalized and which should be expensed. The Company capitalizes the payroll and payroll-related costs of employees and third-party consultants who devote time to the development of internal-use computer software. The Company amortizes these costs on a straight-line basis over the estimated useful life of the software, which is generally two to five years. The Company’s judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value and impairment of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized.
     Software development costs of $805 and $1,045 for the three months ended September 30, 2011 and 2010, respectively, and $2,944 and $5,063 for the nine months ended September 30, 2011 and 2010, respectively, have been capitalized in accordance with ASC 350-40. The capitalized amount was included as software in property and equipment at September 30, 2011 and December 31, 2010. The Company capitalized $0 and $248 during the three months ended September 30, 2011 and 2010, respectively, and $13 and $1,216 for the nine months ended September 30, 2011 and 2010, respectively, related to a company-wide enterprise resource planning systems implementation project, which was put into production in June 2011 and is being amortized over a five year useful life. Amortization of capitalized internal use software costs was $1,160 and $749 for the three months ended September 30, 2011 and 2010, respectively, and $3,028 and $2,123 for the nine months ended September 30, 2011 and 2010, respectively. Accumulated amortization of capitalized internal use software costs was $10,162 and $7,134 as of September 30, 2011 and December 31, 2010, respectively.
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. 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.
     During the three months ended September 30, 2011, the Company identified an impairment indicator related to certain demand response equipment as a result of the removal of such equipment from service during the three months ended September 30, 2011. As a result of this impairment indicator, the Company performed an impairment test during the three months ended September 30, 2011 and recognized an impairment charge of $168 during the three months ended September 30, 2011, representing the difference between the carrying value and fair market value of the demand response equipment, which is included in cost of revenues in the accompanying unaudited condensed consolidated statements of income. The fair market value was determined utilizing Level 3 inputs, as defined by ASC 820, Fair Value Measurements and Disclosures (ASC 820), based on the projected future cash flows discounted using the estimated market participant rate of return for this type of asset.
     As of September 30, 2011, there were no impairment indicators noted with respect to the Company’s generation equipment that required an impairment test. As of September 30, 2011 approximately $1,726 of the Company’s generation equipment is utilized in open market programs. The recoverability of the carrying value of this generation equipment is largely dependent on the rates that the Company is compensated for its committed capacity within these programs. These rates represent market rates and can fluctuate based on the supply and demand of capacity. Although these market rates are established up to three years in advance of the service delivery, these market rates have not yet been established for the entire remaining useful life of this generation equipment. In performing its impairment analysis, the Company estimates the expected future market rates based on current existing market rates and trends. A decline in the expected future market rates of 10% by itself would not result in an impairment charge related to this generation equipment.

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     During the three months ended June 30, 2011, the Company identified a potential impairment indicator related to certain demand response and back-up generator equipment as a result of lower than estimated demand response event performance by these assets. As a result of this potential indicator of impairment, the Company performed an impairment test during the three months ended June 30, 2011. The applicable long-lived assets are measured for impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets or liabilities. The Company determined that the undiscounted cash flows to be generated by the asset group over its remaining estimated useful life would not be sufficient to recover the carrying value of the asset group. The Company determined the fair value of the asset group using a discounted cash flow technique based on Level 3 inputs, as defined by ASC 820, and a discount rate of 11%, which the Company determined represents a market rate of return for the assets being evaluated for impairment. The Company determined that the fair value of the asset group was $57 compared to the carrying value of the asset group of $83, and as a result recorded an impairment charge of $26 during the three months ended June 30, 2011, which is reflected in cost of revenues in the accompanying unaudited condensed consolidated statements of income. The impairment charge was allocated to the individual assets within the asset group on a pro-rata basis using the relative carrying amounts of those assets.
     During the three months ended June 30, 2011, the Company identified an impairment indicator related to certain demand response equipment as a result of the removal of such equipment from service during the three months ended June 30, 2011. As a result of this impairment indicator, the Company performed an impairment test during the three months ended June 30, 2011 and recognized an impairment charge of $204 during the three months ended June 30, 2011, representing the difference between the carrying value and fair market value of the demand response equipment, which is included in cost of revenues in the accompanying unaudited condensed consolidated statements of income. The fair market value was determined utilizing Level 3 inputs, as defined by ASC 820, based on the projected future cash flows discounted using the estimated market participant rate of return for this type of asset.
     During the three months ended March 31, 2011, the Company identified an impairment indicator related to certain demand response equipment as a result of the removal of such equipment from service during the three months ended March 31, 2011. As a result of this impairment indicator, the Company performed an impairment test during the three months ended March 31, 2011 and recognized an impairment charge of $110 during the three months ended March 31, 2011, representing the difference between the carrying value and fair market value of the demand response equipment, which is included in cost of revenues in the accompanying unaudited condensed consolidated statements of income. The fair market value was determined utilizing Level 3 inputs, as defined by ASC 820, based on the projected future cash flows discounted using the estimated market participant rate of return for this type of asset.
Inventories
     Inventories are valued at the lower of cost or market on a first in, first out basis. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. The valuation of inventory requires management to estimate excess and obsolete inventory. The Company employs a variety of methodologies to determine the net realizable value of its inventory. Provisions for excess and obsolete inventory are primarily based on management’s estimates of forecasted net sales and service usage levels. A significant change in the timing or level of demand for the Company’s products as compared to forecasted amounts may result in recording additional provisions for excess and obsolete inventory in the future. The Company records provisions for excess and obsolete inventory as cost of product sales. As of September 30, 2011, the Company had $323 of inventory, which primarily consisted of raw materials related to M2M.
Industry Segment Information
     The Company is required to disclose the standards for reporting information about its operating segments in annual financial statements and required selected information of these segments being presented in interim financial reports issued to stockholders. 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.
     The Company operates in several geographic areas, primarily the United States, Canada, United Kingdom, Australia and New Zealand. Revenues derived from United States operations comprise the majority of consolidated revenues. International subsidiaries comprised less than 10% of consolidated revenues for the three and nine months ended September 30, 2011 and are not expected to exceed 10% of consolidated revenues for fiscal 2011.

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     As of September 30, 2011 and December 31, 2010, the long-lived assets related to the Company’s international subsidiaries were not material to the accompanying unaudited condensed consolidated financial statements taken as a whole.
2. Acquisitions
Energy Response Holdings Pty Ltd
     In July 2011, the Company and one of its subsidiaries acquired all of the outstanding stock of Energy Response, a privately-held company headquartered in Australia and specializing in demand response and other energy management services in Australia and New Zealand, pursuant to a definitive agreement dated July 1, 2011. The Company concluded that this acquisition represents a business combination and therefore, has accounted for it as such. The Company believes that Energy Response will enhance and broaden the Company’s service offerings in Australia and New Zealand.
     The Company concluded that the acquisition of Energy Response represented a material business combination under the provisions of ASC 805, Business Combinations (ASC 805), and therefore, pro forma financial information has been provided herein. Subsequent to the acquisition date, the Company’s results of operations include the results of operations of Energy Response.
     The Company acquired Energy Response for an aggregate purchase price, exclusive of potential contingent consideration, of $29,286, plus an additional $470 paid as working capital and other adjustments, consisting of $27,265 in cash paid at closing and $2,491 representing the fair value of the 156,697 shares of Company common stock issued as of the acquisition date. Of the consideration paid at closing, $2,646 was paid as consideration to settle Energy Response’s outstanding debt obligations. In addition to the amounts paid at closing, the Company may be obligated to pay additional contingent purchase price consideration related to an earn-out payment equal to $10,718 ($10,000 Australian). The earn-out payment, if any, will be based on the development of a demand response reserve capacity market in the National Electricity Market in Australia by December 31, 2013 that meets certain market size and price per megawatt conditions. This milestone needs to be achieved in order for the earn-out payment to occur and there will be no partial payment if the milestone is not fully achieved. The Company determined that the initial fair value of the earn-out payment as of the acquisition date was $309. This fair value was included as a component of the purchase price resulting in an aggregate purchase price of $30,065. Any changes in fair value will be recorded in the Company’s consolidated statements of income. The Company recorded its estimate of the fair value of the contingent consideration based on the evaluation of the likelihood of the achievement of the contractual conditions that would result in the payment of the contingent consideration and weighted probability assumptions of these outcomes. This fair value measurement was based on significant inputs not observable in the market and therefore, represented a Level 3 measurement as defined in ASC 820. As of September 30, 2011, there were no changes in the probability of the earn out payment. This liability has been discounted to reflect the time value of money and therefore, as the milestone date approaches, the fair value of this liability will increase. This increase in fair value was recorded in general and administrative expenses in the Company’s accompanying unaudited condensed consolidated statements of income. During the three and nine months ended September 30, 2011, the Company recorded a charge of $23. At September 30, 2011, the liability was recorded at $303 after adjusting for changes in exchange rates. The difference between the $29,286 aggregate purchase price and the $29,475 aggregate purchase price set forth in the definitive agreement was due to the fair value of the stock issued in connection with the acquisition, which was based on the Company’s stock price as of the closing date of the acquisition of $15.90 per share, as reported on the NASDAQ Global Market (NASDAQ), as compared to a per share value of $17.10 determined in accordance with the definitive agreement, which was based on the average of the per share last sale price as reported on NASDAQ for the Company’s common stock for the thirty day period ending two trading days prior to closing.
     Transaction costs related to this business combination have been expensed as incurred, which are included in general and administrative expenses in the Company’s unaudited condensed consolidated statements of income. Transaction costs incurred related to this transaction were approximately $500.
     The components and preliminary allocation of the purchase price consist of the following approximate amounts:
         
Net tangible assets acquired as of July 1, 2011
  $ 228  
Customer relationships
    16,800  
Non-compete agreements
    79  
Developed technology
    165  
Trade name
    199  
Goodwill
    12,594  
 
     
Total
  $ 30,065  
 
     

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     Net tangible assets acquired in the acquisition of Energy Response primarily related to the following:
         
Cash
  $ 695  
Restricted cash
    2,237  
Accounts receivable
    148  
Unbilled revenue
    633  
Prepaids and other assets
    756  
Forward energy contracts (current asset)
    144  
Property and equipment
    780  
Accounts payable
    (1,114 )
Amounts due to former stockholders
    (2,051 )
Accrued expenses and other liabilities
    (1,868 )
Forward energy contracts (current liability)
    (132 )
 
     
Total
  $ 228  
 
     
     Restricted cash acquired primarily relates to certain security deposits posted by Energy Response to collateralize its performance obligations under certain contractual arrangements with electric power grid operator customers. In accordance with the definitive agreement, the Company is required to distribute to the former stockholders of Energy Response $2,051 of this restricted cash upon the amount being released by the applicable electric power grid operator customers. This amount has been classified as an amount due to the former stockholders in the reconciliation of net tangible assets acquired above. This amount was released by the electric power grid operator customers during the three months ended September 30, 2011 and the Company distributed this amount to the former stockholders during the three months ended September 30, 2011. The remaining restricted cash relates to amounts used to collateralize Energy Response’s obligations under certain of its facility operating lease arrangements. The acquired forward energy contracts represent derivative instruments. ASC Topic 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. The Company determined the fair value of these derivative instruments using the framework prescribed by ASC 820, by considering the estimated amount that would be received or paid to sell or transfer these instruments at the reporting date and by taking into account current interest rates, current energy rates, and the creditworthiness of the applicable counterparty. These acquired forward energy contracts were short-term arrangements which either expired or were terminated prior to September 30, 2011.The Company has not entered into any additional forward energy contracts since the acquisition date and therefore, the Company held no derivative instruments as of September 30, 2011. From the date of acquisition through the date of expiration or termination, the change in fair value of these forward energy contracts was not material and was included in other expense (income), net in the accompanying unaudited condensed consolidated statements of income.
Identifiable Intangible Assets
     As part of the preliminary purchase price allocation, the Company determined that Energy Response’s separately identifiable intangible assets were its customer relationships, non-compete agreements, developed technology and trade name. Developed technology represented certain proprietary software tools that Energy Response had developed, which are utilized to assist in the management of certain contractual arrangements. As of the date of acquisition, the Company determined that there was no in-process research and development as the ongoing research and development efforts were nominal and related to routine, on-going maintenance efforts.
     The Company used the income approach to value the customer relationships, non-compete agreements, developed technology and trade name. This approach calculates fair value by discounting the after-tax cash flows back to a present value. The baseline data for this analysis was the cash flow estimates used to price the transaction. Cash flows were forecasted for each intangible asset then discounted based on an appropriate discount rate. The discount rates applied, which ranged between 12% and 17%, were benchmarked with reference to the implied rate of return from the transaction model, as well as an estimate of a market-participant’s weighted average cost of capital based on the capital asset pricing model.

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     In estimating the useful life of the acquired assets, the Company considered ASC 350-30-35, General Intangibles Other Than Goodwill (ASC 350-30-35) , which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company amortizes these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows, as the Company believes this will approximate the pattern in which the economic benefits of the assets will be utilized, or where the Company has concluded that the cash flows were not reliably determinable, on a straight-line basis.
     Subsequent to the acquisition, the Company discontinued the use of the trade name intangible asset and recorded an impairment charge of $199. This amount is included in selling and marketing expense in the accompanying unaudited condensed consolidated statements of income during the three months ended September 30, 2011.
     The factors contributing to the recognition of this amount of goodwill were based upon the Company’s determination that several strategic and synergistic benefits are expected to be realized from the combination. None of the goodwill is expected to be currently deductible for tax purposes.
     As noted above, the Company’s consolidated results of operations for the three and nine months ended September 30, 2011 include the results of operations for Energy Response from the date of acquisition through September 30, 2011, which included net revenues of $2,596 and net loss of $1,637.
     The following unaudited pro forma financial information presents the consolidated results of operations of the Company and Energy Response as if the acquisition had occurred at the beginning of fiscal 2010 with pro forma adjustments to give effect to amortization of intangible assets, a decrease in interest expense as all of Energy Response’s debt arrangement were settled in connection with the acquisition, an increase in weighted average number of common shares outstanding based on the shares issued in connection with the acquisition and certain other adjustments:
                 
    Nine months ended  
    September 30,  
    2011     2010  
Net revenue
  $ 263,044     $ 258,975  
Net income
  $ 11,695     $ 26,350  
Net income per common share:
               
Basic
  $ 0.46     $ 1.06  
 
           
Diluted
  $ 0.44     $ 1.01  
 
           
     The direct acquisition fees and expenses of approximately $500 that were a direct result of the transaction are excluded from the unaudited pro forma information above for the nine months ended September 30, 2011. The unaudited pro forma financial information for the nine months ended September 30, 2010 was adjusted to include these charges. The unaudited pro forma results are not necessarily indicative of the results that the Company would have attained had the acquisitions of Energy Response occurred on January 1, 2010.
Global Energy Partners, Inc.
     In January 2011, the Company acquired all of the outstanding stock of Global Energy, a privately-held company located in California and specializing in the design and implementation of utility energy efficiency and demand response programs. The Company believes that Global Energy’s service offerings will enhance and broaden its portfolio of service offerings in the area of energy efficiency and demand response.
     The Company concluded that the acquisition of Global Energy did not represent a material business combination and therefore, no pro forma financial information has been provided herein. Subsequent to the acquisition date, the Company’s results of operations include the results of operations of Global Energy. The Company accounted for the acquisition of Global Energy as a purchase of a business under ASC 805.

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     The total purchase price paid by the Company at closing was approximately $26,658, consisting of $19,875 in cash and the remainder of which was paid by the issuance of 275,181 shares of the Company’s common stock that had a fair value of approximately $6,783. The fair value of these shares was measured as of the acquisition date using the closing price of the Company’s common stock, as reported on NASDAQ on January 3, 2011. This acquisition had no contingent consideration or earn-out payments.
     Transaction costs related to this business combination were not material and have been expensed as incurred, which are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of income.
     During the three months ended September 30, 2011, based on additional information gathered related to the fair value of certain acquired assets and liabilities, the Company recorded adjustments to the allocation of the purchase price, resulting in an increase of net tangible assets acquired of $104 and a corresponding decrease to goodwill.
     During the three months ended June 30, 2011, based on additional information gathered related to the fair value of certain acquired assets and liabilities, the Company recorded adjustments to the allocation of the purchase price, resulting in an increase of net tangible assets acquired of $120 and a corresponding increase to goodwill.
     The components and preliminary allocation of the purchase price consist of the following approximate amounts:
         
Net tangible assets acquired as of January 3, 2011
  $ 572  
Customer relationships
    6,430  
Non-compete agreements
    420  
Developed technology
    50  
Trade name
    260  
Goodwill
    18,926  
 
     
Total
  $ 26,658  
 
     
     Net tangible assets acquired in the acquisition of Global Energy primarily related to the following:
         
Cash
  $ 273  
Accounts receivable
    1,049  
Prepaids and other assets
    35  
Property and equipment
    183  
Accounts payable
    (196 )
Accrued expenses and other liabilities
    (772 )
 
     
Total
  $ 572  
 
     
Identifiable Intangible Assets
     As part of the preliminary purchase price allocation, the Company determined that Global Energy’s separately identifiable intangible assets were its customer relationships, non-compete agreements, developed technology and trade name. Developed technology represented certain proprietary software tools that Global Energy had developed, which are utilized on certain consulting projects. As of the date of acquisition, the Company determined that there was no in-process research and development as the ongoing research and development efforts were nominal and related to routine, on-going maintenance efforts.
     The Company used the income approach to value the customer relationships, non-compete agreements, developed technology and trade name. This approach calculates fair value by discounting the after-tax cash flows back to a present value. The baseline data for this analysis was the cash flow estimates used to price the transaction. Cash flows were forecasted for each intangible asset then discounted based on an appropriate discount rate. The discount rates applied, which ranged between 10% and 16%, were benchmarked with reference to the implied rate of return from the transaction model as well as an estimate of a market-participant’s weighted average cost of capital based on the capital asset pricing model.
     In estimating the useful life of the acquired assets, the Company considered ASC 350-30-35, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets,

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legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company amortizes these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows, as the Company believes this will approximate the pattern in which the economic benefits of the assets will be utilized, or where the Company has concluded that the cash flows were not reliably determinable, on a straight-line basis. The acquisition of Global Energy was deemed to be an asset purchase for income tax purposes. Accordingly, no deferred taxes were established relating to the fair value of the acquired intangible assets.
     The factors contributing to the recognition of this amount of goodwill were based upon several strategic and synergistic benefits that are expected to be realized from the combination. Substantially all of the goodwill is expected to be deductible for tax purposes.
M2M Communications Corporation
     On January 21, 2011, the Company entered into a definitive agreement to acquire M2M, a privately-held company located in Idaho and specializing in wireless technology solutions for energy management and demand response. The acquisition closed on January 25, 2011. By integrating M2M’s wireless technology solutions with the Company’s energy management applications and services, the Company believes that it will be able to enhance its automated demand response offering and deliver more value to its rapidly growing C&I customer base.
     The Company concluded that the acquisition of M2M did not represent a material business combination and therefore, no pro forma financial information has been provided herein. Subsequent to the acquisition date, the Company’s results of operations include the results of operations of M2M. The Company accounted for the acquisition of M2M as a purchase of a business under ASC 805.
     The total initial purchase price paid by the Company at closing was approximately $29,871, consisting of $17,597 in cash, $3,925 representing the estimated fair value of $7,000 of deferred purchase price consideration determined at closing, and the remainder of which was paid by the issuance of 351,665 shares of the Company’s common stock that had a fair value of approximately $8,349. The fair value of these shares was measured as of the acquisition date using the closing price of the Company’s common stock, as reported on NASDAQ on January 25, 2011. The deferred purchase price consideration of $7,000 will be paid upon the earlier of the satisfaction of certain conditions contained in the definitive agreement or seven years after the acquisition date of January 25, 2011. The deferred purchase price consideration is not subject to adjustment or forfeiture. The Company recorded its estimate of the fair value of the deferred purchase price consideration based on the evaluation of the likelihood of the achievement of the contractual conditions that would result in the payment of the deferred purchase price consideration prior to seven years from the acquisition date and weighted probability assumptions of these outcomes. This fair value measurement was based on significant inputs not observable in the market and therefore, represented a Level 3 measurement as defined in ASC 820. As of September 30, 2011, there were no significant changes in the estimated timing of payment of the deferred purchase price consideration. This liability has been discounted to reflect the time value of money and therefore, as the milestone date approaches, the fair value of this liability will increase. This increase in fair value was recorded as an expense in the Company’s accompanying unaudited condensed consolidated statements of income with a portion of the charge being recorded to cost of revenues related to the component of the deferred purchase price consideration related to the achievement of certain gross profit metrics and the remaining portion of the charge being recorded to general and administrative expenses. During the three and nine months ended September 30, 2011, the Company recorded a charge of $109 and $293, respectively. Of the $109 recorded for the three months ended September 30, 2011, $52 was recorded to cost of revenues and $57 was recorded to general and administrative expenses. Of the $293 recorded for the nine months ended September 30, 2011, $139 was recorded to cost of revenues and $154 was recorded to general and administrative expenses. At September 30, 2011, the liability was recorded at $4,218. This acquisition had no contingent consideration or earn-out payments.
     Transaction costs related to this business combination were not material and have been expensed as incurred, which are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of income.
     The allocation of the purchase price is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed as of January 25, 2011. The Company is in the process of gathering information to finalize its valuation of certain assets and liabilities. The purchase price allocation is preliminary and will be finalized once the Company has all necessary information to complete its estimate, but generally no later than one year from the date of acquisition.
     During the three months ended September 30, 2011, based on additional information gathered related to the fair value of certain acquired assets and liabilities, the Company recorded adjustments to the allocation of the purchase price, resulting in an increase of net tangible assets acquired of $192 and a corresponding decrease to goodwill.

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     During the three months ended June 30, 2011, as a result of gathering information to update the Company’s valuation allocation, the Company asserted that the estimated merger consideration paid at the closing exceeded the final merger consideration. The Company and the former stockholders of M2M reached a settlement agreement to reduce the purchase price by $1,250, which was recorded in prepaid expenses, deposits and other current assets in the Company’s unaudited condensed consolidated balance sheets as of June 30, 2011 included in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2011. This reduction in purchase price reduced the fair value of the customer relationships and non-compete agreements intangible assets acquired by $100 and $10, respectively. The additional $1,140 reduction in purchase price was recorded as a reduction of goodwill. The Company received 45,473 shares of common stock, which was based on the fair value used to determine the stock consideration issued in connection with the acquisition of $23.74 per share and represents a fair value of $1,125, and cash of $125 from escrow during the three months ended September 30, 2011.
     The components and preliminary allocation of the purchase price consist of the following approximate amounts:
         
Net tangible assets acquired as of January 25, 2011
  $ 1,340  
Customer relationships
    4,700  
Non-compete agreements
    270  
Developed technology
    3,000  
Trade name
    400  
Goodwill
    18,911  
 
     
Total
  $ 28,621  
 
     
     Net tangible assets acquired in the acquisition of M2M primarily related to the following:
         
Cash
  $ 70  
Accounts receivable
    1,444  
Inventory
    437  
Property and equipment
    272  
Other current assets
    182  
Accounts payable
    (458 )
Accrued expenses
    (94 )
Borrowing under line of credit arrangement
    (500 )
Other long-term liabilities
    (13 )
 
     
Total
  $ 1,340  
 
     
     In connection with the acquisition of M2M, the Company acquired M2M’s outstanding borrowing under M2M’s line of credit arrangement with a financial institution. At closing, the Company fully repaid these borrowings and M2M’s line of credit arrangement was terminated.
Identifiable Intangible Assets
     As part of the preliminary purchase price allocation, the Company determined that M2M’s separately identifiable intangible assets were its customer relationships, non-compete agreements, developed technology and trade name. Developed technology represented the products and related software that M2M had developed for its wireless technology applications. As of the date of the acquisition, the Company determined that there was no in-process research and development as the ongoing research and development efforts related solely to routine, on-going efforts to refine, enrich, or otherwise improve the qualities of the existing product, and the adaptation of existing capability to a particular requirement or customer’s need as part of a contractual arrangement (i.e. configuring equipment for specific customer requirements), which do not meet the criteria of in-process research and development.
     The Company used the income approach to value the customer relationships, non-compete agreements, developed technology and trade name. This approach calculates fair value by discounting the after-tax cash flows back to a present value. The baseline data for this analysis was the cash flow estimates used to price the transaction. Cash flows were forecasted for each intangible asset then discounted based on an appropriate discount rate. The discount rates applied, which ranged between 10% and 18%, were benchmarked with reference to the implied rate of return from the transaction model, as well as an estimate of a market-participant’s weighted average cost of capital based on the capital asset pricing model.

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     In estimating the useful life of the acquired assets, the Company considered ASC 350-30-35, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company amortizes these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows, as the Company believes this will approximate the pattern in which the economic benefits of the assets will be utilized, or where the Company has concluded that the cash flows were not reliably determinable, on a straight-line basis. The acquisition of M2M was deemed to be an asset purchase for income tax purposes. Accordingly, no deferred taxes were established relating to the fair value of the acquired intangible assets.
     The factors contributing to the recognition of this amount of goodwill were based upon the Company’s determination that several strategic and synergistic benefits are expected to be realized from the combination. Substantially all of the goodwill is expected to be deductible for tax purposes.
Other Immaterial Acquisitions
     In January 2011, the Company completed its acquisition of a privately-held company specializing in demand response and other energy management services. The Company believes that this acquisition will enhance and broaden the Company’s international service offerings.
     The Company concluded that this acquisition did not represent a material business combination and therefore, no pro forma financial information has been provided herein. Subsequent to the acquisition date, the Company’s results of operations include the results of operations of the acquired company. The Company accounted for this acquisition as a purchase of a business under ASC 805.
     The total purchase price paid by the Company at closing was approximately $5,193, consisting of $3,918 in cash at closing, $779 paid as consideration to settle the acquired company’s outstanding debt obligations and $496 of cash consideration to be paid upon satisfaction of certain general representations and warranties, which will be paid in one year or less and is included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2011. This acquisition had no contingent consideration or earn-out payments. The Company did not issue any shares of its capital stock in connection with this acquisition.
     Transaction costs related to this business combination were not material and have been expensed as incurred, which are included in general and administrative expenses in the accompanying unaudited condensed consolidated statements of income.
     The allocation of the purchase price is based upon preliminary estimates of the fair value of assets acquired and liabilities assumed as of January 25, 2011. The Company is in the process of gathering information to finalize its valuation of certain assets and liabilities. The purchase price allocation is preliminary and will be finalized once the Company has all necessary information to complete its estimate, but generally no later than one year from the date of acquisition.
     The components and preliminary allocation of the purchase price consist of the following approximate amounts:
         
Net tangible liabilities assumed as of January 25, 2011
  $ (319 )
Customer relationships
    4,400  
Non-compete agreements
    20  
Trade name
    50  
Goodwill
    1,042  
 
     
Total
  $ 5,193  
 
     
     Net tangible liabilities assumed in this acquisition primarily related to the following:
         
Other receivables
  $ 35  
Accounts payable
    (354 )
 
     
Total
  $ (319 )
 
     

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Identifiable Intangible Assets
     As part of the preliminary purchase price allocation, the Company determined that the acquired company’s separately identifiable intangible assets were its customer relationships, non-compete agreements and trade name. The acquired company had no developed technology nor were there any ongoing research and development efforts as of the date of acquisition.
     The Company used the income approach to value the customer relationships, non-compete agreements and trade name. This approach calculates fair value by discounting the after-tax cash flows back to a present value. The baseline data for this analysis was the cash flow estimates used to price the transaction. Cash flows were forecasted for each intangible asset then discounted based on an appropriate discount rate. The discount rates applied, which ranged between 16% and 28%, were benchmarked with reference to the implied rate of return from the transaction model, as well as an estimate of a market-participant’s weighted average cost of capital based on the capital asset pricing model.
     In estimating the useful life of the acquired assets, the Company considered ASC 350-30-35, which lists the pertinent factors to be considered when estimating the useful life of an intangible asset. These factors include a review of the expected use by the combined company of the assets acquired, the expected useful life of another asset (or group of assets) related to the acquired assets, legal, regulatory or other contractual provisions that may limit the useful life of an acquired asset or may enable the extension of the useful life of an acquired asset without substantial cost, the effects of obsolescence, demand, competition and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The Company amortizes these intangible assets over their estimated useful lives using a method that is based on estimated future cash flows, as the Company believes this will approximate the pattern in which the economic benefits of the assets will be utilized, or where the Company concluded that the cash flows were not reliably determinable, on a straight-line basis.
     The factors contributing to the recognition of this amount of goodwill were based upon the Company’s determination that several strategic and synergistic benefits were expected to be realized from the combination. None of the goodwill is expected to be expected to be currently deductible for tax purposes.
3. Impairment of Intangible Assets and Goodwill
Definite-Lived Intangible Assets
     The Company amortizes its intangible assets that have finite lives using either the straight-line method or, if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be consumed utilizing expected undiscounted future cash flows. Amortization is recorded over the estimated useful lives ranging from one to ten years. The Company reviews its intangible assets subject to amortization to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, the Company will write-down the carrying value of the intangible asset to its fair value in the period identified. In assessing recoverability, the Company must make assumptions regarding estimated future cash flows and discount rates. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges. The Company generally calculates fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. If the estimate of an intangible asset’s remaining useful life changes, the Company will amortize the remaining carrying value of the intangible asset prospectively over the revised remaining useful life. During the three months ended September 30, 2011, as a result of a discontinuation of certain tradenames acquired in connection with the acquisition of Energy Response and another immaterial acquisition that occurred in January 2011, the Company determined that these definite-lived intangible assets were impaired and recorded an impairment charge of $241 during the three months ended September 30, 2011 to reduce the carrying value of these assets to zero, which was included in selling and marketing expense in the accompanying unaudited condensed consolidated statements of income.

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     The following table provides the gross carrying amount and related accumulated amortization of intangible assets as of September 30, 2011 and December 31, 2010:
                                         
            As of September 30, 2011     As of December 31, 2010  
    Weighted Average     Gross             Gross        
    Amortization     Carrying     Accumulated     Carrying     Accumulated  
    Period (in years)     Amount     Amortization     Amount     Amortization  
Customer contracts
    5.51     $ 4,217     $ (1,903 )   $ 4,217     $ (1,593 )
Employment agreements and non- compete agreements
    2.40       1,554       (574 )     772       (309 )
Software
    0.72       120       (93 )     120       (63 )
Developed technology
    3.17       3,591       (577 )            
Customer relationships
    5.28       34,281       (4,206 )     3,510       (1,016 )
Trade name
    2.65       775       (230 )     115       (115 )
Patents
    8.43       200       (30 )     200       (15 )
 
                               
Total
          $ 44,738     $ (7,613 )   $ 8,934     $ (3,111 )
 
                               
     The increase in intangibles assets from December 31, 2010 to September 30, 2011 was due to the allocation of purchase price related to the acquisitions made by the Company during the nine months ended September 30, 2011. Amortization expense related to intangible assets amounted to $2,008 and $353 for the three months ended September 30, 2011 and 2010, respectively, and $4,533 and $1,109 for nine months ended September 30, 2011 and 2010, respectively. Amortization expense for developed technology, which was $247 for the three months ended September 30, 2011 and $577 for the nine months ended September 30, 2011, is included in cost of revenues in the accompanying unaudited condensed consolidated statements of income. Amortization expense for all other intangible assets is included as a component of operating expenses in the accompanying unaudited condensed consolidated statements of income. The intangible asset lives range from one to ten years and the weighted average remaining life was 4.99 years at September 30, 2011. Estimated amortization is $2,139, $7,950, $7,867, $7,223, $4,911 and $7,035 for 2011, 2012, 2013, 2014, 2015 and thereafter, respectively.
Indefinite-Lived Intangible Assets
     In connection with the Company’s acquisition of SmallFoot LLC (Smallfoot) and ZOX, LLC (Zox), the Company acquired certain in-process research and development projects with a fair value of $390 and $530, respectively. During the three months ended June 30, 2011, the Company concluded that the Smallfoot in-process research and development project had reached technological feasibility. Prior to re-classifying the asset as a definite-lived intangible asset, the Company performed an impairment test utilizing the income approach to assess whether the carrying value of the asset was impaired. The Company determined that the fair value exceeded the carrying value, and therefore, no impairment existed. Therefore, the Company re-classified the fair value of $390 relating to the Smallfoot in-process research and development projects to a definite-lived intangible asset at June 30, 2011 with a useful life of three years. The amount of amortization expense recorded in the three and nine months ended September 30, 2011 was immaterial.
     The Zox in-process research and development project has not reached technological feasibility and remained an indefinite-lived intangible asset at September 30, 2011. There were no interim impairment indicators that had been identified for Zox as of September 30, 2011.
Goodwill
The following table shows the change of the carrying amount of goodwill from December 31, 2010 to September 30, 2011:
         
Balance at December 31, 2010
  $ 24,653  
Acquisitions
    52,789  
Purchase price adjustments related to Global Energy
    16  
Purchase price adjustments related to M2M
    (1,332 )
Foreign currency translation impact
    (1,103 )
 
     
Balance at September 30, 2011
  $ 75,023  
 
     

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4. Net Income Per Share
     A reconciliation of basic and diluted share amounts for the three and nine months ended September 30, 2011 and 2010 are as follows (shares in thousands):
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
 
                       
Basic weighted average common shares outstanding
    25,683       24,865       25,491       24,650  
Weighted average common stock equivalents
    855       1,351       1,008       1,363  
 
                       
Diluted weighted average common shares outstanding
    26,538       26,216       26,499       26,013  
 
                       
 
                               
Weighted average anti-dilutive shares related to:
                               
Stock options
    1,775       945       1,170       954  
Nonvested restricted stock
    239       151       213       170  
Restricted stock units
    194       391       107       333  
     In reporting periods in which the Company reports net income, anti-dilutive shares comprise those common stock equivalents that have either an exercise price above the average stock price for the quarter or the common stock equivalent’s related average unrecognized stock compensation expense is sufficient to “buy back” the entire amount of shares. In those reporting periods in which the Company has a net loss, anti-dilutive shares comprise the impact of those number of shares that would have been dilutive had the Company had net income plus the number of common stock equivalents that would be anti-dilutive had the Company had net income.
     The Company excludes the shares issued in connection with restricted stock awards from the calculation of basic weighted average common shares outstanding until such time as those shares vest. In addition, in connection with certain of the Company’s business combinations, the Company issued shares that were held in escrow upon closing of the applicable business combination. The Company excludes shares held in escrow from the calculation of basic weighted average common shares outstanding where the release of such shares is contingent upon an event and not solely subject to the passage of time.
5. Disclosure of Fair Value of Financial Instruments
     The Company’s financial instruments mainly consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and debt obligations. The carrying amounts of the Company’s cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments. At September 30, 2011, the Company had no borrowings and outstanding letters of credit totalling $42,314 under the $75,000 senior secured revolving credit facility pursuant to the credit agreement entered into in April 2011 (2011 credit facility) with Silicon Valley Bank (SVB). At December 31, 2010, the Company had no borrowings and outstanding letters of credit totalling $36,561 under the previous credit facility pursuant to the loan and security agreement entered into with SVB in August 2008 (2008 credit facility). For additional information regarding the 2011 credit facility, see Note 7.
6. Fair Value Measurements
     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.

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     The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at September 30, 2011:
                                 
    Fair Value Measurement at September 30, 2011 Using  
            Quoted Prices in     Significant        
            Active Markets     Other        
            for Identical     Observable     Unobservable  
    Totals     Assets (Level 1)     Inputs (Level 2)     Inputs (Level 3)  
Money market funds (1)
  $ 40,350     $ 40,350     $     $  
Deferred acquisition consideration (2)
  $ 4,218     $     $     $ 4,218  
Accrued acquisition contingent consideration (2)
  $ 303     $     $     $ 303  
 
(1)   Included in cash and cash equivalents in the accompanying unaudited condensed consolidated balance sheets.
 
(2)   Deferred acquisition consideration and accrued acquisition contingent consideration, which are liabilities, represent the only assets or liabilities that the Company measures and records at fair value on a recurring basis using significant unobservable inputs (Level 3). The increase in fair value for the three and nine months ended September 30, 2011 of $133 and $316, respectively, is due to the increase in the liabilities as a result of the amortization of the applicable discounts. See Note 2 for further discussion.
     With respect to assets measured at fair value on a non-recurring basis, which would be impaired long-lived assets, refer to Note 1 and Note 3 for discussion of the determination of fair value of these assets.
     At September 30, 2011, the Company had restricted cash of approximately $93 collateralizing certain other commitments. All certificates of deposit have contractual maturities of twelve months or less. The Company’s investments in certificates of deposit have a fair value that approximates cost.
7. Financing Arrangements
     In April 2011, the Company and one of its subsidiaries entered into the 2011 credit facility. Subject to continued covenant compliance, the 2011 credit facility provides for a two-year revolving line of credit in the aggregate amount of $75,000, the full amount of which may be available for issuances of letters of credit and up to $5,000 of which may be available for swing line loans. The revolving line of credit is subject to increase from time to time up to an aggregate amount of $100,000 with additional commitments from the lenders or new commitments from financial institutions acceptable to SVB. The interest on revolving loans under the 2011 credit facility will accrue, at the Company’s election, at either (i) the Eurodollar Rate with respect to the relevant interest period plus 2.00% or (ii) the ABR (defined as the highest of (x) the “prime rate” as quoted in the Wall Street Journal , (y) the Federal Funds Effective Rate plus 0.50% and (z) the Eurodollar Rate for a one-month interest period plus 1.00%) plus 1.00%. 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 2.125% pursuant to the 2011 credit facility. The Company expenses the interest and letter of credit fees, as applicable, in the period incurred. The 2011 credit facility terminates and all amounts outstanding are due and payable in full on April 15, 2013.
     The 2011 credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, enter into transactions with affiliates, transfer assets, pay dividends or make distributions on, or repurchase, the Company’s common stock, consolidate or merge with other entities, or suffer a change in control. In addition, the Company is required to meet certain monthly and quarterly financial covenants customary with this type of credit facility. The Company’s monthly financial covenants include a minimum specified ratio of current assets to current liabilities. The Company’s quarterly financial covenants include achievement of minimum earnings levels, which is based on earnings before depreciation and amortization expense, interest expense, provisions for cash based income taxes, share-based compensation expense, rent expense and certain other non-cash charges over a rolling twelve month period, and maintaining a minimum specified fixed charge coverage ratio, which is based on the ratio of earnings calculation from the minimum earnings covenants discussed above less capital expenditures as compared to fixed charges, including depreciation expense, rent expense, and income taxes paid.
     The 2011 credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge

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certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, the lenders may accelerate the Company’s obligations under the 2011 credit facility. The 2011 credit facility replaced the 2008 credit facility which existed as of March 31, 2011. If the Company is determined to be in default then any amounts outstanding under the 2011 credit facility would become immediately due and payable and the Company would be required to collateralize with cash any outstanding letters of credit up to 105% of the amounts outstanding.
     As of September 30, 2011, the Company was in compliance with all of its covenants under the 2011 credit facility, including all financial covenants. At September 30, 2011, the Company had no borrowings and outstanding letters of credit totaling $42,314 under the 2011 credit facility. As of September 30, 2011, the Company had $32,686 available under the 2011 credit facility for future borrowings or issuances of additional letters of credit.
     In April 2011, the Company and one of its subsidiaries entered into a guarantee and collateral agreement with SVB for the benefit of the lenders. The guarantee and collateral agreement provides that the obligations under the 2011 credit facility are secured by all domestic assets of the Company and several of its subsidiaries, excluding the Company’s foreign subsidiaries.
     The Company incurred financing costs of $543 in connection with the 2011 credit facility, which were deferred and are being amortized to interest expense over the life of the 2011 credit facility, which matures on April 15, 2013.
     In April 2011, the Company was required to provide financial assurance in connection with its capacity bid in a certain open market bidding program. The Company provided this financial assurance utilizing approximately $56,000 of its available cash on hand and a $39,000 letter of credit issued under the 2011 credit facility. In May 2011, based on the capacity that the Company cleared in this open market bidding program and the required post-auction financial assurance requirements, the Company recovered all of the $56,000 of its available cash that it had provided as financial assurance prior to the auction and was able to reduce the $39,000 letter of credit to $13,500.
     In June 2011, the Company and one of its subsidiaries entered into an amendment to the 2011 credit facility, which modified certain of the Company’s covenant requirements.
8. Commitments and Contingencies
     The Company is contingently liable under outstanding letters of credit. Restricted cash balances in the amount of $0 and $1,300, respectively, collateralize certain outstanding letters of credit and cover financial assurance requirements in certain of the programs in which the Company participated at September 30, 2011 and December 31, 2010. Restricted cash to secure certain other commitments was $93 and $237 at September 30, 2011 and December 31, 2010, respectively.
     The Company is subject to performance guarantee requirements under certain utility and electric power grid operator customer contracts and open market bidding program participation rules. The Company had deposits held by certain customers of $15,847 and $3,467, respectively, at September 30, 2011 and December 31, 2010. These amounts primarily represent up-front payments required by utility and electric power 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 those programs. If the Company fails to meet its minimum committed capacity 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 and loss of deposits to be remote. In addition, under certain utility and electric power grid operator customer contracts, if the Company does not achieve the required performance guarantee requirements, the customer can terminate the arrangement and the Company would potentially be subject to termination penalties. Under these arrangements, the Company defers all fees received up to the amount of the potential termination penalty until the Company has concluded that it can reliably determine that the potential termination penalty will not be incurred or the termination penalty lapses. As of September 30, 2011, the Company had no remaining deferred fees that were included in deferred revenues. As of September 30, 2011, the maximum termination penalty that the Company was subject to under these arrangements, which the Company has not deemed probable of incurring, is approximately $6,210.
     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 and will be recognized ratably as a charge to cost of revenues as revenue is recognized over the 2012/2013 delivery year. 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.

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Indemnification Provisions
     The Company includes indemnification provisions in certain of its contracts. These indemnification provisions include provisions indemnifying the customer against losses, expenses, and liabilities from damages that could be awarded against the customer in the event that the Company’s services and related enterprise software platforms are found to infringe upon a patent or copyright of a third party. The Company believes that its internal business practices and policies and the ownership of information limits the Company’s risk in paying out any claims under these indemnification provisions.
9. Stock-Based Compensation
Stock Options
     The Company’s Amended and Restated 2003 Stock Option and Incentive Plan (2003 Plan) and the Amended and Restated 2007 Employee, Director and Consultant Stock Plan (the 2007 Plan, and together with the 2003 Plan, the Plans) provide for the grant of incentive stock options, nonqualified stock options, restricted and unrestricted stock awards and other stock-based awards to eligible employees, directors and consultants of the Company. Options granted under the Plans are exercisable for a period determined by the Company, but in no event longer than ten years from the date of the grant. Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock on the date of grant. Options, restricted stock awards and restricted stock unit awards generally vest over four years, with certain exceptions. The 2003 Plan expired upon the Company’s initial public offering (IPO) in May 2007. Any forfeitures under the 2003 Plan that occurred after the effective date of the IPO are available for future grant under the 2007 Plan up to a maximum of 1,000,000 shares. The 2007 Plan provides for an annual increase to the shares issuable under the 2007 Plan by an amount equal to the lesser of 520,000 shares or an amount determined by the Company’s board of directors. This annual increase is effective on the first day of each fiscal year through 2017. During the nine months ended September 30, 2011 and 2010, the Company issued 18,211 shares of its common stock and 24,681 shares of its common stock, respectively, to certain executives to satisfy a portion of the Company’s compensation obligations to those individuals. As of September 30, 2011, 2,065,965 shares were 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 lattice valuation model. The lattice valuation model considers characteristics of fair value option pricing that are not available under the Black-Scholes option pricing model. Similar to the Black-Scholes option pricing model, the lattice valuation model takes into account variables such as expected volatility, dividend yield rate, and risk free interest rate. However, in addition, the lattice valuation 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 lattice model provides a fair value that is more representative of actual experience and future expected experience than that value calculated using the Black-Scholes option pricing 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,  
    2011     2010  
Risk-free interest rate
    3.2 %     3.5 %
Vesting term, in years
    2.22       2.16  
Expected annual volatility
    79 %     85 %
Expected dividend yield
    %     %
Exit rate pre-vesting
    7.5 %     5.98 %
Exit rate post-vesting
    14.06 %     11.29 %

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     Volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. As there was no public market for the Company’s common stock prior to the effective date of the IPO, the Company determined the volatility based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted through September 30, 2010 was determined using an average of the historical volatility measures of this peer group of companies. During the three months ended September 30, 2010, the Company determined that it had sufficient history to utilize Company-specific volatility in accordance with ASC 718, Stock Compensation (ASC 718) and began calculating volatility using a component of implied volatility and historical volatility to determine the value of share-based payments. The risk-free interest rate is the rate available as of the option date on zero-coupon United States government issues with a term equal to the expected life of the option. During the three months ended March 31, 2010, the Company changed its vesting for new grants of stock options and restricted stock to a 25% cliff vest after one year of grant and quarterly thereafter for three years as compared to its primary vesting for historical grants of 25% cliff vest after one year of grant and monthly thereafter for three years. The change in vesting resulted in the vesting term changing in 2010 for new grants awarded with this new vesting. The Company has not paid dividends on its common stock in the past and does not plan to pay any dividends in the foreseeable future. In addition, the terms of the 2011 credit facility preclude the Company from paying dividends. During the three months ended September 30, 2011, the Company updated its estimated exit rate pre-vesting and post-vesting applied to options, restricted stock and restricted stock units based on an evaluation of demographics of its employee groups and historical forfeitures for these groups in order to determine its option valuations as well as its stock-based compensation expense. The changes in estimate of the volatility, exit rate pre-vesting and exit rate post-vesting did not have a material impact on the Company’s stock-based compensation expense recorded in the accompanying unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2011.
     The Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of such services received or of the equity instruments issued, whichever is more reliably measurable.
  The components of stock-based compensation expense are disclosed below:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Stock options
  $ 1,107     $ 2,433     $ 4,252     $ 7,109  
Restricted stock and restricted stock units
    2,114       1,231       6,236       4,559  
 
                       
Total
  $ 3,221     $ 3,664     $ 10,488     $ 11,668  
 
                       
     Stock-based compensation is recorded in the accompanying unaudited condensed consolidated statements of income, as follows:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Selling and marketing expenses
  $ 964     $ 1,222     $ 3,262     $ 3,403  
General and administrative expenses
    1,975       2,218       6,355       7,676  
Research and development expenses
    282       224       871       589  
 
                       
Total
  $ 3,221     $ 3,664     $ 10,488     $ 11,668  
 
                       
     The Company recognized no material income tax benefit from stock-based compensation arrangements during the three and nine months ended September 30, 2011 and 2010. In addition, no material compensation cost was capitalized during the three and nine months ended September 30, 2011 and 2010.
     The following is a summary of the Company’s stock option activity during the nine months ended September 30, 2011:

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    Nine Months Ended September 30, 2011  
    Number of             Weighted-        
    Shares     Exercise     Average     Aggregate  
    Underlying     Price Per     Exercise Price     Intrinsic  
    Options     Share     Per Share     Value  
Outstanding at December 31, 2010
    2,112,359     $ 0.17 - $48.06     $ 14.38     $ 23,948 (2)
Granted
    42,500               18.83          
Exercised
    (292,682 )             6.46     $ 3,450 (3)
Cancelled
    (207,679 )             18.00          
 
                             
Outstanding at September 30, 2011
    1,654,498     $ 0.17 - $48.06       15.44     $ 3,007 (4)
 
                       
Weighted average remaining contractual life in years: 5.0
                               
Exercisable at end of period
    1,228,726     $ 0.17 - $48.06     $ 12.63     $ 2,978 (4)
 
                       
Weighted average remaining contractual life in years: 4.7
                               
Vested or expected to vest at September 30, 2011 (1)
    1,626,558     $ 0.17 - $48.06     $ 15.27     $ 3,006 (4)
 
                       
 
(1)   This represents the number of vested options as of September 30, 2011 plus the number of unvested options expected to vest as of September 30, 2011 based on the unvested options outstanding at September 30, 2011, adjusted for the estimated forfeiture rate of 7.5%.
 
(2)   The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on December 31, 2010 of $23.91 and the exercise price of the underlying options.
 
(3)   The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on the applicable exercise dates and the exercise price of the underlying options.
 
(4)   The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on September 30, 2011 of $9.00 and the exercise price of the underlying options.
Additional Information About Stock Options
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
    In thousands, except share and     In thousands, except share and  
    per share amounts     per share amounts  
Total number of options granted during the period
    2,550       39,293       42,500       290,568  
Weighted-average fair value per share of options granted
  $ 5.77     $ 20.98     $ 11.59     $ 18.98  
Total intrinsic value of options exercised(1)
  $ 661     $ 2,431     $ 3,450     $ 12,392  
 
(1)   Represents the difference between the market price at exercise and the price paid to exercise the options.
     Of the stock options outstanding as of September 30, 2011, 1,640,505 options were held by employees and directors of the Company and 13,993 options were held by non-employees. For outstanding unvested stock options related to employees as of September 30, 2011, the Company had $5,398 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.1 years. There were no unvested non-employee options as of September 30, 2011.
Restricted Stock and Restricted Stock Units
     For non-vested restricted stock and restricted stock units outstanding as of September 30, 2011, the Company had $14,976 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.4 years.
Restricted Stock
The following table summarizes the Company’s restricted stock activity during the nine months ended September 30, 2011:

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            Weighted Average  
    Number of     Grant Date Fair  
    Shares     Value Per Share  
Nonvested at December 31, 2010
    254,896     $ 30.03  
Granted
    531,231       18.78  
Vested
    (60,099 )     25.42  
Cancelled
    (38,041 )     28.73  
 
             
Nonvested at September 30, 2011
    687,987     $ 21.82  
 
             
     All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. Restricted stock typically vests ratably over a four-year period from the date of issuance, with certain exceptions. Included in the above table are 4,350 shares of restricted stock granted to certain non-executive employees, 250 shares granted to a non-employee, and 16,000 shares of restricted stock granted to the Company’s board of directors during the nine months ended September 30, 2011 that were immediately vested.
     The fair value of restricted stock where vesting is solely based on service vesting condition is expensed ratably over the vesting period. With respect to restricted stock where vesting contains certain performance based vesting conditions, the fair value is expensed based on the accelerated attribution method as prescribed by ASC 718 over the vesting period. During the nine months ended September 30, 2011, the Company granted 260,000 shares of nonvested restricted stock to certain executives that contain performance based vesting conditions, which the Company determined were probable of being achieved. As of September 30, 2011, the Company determined that the performance-based vesting conditions were still probable of being achieved. If the employee who received the restricted stock leaves the Company prior to the vesting date for any reason, the shares of restricted stock will be forfeited and returned to the Company.
Additional Information about Restricted Stock
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
            in thousands, except share and per          
            share amounts          
Total number of shares of restricted stock granted during the period
    76,850       1,583       531,231       86,375  
Weighted average fair value per share of restricted stock granted
  $ 13.44     $ 33.99     $ 18.78     $ 29.67  
Total number of shares of restricted stock vested during the period
    13,977       43,482       60,099       130,809  
Total fair value of shares of restricted stock vested during the period
  $ 191     $ 1,387     $ 1,077     $ 3,938  
Restricted Stock Units
The following table summarizes the Company’s restricted stock unit activity during the nine months ended September 30, 2011:
                 
            Weighted Average  
    Number of     Grant Date Fair  
    Units     Value Per Unit  
Nonvested at December 31, 2010
    388,124     $ 26.11  
Granted
           
Vested
    (88,437 )     25.45  
Cancelled
    (54,562 )     25.60  
 
             
Nonvested at September 30, 2011
    245,125     $ 26.46  
 
             
     The total fair value of restricted stock units that vested during the nine months ended September 30, 2011 was $1,537. The weighted average grant date fair value of restricted stock units granted during the nine months ended September 30, 2010 was $28.99 per share. The total fair value of restricted stock units that vested during the nine months ended September 30, 2010 was $1,440.

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10. Income Taxes
     The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740), which is the asset and liability method for accounting and reporting income taxes. Under ASC 740, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, ASC 740 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
     ASC 740 also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits. As of September 30, 2011 and December 31, 2010, the Company had no material unrecognized tax benefits.
     In accordance with ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. Generally, if an enterprise has an ordinary loss for the year to date at the end of an interim period and anticipates ordinary income for the fiscal year, the enterprise will record an interim period tax benefit based on applying the estimated annual effective tax rate to the ordinary loss as long as the tax benefits are realized during the year or recognizable as a deferred tax asset as of the end of the year. However, if an enterprise is unable to make a reliable estimate of its annual effective tax rate than the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. The Company has determined that it is currently unable to make a reliable estimate of its annual effective tax rate as of September 30, 2011 due to unusual sensitivity to the rate as it relates to the current forecasted fiscal 2011 U.S. ordinary income (loss). As a result, the Company recorded a tax provision for the nine months ended September 30, 2011 based on its actual effective tax rate for nine months ended September 30, 2011. The tax provision recorded for the three and nine months ended September 30, 2011 was $1,225 and $1,992, respectively, and represented the following:
    estimated foreign taxes resulting from guaranteed profit allocable to certain of the Company’s foreign subsidiaries, which have been determined to be limited-risk service providers acting on behalf of the U.S. parent for tax purposes, for which there are no tax net operating loss carryforwards;
    amortization of tax deductible goodwill, which generates a deferred tax liability that cannot be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature; and
    estimated U.S. state income taxes to be incurred for the nine months ended September 30, 2011 based on estimated state taxable income incurred for the nine months ended September 30, 2011. As the Company currently anticipates that it will incur a state taxable loss for the three months ending December 31, 2011, the Company anticipates recording a current state tax benefit during the three months ending December 31, 2011.
     The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of accumulated losses in all tax jurisdictions over the last three years, as well as its ability to generate income in future periods. As of September 30, 2011, due to the uncertainty related to the ultimate use of the Company’s deferred income tax assets, the Company provided a full valuation allowance on all of its U.S. deferred tax assets.
11. Concentrations of Credit Risk
     The following table presents the Company’s significant customers. With respect to PJM Interconnection (PJM) and ISO-New England, Inc. (ISO-NE), these customers are regional electric power grid operator customers, which are comprised of multiple utilities and were formed to control the operation of a regional power system, coordinate the supply of electricity, and establish fair and efficient markets.

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    Three Months Ended September 30,  
    2011     2010  
            % of Total             % of Total  
    Revenues     Revenues     Revenues     Revenues  
PJM Interconnection
  $ 120,160       71 %   $ 127,609       78 %
ISO-New England, Inc.
    *       *       *       *  
*   This customer did not, nor did any other customer, comprise more than 10% of the Company’s consolidated revenue for the three months ended September 30, 2011 and 2010, respectively.
                                 
    Nine Months Ended September 30,  
    2011     2010  
            % of Total             % of Total  
    Revenues     Revenues     Revenues     Revenues  
PJM Interconnection
  $ 151,533       58 %   $ 166,806       65 %
ISO-New England, Inc.
    29,724       11       41,466       16  
 
                       
Total
  $ 181,257       69 %   $ 208,272       81 %
 
                       
     Accounts receivable from PJM was approximately $5,913 and $7,848 at September 30, 2011 and December 31, 2010, respectively. Accounts receivable from ISO-NE was approximately $2,696 and $3,351 at September 30, 2011 and December 31, 2010, respectively.
     Pacific Gas and Electric Company and Southern California Edison Company (SCE) also comprised 10% or more of the accounts receivable balance at September 30, 2011 at 15% and 16%, respectively. SCE was the only additional customer that comprised 10% or more of the accounts receivable balance at December 31, 2010 at 15% of the accounts receivable balance. Unbilled revenue related to PJM was $101,431 and $72,887 at September 30, 2011 and December 31, 2010, respectively. There was no significant unbilled revenue for any other customers at September 30, 2011 and December 31, 2010.
12. Legal Proceedings
     The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not expect the ultimate costs to resolve these matters to have a material adverse effect on its consolidated financial condition, results of operations or cash flows.
13. Recent Accounting Pronouncements
Business Combinations
     In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations — Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29). ASU 2010-29 requires a public entity to disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the prior year. It also requires a description of the nature and amount of material, nonrecurring adjustments directly attributable to the business combination included in the reported revenue and earnings. The new disclosure was effective for the Company’s first quarter of fiscal 2011. The adoption of ASU 2010-29 requires additional disclosure in the event of a material business combination but did not have a material impact on the Company’s financial condition and results of operations during the three and nine months ended September 30, 2011. As a result of the acquisition of Energy Response in July 2011, the Company was required to meet certain disclosure requirements and provide pro-forma financial information. Refer to Note 2 for further information on the acquisition of Energy Response.
Intangibles — Goodwill and Other
     In December 2010, the FASB issued ASU 2010-28, Intangibles- Goodwill and Other (ASU 2010-28). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. ASU 2010-28 is effective for fiscal years that begin after December 15, 2010, which is fiscal 2011 for the Company. The adoption of ASU 2010-28 did not have a material impact on the Company’s results from operations and financial condition.

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     ASC 350 (ASC 350), Intangibles — Goodwill and Other (formerly the FASB) SFAS No. 142, Goodwill and Other Intangible Assets ), has a two-step impairment test that requires companies to assess goodwill for impairment by quantitatively comparing the fair value of a reporting unit with its carrying amount, including goodwill (Step 1). If the reporting unit’s fair value is less than its carrying amount, Step 2 of the goodwill impairment test must be performed to measure the amount of the goodwill impairment, if any.
     In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, (ASU 2011-08) which gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If a company concludes that this is the case, it must perform the two-step test. Otherwise, a company can forgo the two-step test. ASU 2011-08 is effective for fiscal years that begin after December 15, 2011, which is fiscal 2012 for the Company; however, early adoption is permitted. The Company is currently evaluating ASU 2011-08, including whether the Company will early adopt. The Company does not expect the adoption of ASU 2011-08 to have a material impact on its consolidated financial condition or results of operations.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
     In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04), which amends the FASB’s accounting guidance related to fair value measurements in order to more closely align its disclosure requirements with those in International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements and also changes certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a material effect on the Company’s financial position or results of operations.
Presentation of Comprehensive Income
     In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income (ASU 2011-05) , which represents new accounting guidance related to the presentation of other comprehensive income (OCI). ASU 2011-05 eliminates the option to present components of OCI as part of the statement of changes in shareholders’ equity, which is the option that the Company currently uses to present OCI. ASU 2011-05 allows for a one-statement or two-statement approach, outlined as follows:
    One-statement approach: Present the components of net income and total net income, the components of OCI and a total for OCI, along with the total of comprehensive income in a single continuous statement.
    Two-statement approach: Present the components of net income and total net income in the statement of net income. A statement of OCI would immediately follow the statement of net income and include the components of OCI and a total for OCI, along with the total of comprehensive income.
     ASU 2011-05also requires an entity to present on the face of the financial statements any reclassification adjustments for items that are reclassified from OCI to net income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-05will not have an effect on the Company’s financial position or results of operations, but will only impact how certain information related to OCI is presented in the Company’s consolidated financial statements.

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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, 2010, as filed with the Securities and Exchange Commission, or the SEC, on March 1, 2011. 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, 2010. 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 management applications and services for the smart grid, which include comprehensive demand response, data-driven energy efficiency, energy price and risk management, and enterprise carbon management applications and services. Our energy management applications and services enable cost effective energy management strategies for commercial, institutional and industrial end-users of energy, which we refer to as our C&I customers, and our electric power grid operator and utility customers by reducing real-time demand for electricity, increasing energy efficiency, improving energy supply transparency, and mitigating emissions.
     We believe that we are the largest demand response service provider to C&I customers. As of September 30, 2011, we managed approximately 7,000 megawatts, or MW, of demand response capacity across a C&I customer base of approximately 4,750 accounts and 11,150 sites throughout multiple electric power grids. Demand response is an alternative to traditional power generation and transmission infrastructure projects that enables electric power 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 or during periods when energy prices are high. We use our Network Operations Center, or NOC, and comprehensive demand response application, DemandSMART, to remotely manage and reduce electricity consumption across a growing network of C&I customer sites, making demand response capacity available to electric power grid operators and utilities on demand while helping C&I customers achieve energy savings, improved financial results and environmental benefits. To date, we have received substantially all of our revenues from electric power grid operators and utilities, who make recurring payments to us for managing demand response capacity that we share with our C&I customers in exchange for those C&I customers reducing their power consumption when called upon.
     We build on our position as the leading demand response services provider by using our NOC and energy management application platform to deliver a portfolio of additional energy management applications and services to new and existing C&I, electric power grid operator and utility customers. These additional energy management applications and services include our EfficiencySMART, SupplySMART and CarbonSMART applications and services. EfficiencySMART is our data-driven energy efficiency suite that includes commissioning and retro-commissioning authority services, energy consulting and engineering services, a persistent commissioning application and an enterprise energy management application for managing energy across a portfolio of sites. SupplySMART is our energy price and risk management application that provides our C&I 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, budget forecasting, and utility bill management. CarbonSMART is our enterprise carbon management application that supports and manages the measurement, tracking, analysis, reporting and management of greenhouse gas emissions.

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     Since inception, our business has grown substantially. We began by providing demand response services in one state in 2003 and expanded to providing our portfolio of energy management applications and services in several regions throughout the United States, as well as internationally in Australia, Canada, New Zealand and the United Kingdom, by September 30, 2011.
Significant Recent Developments
     In February 2011, PJM Interconnection, or PJM, a grid operator customer, and Monitoring Analytics, LLC, the PJM market monitor, issued a joint statement concerning settlements in PJM’s capacity market for participants using a certain baseline methodology for the measurement and verification of demand response. We refer to this as the PJM statement. The PJM statement, among other things, asserted that certain market practices in the PJM capacity market were no longer appropriate or acceptable and unilaterally implied that compensation should no longer be determined by actual measured reductions in a C&I customer’s electrical load, unless the reductions are below that C&I customer’s peak demand for electricity, or PLC, in the prior year. In March 2011, we filed for and were granted expedited declaratory relief with the Federal Energy Regulatory Commission, or FERC, which allowed us to continue to manage our portfolio of demand response capacity in PJM as we had in the past and receive settlement in accordance with the then current PJM market rules approved by FERC. However, PJM continued to take steps to modify the market rules according to the PJM statement, including by filing proposed tariff changes with FERC.
     On November 4, 2011, FERC issued an order that addressed the PJM statement and clarified the rules related to the measurement and verification of demand response resources in the PJM capacity market, which is a market from which we derive a substantial portion of our revenues. We refer to this as the FERC order. The FERC order, among other things, preserves PJM’s original market rules for the full compliance period of the 2011-12 delivery year, while accepting PJM’s proposed market rule changes going forward, subject to certain conditions, including the requirement that PJM submit a compliance filing with FERC by January 3, 2012 that includes the development of an interim mechanism to protect demand response suppliers’ reasonable reliance expectations regarding capacity compliance measurement and verification for the 2012-13 delivery year through the 2014-15 delivery year and explains how PJM will treat the aggregation of demand response resources under its proposal. In addition, the FERC order encouraged further examination of the limitations of PLC and consideration of the development of a more dynamic baseline methodology applicable to demand response resources in the future.
Revenues and Expense Components
Revenues
     We derive recurring revenues from the sale of our energy management applications and services. We do not recognize any revenues until persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be reasonably assured.
     Our revenues from our demand response services primarily consist of capacity and energy payments, including ancillary services payments. We derive revenues from demand response capacity that we make available in open market programs and pursuant to contracts that we enter into with electric power grid operators and utilities. In certain markets, we enter into contracts with electric power grid operators and utilities, generally ranging from three to 10 years in duration, to deploy our demand response services. We refer to these contracts as utility contracts.
     Where we operate in open market programs, our revenues from demand response capacity payments may vary month-to-month based upon our enrolled capacity and the market payment rate. Where we have a utility contract, we receive periodic capacity payments, which may vary monthly or seasonally, based upon enrolled capacity and predetermined payment rates. Under both open market programs and utility contracts, 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 measurement and verification 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 refer to this as an energy payment.
     As program rules may differ for each open market program in which we participate and for each utility contract, 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 capacity revenues when we have provided verification to the electric power grid operator or utility of our ability to deliver the committed capacity under the open market program or utility contract. Committed capacity is verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenues are recognized and future revenues become fixed or determinable and are recognized monthly over the performance period until the next demand response event or measurement and verification test. In subsequent demand response events or measurement and verification tests, if our verified capacity is below the previously verified amount, the electric power grid operator or utility customer will reduce future payments based on the adjusted verified capacity amounts. Under certain utility contracts and open market program participation rules, our performance and related fees are measured and determined over a period of time. If we can reliably estimate our performance for the applicable performance period, we will reserve the entire amount of estimated penalties that will be incurred, if any, as a result of estimated underperformance prior to the commencement of revenue recognition. If we are unable to reliably estimate the performance and any related penalties, we defer the recognition of revenues until the fee is fixed or determinable. Any changes to our original estimates of net revenues are recognized as a change in accounting estimate in the earliest reporting period that such a change is determined.
     We defer incremental direct costs incurred related to the acquisition or origination of a utility contract or open market program in a transaction that results in the deferral or delay of revenue recognition. As of September 30, 2011 and December 31, 2010, the incremental direct costs deferred were approximately $0.9 million and $0.9 million, respectively. These deferred expenses would not have been incurred without our participation in a certain open market program and will be expensed in proportion to the related revenue being recognized. During the three and nine months ended September 30, 2011 and 2010, we did not defer any contract origination costs. In addition, we capitalize the costs of our production and generation equipment utilized in the delivery of our demand response services and expense this equipment over the lesser of its useful life or the term of the contractual arrangement. During the three months ended September 30, 2011 and 2010, we capitalized $1.9 million and $1.3 million, respectively, of production and generation equipment costs. During the nine months ended September 30, 2011 and 2010, we capitalized $8.5 million

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and $5.8 million, respectively, of production and generation equipment costs. We believe that this accounting treatment appropriately matches expenses with the associated revenue.
     As of September 30, 2011, we had approximately 7,000 MW under management in our demand response network, meaning that we had entered into definitive contracts with our C&I customers representing approximately 7,000 MW of demand response capacity. In determining our MW under management in the seasonal demand response programs in which we participate, we typically count the maximum demand response capacity for a C&I customer site over a trailing twelve-month period as the MW under management for that C&I customer site. However, the trailing period could be longer in certain programs under which significant rule changes have occurred or under which we do not have enough obligation to enroll all of our MW in a given program period, but have enough obligation in a future program period to enroll the MW again. 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. The most significant exception is the PJM forward capacity market, which is a market from which we derive a substantial portion of our revenues. 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 C&I customer portfolio from the point in time when we consider a MW to be under management to when we earn revenues from that MW. Certain other markets in which we currently participate, such as the ISO-New England, Inc., or ISO-NE, market, or choose to participate in the future operate or may operate in a manner that could create a delay in recognizing revenue from the MW that we enable in those markets. Additionally, not all of our MW under management may be enrolled in a demand response program or may earn revenue in a given program period or year based on the way that we manage our portfolio of demand response capacity.
     In the PJM open market programs in which we participate, the program year operates on a June to May basis and performance is measured based on the aggregate performance during the months of June through September. As a result, fees received for the month of June could potentially be subject to adjustment or refund based on performance during the months of July through September. We concluded that we could reliably estimate the amount of fees potentially subject to adjustment or refund and recorded a reserve for this amount in the month of June. As of June 30, 2011, we recorded an estimated reserve of $9.3 million related to potential subsequent performance adjustments. The fees under this program were fixed as of September 30, 2011 and, based on final performance during the three months ended September 30, 2011, we recorded a reduction in the estimated reserve totaling $3.7 million, which resulted in final performance adjustments of $5.6 million. For the three months ended September 30, 2011, the impact of this change in estimate on income before income tax and net income was $3.7 million and $3.6 million, respectively, and the impact of this change in estimate on diluted income per common share was $0.13. This change in estimate had no impact on the nine months ended September 30, 2011 nor will it impact any future periods. Our performance estimates which provided the basis for the estimated reserve as of June 30, 2011 were reasonably consistent with the actual performance during demand response events and test events during the three months ended September 30, 2011. The primary driver of the change in estimate from June 30, 2011 to September 30, 2011 was due to the differences based on the number and type of demand response events by which performance was measured, which was not within our control. We are in the process of reevaluating our ability to reliably estimate the amount of fees potentially subject to adjustment or refund for the year ending December 31, 2012, or fiscal 2012, on a prospective basis based on our consideration of our actual performance during the months of June 2011 through September 2011, as well as additional guidance issued by PJM regarding its interpretation of certain program rules that will impact performance calculations on a prospective basis. As there are no revenues recognized related to the PJM open market programs during the fourth quarter of our fiscal year, any change in our evaluation of our ability to reliably estimate the amount of fees potentially subject to adjustment or refund would have no impact on results of operations for the three months ending December 31, 2011.
     Although we believe that, based on the language contained in the FERC order, our revenues derived from the PJM market for the fiscal year ending December 31, 2011, or fiscal 2011, will not be impacted by the FERC order, our ability to manage our portfolio of demand response capacity in the PJM market for future delivery years may be harmed by the FERC order, which could significantly reduce our future revenues for 2012 and beyond and which may have a material adverse effect on our results of operations and financial condition. Furthermore, the attention of our management and other personnel has been, and may continue to be, diverted as we evaluate and respond to the FERC order, which may continue to have a negative impact on our sales efforts in, and revenues and gross profits derived from the PJM region, as well as our other operating regions.

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     Revenues generated from open market sales to PJM accounted for 71% and 78%, respectively, of our total revenues for the three months ended September 30, 2011 and 2010 and 58% and 65%, respectively, of our total revenues for the nine months ended September 30, 2011 and 2010.
     Revenues generated from open market sales to ISO-NE accounted for 11% and 16%, respectively, of our total revenues for the nine months ended September 30, 2011 and 2010. Revenues generated from open market sales to ISO-NE did not comprise more than 10% of our total revenues for the three months ended September 30, 2011 or 2010.
     In addition to demand response revenues, we generally receive either a subscription-based fee, consulting fee or a percentage savings fee for arrangements under which we provide our other energy management applications and services, specifically our EfficiencySMART, SupplySMART and CarbonSMART applications and services. We also derive revenues from the sale, installation and ongoing services of our wireless technology solutions, primarily related to our acquisition of M2M Communications Corporation, or M2M, in January 2011. Revenues derived from these offerings were $7.3 million and $4.0 million, respectively, for the three months ended September 30, 2011 and 2010 and $19.6 million and $10.5 million, respectively, for the nine months ended September 30, 2011 and 2010.
     Our revenues have historically been higher in our second and third fiscal quarters compared to other quarters in our fiscal year due to seasonality related to the demand response market.
Cost of Revenues
     Cost of revenues for our demand response services consists primarily of amounts owed to our C&I customers for their participation in our demand response network and are generally recognized over the same performance period as the corresponding revenue. We enter into contracts with our C&I 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 C&I customer reduces consumption of energy from the electric power grid during a demand response event. The equipment and installation costs for our devices located at our C&I customer sites, which monitor energy usage, communicate with C&I customer sites and, in certain instances, remotely control energy usage to achieve committed capacity are capitalized and depreciated over the lesser of the remaining estimated customer relationship period or the estimated useful life of the equipment, and this depreciation is reflected in cost of revenues. We also include in cost of revenues our amortization of acquired developed technology, amortization of capitalized internal-use software costs related to our DemandSMART application, the monthly telecommunications and data costs we incur as a result of being connected to C&I customer sites, and our internal payroll and related costs allocated to a C&I customer site. Certain costs, such as equipment depreciation and telecommunications and data costs, are fixed and do not vary based on revenues recognized. These fixed costs could impact our gross margin trends described elsewhere in this Quarterly Report on Form 10-Q during interim periods. Cost of revenues for our EfficiencySMART, SupplySMART and CarbonSMART applications and services include our amortization of capitalized internal-use software costs related to those applications and services, third party services, equipment costs, 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 energy management applications and services, (b) the selling price of our energy management applications and services, (c) our cost of revenues, (d) the way in which we manage, or are permitted to manage by the relevant electric power grid operator or utility, our portfolio of demand response capacity, (e) the introduction of new clean and intelligent energy management applications and services, (f) our demand response event performance and (g) our ability to open and enter new markets and regions and expand deeper into markets we already serve. Our outcomes in negotiating favorable contracts with our C&I customers, as well as with our electric power grid operator and utility customers, the effective management of our portfolio of demand response capacity and our demand response event performance are the primary determinants of our gross profit and gross 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 465 full-time employees at September 30, 2010 to 587 full-time employees at September 30, 2011. 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. We expect our overall operating expenses to increase in absolute dollar terms for the foreseeable future and to increase as a percentage of total annual revenues in the near term as we continue to invest in our business and employee base in order to capitalize on emerging opportunities, expand the development of our energy management applications and services, and grow our MW under management. In

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addition, amortization expense from intangible assets acquired in future acquisitions will increase our operating expenses in future periods.
Selling and Marketing
     Selling and marketing expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards, related to our sales and marketing organization, (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 our selling and marketing expenses to continue to increase in absolute dollar terms for the foreseeable future and to slightly increase as a percentage of total annual revenues in the near term as we further increase the number of our sales professionals.
General and Administrative
     General and administrative expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards and bonuses, related to our executive, finance, human resource, information technology and operations organizations, (b) facilities expenses, (c) accounting and legal professional fees, including fees associated with acquisitions, (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 and to slightly increase as a percentage of total annual revenues in the near term as we further invest in our infrastructure and employee base to support our continued growth.
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 research and development organization, (b) payments to suppliers for design and consulting services, (c) costs relating to the design and development of new energy management applications and services and enhancement of existing energy management applications and services, (d) quality assurance and testing and (e) other related overhead. During the three and nine months ended September 30, 2011, we capitalized software development costs of $0.8 million and $2.9 million, respectively, and the amount is included as software in property and equipment at September 30, 2011. During the three and nine months ended September 30, 2010, we capitalized software development costs of $1.0 million and $5.1 million, respectively, and the amount is included as software in property and equipment at September 30, 2010. Included in the amounts above, we capitalized $0 and $0.2 million during the three months ended September 30, 2011 and 2010, respectively, and $13,000 and $1.2 million during the nine months ended September 30, 2011 and 2010, respectively, related to a company-wide enterprise resource planning systems implementation project, which was put into production in June 2011 and is being amortized over a five year useful life. We expect research and development expenses to increase in absolute dollar terms for the foreseeable future and to slightly increase as a percentage of total annual revenues in the near term as we develop new technologies and further invest in our research and development organization.
Stock-Based Compensation
     We account for stock-based compensation in accordance with Accounting Standards Codification, or ASC, 718, Stock Compensation . As such, all share-based payments to employees, including grants of stock options, restricted stock and restricted stock units, are recognized in the statement of income based on their fair values as of the date of grant. 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 and will be estimated on the date of grant using a lattice valuation model. For the three months ended September 30, 2011 and 2010, we recorded expenses of approximately $3.2 million and $3.7 million, respectively, in connection with share-based payment awards to employees and non-employees. For the nine months ended September 30, 2011 and 2010, we recorded expenses of approximately $10.5 million and $11.7 million, respectively, in connection with share-based payment awards to employees and non-employees. With respect to option grants through September 30, 2011, a future expense of non-vested options of approximately $5.4 million is expected to be recognized over a weighted average period of 2.1 years. With respect to restricted stock and restricted stock units issued through September 30, 2011, a future expense of unvested restricted stock and restricted stock unit awards of approximately $15.0 million is expected to be recognized over a weighted average period of 2.4 years.

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Other Income and Expense, Net
     Other income and expense consist primarily of interest income earned on cash balances, gain or loss on transactions designated in currencies other than our or our subsidiaries’ functional currency and other non-operating income. We historically have invested our cash in money market funds, treasury funds, commercial paper, and municipal bonds.
Interest Expense
     Interest expense consists of interest on our capital lease obligations, fees associated with the credit facility that we entered into with Silicon Valley Bank, or SVB, in August 2008, which we refer to as the 2008 credit facility, fees associated with the $75.0 million senior secured revolving credit facility that we entered into with SVB and a certain other lender in April 2011, which we refer to as the 2011 credit facility, and fees associated with issuing letters of credit and other financial assurances.
Consolidated Results of Operations
Three and Nine Months Ended September 30, 2011 Compared to the Three and Nine Months Ended September 30, 2010
Revenues
     The following table summarizes our revenues for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):
                                 
    Three Months Ended September 30,     Dollar     Percentage  
    2011     2010     Change     Change  
Revenues:
                               
DemandSMART
  $ 161,874     $ 158,836     $ 3,038       1.9 %
EfficiencySMART, SupplySMART, CarbonSMART and Other
    7,309       3,962       3,347       84.5  
 
                         
Total
  $ 169,183     $ 162,798     $ 6,385       3.9 %
 
                         
                                 
    Nine Months Ended September 30,     Dollar     Percentage  
    2011     2010     Change     Change  
Revenues:
                               
DemandSMART
  $ 240,268     $ 246,983     $ (6,715 )     (2.7 )%
EfficiencySMART, SupplySMART, CarbonSMART and Other
    19,581       10,484       9,097       86.8  
 
                         
Total
  $ 259,849     $ 257,467     $ 2,382       0.9 %
 
                         
     For the three months ended September 30, 2011, our DemandSMART revenues increased by $3.0 million, or 2%, as compared to the three months ended September 30, 2010. For the nine months ended September 30, 2011, our DemandSMART revenues decreased by $6.7 million, or 3%, as compared to the nine months ended September 30, 2010. The increase (decrease) in our DemandSMART revenues was primarily attributable to changes in the following existing operating areas (dollars in thousands):
                 
    Revenue (Decrease) Increase:     Revenue (Decrease) Increase:  
    Three Months Ended     Nine Months Ended  
    September 30, 2010 to     September 30, 2010 to  
    September 30, 2011     September 30, 2011  
PJM
  $ (7,449 )   $ (15,273 )
ERCOT
    (101 )     1,683  
New England
    382       (11,742 )
Ontario Power Authority
    3,816       10,406  
New York
    (1,303 )     (2,225 )
California
    3,661       4,659  
Australia
    3,027       3,027  
Tennessee Valley Authority
    287       1,013  
Other (1)
    718       1,737  
 
           
Total increased (decreased) DemandSMART revenues
  $ 3,038     $ (6,715 )
 
           
 
(1)   The amounts included in this category relate to increases in various demand response programs, none of which are individually material.

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     The increase in DemandSMART revenues during the three months ended September 30, 2011 as compared to the same period in 2010 was partially due to our ability to recognize revenues that had previously been deferred in connection with our utility contract with Ontario Power Authority, or the OPA contract. As a result of an amendment to the OPA contract that modified certain refund provisions and that we entered into during the three months ended September 30, 2011, we concluded that fees under the OPA contract were no longer subject to refund and were fixed or determinable. As a result, during the three months ended September 30, 2011, we recognized as revenues $2.3 million of fees under the OPA contract that had been previously deferred. Prior to the three months ended March 31, 2011, we had not recognized any revenues related to the OPA contract. The increase in DemandSMART revenues was also partially attributable to an increase in MW enrolled in our New England and California demand response programs and stronger demand response event performance in those programs. The increase in DemandSMART revenues was also partially attributable to our participation in a demand response program in Australia, which resulted from our acquisitions of DMT Energy Pty Ltd, or DMT, during the first quarter of 2011and Energy Response Holdings Pty Ltd, or Energy Response, during the third quarter of 2011. The increase in DemandSMART revenues related to other demand response programs, including Tennessee Valley Authority, were primarily driven by an increase in MW enrolled in these programs. The increase in DemandSMART revenues was also partially attributable to a $3.7 million change in the estimate related to the reserve for potential performance adjustments in PJM that had been recorded during the three months ended September 30, 2011. The increase in DemandSMART revenues during the three months ended September 30, 2011 was partially offset by less favorable pricing in our PJM, New England and New York programs, as well as a decrease in MW enrolled in our ERCOT program as compared to the same period in 2010. DemandSMART revenues were also negatively affected by fewer demand response events being called during the three months ended September 30, 2011, which resulted in decreased energy payments, as compared to the same period in 2010.
     The decrease in our DemandSMART revenues during the nine months ended September 30, 2011 as compared to the same period in 2010 was primarily attributable to less favorable pricing in the PJM and New York markets, as well as a decrease in MW enrolled in our ISO-NE program as compared to the same period in 2010 as a result of the commencement of an ISO-NE program in which we currently participate, which started on June 1, 2010, under which we enrolled fewer MW with lower pricing compared to a prior, similar ISO-NE program in which we participated. The decrease in DemandSMART revenues was also partially attributable to fewer demand response events being called by PJM during the three months ended September 30, 2011, which resulted in decreased energy payments, as compared to the same period in 2010. The decrease in DemandSMART revenues was partially offset by an increase in revenues recognized as a result of amendments to the OPA contract during the nine months ended September 30, 2011 that resulted in the recognition of $5.3 million of revenues during the period that had been previously deferred. The decrease in DemandSMART revenues was also partially offset by an increase in our MW under management in certain of the demand response programs in which we participate, stronger demand response event performance in our California demand response programs, our participation in demand response programs in Australia and our ability to recognize revenues based on the finalization of performance in a certain California demand response program. There were no revenues related to Australia in 2010.
     For the three and nine months ended September 30, 2011, our EfficiencySMART, SupplySMART and CarbonSMART applications and services and other revenues increased by $3.3 million and $9.1 million, respectively, as compared to the same periods in 2010, primarily due to our acquisitions of Global Energy Partners, Inc., or Global Energy, and M2M, both of which occurred in January 2011. In addition, we completed a certain EfficiencySMART project during the three months ended September 30, 2011, which resulted in the recognition of $0.6 million of revenues that had been previously deferred.
     We currently expect our total revenues to increase slightly for the year ending December 31, 2011 as compared to 2010, as we further increase our MW under management in all of our expanded operating regions, enroll new C&I customers in our demand response programs, expand the sales of our EfficiencySMART, SupplySMART and CarbonSMART applications and services and other services and products to our new and existing C&I customers, and pursue more favorable pricing opportunities with our C&I customers. Although our MW under management have increased in the PJM market in 2011 as compared to 2010, until PJM prices improve in 2013, we expect our revenues derived from the PJM market to decrease as a percentage of total annual revenues in 2011 and 2012 as significantly lower capacity prices in this market take effect for those years. These lower prices in PJM will negatively impact our ability to grow our overall revenues in 2011 and 2012 at levels consistent with prior years.

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     In addition, the discontinuance of PJM’s Interruptible Load for Reliability program, or the ILR program, by PJM beginning in 2012 will reduce the flexibility that we currently have to manage our portfolio of demand response capacity in the PJM market and will negatively impact our future revenues. We also expect a decrease in MW enrolled in the PJM market in 2012 as compared to 2011, which will also negatively impact our revenues in 2012. Although we believe that, based on the language contained in the FERC order, our revenues derived from the PJM market for fiscal 2011 will not be impacted by the FERC order, our ability to manage our portfolio of demand response capacity in the PJM market for future delivery years may be harmed by the FERC order, which could significantly reduce our future revenues for 2012 and beyond and which may have a material adverse effect on our results of operations and financial condition. Furthermore, the attention of our management and other personnel has been, and may continue to be, diverted as we evaluate and respond to the FERC order, which may continue to have a negative impact on our sales efforts in, and revenues derived from the PJM region, as well as our other operating regions.
Gross Profit and Gross Margin
     The following table summarizes our gross profit and gross margin percentages for our energy management applications and services for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):
                         
Three Months Ended September 30,  
2011     2010  
Gross Profit   Gross Margin     Gross Profit     Gross Margin  
$84,832
    50.1 %   $ 77,736       47.7 %
 
                     
                         
Nine Months Ended September 30,  
2011     2010  
Gross Profit   Gross Margin     Gross Profit     Gross Margin  
$117,770
    45.3 %   $ 116,303       45.2 %
 
                     
     The increase in gross profit during the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily due to our ability to recognize revenues that had previously been deferred in connection with the OPA contract, pursuant to which we recognized the cost of such revenues in previous periods, and to a change in estimate of $3.7 million related to the estimated reserve for potential performance adjustments in PJM that had been recorded during the three months ended June 30, 2011. The increase in gross profit was also partially attributable to stronger demand response event performance in certain of the demand response programs in which we participate, including ISO-NE, which in some cases resulted in increased energy payments for the three and nine months ended September 30, 2011 as compared to the same periods in 2010, as well as our ability to recognize revenues based on the finalization of performance in a certain California demand response program for which the corresponding cost of revenues were recorded in 2010. The acquisitions of Global Energy, M2M, Energy Response and DMT that we completed in 2011 also contributed to the increase in gross profit for the three and nine months ended September 30, 2011. The increase was partially offset by less favorable pricing in PJM and ISO-NE, as well as fewer demand response events being called by PJM during the three and nine months ended September 30, 2011, which resulted in decreased energy payments, as compared to the same periods in 2010.
     The increase in gross margin during the three months ended September 30, 2011 as compared to the same period in 2010 was primarily due to the recognition of revenues in connection with the OPA contract, pursuant to which we recognized the cost of revenues in previous periods, and a change in estimate of $3.7 million related to the estimated reserve for potential performance adjustments in PJM that had been recorded during the three months ended June 30, 2011. The increase was partially offset by less favorable pricing in PJM and ISO-NE, which was not entirely offset by lower payments to our C&I customers. Our gross margin for the nine months ended September 30, 2011 was consistent with the comparable period in 2010.
     We currently expect that our gross margin for the year ending December 31, 2011 will be slightly higher than our gross margin for the year ended December 31, 2010, and that our gross margin for the three months ended September 30, 2011 will be the highest gross margin among our four quarterly reporting periods in 2011, consistent with our gross margin pattern in 2010, due to seasonality related to the demand response industry. In addition, until prices in the PJM market improve in 2013, we expect the lower capacity prices that will take effect in the PJM market in 2011 and 2012 to negatively impact our ability to grow our overall gross profits and gross margins in 2011 and 2012 at levels consistent with prior years. Moreover, the discontinuance of the ILR program by PJM beginning in 2012 will reduce the flexibility that we currently have to manage our portfolio of demand response capacity in the PJM market and will negatively impact our future gross profits and gross margins. We also expect a decrease in MW enrolled in the PJM market in 2012 as compared to 2011, which could also negatively impact our gross profits and gross margins in

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2012. Although we believe that, based on the language contained in the FERC order, our gross profit derived from the PJM market for fiscal 2011 will not be impacted by the FERC order, our ability to manage our portfolio of demand response capacity in the PJM market for future delivery years may be harmed by the FERC order, which could significantly reduce our future gross profits for 2012 and beyond and which may have a material adverse effect on our results of operations and financial condition. Furthermore, the attention of our management and other personnel has been, and may continue to be, diverted as we evaluate and respond to the FERC order, which may continue to have a negative impact on our sales efforts in, and gross profits derived from the PJM region, as well as our other operating regions.
Operating Expenses
     The following table summarizes our operating expenses for the three and nine months ended September 30, 2011 and 2010 (dollars in thousands):
                         
    Three Months Ended September 30,     Percentage  
    2011     2010     Change  
Operating Expenses:
                       
Selling and marketing
  $ 14,591     $ 12,487       16.8 %
General and administrative
    15,960       14,254       12.0 %
Research and development
    3,310       3,197       3.5 %
 
                   
Total
  $ 33,861     $ 29,938       13.1 %
 
                   
 
                       
                         
    Nine Months Ended September 30,     Percentage  
    2011     2010     Change  
Operating Expenses:
                       
Selling and marketing
  $ 39,798     $ 33,132       20.1 %
General and administrative
    48,172       41,155       17.1 %
Research and development
    9,892       7,748       27.7 %
 
                   
Total
  $ 97,862     $ 82,035       19.3 %
 
                   
     In certain forward capacity markets in which we participate, such as PJM, we may enable our C&I customers, meaning we may install our equipment at a C&I customer site to allow for the curtailment of MW from the electric power grid, up to twelve months in advance of enrolling the C&I customer in a particular demand response program. This market feature creates a longer average revenue recognition lag time across our C&I 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 operational expenses, including salaries and related personnel costs, at the time of enablement, there has been a trend of incurring operating expenses associated with enabling our C&I customers in advance of recognizing the corresponding revenues.
     The increase in payroll and related costs within our operating expenses during the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily driven by an increase in headcount, which was substantially due to the acquisitions that we completed in 2011.
      Selling and Marketing Expenses
                         
    Three Months Ended September 30,     Percentage  
    2011     2010     Change  
Payroll and related costs
  $ 9,296     $ 8,900       4.4 %
Stock-based compensation
    964       1,194       (19.3 )%
Other
    4,331       2,393       81.0 %
 
                   
Total
  $ 14,591     $ 12,487       16.8 %
 
                   
 
                       
                         
    Nine Months Ended September 30,     Percentage  
    2011     2010     Change  
Payroll and related costs
  $ 26,362     $ 22,701       16.1 %
Stock-based compensation
    3,262       3,318       (1.7 )%
Other
    10,174       7,113       43.0 %
 
                   
Total
  $ 39,798     $ 33,132       20.1 %
 
                   

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     The increase in selling and marketing expenses for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily due to an increase in payroll and related costs associated with an increase in the number of selling and marketing full-time employees from 176 at September 30, 2010 to 242 at September 30, 2011. The increase was offset by a decrease in salary rates per full-time employee, as well as the timing associated with our hiring new full-time employees during 2011 as compared to 2010. The increase was also offset by decreases in sales commissions payable to employees in our sales organization of $1.3 million and $0.5 million for the three and nine months ended September 30, 2011, respectively, as compared to the same periods in 2010.
     The decrease in stock-based compensation for the three months ended September 30, 2011 as compared to the same period in 2010 was primarily due to significant stock-based awards granted in 2007 that became fully vested prior to the three months ended September 30, 2011. The decrease was also partially attributable to the reversal of stock-based compensation expense due to forfeitures of a greater number of stock-based awards in connection with an increase in our attrition rate. Stock-based compensation for the nine months ended September 30, 2011 was relatively flat as compared to the same period in 2010.
     The increase in other selling and marketing expenses for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily attributable to an increase in amortization expense of $1.5 million and $3.0 million, respectively, due to the customer relationship and trade name intangible assets acquired in connection with our acquisitions of Global Energy, M2M, Energy Response and DMT. During the three and nine months ended September 30, 2011, we recorded an impairment charge of $0.2 million and $0.2 million, respectively, related to the discontinued use of the trade name intangible assets acquired in connection with our acquisitions of Energy Response and DMT in 2011, which also contributed to the increase in selling and marketing expenses for the three and nine months ended September 30, 2011 as compared to the same periods in 2010. The increase in other selling and marketing expenses for the three months ended September 30, 2011 as compared to the same period in 2010 was also partially attributable to allocating company-wide costs to selling and marketing expenses based on headcount, which resulted in an increase in facility costs of $0.1 million due to the expansion of our office space as a result of recent acquisitions. The increase in other selling and marketing expenses for the nine months ended September 30, 2011 as compared to the same period in 2010 was also partially attributable to an increase in professional services fees of $0.2 million. The increase in other selling and marketing expenses for the three and nine months ended September 30, 2011 was offset by a decrease in marketing costs of $0.2 million and $0.4 million, respectively, due to our rebranding efforts that took place in 2010.
      General and Administrative Expenses
                         
    Three Months Ended September 30,     Percentage  
    2011     2010     Change  
Payroll and related costs
  $ 8,621     $ 7,897       9.2 %
Stock-based compensation
    1,975       2,246       (12.1 )%
Other
    5,364       4,111       30.5 %
 
                   
Total
  $ 15,960     $ 14,254       12.0 %
 
                   
                         
    Nine Months Ended September 30,     Percentage  
    2011     2010     Change  
Payroll and related costs
  $ 26,678     $ 22,002       21.3 %
Stock-based compensation
    6,355       7,761       (18.1 )%
Other
    15,139       11,392       32.9 %
 
                   
Total
  $ 48,172     $ 41,155       17.1 %
 
                   
     The increase in general and administrative expenses for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily due to an increase in payroll and related costs due to an increase in salary rates and certain severance costs. The increase in payroll and related costs for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was also partially attributable to an increase in full-time employees from 232 at September 30, 2010 to 273 at September 30, 2011.

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     The decrease in stock-based compensation for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily due to prior period stock-based awards that were fully vested as of June 30, 2011 and the reversal of stock-based compensation expense due to forfeitures of a greater number of stock-based awards in connection with an increase in our attrition rate. The decrease in stock-based compensation expense for the nine months ended September 30, 2011 as compared to the same period in 2010 was also partially attributable to fully-vested stock awards granted to our board of directors during the nine months ended September 30, 2011 with a lesser grant-date fair value than the same amount of fully-vested stock awards granted during the same period in 2010.
     The increase in other general and administrative expenses for the three months ended September 30, 2011 as compared to the same period in 2010 was primarily attributable to an increase in professional services fees of $0.5 million incurred in connection with the integration of the Global Energy, M2M, Energy Response and DMT acquisitions. The increase was also partially attributable to technology and communication costs of $0.4 million due to increased software licensing fees and computer supplies, as well as new hire orientation training costs of $0.1 million, all of which resulted from increased headcount. Additionally, for the three months ended September 30, 2011, we allocated company-wide costs to general and administrative expenses based on headcount, which resulted in an increase in facility costs of $0.2 due to the expansion of our office space as a result of recent acquisitions.
     The increase in other general and administrative expenses for the nine months ended September 30, 2011 as compared to the same period in 2010 was primarily attributable to an increase in professional services fees of $1.6 million incurred in connection with the integration of the acquisitions that we completed in 2011. The increase was also partially attributable to miscellaneous expenses, including finance charges and other taxes, of $0.5 million due to the growth of our business, as well as technology and communication costs of $0.7 million. We also allocated company-wide costs to general and administrative expenses for the nine months ended September 30, 2011 based on headcount, which resulted in an increase in facility costs of $0.5 million due to the expansion of our office space as a result of our recent acquisitions. The increase was also attributable to employee-related non-compensation expenses, including payroll services and other expenses of $0.4 million.
      Research and Development Expenses
                         
    Three Months Ended September 30,     Percentage  
    2011     2010     Change  
Payroll and related costs
  $ 1,869     $ 1,664       12.3 %
Stock-based compensation
    282       224       25.9 %
Other
    1,159       1,309       (11.5 )%
 
                   
Total
  $ 3,310     $ 3,197       3.5 %
 
                   
 
                       
                         
    Nine Months Ended September 30,     Percentage  
    2011     2010     Change  
Payroll and related costs
  $ 5,541     $ 4,437       24.9 %
Stock-based compensation
    871       589       47.9 %
Other
    3,480       2,722       27.8 %
 
                   
Total
  $ 9,892     $ 7,748       27.7 %
 
                   
     The increase in research and development expenses for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily driven by the costs associated with an increase in the number of research and development full-time employees from 57 at September 30, 2010 to 72 at September 30, 2011, as well as an increase in salary rates per full-time employee. The increase was offset by an increase in capitalized internal payroll and related costs of $0.2 million and $0.6 million, respectively, for the three and nine months ended September 30, 2011.
     The increase in stock-based compensation for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was primarily due to costs related to equity awards granted to new employees during 2011, including a senior level employee.
     The decrease in other research and development expenses for the three months ended September 30, 2011 as compared to the same period in 2010 was primarily related to $0.2 million in higher consulting-related professional fees incurred during the three months ended September 30, 2010. We also allocated company-wide costs to research and development expenses for the three months ended September 30, 2011 based on

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headcount, which resulted in a $0.1 million increase of facility costs related to increased rent expense due to the expansion of our office space as a result of acquisitions.
     The increase in other research and development expenses for the nine months ended September 30, 2011 as compared to the same period in 2010 was primarily attributable to a $0.5 million increase in technology and communications expenses related to software licensing fees. We also allocated company-wide costs to research and development expenses for the nine months ended September 30, 2011 based on headcount, which resulted in an increase in facility costs of $0.1 million due to the expansion of our office space as a result of recent acquisitions. The increase was also partially attributable to $0.1 million of professional services fees related to our intellectual property and miscellaneous equipment expenses of $0.1 million as a result of the expansion of our hardware product offerings.
Other (Expense) Income, Net
     Other expense, net for the three and nine months ended September 30, 2011 was primarily comprised of foreign currency losses related to certain intercompany receivables denominated in foreign currencies. Other income, net for the three and nine months ended September 30, 2010 was primarily comprised of a nominal amount of interest income and a nominal amount of foreign currency gains related to certain intercompany receivables denominated in foreign currencies. The significant increase in losses arising from transactions denominated in foreign currencies for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was due to the significant increase of foreign denominated intercompany receivables held by us from one of our Australian subsidiaries primarily as a result of the funding provided to complete the acquisition of Energy Response and the strengthening of the United States dollar as compared to the Australian dollar during the three months ended September 30, 2011. As of September 30, 2011, we had an intercompany receivable from our Australian subsidiary that is denominated in Australian dollars and not deemed to be of a “long-term investment” nature totaling $32.0 million ($32.6 million Australian). The significant increase in losses arising from transactions denominated in foreign currencies is a non-cash expense, and we did not implement any currency hedging transactions during the three months ended September 30, 2011.
Interest Expense
     Interest expense for the three and nine months ended September 30, 2011 includes interest on our outstanding capital leases and letters of credit origination fees. The increase in interest expense for the three and nine months ended September 30, 2011 as compared to the same periods in 2010 was due to the amortization of capitalized debt issuance costs associated with the 2011 credit facility, which were significantly higher than the amortization of debt issuance costs associated with the 2008 credit facility.
Income Taxes
     The tax provision recorded for the three and nine months ended September 30, 2011 was $1.2 million and $2.0 million, respectively, and represented the following:
    estimated foreign taxes resulting from guaranteed profit allocable to certain of our foreign subsidiaries, which have been determined to be limited-risk service providers acting on behalf of us for tax purposes, for which there are no tax net operating loss carryforwards;
    amortization of tax deductible goodwill, which generates a deferred tax liability that cannot be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature; and
    estimated U.S. state income taxes to be incurred for the nine months ended September 30, 2011 based on estimated state taxable income incurred for the nine months ended September 30, 2011. As we currently anticipate that we will incur a state taxable loss for the three months ending December 31, 2011, we anticipate recording a current state tax benefit during the three months ending December 31, 2011.
     In accordance with ASC 740, Income Taxes, or ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. Generally, if an enterprise has an ordinary loss for the year to date at the end of an interim period and anticipates ordinary income for the fiscal year, the enterprise will record an interim period tax benefit based on applying the estimated annual effective tax rate to the ordinary loss as long as the tax benefits are realized during the year or recognizable as a deferred tax asset as of the end of the year. However, if an enterprise is unable to make a reliable estimate of its annual effective tax rate, then actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. We have determined that we are currently unable to make a reliable estimate of our annual effective tax rate as of September 30, 2011 due to unusual

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sensitivity to the rate as it relates to the current forecasted U.S. ordinary income (loss) for fiscal 2011. As a result, we recorded a tax provision for the three and nine months ended September 30, 2011 based on our actual effective tax rate for the nine months ended September 30, 2011.
     We reviewed all available evidence to evaluate the recovery of deferred tax assets, including the recent history of accumulated losses in all tax jurisdictions over the last three years, as well as our ability to generate income in future periods. As of September 30, 2011, due to the uncertainty related to the ultimate use of our deferred income tax assets, we have provided a full valuation allowance on all of our U.S. deferred tax assets.
     For the three and nine months ended September 30, 2010, we recorded a provision for income taxes of $3.8 million and $2.9 million, respectively.
Liquidity and Capital Resources
      Overview
     Since inception, we have generated significant cumulative losses. As of September 30, 2011, we had an accumulated deficit of $53.1 million. As of September 30, 2011, our principal sources of liquidity were cash and cash equivalents totaling $77.4 million, a decrease of $76.0 million from the December 31, 2010 balance of $153.4 million. As of September 30, 2011, we were contingently liable for $42.3 million in connection with outstanding letters of credit under the 2011 credit facility. As of September 30, 2011 and December 31, 2010, we had restricted cash balances of $0.1 and $1.5 million, respectively, which relate to amounts that collateralize unused outstanding letters of credit and cover financial assurance requirements in certain of the programs in which we participate and certain other commitments. At September 30, 2011 and December 31, 2010, our excess cash was primarily invested in money market funds.
     We believe our existing cash and cash equivalents at September 30, 2011, amounts available under the 2011 credit facility and our anticipated net cash flows from operating activities will be sufficient to meet our anticipated cash needs, including investing activities and the provision of financial assurances in connection with our capacity bids in certain open market bidding programs, 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 certain of our energy management applications and services to electric power grid operators and utilities and the increasing rate at which letters of credit or security deposits are required by those electric power grid operators and utilities, the introduction and market acceptance of new energy management applications and services, the expansion of our sales and marketing and research and development activities, and the geographic expansion of our business operations. To the extent that our cash and cash equivalents, amounts available under the 2011 credit facility and our anticipated net cash flows from operating activities 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. 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. 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. We currently have the ability to sell approximately $62.1 million of our securities under the shelf registration statement. 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, 2011 and 2010 (dollars in thousands):
                 
    Nine Months Ended September 30,  
    2011     2010  
Cash flows provided by operating activities
  $ 16,766     $ 28,662  
Cash flows used in investing activities
    (94,088 )     (10,544 )
Cash flows provided by financing activities
    1,861       3,473  
Effects of exchange rate changes on cash
    (535 )     (9 )
 
           
Net change in cash and cash equivalents
  $ (75,996 )   $ 21,582  
 
           

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      Cash Flows Provided by Operating Activities
     Cash provided by operating activities primarily consists of net income adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expenses, asset impairment charges, unrealized foreign currency translation gains and losses, and the effect of changes in working capital and other activities.
     Cash provided by operating activities for the nine months ended September 30, 2011 was approximately $16.8 million and consisted of net income of $14.6 million and $32.1 million of non-cash items, primarily consisting of depreciation and amortization, deferred taxes, stock-based compensation charges, impairment charges of property and equipment, and unrealized foreign exchange losses, offset by $30.0 million of net cash used in working capital and other activities.
     Cash provided by working capital and other activities consisted of an increase in accrued capacity payments of $23.3 million relating primarily to the PJM demand response market, an increase of $3.4 million in deferred revenue, an increase of $1.6 million in accrued payroll and related expenses, and a decrease of $0.1 million in inventory. These amounts were offset by cash used in working capital and other activities consisting of an increase of $30.1 million in unbilled revenues relating to the PJM demand response market, an increase of $18.7 million in accounts receivable due to the timing of cash receipts under the demand response programs in which we participate, a decrease of $5.4 million in accounts payable and accrued expenses and other current liabilities due to the timing of payments, an increase in other assets of $2.9 million, an increase in prepaid expenses and other current assets of $1.1 million, and a decrease in other noncurrent liabilities of 0.2 million.
     Cash provided by operating activities for the nine months ended September 30, 2010 was $28.7 million and consisted of net income of $30.7 million and $26.2 million of non-cash items, primarily consisting of depreciation and amortization, deferred taxes, stock-based compensation charges and impairment of property and equipment. These amounts were offset by $28.2 million of net cash used in working capital and other activities. Cash used in working capital and other activities consisted of an increase of $73.8 million in unbilled revenues relating to the PJM demand response market and an increase of $16.6 million in accounts receivable due to the timing of cash receipts under the demand response programs in which we participate. These amounts were partially offset by cash provided by working capital and other activities, which reflected an increase of $2.8 million in accrued payroll and related expenses, an increase in other non-current liabilities of $1.9 million, an increase of $7.6 million in accounts payable and accrued expenses due to the timing of payments, an increase in accrued capacity payments of $48.7 million, the majority of which was related to the PJM demand response market, an increase of $0.2 in deferred revenue and a decrease in prepaid expenses and other assets of $1.0 million.
      Cash Flows Used in Investing Activities
     Cash used in investing activities was $94.1 million for the nine months ended September 30, 2011. During the nine months ended September 30, 2011, we acquired Global Energy for a purchase price of $26.7 million, of which $19.9 million was paid in cash, M2M for a purchase price of $28.6 million, of which $17.5 million was paid in cash, DMT for a purchase price of $5.2 million, of which $3.9 million was paid in cash, and Energy Response for a purchase price of $30.1 million, of which $27.3 million was paid in cash. The net cash acquired from these acquisitions was $1.1 million. Additionally, our cash investments included the cash portion of the acquisition contingent consideration for Cogent Energy, Inc., or Cogent, of $1.5 million. Our other principal cash investments during the nine months ended September 30, 2011 related to capitalized internal use software costs used to build out and expand our energy management applications and services and purchases of property and equipment. During the nine months ended September 30, 2011, we also incurred $15.2 million in capital expenditures primarily related to the purchase of office equipment and demand response equipment and other miscellaneous expenditures. In addition, during the nine months ended September 30, 2011, our deposits increased by $9.4 million primarily due to financial assurance requirements related to demand response programs in Australia.
     Cash used in investing activities was $10.5 million for the nine months ended September 30, 2010. Our principal cash investments during the nine months ended September 30, 2010 related to capitalizing internal use software costs used to build out and expand our energy management applications and services and purchases of property and equipment. During the nine months ended September 30, 2010, we acquired SmallFoot LLC and ZOX, LLC for a purchase price of $1.4 million, of which $1.1 million was paid in cash. Additionally, our cash investments included the cash portion of the earn-out payment due in connection with our acquisition of South River Consulting, LLC of $0.9 million. We had a decrease in restricted cash and deposits of $6.7 million primarily as a result of demand response event performance in July 2010 under a certain open market program in which we participate, resulting in our restricted cash becoming unrestricted in July 2010. During the nine months ended September 30, 2010, we also incurred $15.3 million in capital expenditures primarily related to the purchase of office equipment and demand response equipment and other miscellaneous expenditures.

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      Cash Flows Provided by Financing Activities
     Cash provided by financing activities was $1.9 million and $3.5 million for the nine months ended September 30, 2011 and 2010, respectively, and consisted primarily of proceeds that we received from exercises of options to purchase shares of our common stock during the nine months ended September 30, 2011 and 2010.
      Credit Facility Borrowings
     In April 2011, we and one of our subsidiaries entered into the 2011 credit facility. Subject to continued covenant compliance, the 2011 credit facility provides for a two-year revolving line of credit in the aggregate amount of $75.0 million, the full amount of which may be available for issuances of letters of credit and up to $5.0 million of which may be available for swing line loans. The revolving line of credit is subject to increase from time to time up to an aggregate amount of $100.0 million with additional commitments from the lenders or new commitments from financial institutions acceptable to SVB. The interest on revolving loans under the 2011 credit facility will accrue, at our election, at either (i) the Eurodollar Rate with respect to the relevant interest period plus 2.00% or (ii) the ABR (defined as the highest of (x) the “prime rate” as quoted in the Wall Street Journal , (y) the Federal Funds Effective Rate plus 0.50% and (z) the Eurodollar Rate for a one-month interest period plus 1.00%) plus 1.00%. In connection with the issuance or renewal of letters of credit for our account, we are charged a letter of credit fee of 2.125% pursuant to the 2011 credit facility. We expense the interest and letter of credit fees, as applicable, in the period incurred. The 2011 credit facility terminates and all amounts outstanding thereunder are due and payable in full on April 15, 2013. As of September 30, 2011, we were in compliance with all of our covenants under the 2011 credit facility, including all financial covenants. At September 30, 2011, we had no borrowings and letters of credit totaling $42.3 million outstanding under the 2011 credit facility. As of September 30, 2011, we had $32.7 million available under the 2011 credit facility for future borrowings or issuance of additional letters of credit.
     The 2011 credit facility contains customary terms and conditions for credit facilities of this type, including restrictions on our ability and the ability of our subsidiaries to incur additional indebtedness, create liens, enter into transactions with affiliates, transfer assets, pay dividends or make distributions on, or repurchase our common stock, consolidate or merge with other entities, or suffer a change in control. In addition, we are required to meet certain monthly and quarterly financial covenants customary with this type of credit facility. Our monthly financial covenants include a minimum specified ratio of current assets to current liabilities. Our quarterly financial covenants include achievement of minimum earnings levels, which is based on earnings before depreciation and amortization expense, interest expense, provisions for cash-based income taxes, share-based compensation expense, rent expense and certain other non-cash charges over a rolling twelve month period and maintaining a minimum specified charge coverage ratio, which is based on the ratio of earnings calculation from the minimum earnings covenants less capital expenditures compared to fixed charges, including depreciation expense, rent expense, and income taxes paid.
     The 2011 credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, the lenders may accelerate our obligations under the 2011 credit facility. The 2011 credit facility replaces the 2008 credit facility, which was in place as of March 31, 2011. If we are determined to be in default under the 2011 credit facility, then any amounts outstanding would become immediately due and payable and we would be required to collateralize with cash any outstanding letters of credit up to 105% of the amounts outstanding.
     On April 15, 2011, we and one of our subsidiaries entered into a guarantee and collateral agreement with SVB for the benefit of the lenders under the 2011 credit facility. The guarantee and collateral agreement provides that the obligations under the 2011 credit facility are secured by all of our domestic assets and the domestic assets of several of our subsidiaries, excluding our foreign subsidiaries.
     We incurred financing costs of $0.5 million in connection with the 2011 credit facility, which were deferred and are being amortized as interest expense over the life of the 2011 credit facility, which matures on April 15, 2013.
     In April 2011, we were required to provide financial assurance in connection with our capacity bid in a certain open market bidding program. We provided this financial assurance utilizing approximately $56.0 million of our available cash and a $39.0 million letter of credit issued under the 2011 credit facility. In May 2011, based on the capacity that we cleared in this open market bidding program and the required post-auction financial assurance requirements, we recovered all $56.0 million of our available cash that we had provided as financial assurance and were able to reduce the $39.0 million letter of credit to $13.5 million.

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     In June 2011, we and one of our subsidiaries entered into an amendment to the 2011 credit facility, which modified certain of our covenant requirements.
Contingent Earn-Out Payments
     In connection with our acquisition of Energy Response, we may be obligated to pay additional contingent purchase price consideration related to an earn-out payment of $10.7 million, or $10.0 million Australian. The earn-out payment, if any, will be based on the development of a demand response reserve capacity market in the National Electric Market in Australia by December 31, 2013 that meets certain market size and price per megawatt conditions. This milestone needs to be achieved in order for the earn-out payment to occur, and there will be no partial payment if the milestone is not fully achieved. We determined that the initial fair value of the earn-out payment as of the acquisition date was $0.3 million. Any changes in fair value will be recorded in our consolidated statements of income. We recorded our estimate of the fair value of the contingent consideration based on the evaluation of the likelihood of the achievement of the contractual conditions that would result in the payment of the contingent consideration and weighted probability assumptions of these outcomes. This fair value measurement was based on significant inputs not observable in the market and, therefore, represented a Level 3 measurement as defined in ASC 820, Fair Value Measurements and Disclosures . As of September 30, 2011, there were no changes in the probability of payment of the earn-out payment. Since the liability associated with the earn-out payment has been discounted, as the time period to payment shortens, the liability will increase. The change in fair value resulting from this liability was recorded in general and administrative expenses in the accompanying unaudited condensed consolidated statements of income. During the three and nine months ended September 30, 2011, we recorded a charge of $23,000 in general and administrative expenses in the accompanying unaudited condensed consolidated statements of income. At September 30, 2011, the liability associated with the earn-out payment was recorded at $0.3 million after adjusting for changes in exchange rates.
     In connection with our acquisition of Cogent, we agreed to make a single contingent earn-out payment of $1.5 million in cash, to be paid based on the achievement of a certain minimum revenue-based milestone and a certain earnings-based milestone of Cogent for the year ended December 31, 2010. Both of these milestones needed to be achieved in order for the earn-out payment to occur, and there would be no partial payment if the milestones were not fully achieved. As we believed that it was remote that the earn-out payment would not be made, we determined the fair value of the earn-out payment based on the present value of the $1.5 million and recorded this in connection with our purchase accounting for the acquisition of Cogent. The milestones were achieved and we paid the earn-out payment in January 2011.
Capital Spending
     We have made capital expenditures primarily for general corporate purposes to support our growth and for equipment installation related to our business. Our capital expenditures totaled $15.2 million and $15.3 million during the nine months ended September 30, 2011 and 2010, respectively. As we continue to grow, we expect our capital expenditures for 2011 to increase as compared to 2010.
Contractual Obligations
     As of September 30, 2011, the contractual obligations disclosure contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, or our 2010 Form 10-K, which we filed with the SEC on March 1, 2011, has not materially changed.
Off-Balance Sheet Arrangements
     As of September 30, 2011, 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, 2011, we had outstanding letters of credit totaling $42.3 million. For information on these commitments and contingent obligations, see “Liquidity and Capital Resources — Credit Facility Borrowings” above and Note 8 to our unaudited condensed consolidated financial statements contained herein.
Critical Accounting Policies and Use of Estimates
     The discussion and analysis of our financial condition and results of operations are based upon our interim unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition for multiple element arrangements, allowance for doubtful accounts, valuations and

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purchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of our net deferred tax assets and related valuation allowance. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Any differences could have a material impact on our financial condition and results of operations.
     The critical accounting estimates used in the preparation of our financial statements that we believe affect our more significant judgments and estimates used in the preparation of our interim condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in our 2010 Form 10-K. Except as disclosed herein, there have been no material changes to our critical accounting policies or estimates during the three and nine months ended September 30, 2011.
Revenue Recognition
     We recognize revenues in accordance with ASC 605, Revenue Recognition, or ASC 605. In all of our arrangements, we do not recognize any revenues until we can determine that persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be reasonably assured. In making these judgments, we evaluate these criteria as follows:
    Evidence of an arrangement. We consider a definitive agreement signed by the customer and us or an arrangement enforceable under the rules of an open market bidding program to be representative of persuasive evidence of an arrangement.
    Delivery has occurred. We consider delivery to have occurred when service has been delivered to the customer and no significant post-delivery obligations exist. In instances where customer acceptance is required, delivery is deemed to have occurred when customer acceptance has been achieved.
    Fees are fixed or determinable. We consider the fee to be fixed or determinable unless the fee is subject to refund or adjustment or is not payable within normal payment terms. If the fee is subject to refund or adjustment and we cannot reliably estimate this amount, we recognize revenues when the right to a refund or adjustment lapses. If offered payment terms exceed the normal terms, we recognize revenues as the amounts become due and payable or upon the receipt of cash.
    Collection is reasonably assured. We conduct a credit review at the inception of an arrangement to determine the creditworthiness of the customer. Collection is reasonably assured if, based upon evaluation, we expect that the customer will be able to pay amounts under the arrangement as payments become due. If we determine that collection is not reasonably assured, revenues are deferred and recognized upon the receipt of cash.
     We enter into utility contracts and open market programs to provide demand response applications and services. Demand response revenues consist of two elements: revenue earned based on our ability to deliver committed capacity to our electric power grid operator and utility customers, which we refer to as capacity revenue; and revenue earned based on additional payments made to us for the amount of energy usage actually curtailed from the electric power grid during a demand response event, which we refer to as energy event revenue.
     We recognize demand response revenue when we have provided verification to the electric power grid operator or utility of our ability to deliver the committed capacity which entitles us to payments under the utility contract or open market program. Committed capacity is generally verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenue is recognized and future revenue becomes fixed or determinable and is recognized monthly until the next demand response event or test. In subsequent verification events, if our verified capacity is below the previously verified amount, the electric power grid operator or utility customer will reduce future payments based on the adjusted verified capacity amounts. Ongoing demand response revenue recognized between demand response events or tests that are not subject to penalty or customer refund are recognized in revenue. If the revenue is subject to refund and the amount of refund cannot be reliably estimated, the revenue is deferred until the right of refund lapses. Based on the evaluation of the factors in ASC 605-45-45, including the fact that we are the primary obligor and bear both the performance and credit risk related to our arrangements with electric power grid operators or utilities, we have determined that we are the principal in our arrangements with electric power grid operators or utilities. Therefore, we record demand response revenues gross of the amounts billed to the electric power grid operators or utilities and record the amounts paid to C&I customers as cost of revenues.

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     In one of the open market programs in which we participate, the program year operates on a June to May basis and performance is measured based on the aggregate performance during the months of June through September. As a result, fees received for the month of June could potentially be subject to adjustment or refund based on performance during the months of July through September. We concluded that we could reliably estimate the amount of fees potentially subject to adjustment or refund and recorded a reserve for this amount in the month of June. As of June 30, 2011, we recorded an estimated reserve of $9.3 million related to potential subsequent performance adjustments. The fees under this program were fixed as of September 30, 2011 and, based on final performance during the three months ended September 30, 2011, we recorded a reduction in the estimated reserve totaling $3.7 million, which resulted in final performance adjustments of $5.6 million. For the three months ended September 30, 2011, the impact of this change in estimate on income before income tax and net income was $3.7 million and $3.6 million, respectively, and the impact of this change in estimate on diluted income per common share was $0.13. This change in estimate had no impact on the nine months ended September 30, 2011 nor will it impact any future periods. Our performance estimates which provided the basis for the estimated reserve as of June 30, 2011 were reasonably consistent with the actual performance during demand response events and test events during the three months ended September 30, 2011. The primary driver of the change in estimate from June 30, 2011 to September 30, 2011 was due to the differences based on the number and type of demand response events by which performance was measured, which was not within our control. We are in the process of reevaluating our ability to reliably estimate the amount of fees potentially subject to adjustment or refund for fiscal 2012 on a prospective basis based on our consideration of our actual performance during the months of June 2011 through September 2011, as well as additional guidance issued by the customer regarding its interpretation of certain program rules that will impact performance calculations on a prospective basis. As there are no revenues recognized related to this open market program during the fourth quarter of our fiscal year, any change in the our evaluation of our ability to reliably estimate the amount of fees potentially subject to adjustment or refund would have no impact on results of operations for the three months ending December 31, 2011.
     As a result of contractual amendments entered into during the three months ended March 31, 2011 and the three months ended September 30, 2011 to amend certain refund provisions included in one of our contracts with a utility customer, we concluded that we could reliably estimate the fees potentially subject to refund and, therefore, the fees under this arrangement were fixed or determinable. As a result, during the three months ended March 31, 2011 and the three months ended September 30, 2011, we recognized as revenues $3.0 million and $2.3 million, respectively, of fees that had been previously deferred. As of September 30, 2011, there were no deferred revenues related to this contractual arrangement.
     Certain of the forward capacity programs in which we participate may be deemed derivative contracts under ASC 815, Derivatives and Hedging , or ASC 815. We believe that we meet the scope exception with respect to these forward capacity programs under ASC 815 as a normal purchase, normal sale as that term is defined in ASC 815 and, accordingly, the arrangement is not treated as a derivative contract.
     Energy event revenues are recognized when earned. Energy event revenue is deemed to be substantive and represents the culmination of a separate earnings process and is recognized when the energy event is initiated by the electric power grid operator or utility customer and we have responded under the terms of the utility contract or open market program.
     Under certain of our arrangements, in particular those arrangements entered into by our wholly-owned subsidiary, M2M, we sell equipment to the C&I customer that is utilized to provide the ongoing services that we deliver. Currently, this equipment has been determined to not have stand-alone value. As a result, we defer the fees associated with the equipment and we begin recognizing those fees ratably over the expected C&I customer relationship period, which is generally 3 years, once the C&I customer is receiving the ongoing services from us. In addition, we capitalize the associated direct and incremental costs, which primarily represent the equipment and third-party installation costs, and recognize such costs over the expected C&I customer relationship period.
     In September 2009, the Financial Accounting Standards Board, or FASB, ratified ASC Update No. 2009-13, Multiple-Deliverable Revenue Arrangements , or ASU 2009-13. ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of ASC Subtopic 605-25, which is the revenue recognition guidance for multiple-element arrangements. ASU 2009-13 provides for three significant changes to the existing multiple element revenue recognition guidance as follows:
    deletes the requirement to have objective and reliable evidence of fair value for undelivered elements in an arrangement. This may result in more deliverables being treated as separate units of accounting;
    modifies the manner in which the arrangement consideration is allocated to the separately identified deliverables. ASU 2009-13 requires an entity to allocate revenue in an arrangement using its best estimate of selling prices, or ESP, of deliverables if a vendor does not have vendor-specific objective evidence of selling price, or VSOE, or third-party evidence of selling price, or TPE, if VSOE is not available. Each separate unit of accounting must have a selling price, which can be based on management’s

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      estimate when there is no other means (VSOE or TPE) to determine the selling price of that deliverable. The arrangement consideration is allocated based on the elements’ relative selling prices; and
    eliminates use of the residual method and requires an entity to allocate revenue using the relative selling price method, which results in the discount in the transaction being evenly allocated to the separate units of accounting.
     As required, we adopted ASU 2009-13 at the beginning of the first quarter of fiscal 2011 on a prospective basis for transactions originating or materially modified on or after January 1, 2011. ASU 2009-13 generally does not change the units of accounting for our revenue transactions. The impact on adopting ASU 2009-13 was not material to our financial statements during the nine months ended September 30, 2011, and if they were applied in the same manner to the fiscal year ended December 31, 2010 would not have had a material impact on revenue for the nine months ended September 30, 2010. We do not expect the adoption of ASU 2009-13 to have a significant impact on the timing and pattern of revenue recognition in the future due to the limited number of multiple element arrangements. The key impact that we expect the adoption of ASU 2009-13 to have relates to certain EfficiencySMART service arrangements with C&I customers who also provide curtailment of capacity as part of our demand response arrangements. Historically, we had recorded the fees recognized under these arrangements as a reduction of cost of revenues because evidence of fair value did not exist for persistent commissioning services due to the limited history of selling separately and no available TPE. As previously stated, the impact of ASU 2009-13 has not had and is not expected to have a material impact on our financial condition and results of operations.
     We typically determine the selling price of our services based on VSOE. Consistent with our methodology under previous accounting guidance, we determine VSOE based on our normal pricing and discounting practices for the specific service when sold on a stand-alone basis. In determining VSOE, our policy is to require a substantial majority of selling prices for a product or service to be within a reasonably narrow range. We also consider the class of customer, method of distribution, and the geographies into which our products and services are sold into when determining VSOE. We typically have had VSOE for our products and services.
     In certain circumstances, we are not able to establish VSOE for all deliverables in a multiple element arrangement. This may be due to the infrequent occurrence of stand-alone sales for an element, a limited sales history for new services or pricing within a broader range than permissible by our policy to establish VSOE. In those circumstances, we proceed to the alternative levels in the hierarchy of determining selling price. TPE of selling price is established by evaluating largely similar and interchangeable competitor products or services in stand-alone sales to similarly situated customers. We are typically not able to determine TPE and we have not used this measure since we are unable to reliably verify stand-alone prices of competitive solutions. ESP is established in those instances where neither VSOE nor TPE are available, considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life cycle. Consideration is also given to market conditions such as competitor pricing strategies information gathered from experience in customer negotiations, market research and information, recent technological trends, competitive landscape and geographies. Use of ESP is limited to a very small portion of our services, principally certain EfficiencySMART services.
Recent Accounting Pronouncements
Business Combinations
     In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations — Disclosure of Supplementary Pro Forma Information for Business Combinations, or ASU 2010-29. ASU 2010-29 requires a public entity to disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the prior year. It also requires a description of the nature and amount of material, nonrecurring adjustments directly attributable to the business combination included in the reported revenue and earnings. The new disclosure was effective for the first quarter of fiscal 2011. The adoption of ASU 2010-29 requires additional disclosure in the event of a material business combination but did not have a material impact on our financial condition and results of operations during the three and nine months ended September 30, 2011. As a result of the acquisition of Energy Response in July 2011, we were required to meet certain disclosure requirements and provide pro-forma financial information.
Intangibles — Goodwill and Other
     In December 2010, the FASB issued ASU 2010-28, Intangibles- Goodwill and Other, or ASU 2010-28. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. ASU 2010-28 is effective for fiscal years that begin after

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December 15, 2010, which is fiscal 2011 for us. The adoption of ASU 2010-28 did not have a material impact on our financial condition or results of operations.
     ASC 350, Intangibles — Goodwill and Other , or ASU 350 (formerly the FASB Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ), has a two-step impairment test that requires companies to assess goodwill for impairment by quantitatively comparing the fair value of a reporting unit with its carrying amount, including goodwill (Step 1). If the reporting unit’s fair value is less than its carrying amount, Step 2 of the goodwill impairment test must be performed to measure the amount of the goodwill impairment, if any.
     In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, or ASU 2011-08, which gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a company concludes that this is the case, it must perform the two-step test. Otherwise, a company can forgo the two-step test. ASU 2011-08 is effective for fiscal years that begin after December 15, 2011, which is fiscal 2012 for us; however, early adoption is permitted. We are currently evaluating the impact of ASU 2011-08, including whether we will early adopt. We do not expect the adoption of ASU 2011-08 to have a material impact on our financial condition or results of operations.
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
     In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS , or ASU 2011-04, which amends FASB’s accounting guidance related to fair value measurements in order to more closely align its disclosure requirements with those in International Financial Reporting Standards. ASU 2011-04 clarifies the application of existing fair value measurement and disclosure requirements and also changes certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 is not expected to have a material effect on our financial condition or results of operations.
Presentation of Comprehensive Income
     In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, or ASU 2011-05, which represents new accounting guidance related to the presentation of other comprehensive income (OCI). ASU 2011-05 eliminates the option to present components of OCI as part of the statement of changes in shareholders’ equity, which is the option that we currently use to present OCI. ASU 2011-05 allows for a one-statement or two-statement approach, outlined as follows:
    One-statement approach: Present the components of net income and total net income, the components of OCI and a total for OCI, along with the total of comprehensive income in a single continuous statement.
    Two-statement approach: Present the components of net income and total net income in the statement of net income. A statement of OCI would immediately follow the statement of net income and include the components of OCI and a total for OCI, along with the total of comprehensive income.
     ASU 2011-05 also requires an entity to present on the face of the financial statements any reclassification adjustments for items that are reclassified from OCI to net income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-05 will not have an effect on our financial condition or results of operations, but will only impact how certain information related to OCI is presented in our consolidated financial statements.
Additional Information
Non-GAAP Financial Measures
     To supplement our consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP measures that exclude certain amounts, including non-GAAP net income, non-GAAP net income per share, adjusted EBITDA and free cash flow. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States.
     The GAAP measure most comparable to non-GAAP net income is GAAP net income; the GAAP measure most comparable to non-GAAP net income per share is GAAP net income per share; the GAAP measure most comparable to adjusted EBITDA is GAAP net income; and the GAAP measure most comparable to free cash flow is cash flows from operating activities. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measure are included below.

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Use and Economic Substance of Non-GAAP Financial Measures Used by EnerNOC
     Management uses these non-GAAP measures when evaluating our operating performance and for internal planning and forecasting purposes. Management believes that such measures help indicate underlying trends in our business, are important in comparing current results with prior period results, and are useful to investors and financial analysts in assessing our operating performance. For example, management considers non-GAAP net income (loss) to be an important indicator of the overall performance because it eliminates the effects of events that are either not part of our core operations or are non-cash compensation expenses. In addition, management considers adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a good measure of our historical operating trend. Moreover, management considers free cash flow to be an indicator of our operating trend and performance of our business.
     The following is an explanation of the non-GAAP measures that we utilize, including the adjustments that management excluded as part of the non-GAAP measures for the three and nine months ended September 30, 2011 and 2010, respectively, as well as reasons for excluding these individual items:
    Management defines non-GAAP net income (loss) as net income (loss) before expenses related to stock-based compensation and amortization expenses related to acquisition-related intangible assets, net of related tax effects.
 
    Management defines adjusted EBITDA as net income (loss), excluding depreciation, amortization, stock-based compensation, interest, income taxes and other income (expense). Adjusted EBITDA eliminates items that are either not part of our core operations or do not require a cash outlay, such as stock-based compensation. Adjusted EBITDA also excludes depreciation and amortization expense, which is based on our estimate of the useful life of tangible and intangible assets. These estimates could vary from actual performance of the asset, are based on historic cost incurred to build out our deployed network and may not be indicative of current or future capital expenditures.
 
    Management defines free cash flow as net cash provided by (used in) operating activities less capital expenditures. Management defines capital expenditures as purchases of property and equipment, which includes capitalization of internal-use software development costs.
Material Limitations Associated with the Use of Non-GAAP Financial Measures
     Non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow may have limitations as analytical tools. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to the financial information presented in accordance with GAAP and should not be considered measures of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies.
Non-GAAP Net Income and Non-GAAP Net Income per Share
     Net income for the three months ended September 30, 2011 was $46.9 million, or $1.83 per basic share and $1.77 per diluted share, compared to net income of $43.9 million, or $1.76 per basic share and $1.67 per diluted share, for the three months ended September 30, 2010. Net income for the nine months ended September 30, 2011 was $14.6 million, or $0.57 per basic and $0.55 per diluted share, compared to net income of $30.7 million, or $1.25 per basic share and $1.18 per diluted share, for the nine months ended September 30, 2010. Excluding stock-based compensation charges and amortization of expenses related to acquisition-related assets, net of related tax effects, non-GAAP net income for the three months ended September 30, 2011 was $52.1, or $2.03 per basic share and $1.96 per diluted share, compared to a non-GAAP net income of $47.6 million, or $1.91 per basic share and $1.81 per diluted share, for the three months ended September 30, 2010. Excluding stock-based compensation charges and amortization of expenses related to acquisition-related assets, net of related tax effects, non-GAAP net income for the nine months ended September 30, 2011 was $29.7, or $1.16 per basic share and $1.12 per diluted share, compared to a non-GAAP net income of $42.4 million, or $1.72 per basic share and $1.63 per diluted share, for the nine months ended September 30, 2010. The reconciliation of non-GAAP net income to GAAP net income is set forth below:

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    Three Months Ended September 30,  
    2011     2010  
    (In thousands, except share and per share data)  
GAAP net income
  $ 46,878     $ 43,866  
ADD: Stock-based compensation
    3,221       3,664  
ADD: Amortization expense of acquired intangible assets
    2,008       353  
LESS: Income tax effect on Non-GAAP adjustments(1)
          (319 )
 
           
Non-GAAP net income
  $ 52,107     $ 47,564  
 
           
 
               
GAAP net income per basic share
  $ 1.83     $ 1.76  
ADD: Stock-based compensation
    0.12       0.15  
ADD: Amortization expense of acquired intangible assets
    0.08       0.01  
LESS: Income tax effect on Non-GAAP adjustments(1)
          (0.01 )
 
           
Non-GAAP net income per basic share
  $ 2.03     $ 1.91  
 
           
 
               
GAAP net income per diluted share
  $ 1.77     $ 1.67  
ADD: Stock-based compensation
    0.12       0.14  
ADD: Amortization expense of acquired intangible assets
    0.07       0.01  
LESS: Income tax effect on Non-GAAP adjustments(1)
          (0.01 )
 
           
Non-GAAP net income per diluted share
  $ 1.96     $ 1.81  
 
           
 
               
Weighted average number of common shares outstanding
               
Basic
    25,683,177       24,864,755  
Diluted
    26,538,278       26,215,766  
                 
    Nine Months Ended September 30,  
    2011     2010  
    (In thousands, except share and per share data)  
GAAP net income
  $ 14,633     $ 30,744  
ADD: Stock-based compensation
    10,488       11,668  
ADD: Amortization expense of acquired intangible assets
    4,533       1,109  
LESS: Income tax effect on Non-GAAP adjustments(2)
          (1,091 )
 
           
Non-GAAP net income
  $ 29,654     $ 42,430  
 
           
 
               
GAAP net income per basic share
  $ 0.57     $ 1.25  
ADD: Stock-based compensation
    0.41       0.47  
ADD: Amortization expense of acquired intangible assets
    0.18       0.04  
LESS: Income tax effect on Non-GAAP adjustments(2)
          (0.04 )
 
           
Non-GAAP net income per basic share
  $ 1.16     $ 1.72  
 
           
 
               
GAAP net income per diluted share
  $ 0.55     $ 1.18  
ADD: Stock-based compensation
    0.40       0.45  
ADD: Amortization expense of acquired intangible assets
    0.17       0.04  
LESS: Income tax effect on Non-GAAP adjustments(2)
          (0.04 )
 
           
Non-GAAP net income per diluted share
  $ 1.12     $ 1.63  
 
           
 
               
Weighted average number of common shares outstanding
               
Basic
    25,491,362       24,650,453  
Diluted
    26,498,620       26,013,402  

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(1)   Represents the increase in the income tax provision recorded for the three months ended September 30, 2010 based on our effective tax rate for the three months ended September 30, 2010. The non-GAAP adjustments would have no impact on the provision for income taxes recorded for the three months ended September 30, 2011.
 
(2)   Represents the reduction in the income tax benefit recorded for the nine months ended September 30, 2010 based on the effective tax rate for the nine months ended September 30, 2010. The non-GAAP adjustments would have no impact on the provision for income taxes recorded for the nine months ended September 30, 2011.
Adjusted EBITDA
     Adjusted EBITDA was $60.7 million and $55.9 million for the three months ended September 30, 2011 and 2010, respectively. Adjusted EBITDA was $46.9 million and $57.7 million for the nine months ended September 30, 2011 and 2010, respectively.
     The reconciliation of adjusted EBITDA to net income is set forth below:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Net income
  $ 46,878     $ 43,866     $ 14,633     $ 30,744  
Add back:
                               
Depreciation and amortization
    6,545       4,463       16,509       11,793  
Stock-based compensation expense
    3,221       3,664       10,488       11,668  
Other expense (income)
    2,471       (42 )     2,485       (31 )
Interest expense
    397       195       798       686  
Provision for income tax
    1,225       3,779       1,992       2,869  
 
                       
Adjusted EBITDA
  $ 60,737     $ 55,925     $ 46,905     $ 57,729  
 
                       

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Free Cash Flow
     Cash flows provided by operating activities was $8.7 million and $16.8 million for the three and nine months ended September 30, 2011, respectively. Cash flows provided by operating activities was $17.7 million and $28.7 million for the three and nine months ended September 30, 2010, respectively. Although our net income for the three months ended September 30, 2011 was greater than our net income for the comparable period of 2010, our cash flows provided by operating activities for the three months ended September 30, 2011 were lower than the comparable period of 2010. The key factors that resulted in lower cash flows provided by operating activities for the three months ended September 30, 2011 as compared to the same period in 2010 were as follows: approximately $6.0 million of our consolidated revenues and consolidated net income for the three months ended September 30, 2011 resulted from a change in an estimated reserve and recognition of deferred revenues which had been paid in a prior period; certain payments received in advance of performance of services during the three months ended September 30, 2010 that did not occur during the comparable period of 2011; and the timing of cash receipts related accounts receivable. We expect to continue to collect our accounts receivables in the normal course and have not identified any material collectability issues with respect to accounts receivable as of September 30, 2011. We incurred positive free cash flows of $5.7 million and $14.4 million for the three months ended September 30, 2011 and 2010, respectively. We incurred positive free cash flows of $1.6 million and $13.4 million for the nine months ended September 30, 2011 and 2010, respectively. The reconciliation of free cash flow to cash flow from operating activities is set forth below:
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Net cash provided by operating activities
  $ 8,714     $ 17,686     $ 16,766     $ 28,662  
Subtract:
                               
Purchases of property and equipment
    (3,028 )     (3,244 )     (15,172 )     (15,283 )
 
                       
Free cash flow
  $ 5,686     $ 14,442     $ 1,594     $ 13,379  
 
                       
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     Except as disclosed herein, there have been no material changes to 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 2010 Form 10-K during the three and nine months ended September 30, 2011.
Foreign Exchange Risk
     Our international business is subject to risks, including, but not limited to unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.
     A substantial majority of our foreign expense and sales activities are transacted in local currencies, including Australian dollars, British pounds, Canadian dollars and New Zealand dollars. In addition, our foreign sales are denominated in local currencies. Fluctuations in the foreign currency rates could affect our sales, cost of revenues and profit margins and could result in exchange losses. In addition, currency devaluations can result in a loss if we maintain deposits in a foreign currency. During the three and nine months ended September 30, 2011, less than 10% of our sales were generated outside the United States.
     We believe that the operating expenses of our international subsidiaries that are incurred in local currencies will not have a material adverse effect on our business, results of operations or financial condition for the year ending December 31, 2011. Our operating results and certain assets and liabilities that are denominated in foreign currencies are affected by changes in the relative strength of the U.S. dollar against the applicable foreign currency. Our expenses denominated in foreign currencies are positively affected when the U.S. dollar strengthens against the applicable foreign currency and adversely affected when the U.S. dollar weakens.
     During the three and nine months ended September 30, 2011, we incurred foreign exchange losses of $2.6 million and $2.8 million, respectively. Gains arising from transactions denominated in foreign currencies were $13,000 for the three months ended September 30, 2010. Losses arising from transactions denominated in foreign currencies were $17,000 for the nine months ended September 30, 2010. The significant increase in losses arising from transactions denominated in foreign currencies for the three and nine months ended September 30, 2011 as compared to the same periods of 2010 was due to the significant increase of foreign denominated intercompany receivables held by us from one of our Australian subsidiaries primarily as a result of the funding provided to complete the acquisition of Energy Response and the strengthening of the U.S. dollar as compared to the Australian dollar during the three months ended September 30, 2011. During the three and nine months ended September 30, 2011 and 2010, there were no material realized losses incurred related to transactions denominated in foreign currencies. As of September 30, 2011, we had an intercompany receivable from our Australian subsidiary that is denominated in Australian dollars and not deemed to be of a “long-term investment” nature totaling $32.0 million, or $32.6 million Australian.

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     A hypothetical 10% increase or decrease in foreign currencies that we transact in would not have a material adverse effect on our financial condition or results of operations other than the impact on the unrealized gain (loss) on the intercompany receivable held by us from our Australian subsidiary that is denominated in Australian dollars, for which a hypothetical 10% increase or decrease in the foreign currency would result in an incremental $3.3 million gain or loss.
     We currently do not have a program in place that is designed to mitigate our exposure to changes in foreign currency exchange rates. We are evaluating certain potential programs, including the use of derivative financial instruments to reduce our exposure to a reduction in U.S. dollar value and the volatility of future cash flows caused by changes in currency exchange rates. The utilization of forward foreign currency contracts would reduce, but would not eliminate, the impact of currency exchange rate movements.
Item 4. Controls and Procedures
Disclosure Controls and Procedures.
     Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting.
     As a result of our recent acquisitions, we have begun to integrate certain business processes and systems. Accordingly, certain changes have been made and will continue to be made to our internal controls over financial reporting until such time as these integrations are complete. There have been no other changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are 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 2010 Form 10-K. During the three months ended September 30, 2011, there were no material changes to the risk factors that were disclosed in Part I — Item 1A under the heading “Risk Factors” in our 2010 Form 10-K, other than as set forth below:
     The following risk factors replace and supersede the corresponding risk factors set forth in our 2010 Form 10-K:
A substantial majority of our revenues are and have been generated from contracts with, and open market program sales to, a limited number of electric power 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, 2010, 2009 and 2008, revenues generated from open market sales to PJM, an electric power grid operator customer, accounted for 60%, 52% and 28%, respectively, of our total revenues. During the nine months ended September 30, 2011, revenues generated from open market sales to PJM accounted for 58% of our total revenues. 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 profit margins and have a material adverse effect on our results of operations and financial condition. For example, beginning in June 2012, PJM will discontinue the ILR program, which is a program in which we have historically been an active participant. The discontinuance of the ILR program by PJM will reduce the flexibility that we currently have to manage our portfolio of demand response capacity in the PJM market and will negatively impact our future revenues and profit margins.
     In addition, in February 2011, PJM and Monitoring Analytics, LLC, the PJM market monitor, issued the PJM statement. The PJM statement, among other things, asserted that certain market practices in the PJM market were no longer appropriate or acceptable and unilaterally implied that compensation should no longer be determined by actual measured reductions in C&I customers’ electrical load. In March 2011, we filed for and were granted expedited declaratory relief with FERC, which allowed us to continue to manage our portfolio of demand response capacity in PJM as we had in the past and receive settlement in accordance with the then current PJM market rules approved by FERC. However, PJM continued to take steps to modify the market rules according to the PJM statement, including by filing proposed tariff changes with FERC. The FERC order was subsequently issued on November 4, 2011. Although we believe that, based on the language contained in the FERC order, our revenues and gross profits derived from the PJM market for fiscal 2011 will not be impacted by the FERC order, our ability to manage our portfolio of demand response capacity in the PJM market for future delivery years may be harmed by the FERC order, which could significantly reduce our future revenues and profit margins and which may have a material adverse effect on our results of operations and financial condition. Furthermore, the attention of our management and other personnel has been, and may continue to be, diverted as we evaluate and respond to the FERC order, which may continue to have a negative impact on our sales efforts in, and revenues and gross profits derived from the PJM region, as well as our other operating regions.
     In addition, revenues generated from two fixed price contracts with, and open market sales to ISO-NE, an electric power grid operator customer, accounted for 18%, 29% and 36%, respectively, of our total revenues for the years ended December 31, 2010, 2009 and 2008. During the nine months ended September 30, 2011, revenues generated from open market sales to ISO-NE accounted for 11% of our total revenues. 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 profit margins and have a material adverse effect on our results of operations and financial condition.
Varying regulatory structures, program rules and program designs or an oversupply of electric generation capacity in certain regional electric power markets could negatively affect our business and results of operations.
     Unfavorable regulatory decisions in markets where we currently operate could also significantly and negatively affect our business. For example, in connection with the FERC order, or to the extent PJM is otherwise successful at further modifying the market rules in the future, our future revenues and profit margins will be significantly reduced and our future results of operations and financial condition will be negatively impacted. Regulators could also modify market rules in certain areas to further limit the use of back-up generators in demand response markets or could implement bidding floors or caps that could lower our revenue opportunities. A limit on back-up generators would mean that some of the demand response capacity reductions we aggregate from C&I customers willing to reduce consumption from the electric power grid by activating their own back-up generators during demand response events would not qualify as capacity, and we would have to find alternative sources of capacity from C&I customers willing to reduce load by curtailing consumption rather than by generating electricity themselves. Market rules could also be modified to change the design of a particular demand response program, which may adversely affect our participation in that program, or a demand response program in which we currently participate could be eliminated in its entirety. Any elimination or change in the design of a demand response program, including any supplemental program, in which we participate, especially in the PJM or ISO-NE markets, could adversely impact our ability to successfully provide our demand response application and services or manage our portfolio of demand response capacity in that program.
     In addition, a buildup of new electric generation facilities or reduced demand for electric capacity could result in excess electric generation capacity in certain regional electric power markets. In addition, the electric power industry is highly regulated. The regulatory structures in regional electricity markets are varied and some regulatory requirements make it more difficult for us to provide some or all of our energy management applications and services in those regions. For instance, in some markets, regulated quantity or payment levels for demand response capacity or energy make it more difficult for us to cost-effectively enroll and manage many C&I customers in demand response programs. Further, some markets have regulatory structures that do not yet include demand response as a qualifying resource for purposes of short-term reserve requirements known as ancillary services. As part of our business strategy, we intend to expand into additional regional electricity markets. However, the combination of excess electric generation capacity and unfavorable regulatory structures could limit the number of regional electricity markets available to us for expansion.
     The following risk factor is added to the risk factors included in our 2010 Form 10-K:
An adverse change in the projected cash flows from our acquired businesses or the business climate in which they operate, including the continuation of the current financial and economic turmoil, could require us to incur an impairment charge, which would have an adverse impact on our operating results.
     We periodically review the carrying value of the goodwill and other long-lived assets reflected in our financial statements to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment of the value of

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these assets. Conditions that would indicate impairment and necessitate a revaluation of these assets include, but are not limited to, a significant adverse change in the business climate or the legal or regulatory environment within which we operate. If the carrying value of an asset is determined to be impaired we will write-down the carrying value of the intangible asset to its fair value in the period identified. We generally calculate fair value as the present value of estimated future cash flows to be generated by the asset using a risk-adjusted discount rate. As of September 30, 2011, we had approximately $112.7 million of goodwill and definite-lived and indefinite-lived intangible assets. We have experienced a decline in the price of our publicly-traded common stock and related market capitalization such that our market capitalization has declined slightly below the book value of our net assets. We evaluated this decline in our market capitalization and have concluded that it was not an indicator of an impairment that existed as of September 30, 2011. We will continue to monitor our market capitalization compared to the book value of our net assets. It is possible that the continuation of the current global financial and economic turmoil could negatively affect our anticipated cash flows, or the discount rate that is applied to valuing those cash flows, which could impact our annual impairment test of goodwill that occurs in the fourth quarter of our fiscal year. Any impairment test could result in a material impairment charge that would have an adverse impact on our operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
     (a) Unregistered Sales of Equity Securities
     We offered, issued and/or sold the following unregistered securities during the three months ended September 30, 2011: on July 1, 2011, in connection with our acquisition of Energy Response, we issued 156,697 shares of our common stock.
     The issuance of the securities described above was deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, as transactions by an issuer not involving any public offering. The recipients of these securities in such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof. Such recipients received written disclosures that the securities have not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of these securities are deemed restricted securities for the purposes of the Securities Act. The sales of these securities were made without general solicitation or advertising.
     (c) Issuer Purchases of Equity Securities
     The following table provides information about our purchases of our common stock during the three months ended September 30, 2011.
                                 
                            Maximum Number (or  
                            Approximate Dollar Value)  
                    Total Number of Shares     of Shares  
    Total Number             Purchased As Part     that May Yet Be Purchased  
    Shares of     Average Price Paid     of Publicly Announced     Under the Plans or  
Period   Purchased (1)     per Share (2)     Plans or Programs     Programs  
July 1, 2011 — July 31, 2011
        $              
August 1, 2011 — August 31, 2011
    45,473       23.74              
September 1, 2011 — September 30, 2011
                       
 
                         
Total
    45,473     $ 23.74              
 
                         
 
(1)   Consists of shares of our common stock that were released back to us in August 2011, which were previously held in escrow in connection with our acquisition of M2M. These shares reflect the settlement of a receivable from the former stockholders of M2M that was recorded in connection with a purchase price reduction that resulted from our gathering of information to update our valuation of certain acquired assets and liabilities related to the M2M acquisition. Please refer to Note 2 in the accompanying unaudited condensed consolidated financial statements contained herein for further discussion.
 
(2)   Represents the average of the closing price of a share of our common stock, as reported on The NASDAQ Global Market for the ten trading days ending two days prior to the closing date of our acquisition of M2M, or January 25, 2011.

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Item 6. Exhibits.
     
2.1
  Stock Purchase Agreement, dated as of July 1, 2011, by and among EnerNOC, Inc., EnerNOC Australia Pty Ltd, Energy Response Holdings Pty Ltd, Semibreve Pty Ltd, in its capacity as a security holder representative, and certain individuals named herein.
 
   
10.1
  First Amendment to Amended and Restated Lease, dated as of September 16, 2011, between Aslan III Federal, L.L.C. (formerly known as Transwestern Federal, L.L.C.) and EnerNOC, Inc.
 
   
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 the 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.
 
   
101@
  The following materials from EnerNOC, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements.
 
@   Users of the XBRL data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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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 7, 2011  By:   /s/ Timothy G. Healy    
    Timothy G. Healy   
    Chief Executive Officer
(principal executive officer) 
 
 
     
Date: November 7, 2011  By:   /s/ Timothy Weller    
    Timothy Weller   
    Chief Financial Officer and Treasurer
(principal financial officer) 
 

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Exhibit Index
     
Number   Exhibit Title
2.1
  Stock Purchase Agreement, dated as of July 1, 2011, by and among EnerNOC, Inc., EnerNOC Australia Pty Ltd, Energy Response Holdings Pty Ltd, Semibreve Pty Ltd, in its capacity as a security holder representative, and certain individuals named herein.
 
   
10.1
  First Amendment to Amended and Restated Lease, dated as of September 16, 2011, between Aslan III Federal, L.L.C. (formerly known as Transwestern Federal, L.L.C.) and EnerNOC, Inc.
 
   
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 the 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.
 
   
101@
  The following materials from EnerNOC, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements.
 
@   Users of the XBRL data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

60

Exhibit 2.1
[Execution Copy]
 

STOCK PURCHASE AGREEMENT
BY AND AMONG
ENERNOC, INC.
ENERNOC AUSTRALIA PTY LTD,
ENERGY RESPONSE HOLDINGS PTY LTD,
THE STOCKHOLDERS,
THE NOTEHOLDERS,
THE OPTION HOLDERS, AND
SEMIBREVE PTY LTD, AS SECURITYHOLDER REPRESENTATIVE
Dated as of July 1, 2011
 

1


 

STOCK PURCHASE AGREEMENT
     THIS STOCK PURCHASE AGREEMENT (this “ Agreement ”) is made and entered into as a deed as of this 1st day of July, 2011 by and among EnerNOC, Inc., a Delaware corporation (the “ Parent ”), EnerNOC Australia Pty Ltd (ACN 143 762 350) (the “ Buyer ”), Energy Response Holdings Pty Ltd (ACN 108 827 596) (the “ Company ”), the parties identified on the signature page hereto under the heading “Stockholders” (the “ Stockholders ”), the parties identified on the signature page hereto under the heading “Noteholders” (the “ Noteholders ”), the parties identified on the signature page hereto under the heading “Option Holders” (the “ Option Holders ”, and together with the Stockholders and the Noteholders, the “ Securityholders ”), and Semibreve Pty Ltd (ACN 139 654 541), in its capacity as the representative of the Securityholders. Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to such terms in Article 13 .
RECITALS
     WHEREAS, the Buyer desires to purchase all of the Ordinary Shares in the capital of the Company which shall constitute all of the Shares on issue in the Company;
     WHEREAS, the Stockholders desire to sell to the Buyer all of the Ordinary Shares owned by such Stockholders;
     WHEREAS, with effect from the Closing, all Options (whether or not vested) then outstanding will be cancelled, and the Option Holders will receive payment therefor;
     WHEREAS, prior to the Closing, the Noteholders will convert all outstanding Convertible Notes into Ordinary Shares in accordance with the terms thereof and hereof and the Noteholders will, at the Closing, sell to the Buyer all Ordinary Shares received upon such conversion and shall receive payment for those Ordinary Shares;
     WHEREAS, the Buyer, the Company, and the Securityholders desire to consummate such transaction upon the terms and subject to the conditions set forth herein; and
     WHEREAS, in consideration for the Securityholders and the Company entering into this Agreement, the Parent has agreed to guarantee the performance of the obligations of the Buyer under the Transaction Documents.
AGREEMENT
     NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth and the representations, warranties, covenants and agreements in this Agreement, the parties hereto agree as follows:
ARTICLE 1
PURCHASE AND SALE
      1.1 Purchase and Sale . Upon the terms and subject to the conditions of this Agreement, each Stockholder and Noteholder, severally but not jointly, shall sell to Buyer, and Buyer shall purchase from each such Stockholder and Noteholder, at the Closing, that number of Ordinary Shares as is set forth opposite such Stockholder’s name on Schedule 1.1 . The aggregate purchase price for all of the Ordinary Shares and the amount payable to the

2


 

Option Holders (the “ Purchase Price ”) shall be determined pursuant to Section 2.1 . The Purchase Price shall be paid as provided in Sections 2.3 through 2.6 .
      1.2 The Ordinary Shares must be transferred by each Stockholder and Noteholder to the Buyer together with all rights attaching to or arising from the Ordinary Shares on or after the date of this Agreement, including all rights to receive dividends or other distributions and to receive or subscribe for shares, options, debentures, notes or other securities, declared, paid or issued by the Company.
      1.3 Title to the Shares (and property and risk in them) remains solely with the Stockholders and Noteholders until Closing and, subject to the provisions of this Agreement, passes from the Stockholders and Noteholders to the Buyer with effect from Closing.
ARTICLE 2
PURCHASE PRICE
      2.1 Purchase Price . The “ Purchase Price ” shall equal the following:
           (a) A$27,500,000;
           (b) plus, the Earnout Payment (subject to the satisfaction of the Earnout Milestones in accordance with Section 2.6) ;
           (c) plus, the 2011/2012 IMO Deposit amount referred to in Section 8.4 ;
           (d) if Net Working Capital is less than A$0, less the amount by which Net Working Capital is less than A$0;
           (e) if Net Working Capital is more than A$0, plus the amount by which Net Working Capital exceeds A$0;
           (f) less the amount of Indebtedness of the Company Group on a consolidated basis as at the Closing Date not included in the calculation of Net Working Capital (other than Securityholder Loans);
           (g) less, the amount of any Company Transaction Expenses not included in the calculation of Net Working Capital (whether incurred on or after April 15, 2011); and
           (h) less, the amount of any expense (other than Company Transaction Expenses or expenses paid with the amounts raised from Securityholder Loans) which is:
                (i)  incurred after April 15, 2011; and
                (ii)  an expense which the Company was not entitled to incur under Section 7.2 without the prior written consent of the Buyer;
           (i)  plus, the amount equal to the portion of the loans advanced to the Company under the Loan Agreement dated on or about 28 June 2011 between the Company and Givia Pty Limited, Flowers ‘N Trees Pty Limited as trustee of the Sades Family Trust, Stonnington Securities Pty Ltd as trustee for New Century Super Fund, Jitendar Tomar and

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Uplands Group Pty Limited and the Loan Agreement dated on or about 30 June 2011 between the Company and Uplands Group Pty Limited, which is held by the Borrower at Closing, provided however that no deduction shall be made under this Section 2.1 on account of any Indebtedness to the extent that the Buyer has been directed under Section 3.4 to apply an amount of the Closing Purchase Price in repayment of such Indebtedness.
      2.2 Net Working Capital; Reference Balance Sheet : For the purpose of this Agreement:
           (a)  Net Working Capital ” means (i) the amount of current assets of the Company Group on a consolidated basis as shown in the Reference Balance Sheet exclusive of the 2011/2012 IMO Deposit and the portion of the EFI Funding Receivables attributable to the purchase of metering assets as set forth in the Reference Balance Sheet, minus (ii) the amount of current liabilities of the Company Group on a consolidated basis as shown in the Reference Balance Sheet, minus (iii) the aggregate amount of the non-current Indebtedness of the Company Group as shown in the Reference Balance Sheet (excluding the non-current Indebtedness attributable to the Convertible Notes converting to Shares in connection with this Transaction), which calculation is set forth in the Closing Statement; and
           (b)  Reference Balance Sheet ” means a consolidated balance sheet of the Company Group as at April 15, 2011, set out in Exhibit L of this Agreement, in which the balance sheet amounts that are utilized in the calculation of Net Working Capital have been determined in accordance with IFRS.
      2.3 Consideration Mix .
           (a)  A portion of the Purchase Price (excluding the Earnout Payment) equal to $2.5 million shall be paid in Parent Common Stock. The number of shares of Parent Common Stock shall be determined by dividing (a) $2.5 million by (b) the Thirty Day Trading Average Price.
           (b)  Subject to the satisfaction of the Earnout Milestones, a portion of the Earnout Payment shall be paid in Parent Common Stock in accordance with Section 2.6 .
           (c)  Each Securityholder acknowledges and agrees that only such Securityholders:
                (i)  whose respective portion of the Closing Purchase Price, or whose respective portion of the Closing Purchase Price when aggregated with the portions of the Closing Purchase Price of other Securityholders who are its Related Persons, exceeds A$400,000; and
                (ii)  who are “accredited investors” as defined in Rule 501 promulgated under the United States Securities Act of 1933 and are persons who do not require a disclosure document pursuant to section 708 of the Corporations Act 2001 (Cth) in connection with the offer and issuance of Stock Consideration under this Agreement, (“ Accredited Holders ”) shall be eligible to receive any Stock Consideration pursuant to this Agreement.
           (d)  Any Securityholder who does not meet the criteria set forth in Section

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2.3(c) shall receive their share of the Purchase Price in cash only.
        2.4 Calculation and Payment of the Closing Purchase Price.
           (a) As soon as is reasonably practicable following the date of this Agreement and in any event at least two (2) days prior to the Closing Date, the Company shall prepare and deliver, on behalf of the Securityholders, to the Buyer a statement (the “ Closing Statement ”) in the form set forth on Exhibit A , which shall be accompanied by a report of BDO as required by Section 3.2(i)(iv) , containing (i) the Reference Balance Sheet, (ii) the calculation of Net Working Capital and all other potential additions and deductions to the Purchase Price set forth in Section 2.1 , (iii) the calculation of the Purchase Price pursuant to Section 2.1 (other than the Earnout Payment and the amount referred to in Section 8.4 ), (iv) each Securityholder’s portion of the Closing Purchase Price and, in respect of each Accredited Holder, the amount of the Closing Purchase Price to be paid to such Accredited Holder in cash and the amount to be paid in shares of Parent Common Stock, (v) each Securityholder’s portion of the amount set forth in Section 8.4 , (vi) Escrow Amount, (vi) each Securityholder’s portion of the SR Retention Amount, (vii) each Securityholder’s portion of the Escrow Amount (which, in the case of Accredited Holders, shall consist of Stock Consideration only and in the case of Non-Accredited Holders shall consist of cash only), (viii) each Securityholder’s Pro Rata Portion, (ix) each Securityholder’s portion of the Earnout Amount and, in respect of each Accredited Holder, the amount of the Earnout Payment to be paid to such Accredited Holder in cash and the amount to be paid in shares of Parent Common Stock. The Closing Statement shall be based upon the books and records of the Company and other information then available and shall be subject to Buyer review (including review of reasonable backup information) prior to being formally delivered under this Section 2.4(a) .
     At the Closing the cash amounts referred to in clause (iv) of this Section 2.4(a) shall be paid in accordance with the Closing Statement and promptly after the Closing the Stock Consideration referred to in clause (iv) of this Section 2.4(a) shall be issued and registered in the names of the Securityholders to whom it is issued. All payments of Cash Consideration shall be made by one unendorsed bank cheque drawn on an Australian bank or one wire transfer to an account with an Australian bank specified by the Securityholder Representative. All payments of Stock Consideration shall be mailed as soon as practicable after the Closing to the relevant Securityholders to the addresses provided to the Buyer in writing by the Securityholder Representative. Until surrendered in accordance with Section 3.2(j) , each outstanding share of capital stock of the Company will be deemed from and after the Closing Date, for all corporate purposes, to evidence only the right to receive such portion of the Purchase Price as set forth on the Closing Statement.
                (b)  Immediately following its receipt of the duly executed Payoff Letters (as defined in Section 3.2(d) ) from each lender under any Securityholder Loan, the Buyer shall pay to the Company, and cause the Company, on the date of Closing, to pay to such lenders an amount of principal and interest then outstanding under any Securityholder Loans made after April 15, 2011. Prior to the Company or any Company Subsidiary borrowing any amounts that are equal to or below A$500,000 in principal and interest under any Securityholder Loan after April 15, 2011, the Company shall provide written notification to the Buyer of such borrowing but shall not be required to obtain the Borrower’s consent; and prior to borrowing any amounts under any Securityholder Loan after April 15, 2011, that when combined with any outstanding Indebtedness under any other Securityholder Loans made after such date, exceeds A$500,000 in

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the aggregate in principal and interest, the Company must obtain the written consent of Buyer, which consent may be granted or withheld in its sole discretion and for any reason.
      2.5 Escrow Amount .
           (a)  For purposes of payment of the Securityholders’ obligations pursuant to Article 10 , the Buyer shall retain and hold from the Purchase Price otherwise payable to the Securityholders, an amount equal to the Escrow Amount until distribution is required under the terms of the Escrow Rules, it being understood that the Escrow Amount shall consist of: (i) with respect to Accredited Holders, solely the amount of the Stock Consideration as set forth in the Closing Statement and (ii) with respect to Non-Accredited Holders, solely the amount of Cash Consideration as set forth in the Closing Statement. On Closing, the Buyer shall deposit the Escrow Amount in accordance with the terms of the Escrow Rules. The execution of this Agreement by the Securityholders will constitute their approval of the terms and conditions of the Escrow Rules, which are an integral part of the Transaction, and the appointment of the Securityholder Representative.
           (b)  The retention by the Buyer of the Escrow Amount (including (i) the shares of Parent Common Stock consisting of the portion of the Escrow Amount allocable to Accredited Holders and (ii) the cash consisting of the portion of the Escrow Amount allocable to Non-Accredited Holders, in each case) will be made on behalf of each Securityholder in accordance with the provisions of the Escrow Rules, with the same force and effect as if such amount had been delivered by the Buyer directly to such Securityholder and subsequently delivered by such Securityholder to the Buyer in escrow. Each Securityholder’s portion of the Escrow Amount (as set forth on the Closing Statement) shall be available to satisfy such Securityholder’s obligations pursuant to Article 10 until all amounts held in such Securityholder’s Escrow Amount are released pursuant to the terms of the Escrow Rules.
      2.6 Earnout Payment .
           (a)  Subject to Closing, the Securityholders shall be entitled to an earnout payment of A$10,000,000, payable A$6,670,000 in cash (the “ Earnout Cash Consideration ”) and A$3,330,000 to be paid in such number of shares of Parent Common Stock determined by dividing A$3,330,000 by the Thirty Day Trading Average Price (the “ Earnout Stock Consideration ”, and together with the Earnout Cash Consideration, the “ Earnout Payment ”) if the Earnout Milestones (as defined below) are achieved prior to December 31, 2013 (unless such date is extended pursuant to the proviso below) (such period, the “ Earnout Period ”). The Earnout Payment shall be deemed achieved if, prior to the end of the Earnout Period, a demand response reserve capacity mechanism is launched within the National Electricity Market that (i) provides at least 1,000 megawatt (“ MW ”) of commercial and industrial demand response capacity at a price of no less than A$60,000 per MW-year for curtailment of 100 hours per year or less, (ii) provides portfolio and performance aggregation with a 10-minute or greater response to event dispatch instructions, and (iii) does not require cost-prohibitive technology (collectively, the “ DR Reserve Capacity Market ”); provided that if government policy to create DR Reserve Capacity Market is officially proposed in the year ending December 31, 2013 and pursuant to such policy, the DR Reserve Capacity Market becomes operational and the elements referred to in (i), (ii) and (iii) above (the “ Earnout Milestones ”) are achieved during the year ending December 31, 2014, the Earnout Payment shall also be deemed achieved.

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           (b)  If achieved, the Earnout Payment shall be paid within 15 Business Days after December 31 st of the calendar year in which the Earnout Payment is achieved. The Earnout Payment shall be allocated among, and paid to, the Securityholders in accordance with their entitlements in relation to the Earnout Payment as set forth on the Closing Statement.
           (c)  All payments of Earnout Cash Consideration shall be made by one unendorsed bank cheque drawn on an Australian bank or wire transfer to one account with an Australian bank specified by the Securityholder Representative to the Buyer. All payments of Earnout Stock Consideration shall be mailed to the relevant Securityholders to the addresses provided to the Buyer in writing by the Securityholder Representative.
           (d)  The Earnout Payment shall be available to satisfy indemnification claims to the extent provided in Article 10 .
      2.7 No Fractional Shares . Any entitlement to a fractional share of Parent Company Stock shall be rounded down to the nearest whole share.
      2.8 Treatment of Options . Each Securityholder that holds Options and/or any other equity interests, whether vested or not, agrees that on and from Closing:
           (a)  those Options and all other equity interests shall be terminated without the payment of additional Purchase Price beyond what is provided in the Closing Statement;
           (b)  the Company shall cease to have any liability to the Securityholder in respect of those Options and other equity interests; and
           (c)  where the Securityholder participated in or was entitled to participate in the employee share option plan operated by the Company, the Company shall cease to have any liability to the Securityholder in respect of that plan.
      2.9 Treatment of Convertible Notes . Prior to the Closing, the Company shall take such actions as necessary so that each outstanding Convertible Note, including all outstanding principal, shall convert into Ordinary Shares effective as of the Closing without the payment of additional Purchase Price beyond what is provided in the Closing Statement. Prior to the Closing, the Company and the Securityholders shall provide the Buyer with evidence satisfactory to the Buyer that the foregoing actions have been taken, including the provision of resolutions of the Board of Directors of the Company adopting such actions. The Company and each Noteholder agree that:
           (a)  the Noteholder’s entry into this Agreement shall constitute confirmation of such Noteholder’s agreement to convert the Convertible Notes immediately prior to Closing on the terms of this Agreement and that no notice or other action which may otherwise be required under the terms of the Convertible Notes shall be required to give effect to such conversion; and
           (b)  the conversion of Convertible Notes on this basis shall operate to fully discharge and release the Company from any obligation to pay interest that has accrued in respect of such Convertible Notes but is unpaid as at Closing.
      2.10 Stock Transfers; Removal of Legend; SEC Filings.

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           (a)  At any time after a Securityholder becomes eligible to sell any of its Parent Common Stock pursuant to Rule 144 and any stock certificate representing such Parent Common Stock has a legend or other language that restricts the transfer of such stock certificate (a “ Restricted Stock Certificate ”), such Securityholder may deliver written notice to the Parent and its counsel including a seller’s representation letter and a broker’s representation letter in customary form. Thereafter, Parent shall cause its legal counsel to deliver a written opinion to Parent’s transfer agent within three business days with respect to the sale of the shares. Parent confirms and agrees that the holding period for the purpose of Rule 144 in respect of Stock Consideration (including Stock Consideration forming part of the Escrow Amount) will commence on and from the date of issue of such Stock Consideration.
           (b)  The Buyer confirms that any legend or other language included on any stock certificate in respect of Stock Consideration that restricts the transfer of the stock certificate will be in customary form.
           (c)  With a view to making available to the Securityholders the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit a Securityholder to sell Parent Common Stock to the public without registration, the Parent shall use commercially reasonable efforts to (x) make and keep public information available at all times after the Closing, as those terms are understood and defined in Rule 144, and (y) file with the SEC in a timely manner all reports and other documents required of the Parent under the Securities Act and the Exchange Act.
      2.11 Waiver of pre-emptive and other inconsistent rights.
     (a) Subject to Section 2.11(b) , each Securityholder hereby waives, to the extent of any inconsistency, all rights of pre-emption, rights of first refusal and other rights which it may have under the Company’s constitution or otherwise and which are (or the enforcement of which would be) inconsistent with the performance or consummation of any part of the Transactions as contemplated by the Transaction Documents.
     (b)  Section 2.11(a) shall not prejudice the rights of any Securityholder to enforce the drag-along provisions of the Company’s constitution to the extent that the Buyer and the Securityholder Representative agree in writing the use of those provisions in order to effect the sale of all issued Shares to the Buyer.
ARTICLE 3
CLOSING; CONDITIONS PRECEDENT TO CLOSING
      3.1 Closing . The Closing shall be held at the offices of Norton Rose, located at Level 15, RACV Tower, 485 Bourke Street, Melbourne, Australia, or otherwise (if agreed between the parties) remotely via the exchange of documents and signatures, on a date to be mutually agreed upon by the Buyer and the Securityholder Representative, which date shall be no later than the second Business Day after all of the conditions set forth in this Article 3 have been satisfied or waived (other than those conditions which, by their terms, are intended to be satisfied at the Closing), or at such other time and place as the Buyer and the Securityholder Representative shall mutually agree; provided that no Securityholder shall be required to appear in person at the Closing and provided further that in no event shall the Closing occur any earlier than July 1, 2011. Except as otherwise provided in the Transaction Documents, all proceedings to be taken and all documents to be executed at the Closing shall

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have been taken, delivered and executed simultaneously, and no proceeding shall be deemed taken nor documents deemed executed or delivered until all have been taken, delivered and executed.
      3.2 Conditions Precedent to the Buyer’s Obligations . Subject to Section 3.7 , the obligation of the Buyer to consummate the Transactions is subject to the satisfaction as of the Closing of, and the Closing must not take place until the satisfaction of, each of the following conditions:
           (a) The representations and warranties of the Company set forth in Article 4 and the Securityholders set forth in Article 14 that are qualified by any reference to Material Adverse Effect or other materiality qualifications shall be true and correct on and as of the date of this Agreement and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except to the extent that any representation or warranty is limited by its terms to a specific date or range of dates (in which case such representation and warranty need only be true and correct on the date or during the range of dates so specified). All other representations and warranties of the Company set forth in Article 4 and the Securityholders set forth in Article 14 shall be true and correct on and as of the date of this Agreement and as of the Closing Date in all material respects with the same force and effect as though made on and as of the Closing Date, except to the extent that any representation or warranty is limited by its terms to a specific date or range of dates (in which case such representation and warranty need only be true and correct in all material respects on the date or during the range of dates so specified).
           (b)  The Company and each Securityholder shall have performed in all material respects their respective covenants contained in this Agreement and which are required to be performed on or prior to the Closing Date (other than Section 3.7 ).
           (c)  The Company shall have delivered to the Buyer a certificate dated as of the Closing Date and signed by the Company stating that the conditions set forth in Sections 3.2(a) and (b) applicable to the Company have been satisfied as of the Closing Date. The statements contained in such certificate shall be a representation and warranty of the Company, which shall survive the Closing for the period provided in Section 10.1 and otherwise be subject to the limitations in Article 10 .
           (d) (i) The lenders under any Securityholder Loan or any other Indebtedness of the Company or a Company Subsidiary, including, without limitation, those items set forth on Schedule 3.2(d) , but not including the EFI Financing (which shall be governed by Section 3.2(d)(ii), shall have delivered to the Buyer their final form of payoff, termination and release letter, in a form attached hereto as Exhibit I (the “ Payoff Letters ”).
(ii) Energy for Industry Limited or any of its Related Entities and the Company or any Company Subsidiary shall have entered into an agreement on terms reasonably acceptable to the Buyer pursuant to which (a) the EFI Financing is terminated without any payment therefor by the Buyer, the Parent or, from and after the Closing, the Company or any Company Subsidiary, (b) title and ownership of the metering assets the subject of the EFI Financing is transferred to the Company or a Company Subsidiary, and (c) Energy for Industry Limited has released any Liens it held against such transferred assets or any other assets of the Company or a Company Subsidiary. For the avoidance of doubt, whether or not the EFI Financing would be considered Indebtedness under GAAP or

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IFRS, it shall be considered Indebtedness for purposes of this Agreement, including the calculations under Section 2.1 .
           (e)  The Required Consents listed on Exhibit B , in a form attached hereto as Exhibit B.1 , shall have been received on or prior to the Closing Date.
           (f)  On the Closing Date, no unfavorable ruling shall have been issued, and there shall not be pending any Proceeding wherein an unfavorable ruling is likely to be issued by a Governmental Body that would be reasonably likely to (i) prevent consummation of the Transactions or (ii) cause any of the Transactions to be rescinded following the Closing.
           (g)  On the Closing Date, there shall not have occurred since the date of this Agreement any event, occurrence, revelation or development of a state of circumstances or facts which, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect.
           (h)  As at the Closing Date:
                (i)  all of the Company’s and the Company Subsidiaries’ outstanding Indebtedness, other than that to be repaid pursuant to Section 2.4(b) or Section 3.4 and other than Indebtedness owing by a member of the Company Group to another member of the Company Group, shall have been terminated; and
                (ii)  all Liens over the Assets of the Company or a Company Subsidiary, other than the Permitted Liens, shall have been released including, ASIC charge number 1711549 granted by the Company in favor of Bayard and ASIC charge number 1848374 granted by the Company in favor of Starfish Technology Fund II Nominees A Pty Ltd, Starfish Technology Fund II Nominees B Pty Ltd and Starfish Vicsuper Cleantech Companion Fund Nominees Pty Ltd.
           (i)  The Company shall deliver to the Buyer each of the following:
                (i)  a certificate of the Secretary of the Company, in a form attached hereto as Exhibit C certifying the form of constitution of the Company and each Company Subsidiary in full force and effect;
                (ii)  a certificate of the Secretary of the Company, in a form attached hereto as Exhibit C, certifying that all requisite approvals of the Transactions by the Securityholders of the Company have been obtained in accordance with the constitution of the Company and the Corporations Act 2001 (Cth) ;
                (iii)  the resignation and release letters, effective as of the Closing, of each director, secretary and public officer of the Company and each Company Subsidiary in a form attached hereto as Exhibit E;
                (iv)  a copy of the Closing Statement, accompanied by an audit report from BDO in a form attached hereto as Exhibit J;
                (v)  (I) signed copy of minutes of the Company evidencing the passing of resolutions of the Board of Directors of the Company (in a form to be provided to the Buyer in draft for review at least 3 Business Days prior to Closing) as at Closing, at

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which a quorum of directors is present and acting throughout, and at which the directors of the Company resolve: (a) to register the transfer of the Shares delivered under Section 3.2(j) subject to stamping, despite any contrary provision of the constitution of the Company; (b) to cancel the existing share certificates for the Shares and issue new share certificates for the Shares in the name of the Buyer; (c) to appoint as directors, secretaries and public officers (as appropriate) of the Company those persons nominated by the Buyer in writing prior to Closing, subject to those persons providing their written consent; (d) to accept the resignations of each director, secretary and public officer of the Company whose resignation is delivered under Section 3.2(i)(iii) ; (e) to transfer the registered offices of the Company to the address nominated by the Buyer prior to Closing, subject to the occupiers providing their written consent; (f) to revoke all existing banking authorities given by the Company and approve any new or revised banking authorities notified by the Buyer prior to Closing and (g) to revoke all existing powers of attorney or other authorities granted by the Company; and (II) signed copy of minutes of each Company Subsidiary evidencing the passing of resolutions of the Board of Directors of each Company Subsidiary (in a form to be provided to the Buyer in draft for review at least 3 Business Days prior to Closing) as at Closing, at which a quorum of directors is present and acting throughout, and at which the directors of each Company Subsidiary resolve: (a) to appoint as directors, secretaries and public officers (as appropriate) of the Company Subsidiary those persons nominated by the Buyer in writing prior to Closing, subject to those persons providing their written consent; (b) to accept the resignations of each director, secretary and public officer of the Company Subsidiary whose resignation is delivered under Section 3.2(i)(iii) ; (c) to transfer the registered offices of the Company Subsidiary to the address nominated by the Buyer prior to Closing, subject to the occupiers providing their written consent; and (d) to revoke all existing banking authorities given by the Company Subsidiary and approve any new or revised banking authorities notified by the Buyer prior to Closing;
                (vi)  the Cash Escrow Agreement, in the form attached hereto as Exhibit D , (“ Cash Escrow Agreement ”) duly executed by the Securityholder Representative on behalf of each Securityholder;
                (vii)  a legal opinion of the Company’s counsel in a form attached hereto as Exhibit G; and
                (viii)  executed offer letters and letters of variation, as applicable, to employment agreementfrom at least 75% of all persons who are employees of any member of the Company Group at Closing (which group of employees must include Michael Zammit and Ross Fraser), which letters of variation and offer letters, as applicable, shall be substantially in the forms attached hereto as Exhibit H .
           (j)  Each Securityholder shall have delivered to the Buyer each of the following:
                (i)  original stock certificate(s) representing all of the Ordinary Shares owned by such Securityholder together with a duly executed share transfer form (executed by the Securityholder or its attorney) of the Securityholder’s Shares in favour of the Buyer;
                (ii)  if such Securityholder is unable to locate the original stock certificates listed in subclause (i) because such certificates have been lost, stolen or destroyed, a Lost Stock Affidavit and Indemnity Agreement in a form attached hereto as

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Exhibit K; and
                (iii)  evidence that any Liens on the Shares have been released to the reasonable satisfaction of the Buyer including ASIC charge number 1610806 in relation to Hawkswood Investments Pty Ltd in favor of Australia and New Zealand Banking Group Limited and ASIC charge number 1644873 in relation to Bayard in favor of Lloyds TSB Bank PLC.
           (k)  To the extent not already given under Section 2.11 , each person with a right of pre-emption, right of first refusal or other right in relation to the Shares, Options or Convertible Notes which right is inconsistent with the any part of the Transactions, shall have waived those rights and consented to the Transactions, to the extent of the inconsistency.
           (l)  None of the Company’s outstanding Options shall have been exercised.
           (m)  All of the Convertible Notes shall have been converted into Ordinary Shares in accordance with the terms of this Agreement.
           (n)  Each Securityholders has executed a counterpart of this Agreement.
      3.3 Conditions Precedent to the Securityholders’ Obligations . The obligation of the Securityholders to consummate the Transactions is subject to the satisfaction as of the Closing of each of the following conditions:
           (a)  The representations and warranties of the Buyer and Parent set forth in Article 5 and Article 6 , respectively, that are qualified by any reference to material adverse effect or other materiality qualifications shall be true and correct on and as of the date of this Agreement and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except to the extent that any representation or warranty is limited by its terms to a specific date or range of dates (in which case such representation and warranty need only be true and correct on the date or during the range of dates so specified). All other representations and warranties of the Buyer and Parent set forth in Article 5 and Article 6 , respectively, shall be true and correct in all material respects on and as of the date of this Agreement and as of the Closing Date with the same force and effect as though made on and as of the Closing Date, except to the extent that any representation or warranty is limited by its terms to a specific date or range of dates (in which case such representation and warranty need only be true and correct in all material respects on the date or during the range of dates so specified).
           (b)  Each of the Buyer and Parent has performed in all material respects their respective covenants contained in this Agreement and which are required to be performed on or prior to the Closing Date.
           (c)  The Buyer and Parent shall have delivered to the Securityholder Representative a certificate dated the Closing Date and signed by an authorized officer of the Buyer and Parent stating that each of the conditions set forth in Sections 3.3(a) and (b) has been satisfied as of the Closing Date.
           (d)  On the Closing Date, no unfavorable ruling shall have been issued, and there shall not be pending any Proceeding wherein an unfavorable ruling is likely to be, issued by a Governmental Body that would reasonably be expected to (i) prevent consummation of the

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Transactions or (ii) cause any of the Transactions to be rescinded following the Closing.
           (e)  The Buyer shall have delivered to the Securityholder Representative a copy of the Parent’s instructions to the Parent’s transfer agent, certified by the Secretary of the Parent, directing the transfer agent to issue a certificate in the name of each Accredited Holder for the number of shares of the Parent Common Stock to be issued to the Accredited Holder on Closing (whether directly or into escrow) as shown in the Closing Statement.
      3.4 Repayment of Indebtedness . No less than two Business Days prior to the Closing Date, the Securityholder Representative on behalf of the Securityholders may direct the Buyer in writing that an amount of the Closing Purchase Price specified in such direction is to be applied in repayment of Indebtedness of the Company pursuant to the terms of a Payoff Letter or the agreement under Section 3.2(d)(ii) terminating the EFI Financing. Payment of the relevant amount of the Closing Purchase Price in accordance with any such direction shall discharge in full the Buyer’s obligation to pay that amount of the Closing Purchase Price on Closing.
      3.5 Payment of SR Retention Amount . The Securityholders agree that on Closing the Buyer shall pay an amount of the Purchase Price equal to the SR Retention Amount to the Securityholder Representative or as it directs by wire transfer and that its payment shall discharge in full the Buyer’s obligation to pay that amount of the Closing Purchase Price to the Securityholders on Closing.
      3.6 Termination of EFI Financing . Without limitation to its obligations under Section 7.3 , the Buyer shall act in good faith and provide all reasonable assistance as is within its power to provide, including the timely consideration and response to draft documentation, in connection with the Company’s obligation to procure the satisfaction of the condition in Section 3.2(d)(ii) .
      3.7 Quarterly Financial Statements . The Company shall use its reasonable best efforts to prepare and deliver to the Buyer: quarterly unaudited consolidated statements of operations in accordance with IFRS together with the GAAP Reconciliation for all quarterly periods commencing with the quarter ended March 31, 2010 through the quarter ended March 31, 2011. All financial statements to be provided pursuant to Section 3.7 and shall be provided in US dollars and be translated in accordance with GAAP in all material respects.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
     The Company represents and warrants to the Buyer as of the date hereof and as of the Closing Date that, except as set forth in the Schedules (which Schedules shall reference the specific representation and warranty to which the disclosure relates), the following statements are true and correct and that each statement is in no way limited by any other statement:
      4.1 Authority; Authorization; Enforceability . The Company has the power and authority to enter into Transaction Documents to which it is a party, to perform its obligations under each Transaction Document to which it is a party and to consummate the Transactions. The execution, delivery and performance by the Company of the Transaction Documents to which it is a party have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement has been, and at Closing each other Transaction Document to which the Company is a party will be, duly and validly executed and delivered

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by the Company. This Agreement constitutes, and at Closing each other Transaction Document to which the Company is a party will constitute, the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, subject in each case to bankruptcy, reorganization, insolvency, moratorium and other similar laws affecting the enforcement of creditors’ rights in general and to general principles of equity (regardless of whether considered in a proceeding in equity or an action at law). The Company has delivered to Buyer true and complete copies of its and the Company Subsidiaries’ constitution and certificate of registration as in effect at the date hereof.
      4.2 No Conflict . Neither the execution and delivery by the Company of any Transaction Document to which the Company is a party nor the performance by the Company of its obligations under any Transaction Document will (i) contravene, conflict with, or result in a violation of or default under any provision of the constitution of the Company or of the Company Subsidiaries, (ii) breach or result in a violation of or default under any Legal Requirement or any Order applicable to the Company or any Company Subsidiary, or to which any of the assets owned by the Company or any Company Subsidiary is subject or (iii) breach in any respect, or result in a default under, or give any Person the right to declare a default or exercise any remedy under, to accelerate the maturity or performance of, or to cancel, terminate or modify any Material Contract, or result in the imposition or creation of any Lien (other than Permitted Liens) upon or with respect to any of the assets owned, leased or licensed by the Company or any Company Subsidiary.
      4.3 Governmental Approvals . Except as set forth on Schedule 4.3 , no action, consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Body is required to be obtained or made by the Company in connection with the execution and delivery by the Company of any Transaction Document to which it is a party or the performance by the Company of its obligations under any Transaction Document.
      4.4 Voting Agreements . There are no voting trust agreements, powers of attorney, member or similar agreements, proxies or any other Contracts relating to the sale, transfer, purchase, redemption, voting, distribution or dividend rights or disposition of any of the Shares or otherwise granting any Person any right in respect of the Shares or the Shares of any Company Subsidiary (each a “ Rights Agreement ”) to which the Company, any Company Subsidiary or, to the Company’s Knowledge, any Securityholder is a party or otherwise imposed by or through the Company. Other than restrictions imposed by applicable federal and state securities laws, there are no existing restrictions on the transfer of the Shares or any pre-emptive rights to them, imposed by or through the Company or, to the Knowledge of the Company, any other such existing restrictions which have not been waived.
      4.5 Corporate Matters . The Company and each Company Subsidiary incorporated in Australia is a corporation validly existing under the Corporations Act 2001 (Cth) and the New Zealand Company Subsidiary is a corporation validly existing under the Companies Act 1993 (NZ). The Company and each Company Subsidiary have the corporate power and authority to own or lease its properties and assets as and where currently owned or leased and to conduct the Business. The Company and each Company Subsidiary is duly qualified in each jurisdiction in which the nature of the Business or the ownership or leasing of its assets makes such qualification necessary, except where the lack of such qualification would not have a Material Adverse Effect.

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      4.6 Capitalization . Schedule 4.6 sets forth the total authorized and outstanding shares of capital stock of the Company, all Notes, all Options and other ownership interests of the Company, of whatever class, series or designation; and except as disclosed on such Schedule 4.6 , there are no (i) outstanding ownership interests of the Company, of whatever class, series or designation, or (ii) outstanding warrants, options, subscriptions, convertible or exchangeable securities or other agreements pursuant to which the Company is or may become obligated to issue or sell any ownership interests or other securities of the Company. There is no outstanding Contract of the Company or, to the Knowledge of the Company, any other Person, to purchase, redeem or otherwise acquire any of the Shares. There are no outstanding or authorized equity appreciation, phantom equity, equity plans or similar rights with respect to the equity securities of the Company. All of the Shares on issue in the Company are Ordinary Shares. All Shares, Options and Convertible Notes issued by the Company and each Company Subsidiary, were issued in accordance with the requirements of the Company’s or the relevant Company Subsidiary’s constituent documents and in accordance with all Legal Requirements. The Company is not in breach of, and has not breached, section 113(1) of the Corporations Act 2001 (Cth).
      4.7 Company Subsidiaries .
           (a) Schedule 4.7 sets forth a true and complete list, containing the name, jurisdiction of organization and capitalization of each Company Subsidiary. The Company holds of record, or a Company Subsidiary holds of record, and the Company owns beneficially, all of the outstanding shares or ownership interests of each Company Subsidiary and there are no outstanding warrants, options, subscriptions, convertible or exchangeable securities or other agreements pursuant to which a Company Subsidiary is or may become obligated to issue or sell any shares of capital stock or other securities of such Company Subsidiary. Neither the Company nor any Company Subsidiary owns, or is a party to any Contract to acquire, any equity securities or securities of any Person or any direct or indirect equity or ownership in any other business.
           (b) Except as set forth in Schedule 4.7 , there are no voting trust agreements, powers of attorney, member or similar agreements, proxies or any other Contracts relating to the sale, transfer, purchase, redemption, voting, distribution or dividend rights or disposition of any of the outstanding shares of capital stock or ownership interests of a Company Subsidiary held by the Company (or a Company Subsidiary) or otherwise granting any Person any right in respect of the outstanding shares of capital stock or ownership interests of a Company Subsidiary held by the Company (or a Company Subsidiary) and there are no existing restrictions on the transfer of such outstanding shares of capital stock or ownership interests of a Company Subsidiary other than restrictions imposed by applicable Australian, New Zealand, federal and state securities laws.
      4.8 Tangible Personal Property . All of the material tangible personal property reflected on the Most Recent Balance Sheet or otherwise operated by the Company or any Company Subsidiary in the operation of the Business is either (a) owned by the Company or any Company Subsidiary or (b) leased or licensed pursuant to valid leasehold or license interests, in each case free and clear of all Liens, other than Permitted Liens as of the Closing Date.
      4.9 Leased Real Estate . Schedule 4.9 sets forth each Real Property Lease. Except as otherwise set forth on Schedule 4.9 :

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           (a) each Real Property Lease is a valid and binding obligation of the Company or applicable Company Subsidiary, enforceable against the Company or the Company Subsidiary, as the case may be, in accordance with its terms (except as enforceability may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance and other similar laws affecting creditors’ rights generally and by general principles of equity);
           (b) neither the Company or the applicable Company Subsidiary or, to the Knowledge of the Company or the applicable Company Subsidiary, any other party to any such Real Property Lease is in breach or default under such Real Property Lease, except for such defaults and events as to which requisite waivers or consents have been obtained;
           (c) the consummation of the Transactions does not require the consent of any landlord, sub-landlord or other Person under any such Real Property Lease; and.
           (d) all duties and imposts required to be paid or payable by the Company or any Company Subsidiary in relation to each Real Property Lease has been paid.
      4.10 Owned Real Estate . None of the Company and any Company Subsidiary owns any real property.
      4.11 Proceedings . There is no private or governmental action, suit, proceeding, inquiry, claim, arbitration or investigation pending before any agency, court or tribunal, foreign or domestic, or, to the Knowledge of the Company, threatened against the Company or any Company Subsidiary, any of their properties or any of their respective officers or directors (in their capacities as such), or which questions or challenges the validity of this Agreement or any of the transactions contemplated hereby; and to the Knowledge of the Company, there is no basis for any such action, suit, proceeding, claim, arbitration or investigation. There is no judgment, decree or order against the Company or any Company Subsidiary or any of their respective officers or directors (in their capacity as such), that could prevent, enjoin or materially alter or delay any of the Transactions contemplated by this Agreement or the operation of the Business. Neither the Company nor any Company Subsidiary has any litigation threatened against any other party.
      4.12 Intellectual Property .
           (a) Details of all registered Intellectual Property Rights and material unregistered Intellectual Property Rights owned by the Company or a Company Subsidiary are set out in Schedule 4.12(a) and either the Company or a Company Subsidiary is the absolute legal and beneficial owner of those Intellectual Property Rights, free of all Liens (other than Permitted Liens).
           (b) Details of all material Intellectual Property Rights licensed by either the Company or a Company Subsidiary from any third party are set out in Schedule 4.12(b) . In respect of each such license:
  (i)   the license is subsisting;
 
  (ii)   neither the licensee nor, to the Knowledge of the Company, the licensor is in breach of any material term of the license; and
 
  (iii)   the licensor has not given notice to terminate the license and the

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      Company is not aware of any circumstance that would give the licensor proper cause to do so.
           (c) So far as the Company is aware:
  (i)   none of the Company or any Company Subsidiary is infringing the Intellectual Property Rights of any other person;
 
  (ii)   no person is infringing any of the Intellectual Property Rights set out in Schedule 4.12(a) ; and
 
  (iii)   the Company is not aware of any challenge to the validity of any of the Intellectual Property Rights set out in Schedule 4.12(a) .
           (d) Other than in respect of the licenses set out in Schedule 4.12(b) , there are no royalties, license fees or other similar fees payable by the Company or a Company Subsidiary in connection with the use of any Intellectual Property Rights.
      4.13 Financial Statements; Financial Matters. The Company has delivered the following financial statements (the “ Financial Statements ”) to the Buyer, which are attached to Schedule 4.13 , (a) the audited consolidated balance sheet of the Company Group as of June 30, 2010 (the “ Most Recent Balance Sheet ”), and the related audited consolidated statement of operations, statement of stockholders equity and statement of cash flows of the Company Group for the year ended June 30, 2010, together with an audit opinion from BDO and (b) the unaudited consolidated financial statements of the Company Group as of May 31, 2011 and for the 11 months ended May 31, 2011, including a consolidated balance sheet as of May 31, 2011 and consolidated statements of operations, stockholders equity and cash flows for the eleven months ended May 31, 2011 (the “ Interim Financial Statements ”). Except as set forth on Schedule 4.13 , (i) each of the Financial Statements has been prepared in accordance with International Financial Reporting Standards (“ IFRS ”) applied on a basis consistent with prior periods, (ii) each of such balance sheets fairly presents in all material respects the financial position of the Company Group as of its respective date and (iii) each of such statements of operations fairly presents in all material respects the results of operations of the Company Group for the period covered thereby; provided , however , that the Interim Financial Statements are subject to normal year-end adjustments.
      4.14 Taxes . Except as set forth on Schedule 4.14 :
           (a) All Tax returns required by law to be lodged or filed by the Company and each Company Subsidiary have been lodged or filed and no Tax return contains a statement that is false or misleading in any particular or omits to refer to any matter that is required to be included or without which the statement is false or misleading. The Company has set up adequate reserves, for the Company and each Company Subsidiary, for the payment of all Taxes not yet due and payable.
           (b) All records relating to Tax returns or to the preparation of those returns required by law to be maintained by the Company and each Company Subsidiary have been duly maintained in accordance with the Tax Act.
           (c) All Tax for which the Company or any Company Subsidiary is liable in relation to the period up to and including Closing, including any penalty, fine or

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interest, has been paid or, in the case of Tax that is not yet due and payable, fully provided for in the Financial Statements.
           (d) There is no current dispute between the Company or any Company Subsidiary and any Revenue Authority, and neither the Company nor any Company Subsidiary is the subject of a Tax audit or, to the Knowledge of the Company, investigation by a Revenue Authority and there are no facts or circumstances of which the Company is aware or any Company Subsidiary is aware that might give rise to such a dispute, audit or investigation.
           (e) All amounts of Tax required by law to be deducted or withheld from payments by the Company or any Company Subsidiary have been deducted or withheld and paid to the appropriate authority.
           (f) Excluding the Transactions, no change has occurred in the Business which would prevent any revenue loss being carried forward and deducted from assessable income in a subsequent year or which would prevent any capital loss being carried forward to offset capital gains in a subsequent year.
           (g) No dividend has been paid by the Company or any Company Subsidiary in respect of which the required franking amount has exceeded the franked amount of the dividend, or which has been franked in excess of the required franking amount, which would result in the Company or any Company Subsidiary being liable to pay franking deficit tax or any additional tax.
           (h) The share capital account of the Company and each Company Subsidiary is not “tainted” for the purposes of the Tax Act.
           (i) There are no assets that have been rolled over into the Company or any Company Subsidiary under any rollover provisions, including those in Parts 3-1 to 3-3 of the Tax Act, that may be the subject of a CGT event or treated as having been disposed of for the purposes of the Tax Act as a result of this Agreement.
           (j) The Company and each Company Subsidiary has lodged or retained on file, as required, all returns, information, declarations, elections, notices and statements with respect to Taxes as required by law for all financial years ended on or prior to the Closing Date, has retained copies of same, and will continue to do so until the Closing Date and has made and will make a full and true disclosure of all information it is obliged to disclose in the period prior to Closing to all Revenue Authorities.
           (k) None of the Company and each Company Subsidiary has been involved in any forgiveness, or action that could be treated as forgiveness, of any commercial debt that could result in a net forgiven amount arising for the Company or any Company Subsidiary under Division 245 of the Tax Act.
           (l) All documents, the enforcement of which is material to the Company or any Company Subsidiary, have been duly stamped and no document belonging to the Company that is subject to ad valorem Stamp Duty is unstamped or insufficiently stamped or is liable to have additional duty assessed.
           (m) The Company and each Company Subsidiary is properly registered

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for GST, has an Australian Business Number and any GST net amount has been paid, claimed or provided for in the Financial Statements in respect of Pre-Closing Tax Periods.
           (n) All currently effective transactions and other dealings between the Company or any Company Subsidiary on the one hand, and any director, officer, employee or family member of such persons on the other hand, have been conducted at arm’s length and such arm’s length dealings are evidenced by documentation retained by the Company or such Company Subsidiary.
           (o) Neither the Company nor any Company Subsidiary has been involved in any dividend stripping or dividend or capital streaming or franking credit trading schemes or any scheme that may result in a declaration by the Commissioner pursuant to Division 165 of the GST Act or a determination pursuant to Part IVA of the Tax Act.
           (p) The Company and any Company Subsidiary has never been a member of a GST group or a pay roll tax group.
           (q) The Company and any Company Subsidiary is not a party to:
                (i)  any indirect tax sharing agreement that satisfies all the requirements in section 444 90(1A) in Schedule 1 of the Taxation Administration Act 1953 (Cth); or
                (ii)  any indirect tax funding agreement to fund or contribute to the payment of indirect tax by another entity.
           (r) None of the Company and each Company Subsidiary has ever been a member of a tax consolidated group and no election has or will be made by the Securityholders which would cause the Company or a Company Subsidiary to become a member of such a group.
           (s) None of the Company and each Company Subsidiary is a party to:
                (i)  any tax sharing agreement that satisfies all the requirements in section 721-25 of the Tax Act; or
                (ii)  any tax funding agreement to fund or contribute to the payment of tax by another entity.
      4.15 Material Contracts .
           (a) Schedule 4.15 sets forth a list of all Material Contracts. Except as set forth on Schedule 4.15 , (i) each Material Contract is, and after the Closing will be, a valid and binding obligation of the Company or the Company Subsidiary party thereto, enforceable against the Company or the Company Subsidiary party thereto in accordance with its terms (except as enforceability may be limited by bankruptcy, insolvency, moratorium, fraudulent conveyance and other similar laws affecting creditors’ rights generally and by general principles of equity), (ii) none of the Company or any of the Company Subsidiaries is in breach or default under any Material Contract, and, to the Knowledge of the Company or any Company Subsidiary, no other party thereto is in breach or default under any Material Contract, and (iii) neither the Company nor any of the Company Subsidiaries has received notice that any

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other party to such Material Contract has terminated any such Material Contract.
           (b) The Company has provided the Buyer with true, complete and correct copies of each Material Contract and with respect to any Material Contract that is not in written form, Schedule 4.15 contains a true, complete and correct summary of the material terms of any such Material Contract.
           (c) Schedule 4.15 lists each Material Contract that either constitutes or relates to a Government Contract or Government Bid.
           (d) Except as set forth in Schedule 4.15 :
                (i)  none of the Company and each Company Subsidiary has had any determination of noncompliance, entered into any consent order or undertaken any internal investigation relating directly or indirectly to any Government Contract or Government Bid;
                (ii)  the Company and each Company Subsidiary has complied with all Legal Requirements with respect to all Government Contracts and Government Bids;
                (iii)  all facts set forth in or acknowledged by the Company and each Company Subsidiary in any certification, representation or disclosure statement submitted by the Company or a Company Subsidiary with respect to any Government Contract or Government Bid were current, accurate and complete as of the date of submission;
                (iv)  none of the Company and each Company Subsidiary and any of its employees has been debarred or suspended from doing business with any Governmental Body, and, to the Knowledge of the Company and each Company Subsidiary, no circumstances exist that would warrant the institution of debarment or suspension proceedings against the Company, a Company Subsidiary or any employee of the Company or a Company Subsidiary;
                (v)  no Governmental Body, and no prime contractor or higher-tier subcontractor of any Governmental Body, has withheld or set off, or threatened to withhold or set off, any amount due to the Company or a Company Subsidiary under any Government Contract;
                (vi)  to the Knowledge of the Company, there are not and have not been any irregularities, misstatements or omissions relating to any Government Contract or Government Bid that have led to or could reasonably be expected to lead to (A) any administrative, civil, criminal or other investigation, Proceeding or indictment involving the Company, a Company Subsidiary or any of their respective employees, (B) the questioning or disallowance of any costs submitted for payment by the Company or a Company Subsidiary, (C) the recoupment of any payments previously made to the Company or a Company Subsidiary, (D) a finding or claim of fraud, defective pricing, mischarging or improper payments on the part of the Company or a Company Subsidiary, or (E) the assessment of any penalties or damages of any kind against the Company or a Company Subsidiary;
                (vii)  there is not and has not been any (A) outstanding claim against the Company or a Company Subsidiary by, or dispute involving the Company or a Company Subsidiary with, any prime contractor, subcontractor, vendor or other Person arising under or

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relating to the award or performance of any Government Contract, (B) fact known by the Company or a Company Subsidiary upon which any such claim could reasonably be expected to be based or which may give rise to any such dispute, (C) final decision of any Governmental Body against the Company or a Company Subsidiary;
                (viii)  none of the Company and each Company Subsidiary is undergoing or has undergone any audit, and none of the Company and each Company Subsidiary has Knowledge of any basis for any impending audit, arising under or relating to any Government Contract (other than normal routine audits conducted in the ordinary course of business);
                (ix)  none of the Company and each Company Subsidiary is or will be required to make any filing with or give any notice to, or to obtain any consent from, any Governmental Body under or in connection with any Government Contract or Government Bid as a result of or by virtue of (A) the execution, delivery of performance of this Agreement or any of the other agreements referred to in this Agreement, or (B) the consummation of Transactions contemplated by this Agreement.
      4.16 Employees . Set forth on Schedule 4.16 is (a) the name and total compensation as of the date of this Agreement of each employee and independent contractor of the Company and each Company Subsidiary, (b) all increases in wage or salary for, or bonuses received by, such persons from the Company or any Company Subsidiary since July 1, 2010 with respect to the period beginning January 1, 2010 until the date hereof, (c) any increase in wage or salary or any bonus, or any promise (whether written or otherwise) of an increase in wage or salary or of any bonus, to be paid after the date hereof and (d) any bonus or similar incentive plan in which any employee of the Company or a Company Subsidiary is a participant. None of the Company and each Company Subsidiary is in default of any wage, salary or bonus obligations described in this Section 4.16 including in relation to its statutory obligations to pay its employees in accordance with the national minimum wage order and/or modern award minimum wages as applicable. To the Knowledge of the Company Group, no employee has received an offer to join a business that may be competitive with the Business.
      4.17 Labor and Employment Matters.
           (a) None of the Company and each Company Subsidiary is in breach of any material Legal Requirement pertaining to employees or employment matters.
           (b) None of the Company and each Company Subsidiary is a party to any agreement, arrangement or understanding with a union or industrial organisation in respect of any employee or group of employees.
           (c) Neither the Company nor any Company Subsidiary is involved in any dispute or events that are reasonably likely to result in a dispute involving any employee or officer (or former employee or officer) of the Company or a Company Subsidiary, or any employee organisation or union representing any such employee or officer, and no such dispute is pending or, so far as the Company is aware, threatened.
           (d) No employee of the Company or a Company Subsidiary has notified the Company or a Company Subsidiary that such employee has terminated or intends to terminate such employee’s employment.

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           (e) Neither the Company nor any Company Subsidiary has been investigated or prosecuted by Fair Work Australia (or its predecessor), or the Department of Labour in respect of New Zealand, and no investigation or prosecution of this nature is pending or, to the Knowledge of the Company, threatened or anticipated. Fair Work Australia or the Department of Labour in respect of New Zealand, has not notified the Company or any Company Subsidiary that any workplace agreement, including any Australian Workplace Agreement, does not meet the “better off overall test” (or predecessor), as defined in the Fair Work Act 2009 (Cth) (or predecessor) or does not comply with the Employment Relations Act 2000 and Health & Safety in Employment Act 1992 in respect of New Zealand.
           (f) None of the Company and each Company Subsidiary operates or has ever operated a defined benefit superannuation plan or any other plan that would or does entitle any person to a pension, annuity or lump sum payment.
      4.18 Employee Benefit Plans and Superannuation . None of the Company and each Company Subsidiary presently maintains, contributes to or has any obligation to make contributions to, any employee benefit plan, retirement, profit sharing, stock option, stock bonus or deferred compensation, severance, sick leave, material bonus, pension, profit sharing, deferred compensation, written incentive compensation, vacation, severance, disability, death benefit, hospitalization, medical or other plan or arrangement providing benefits to current or former employees, officers or directors, in each case whether or not terminated, of the Company or any Company Subsidiary (“ Benefit Plans ”). Schedule 4.18 sets forth a list of all superannuation schemes or pension arrangements in operation by or in relation to employees or former employees of the Company and each Company Subsidiary and to which the Company or any Company Subsidiary contributes. Each superannuation fund to which the Company or any Australian Company Subsidiary contributes to is a “complying superannuation fund” for the purposes of the Superannuation Industry (Supervision) Act 1993 (Cth). With respect to each employee and former employee (a) the Company and each Company Subsidiary has provided at least the prescribed minimum level of superannuation support for that Employee or former employee so as not to incur a liability for the Superannuation Guarantee Charge and proper provision has been made for contributions payable in the current quarter, for that period up to and including the Closing Date, (b) there are no outstanding or unpaid superannuation contributions on the part of the Company or any Company Subsidiary for that employee or former employee however arising (including under statute, award or agreement), (c) in respect of each Australian Company Subsidiary, they have been properly offered a choice of superannuation fund to receive employer contributions payable, in accordance with the provisions of Part 3A of the Superannuation Guarantee (Administration) Act 1992 (Cth) (d) there are no outstanding or unpaid benefits currently due to that employee’s or former employee’s dependants or beneficiaries; and there are no complaints or outstanding claims for unpaid superannuation contributions or superannuation benefits. In respect of the New Zealand Company Subsidiary such Company Subsidiary is fully compliant with the provisions of the New Zealand Superannuation Act 2001, the Superannuation Schemes Act 1989 and KiwiSaver Act 2006 including having made all contributions required to be made.
      4.19 Absence of Certain Changes and Events . Since March 31, 2011, the Company and each Company Subsidiary has conducted its business in the ordinary course consistent with past practices, and, except as set forth on Schedule 4.19 or as required, as contemplated by or in accordance with this Agreement, there has not been:

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           (a) any Material Adverse Effect;
           (b) any issuance or grant of any equity securities or any subscriptions, warrants, options or other agreements or rights of any kind whatsoever to purchase or otherwise receive or be issued any equity securities or any securities or obligations of any kind convertible into, or exercisable or exchangeable for, any equity securities of the Company or any of the Company Subsidiaries;
           (c) any recapitalization, reclassification, split or like change in the capitalization of the Company or any Company Subsidiary;
           (d) any amendment of the organizational documents of the Company or any Company Subsidiary, including the constitution and bylaws;
           (e) an increase in the compensation of officers and directors of the Company or any Company Subsidiary, except in the ordinary course of business or as required by any Contract existing on the date of this Agreement, or (ii) any grant of any extraordinary bonus to any employee, director or consultant of the Company or any Company Subsidiary, except for bonuses that are disclosed to the Buyer and consented to by the Buyer which were made prior to the Closing Date and which have been accounted for in determining the Net Working Capital;
           (f) the creation of any Lien over the assets of the Company or any Company Subsidiary other than Permitted Liens;
           (g) sale, assignment, transfer, conveyance, lease or other disposition of any of the properties or assets of the Company or any Company Subsidiary except in the ordinary course of business;
           (h) the acquisition of any properties or assets or the entering into commitments for capital expenditures of the Company or any Company Subsidiary except those that do not exceed A$25,000 for any individual acquisition or commitment and A$50,000 for all acquisitions and commitments in the aggregate;
           (i) except for transfers of cash pursuant to normal cash management practices in the ordinary course of business, payments of wages, salaries, superannuation contributions and expense reimbursements to employees, payments of amounts due to Securityholders in connection with the arrangements in effect as at the date of this Agreement (and disclosed in Section 4.19(i) of Schedule 4.19 ) for the provision of the bank guarantees set forth in Section 8.3(b) , payment of interest due on Convertible Notes issued by the Company in 2010 and the incurring of Indebtedness permitted under Section 4.19(n) , any investments in or loans to, or payment of any fees or expenses to, or the entering into or modification of any contract with, the Securityholders or any of their respective Affiliates;
           (j) the entering into or commencement of any Contract which materially restricts the ability of the Company or any Company Subsidiary to compete with, or conduct, any business or line of business in any geographic area;
           (k) any making, revoking or changing any material Tax election or settling or compromise any material Tax Liability;

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           (l) any making of any payments outside the ordinary course of business for purposes of settling any dispute;
           (m) any entering into any transaction with any stockholder, officer, director, employee or any Affiliate or family member of such Person other than a transaction constituting the incurring of Indebtedness permitted by Section 4.19(n) ;
           (n) any incurring of any Indebtedness by the Company or a Company Subsidiary other than Securityholder Loans which do not require the approval of the Buyer under Section 2.4(b) ;
           (o) any termination of any Material Contract or waiver, release or assignment any rights or claims under any Material Contract;
           (p) failure to file any Tax Return when due or failure to cause each such Tax Return when filed to be true, complete and correct in all material respects or fail to pay any Taxes when due;
           (q) the hiring of any new employee not disclosed in Schedule 4.16 (other than to replace on substantially similar terms, including as to remuneration and benefits, a person who has ceased to be an employee of the Company or any Company Subsidiary);
           (r) any change to its accounting methods, principles, policies, procedures or practices;
           (s) any write off as uncollectible, or establishment of any extraordinary reserve with respect to, any account receivable or other Indebtedness except as set forth in the Financial Statements;
           (t) commencement or settlement of any Proceeding, other than a Proceeding in which Buyer or Parent are directly adverse to the Company; or
           (u) any agreement, undertaking or commitment (whether written or otherwise) to do any of the foregoing.
      4.20 Environmental, Health and Safety Matters . The Company and each Company Subsidiary is in compliance with all Environmental, Health and Safety Laws. The Company and each Company Subsidiary holds and is in compliance with all Governmental Authorizations required to be held by the Company and each Company Subsidiary under Environmental, Health and Safety Laws. To the Knowledge of the Company, there is no proposal to revoke, suspend, modify, challenge or not reissue any of the Government Authorizations mentioned in this Section 4.20 . There has been no complaint to the Company or a Company Subsidiary from any Governmental Body or other person in relation to the impacts on the Environment or any alleged breach of any Environmental, Health and Safety Law associated with the carrying on of the Business.
      4.21 Insurance . Schedule 4.21 sets forth a list of all policies of fire, liability, workmen’s compensation, life, property and casualty and other insurance owned or held by the Company and each Company Subsidiary in the ordinary course of business for the current period that includes the date hereof under which the Company or any Company Subsidiary is the primary insured, other than policies of insurance related to the Benefit Plans (as defined

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in Section 4.18) (the “ Insurance Policies ”). All of the Insurance Policies are in full force and effect. Since the respective dates of the Insurance Policies, no written notice of cancellation or non-renewal with respect to any such policy has been received by the Company or any Company Subsidiary. Except as set forth on Schedule 4.21 , neither the Company nor any Company Subsidiary has any self-insurance or co-insurance programs. Neither the Company nor any Company Subsidiary has added any additional persons as insured parties under any of its Insurance Policies. The Insurance Policies insure the Company and each Company Subsidiary for all insurances that would customarily be expected of a prudent company in respect of the Business.
      4.22 Compliance With Legal Requirements; Governmental Authorizations . The Company and each Company Subsidiary is in material compliance with all Legal Requirements, (ii) no written notice from any Governmental Body has been received by the Company or any Company Subsidiary nor, to the Knowledge of the Company Group, is any Proceeding threatened or pending with respect to any alleged violation by the Company or any Company Subsidiary of any Legal Requirement, (iii) the Company and each Company Subsidiary has all Governmental Authorizations required by all applicable Legal Requirements in the operation of the Business and (iv) the Company and each Company Subsidiary is in material compliance with such Governmental Authorizations.
      4.23 Brokers; Agents . None of the Company, each Company Subsidiary nor any Securityholder has dealt with any agent, finder, broker or other representative in any manner which could result in the Buyer or the Company or any Company Subsidiary being liable for any fee or commission in the nature of a finder’s fee or originator’s fee in connection with the Transactions.
      4.24 Affiliate Transactions . Except pursuant to or as contemplated by any Transaction Document, none of the Company and each Company Subsidiary has any further obligations pursuant to any management, consulting or similar agreement (whether written or otherwise) with any officer, director, 1% or greater stockholder or Affiliate of the Company.
      4.25 No Undisclosed Liabilities. Except as and to the amounts disclosed on the Most Recent Balance Sheet, and except for Company Transaction Expenses, none of the Company and each Company Subsidiary has any liabilities, except for liabilities incurred since the date of the Most Recent Balance Sheet in the ordinary course of business consistent with past practice or in accordance with the Transaction Documents. There are no off-balance sheet arrangements to which the Company or any Company Subsidiary is a party or otherwise involving the Company or any Company Subsidiary.
      4.26 Internal Controls . The Company and each Company Subsidiary (a) makes and keeps accurate books and records that fairly reflect the transactions and dispositions of assets of the Company and each Company Subsidiary, and (b) maintains internal accounting controls which provide reasonable assurance that (i) transactions are recorded as necessary to permit preparation of their respective financial statements, (ii) receipts and expenditures are made only in accordance with general or specific authorizations of managers of the Company or of a Company Subsidiary, and (iii) access to their respective assets is permitted only in accordance with general or specific authorizations of management and directors of the Company.
      4.27 Propriety of Past Payments . (a) No unrecorded fund or asset of the Company or any Company Subsidiary has been established for any purpose, (b) no accumulation or use

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of corporate funds of the Company or any Company Subsidiary has been made without being properly accounted for in the books and records of the Company or the applicable Company Subsidiary, (c) no payment has been made by or on behalf of the Company or any Company Subsidiary with the understanding that any party of such payment is to be used for any purpose other than that described in the documents supporting such payment and (d) none of the Company or any Company Subsidiary, any director, officer, employee, or agent of the Company or any Company Subsidiary or any other person acting for or behalf of the Company or any Company Subsidiary has in those capacities, directly or indirectly, made any illegal contribution, gift, bribe, rebate, payoff, influence payment, kickback or other payment to any person, private or public, regardless of form, whether in money, property or services, (i) to obtain favorable treatment for any officer, director, stockholder, member or manager of the Company or any Company Subsidiary, the Company, any Company Subsidiary or any Affiliate of the Company in securing business, (ii) to pay for favorable treatment for business secured for any stockholder, officer or director of the Company, the Company, any Company Subsidiary or any affiliate of the Company, (iii) to obtain special concessions, or for special concessions already obtained, for or in respect of any stockholder, officer or director of the Company, the Company, any Company Subsidiary or any Affiliate of the Company or (iv) otherwise for the benefit of any stockholder, officer or director of the Company, the Company, any Company Subsidiary or any Affiliate of the company in violation of any Legal Requirement. None of the Company, any Company Subsidiary, or any current director, officer, agent, employee or other person acting on behalf of the Company or any Company Subsidiary, has in those capacities (x) used funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to political activity or (y) accepted or received any unlawful contribution, payment, gift, kickback, expenditure or other item of value.
      4.28 Other Representations . To the Company’s Knowledge, no representation or warranty by Company or any Company Subsidiary set forth in this Agreement, and no statement contained in any exhibit or schedule hereto, or any certificate or writing delivered in connection with this Agreement (including the Closing Statement) and the transactions contemplated herein contains any untrue statement of material fact or omits to state a material fact necessary in order to make the statements contained herein or therein not misleading.
      4.29 Exclusive warranties from the Company : The Buyer acknowledges and agrees that:
           (a) the representations and warranties contained in this Article 4 and in any other Transaction Documents are the only representations and warranties from the Company on which the Buyer has relied in entering into this Agreement; and
           (b) to the maximum extent permitted by law, all other representations and warranties (whether express or implied and whether oral or in writing) on the part of the Company or its directors, officers, employees, agents or representatives are expressly excluded.
ARTICLE 5
REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS OF THE BUYER
      5.1 The Buyer hereby represents and warrants to the Securityholders as of the date hereof and as of the Closing Date that the following statements are true and correct:

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           (a) Authority . The execution and delivery of the Transaction Documents to which the Buyer is a party and the consummation of the Transactions have been duly and validly authorized by all necessary corporate action on the part of such Buyer. This Agreement has been, and at Closing each other Transaction Document to which the Buyer is a party will be, duly and validly executed and delivered by an authorized representative of such Buyer. This Agreement constitutes, and at Closing each other Transaction Document to which the Buyer is a party will constitute, the legal, valid and binding obligations of the Buyer, enforceable against such Buyer in accordance with their respective terms subject in each case to bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting the enforcement of creditors’ rights in general and to general principles of equity (regardless of whether considered in a proceeding in equity or an action at law).
           (b) No Conflict . Neither the execution and delivery of the Transaction Documents by the Buyer nor the consummation or performance of any of the Transactions will (a) contravene, conflict with, or result in a violation of or default under any provision of the articles of incorporation or certificate of incorporation, as applicable, or bylaws or other organizational documents of the Buyer, or (b) contravene, conflict with, or result in a violation of or default under any Legal Requirement or any Order to which the Buyer may be subject.
           (c) Corporate Matters . The Buyer is a corporation validly existing under the Corporations Act 2001 (Cth). The Company is duly registered in Victoria.
           (d) Proceedings . There is no Proceeding pending against or relating to the Buyer which, if determined adversely to the Buyer could affect the ability of the Buyer to consummate the Transactions.
           (e) Brokers; Agents . None of the Buyer or any of its Affiliates has dealt with any agent, finder, broker or other representative in any manner which could result in the Securityholders or, if the Closing does not occur, the Company or a Company Subsidiary being liable for any fee or commission in the nature of a finder’s or originator’s fee in connection with the Transactions.
           (f) Sufficient Funds . The Buyer will have, immediately prior to the Closing Date, the financial capability to consummate the Transactions on the terms and subject to the conditions set forth in this Agreement.
           (g) Issuance of Parent Common Stock . All shares of Parent Common Stock that are issued to Securityholders pursuant to this Agreement have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, (i) will be duly and validly issued free and clear of any Liens, fully paid and non-assessable, (ii) subject to the accuracy of the representations of the Securityholders contained in Article 14 , will be issued and delivered in compliance with all applicable Legal Requirements (including federal and state securities laws), and (iii) will be entitled to all rights, preferences and privileges of all other shares of the Parent Common Stock as described in the Parent’s organizational documents. All corporate action on the part of the Parent by its officers, directors and stockholders necessary for the authorization and issuance of Parent Common Stock to Securityholders in accordance with the terms of this Agreement has been taken or will be taken, and no further consent or authorization of the Parent, its directors, stockholders, any Governmental Body or organization or any other

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person or entity is required.
ARTICLE 6
REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS OF PARENT
      6.1 The Parent hereby represents and warrants to the Securityholders as of the date hereof and as of the Closing Date that the following statements are true and correct:
           (a) Authority . The execution and delivery of the Transaction Documents to which the Parent is a party and the consummation of the Transactions have been duly and validly authorized by all necessary corporate action on the part of such Parent. This Agreement has been, and at Closing each other Transaction Document to which the Parent is a party will be, duly and validly executed and delivered by an authorized representative of such Parent. This Agreement constitutes, and at Closing each other Transaction Document to which the Parent is a party will constitute, the legal, valid and binding obligations of the Parent, enforceable against the Parent in accordance with their respective terms subject in each case to bankruptcy, reorganization, moratorium, insolvency and other similar laws affecting the enforcement of creditors’ rights in general and to general principles of equity (regardless of whether considered in a proceeding in equity or an action at law).
           (b) No Conflict . Neither the execution and delivery of the Transaction Documents by the Parent nor the consummation or performance of any of the Transactions will (a) contravene, conflict with, or result in a violation of or default under any provision of the articles of incorporation or certificate of incorporation, as applicable, or bylaws or other organizational documents of the Parent, or (b) contravene, conflict with, or result in a violation of or default under any Legal Requirement or any Order to which the Parent may be subject.
           (c) Corporate Matters . The Parent is a corporation validly existing and in good standing under the laws of the State of Delaware.
           (d) Proceedings . There is no Proceeding pending against or relating to the Parent which, if determined adversely to the Parent could affect the ability of the Parent to discharge its obligations under the Transaction Documents.
           (e) Brokers; Agents . None of the Parent or any of its Affiliates has dealt with any agent, finder, broker or other representative in any manner which could result in the Securityholders or, if the Closing does not occur, the Company or a Company Subsidiary being liable for any fee or commission in the nature of a finder’s or originator’s fee in connection with the Transactions.
           (f) Issuance of Parent Common Stock . All shares of Parent Common Stock that are issued to Securityholders pursuant to this Agreement have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, (i) will be duly and validly issued free and clear of any Liens, fully paid and non-assessable, (ii) will be issued and delivered in compliance with all applicable Legal Requirements (including federal and state securities laws), and (iii) will be entitled to all

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rights, preferences and privileges of all other shares of the Parent Common Stock as described in the Parent’s organizational documents. All corporate action on the part of the Parent by its officers, directors and stockholders necessary for the authorization and issuance of Parent Common Stock to Securityholders in accordance with the terms of this Agreement has been taken or will be taken, and no further consent or authorization of the Parent, its directors, stockholders, any Governmental Body or organization or any other person or entity is required.
           (g) SEC Documents. The Parent is subject to the reporting requirements of the Exchange Act, and has timely filed (subject to any permitted extensions for which the Parent has timely filed) with SEC all periodic reports, schedules, registration statements and definitive proxy statements that the Buyer was required to file with the SEC on or after January 1, 2011 (collectively, the “ Buyer SEC Filings ”). Each Buyer SEC Filing, (i) as of its date, complied in all material respects with the requirements of the Exchange Act, and (ii) did not, at the time it was filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.
           (h) Parent Common Stock Registration; Listing . The Parent currently meets the continuing eligibility requirements for listing on the Nasdaq Global Market and has not received any notice from Nasdaq, the Financial Industry Regulatory Authority or any other Person that it may not currently satisfy such requirements or that such continued listing of the Parent Common Stock on the Nasdaq may be ended.
ARTICLE 7
PRE-CLOSING COVENANTS
      7.1 Access to Information .
           (a) Subject to Section 7.1(b) , from and after the date hereof and until the Closing, upon reasonable notice, the Company shall provide to the Buyer and its authorized Agents reasonable access during normal business hours to the offices, books and records, Returns, Contracts, commitments, facilities and accountants of the Company Group, and shall furnish and make available to the Buyer and its authorized Agents all such documents and copies of documents (at the Buyer’s expense) and all such additional financial and operating data and other information pertaining to the affairs of the Company Group as the Buyer and its authorized Agents may reasonably request; provided , however , that the activities of the Buyer and its Agents shall be conducted in such a manner as not to interfere unreasonably with the operation of the Businesses.
           (b) The rights of the Buyer and its authorized Agents under Section 7.1(a) and Section 7.2(iii) are subject to any reasonable requirement which the Company may impose, as a condition to providing information, documents or access under Section 7.1(a) or Section 7.2(iii) , that the Buyer agrees to abide by (and agrees to procure that its Agents will abide by) such protocols as the Company may reasonably specify for the purpose of maintaining the security and confidentiality of its confidential information.
      7.2 Operation of Business of Company Prior to Closing . At all times from and after the date of this Agreement until the Closing, the Company agrees that it shall (i) except to the extent the Buyer consents otherwise in writing, conduct the Business only in, and the

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Company Group shall not take any action except in, the ordinary course consistent with past practices, (ii) use reasonable endeavours to preserve intact its current business organization, keep available the services of its current officers and employees and maintain its relations and good will with all suppliers, customers, landlords, creditors, employees and other Persons having business relationships with the Company Group; and (iii) cause the Company Group’s officers to report regularly (but in no event less frequently than weekly) to Buyer concerning the status of the Business. Further, except as otherwise permitted or required by this Agreement, prior to the Closing, neither the Company nor any Company Subsidiary shall do any of the following:
           (a) issue or grant any equity securities or any subscriptions, warrants, options or other agreements or rights of any kind whatsoever to purchase or otherwise receive or be issued any equity securities or any securities or obligations of any kind convertible into, or exercisable or exchangeable for, any equity securities of the Company or any of the Company Subsidiaries;
           (b) engage in any practice, take any action, or enter into any transaction outside the ordinary course of business that would have constituted a breach of any of the representations and warranties in Article 4 had such practice, action or transaction occurred prior to the date of this Agreement and would have not been disclosed in Schedules 4.1 to 4.28 of this Agreement;
           (c) effect any recapitalization, reclassification, split or like change in the capitalization of the Company or any Company Subsidiary;
           (d) amend or waive any provision of the constitution or other organizational documents of the Company or any Company Subsidiary, including the articles of incorporation and the bylaws;
           (e) increase the compensation of any officer and director or other employee of the Company or any Company Subsidiary, except for any increase as required by any Contract existing on the date hereof;
           (f) create any Lien other than Permitted Liens;
           (g) sell, assign, transfer, convey, lease or otherwise dispose of any of the properties or assets of the Company or any Company Subsidiary except in the ordinary course of business;
           (h) acquire any properties or assets or enter into commitments for capital expenditures of the Company or any Company Subsidiary except those that do not exceed A$25,000 for any individual acquisition or commitment and A$50,000 for all acquisitions and commitments in the aggregate;
           (i) except for transfers of cash pursuant to normal cash management practices in the ordinary course of business, payments of wages, salaries, superannuation contributions and expense reimbursements to employees, payments of amounts due to Securityholders in connection with the arrangements in effect as at the date of this Agreement (and disclosed in Section 4.19(i) of Schedule 4.19 ) for the provision of the bank guarantees set forth in Section 8.3(b) , payment of interest due on Convertible Notes issued by the Company in 2010 and the incurring of Indebtedness permitted under Section 7.2(n) , make any investments in

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or loans to, or pay any fees or expenses to, or enter into or modify any Contract with, the Securityholders or any of their respective Affiliates;
           (j) enter into any Contract which materially restricts the ability of the Company or any Company Subsidiary to compete with, or conduct, any business or line of business in any geographic area;
           (k) make, revoke or change any material Tax election or settle or compromise any material Tax Liability;
           (l) make any payments outside the ordinary course of business for purposes of settling any dispute;
           (m) enter into any transaction with any Securityholder, officer, director, employee or any Affiliate or family member of such Person other than a transaction constituting the incurring of Indebtedness permitted under Section 7.2(n) ;
           (n) incur any Indebtedness other than Securityholder Loans which do not require the approval of the Buyer under Section 2.4(b) ;
           (o) terminate any Material Contract or waive, release or assign any rights or claims under any Material Contract;
           (p) fail to file any Tax Return when due or fail to cause each such Tax Return when filed to be true, complete and correct in all material respects or fail to pay any Taxes when due;
           (q) hire any new employee not disclosed in Schedule 4.16 (other than to replace on substantially similar terms, including as to remuneration and benefits, a person who has ceased to be an employee of the Company or any Company Subsidiary);
           (r) make any change to its accounting methods, principles, policies, procedures or practices;
           (s) commence or settle any material Proceeding, other than a Proceeding in which Buyer or Parent are directly adverse to the Company;
           (t) use any funds borrowed under a Securityholder Loan to discharge or otherwise repay any non-current Indebtedness; or
           (u) agree or commit (whether written or otherwise) to do any of the foregoing.
     Notwithstanding the foregoing, nothing in this Section 7.2 shall prohibit the Company or any of the Company Subsidiaries from:
                (i)  taking any action or omitting to take any action as required, as contemplated by or in accordance with this Agreement, as required by Legal Requirement, or otherwise approved in writing by the Buyer (not to be unreasonably withheld or delayed); or
                (ii)  soliciting, negotiating and entering into any agreement or other commitment with any one or more Securityholders or their Related Entities in respect of the

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provision of funding to the Company provided that (x) any such agreement or other commitment is conditional on, and will not take effect unless, this Agreement is validly terminated pursuant to Article 9 and (y) in no event shall the Company or any Company Subsidiary violate Section 7.3(b) in undertaking such efforts.
      7.3 Efforts to Consummate .
           (a) Each Securityholder must use all reasonable endeavours to ensure that each condition in Sections 3.2(a) , 3.2(b) , 3.2(d) and 3.2(j) through 3.2(n) (inclusive), to the extent it is applicable to the Securityholder and is within the reasonable power of the Securityholder to ensure or assist in its satisfaction, is satisfied as soon as practicable after the date of this Agreement and in any event before the Termination Date.
           (b) The Company must use all reasonable endeavours to ensure that each condition in Section 3.2 , to the extent it is applicable to the Company and is within the reasonable power of the Company to ensure or assist in its satisfaction, is satisfied as soon as practicable after the date of this Agreement and in any event before the Termination Date.
           (c) The Buyer must use all reasonable endeavours to ensure that each condition in Section 3.2 and Section 3.3, to the extent it is applicable to the Buyer or Parent and is within the reasonable power of the Buyer or Parent to ensure or assist in its satisfaction, is satisfied as soon as practicable after the date of this Agreement and in any event before the Termination Date.
           (d) The Securityholder Representative must use all reasonable endeavours to ensure that each condition in Section 3.2 , to the extent it is applicable to the Securityholder Representative and is within the reasonable power of the Securityholder Representative to ensure or assist in its satisfaction, is satisfied as soon as practicable after the date of this Agreement and in any event before the Termination Date.
           (e) Without limitation to the foregoing, each of those parties must, in respect of the conditions attributed to it in Sections 7.3(a) , 7.3(b) , 7.3(c) , and 7.3(d) , respectively:
                (i)  to the extent it is within the reasonable power of the relevant party to do so, cooperate with, and comply with all reasonable requests of each other party for the purposes of procuring the satisfaction of any such condition and must not take any action that will or is likely to hinder or prevent the satisfaction of any such condition;
                (ii)  keep each other party informed of any fact, matter or circumstance of which it becomes aware that may result in any such condition not being satisfied in accordance with its terms; and
                (iii)  within two Business Days after becoming aware of the satisfaction of any such condition notify the other party of the satisfaction of the condition.
           (f) Nothing in this Agreement shall be construed as an attempt or an agreement by the Company or any of the Company Subsidiaries to assign or cause the assignment of any Contract or Governmental Authorization which is by Legal Requirement non-assignable without the consent of the other party or parties thereto, unless such consent shall have been given.

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      7.4 Execution of Additional Documents . Prior to Closing, from time to time, as and when requested by a party hereto, each party hereto shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions reasonably necessary to consummate the Transactions.
      7.5 Publicity . Prior to the Closing, other than disclosure (i) to and amongst the Securityholders and their respective advisers for the purpose of informing them about the Transactions, and (ii) by a party to its professional advisers and (where applicable) to the unitholders, limited partners, directors, officers and employees of it and its Affiliates, no public release, announcement or other disclosure concerning the Transactions shall be issued or made by any party hereto or such party’s Affiliates or Agents without the prior consent of the other parties hereto (save that the giving of consent by the Securityholder Representative shall for this purpose be deemed to be the consent of each Securityholder), which consent shall not be unreasonably withheld, conditioned or delayed, except that each party may disclose information if required or advisable under any Legal Requirement and, with respect to Parent, the requirements of any national securities exchange on which the Parent Common Stock is then listed, provided that the Buyer will provide reasonable notice of the circumstances and form of such disclosure to the Company.
      7.6 No Solicitation .
           (a) The Company and the Securityholders shall immediately cease any and all existing activities, discussions or negotiations with any parties conducted heretofore with respect to any Acquisition Proposal.
           (b) During the period from the date hereof and continuing until the earlier to occur of the termination of this Agreement pursuant to Article 9 or the Closing, the Company shall not and shall cause each of its current directors, current executive officers and other employees, Affiliates (including each Company Subsidiary), representatives and other Agents (including its financial, legal and accounting advisors) not to, directly or indirectly: (i) solicit, initiate, encourage, knowingly facilitate or induce any inquiry with respect to, or the making, submission or announcement of, any Acquisition Proposal; (ii) furnish to any Person any nonpublic information or take any other action to facilitate any inquiries or the making of any proposal that constitutes or could reasonably be expected to lead to, any Acquisition Proposal; (iii) participate or engage in discussions or negotiations with any Person with respect to any Acquisition Proposal, or the making of any proposal that constitutes or could reasonably be expected to lead to any Acquisition Proposal; (iv) approve, endorse or recommend any Acquisition Proposal; or (v) enter into any letter of intent or similar document or any Contract relating to any Acquisition Proposal.
           (c) As promptly as practicable after receipt of any Acquisition Proposal or any written request for nonpublic information or written inquiry in respect of any potential Acquisition Proposal, the Company shall provide Buyer with oral and written notice of the fact that such Acquisition Proposal, request or inquiry was submitted or made and, to the extent not prohibited by any confidentiality obligation of the Company or any of its Affiliates to the Person or group making any such Acquisition Proposal, request or inquiry, the identity of such Person and a copy of all written materials provided in connection with such Acquisition Proposal, request or inquiry.
           (d) Without limiting the foregoing, it is understood that any violation of the restrictions set forth in this Section 7.6 by any current executive officer or current director of the

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Company, a Company Subsidiary or any investment banker, attorney or representative of the Company shall be deemed to be a breach of this Section 7.6 by the Company.
      7.7 Compensation. As of the Closing, the bonus, deferred salaries, payroll liabilities, incentive compensation awards, severance (other than severance obligations expressly assumed by Buyer or Parent), consulting fees (including fees payable at termination of such consultant), variable compensation plan payments and/or other profit sharing contributions that may be due with respect to the fiscal year ended June 30, 2011, which have not been paid, are set forth on Schedule 7.7 .
ARTICLE 8
POST-CLOSING COVENANTS
      8.1 Covenants of the Parties . The Securityholders may, following the Closing, retain copies of the Company’s Records, including Records stored on computer disks or tapes or any other storage medium, as the Securityholders are reasonably likely to need in connection with any accounting, auditing and Tax requirements, any Legal Requirements and any claims or Proceedings relating in whole or in part to the Securityholders or the Company. The parties hereto shall reasonably cooperate with each other and shall cause their respective Agents to cooperate with each other following the Closing to ensure the orderly transition of the ownership of the Company and the Business to the Buyer and to minimize any disruption to the Business that might result from the Transactions.
      8.2 Publicity . Following the Closing:
           (a) each of the Securityholder Representative and the Securityholders has complete discretion to announce the Transaction including the general terms thereof and any other information with respect to the Transaction to the extent (i) required or advisable under any Legal Requirement, (ii) such information as is included in the announcement has been included in any of the Parent’s public filings, or (iii) the Parent has consented in writing to the announcement (such consent not to be unreasonably withheld); and
           (b) the Buyer and Parent have complete discretion to announce the Transaction including the general terms thereof and any other information with respect to the Transaction as the Parent or the Buyer may determine in its sole and absolute discretion.
      8.3 IMO Guaranty . Buyer agrees promptly after Closing to:
           (a) provide to the Western Australia Independent Market Operator (the “ IMO ”) cash or a bank undertaking(s) to secure the Company Group’s Curtailable Load Facility and/or DSM Programme for the Capacity Year 2012/2013 as set forth on the IMO’s Wholesale Electricity Market System, such cash, bank undertaking, or any other approved method of satisfying the IMO’s Reserve Capacity Security requirements in an amount and from a bank or financial institution acceptable to the IMO (the “ IMO Undertaking ”);
           (b) cause the guarantors to be released (and in any event within four weeks from the Closing Date) from the bank guarantees totaling A$4,000,002.75 in aggregate previously provided to the IMO with respect to the Capacity Year 2012/2013 and use reasonable endeavors to have those bank guarantees returned to the Securityholder Representative; and procure that the Company pays to the Securityholders who have procured the provision of such bank guarantees the amounts which accrue to them in respect of procuring the provision of

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those guarantees under the arrangements in effect as at the date of this Agreement (and disclosed in Section 4.19(i) of Schedule 4.19 ) until the date those bank guarantees have been returned to the Securityholder Representative from the IMO, such amounts to be paid on their due dates for payment and, in respect of any such amounts which have accrued but not fallen due for payment on the date on which the guarantees are returned from the IMO to the Securityholder Representative, on the date on which the guarantees are returned from the IMO to the Securityholder Representative; provided that the applicable Securityholders agree to provide the Buyer a statement indicating the accrued amounts to be paid to them by the Company pursuant to those arrangements set forth on Section 4.19(i) of Schedule 4.19 and upon receipt of such amounts automatically release the Company from any further liability thereunder; and
           (c) procure the release by the IMO of ASIC fixed charge 1683351 granted in favour of the IMO in relation to a bank deposit in the amount of A$997,050 with respect to the Capacity Year 2010/2011 and ASIC fixed charge 1843601 granted in favour of the IMO in relation to the 2011/2012 IMO Deposit.
The Securityholders shall provide such assistance as is within their power to provide and is reasonably required to procure the releases referred to in Sections 8.3(b) and 8.3(c) .
      8.4 Additional Purchase Price on release of IMO Security Deposit . Buyer agrees that promptly following the IMO providing the releases referred to in Section 8.3(c) , it shall pay or procure the payment to an account with an Australian bank specified by the Securityholder Representative, as additional Purchase Price, an amount equal to the 2011/2012 IMO Deposit that the Company receives from the IMO, including all accrued interest without any conditions or offsets.
      8.5 Security Deposit Claims. Upon Buyer becoming aware of the IMO making a decision to withhold and retain or taking any action to withhold and retain any or all of the security deposit amounts referred to in Section 8.3(c) (“ IMO Claim ”):
           (a) the Buyer must notify the Securityholder Representative immediately of all material details regarding the IMO Claim and provide all documentation and other communications received from the IMO which relate to the IMO Claim;
           (b) the Buyer will not take any action in respect of the IMO Claim (including responding to, admitting liability or paying, accepting or compromising the IMO Claim or agreeing with the IMO as to any appropriation or treatment of the security deposit) without the prior written consent of the Securityholder Representative (which consent may not be unreasonably withheld); and
           (c) the Securityholder Representative will be entitled to be involved in, attend at and participate in, all discussions and negotiations with the IMO regarding the IMO Claim at its own expense. Any expenses incurred by the Company post-Closing or by the Buyer and Parent shall be promptly upon request be reimbursed by the Securityholders.
      8.6 Cooperation with Governmental Inquiry . From and after the Closing Date, each of the Buyer, the Securityholder Representative and the officers and directors of the Company prior to the Closing (to the extent they are also Securityholders) shall cooperate, as reasonably requested, in connection with any inquiry by a Governmental Body relating to this Agreement or the transactions contemplated hereby. Reasonable cooperation shall be determined based on the nature of the inquiry and the person’s knowledge of any factual

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information pertaining to the same. All costs incurred in connection with such cooperation shall be borne by the Buyer.
ARTICLE 9
TERMINATION
      9.1 Grounds for Termination . This Agreement may, by notice given prior to or at the Closing, be terminated as follows:
           (a) by mutual written consent of the Buyer, the Company and the Securityholder Representative;
           (b) by either (i) the Buyer or (ii) the Securityholder Representative if the Closing has not occurred (other than as a result of the failure of any party seeking to terminate this Agreement to comply fully with such party’s obligations under this Agreement) on or before 15 July, 2011, or such later date as the parties may agree upon in writing (the later of such dates to be referred to as the “ Termination Date ”);
           (c) by the Buyer if there shall have been a breach or failure to perform any covenant or agreement on the part of the Company or any of the Securityholders contained in this Agreement (i) that causes (or would reasonably be expected to cause) any condition precedent to Buyer’s obligations as set forth in Section 3.2 not to be satisfied, and (ii) which breach or failure to perform is not capable of being cured or, if reasonably capable of being cured, shall not have been cured prior to the earlier of (A) twenty (20) days following notice of such breach and (B) the Termination Date; or
           (d) by the Securityholder Representative if there shall have been a breach or failure to perform any covenant or agreement on the part of the Buyer or the Parent contained in this Agreement (i) that causes (or would reasonably be expected to cause) any condition precedent to the Securityholders’ obligations as set forth in Section 3.3 not to be satisfied, and (ii) which breach or failure to perform is not capable of being cured or, if reasonably capable of being cured, shall not have been cured prior to the earlier of (A) twenty (20) days following notice of such breach and (B) the Termination Date;
      9.2 Effect of Termination . Any termination of this Agreement by a party under this Article 9 shall be without liability to the other parties other than any liability which any party may have arising out of a breach of this Agreement prior to such termination. Nothing in this Section 9.2 shall relieve any party from liability for any breach of this Agreement prior to such termination, in which case the terminating party shall retain its rights against such other party in respect of such other party’s breach. If this Agreement is terminated, the Buyer must promptly on demand by the Company pay the fees and expenses of BDO and Moore Stephens and the costs of additional internal accounting resources utilized by the Company in connection with the preparation of the financial statements contemplated by Sections 3.2 , 3.7 , and 4.13 and all associated work (including valuation work).
      9.3 Termination Procedures . If Buyer wishes to terminate this Agreement pursuant to Section 9.1(b) or Section 9.1(c) , Buyer shall deliver to the Company and the Securityholder Representative a written notice stating that Buyer is terminating this Agreement and setting forth a brief description of the basis on which Buyer is terminating

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this Agreement. If the Securityholder Representative wishes to terminate this Agreement pursuant to Section 9.1(b), or Section 9.1(d) , the Securityholder Representative shall deliver to Buyer a written notice stating that the Securityholder Representative is terminating this Agreement and setting forth a brief description of the basis on which the Securityholder Representative is terminating this Agreement.
ARTICLE 10
INDEMNIFICATION
      10.1 Survival . The representations and warranties of the parties hereto contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive the Closing until the eighteen (18) month anniversary of the Closing Date; provided that
           (a) all covenants and agreements contained in this Agreement or in any certificate or other writing delivered pursuant hereto or in connection herewith shall survive until fully performed; and
           (b) the representations and warranties set forth in Section 4.6 , Section 14.1 and Section 14.6 shall survive indefinitely.
     Subject to the limitations in this Article 10 , any Claim (as hereinafter defined) based upon a breach of a representation, warranty, agreement or covenant which is made in writing prior to the expiration of the applicable survival period shall survive such expiration until resolved or judicially determined.
      10.2 Indemnification by Securityholders .
           (a) Subject to the limitations, conditions and restrictions set forth in this Agreement, each Securityholder and its successors and assigns, jointly and severally (subject to the limitations set forth in Section 10.5 ), shall indemnify and defend the Buyer Indemnified Parties and hold them harmless from and against any and all Losses of or against the Buyer Indemnified Parties after the Closing to the extent resulting from or arising out of (i) any breach as of the date hereof or as of the Closing Date of any representation or warranty made by the Company, (ii) any breach or non-fulfillment of any agreement or covenant of the Company contained in the Transaction Documents which are to be performed prior to Closing, and (iii) any inaccuracies or omissions in the data provided by the Company to BDO in the Closing Statement.
           (b) Subject to the limitations, conditions and restrictions set forth in this Agreement, each Securityholder shall severally and not jointly indemnify and defend the Buyer Indemnified Parties and hold them harmless from and against any and all Losses incurred or suffered by them to the extent resulting from or arising out of (i) any breach of any representation, warranty or covenant made by such Securityholder in Article 14 to this Agreement, and (ii) any breach or non-fulfillment of any agreement or covenant of such Securityholder contained in any Transaction Document .
           (c) Each Restricted Party shall indemnify, severally and not jointly, the Buyer Indemnified Parties and hold them harmless from and against any and all Losses incurred

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or suffered by them to the extent resulting from any breach of Section 14.2 by such Restricted Party.
           (d) Each Option Holder shall indemnify, severally and not jointly, the Buyer Indemnified Parties and hold them harmless from and against any and all Losses incurred or suffered by them to the extent resulting from any breach of Section 14.4 by such Option Holder.
           (e) Each Noteholder shall indemnify, severally and not jointly, the Buyer Indemnified Parties and hold them harmless from and against any and all Losses incurred or suffered by them to the extent resulting from any breach of Section 14.5 by such Noteholder.
           (f) This Article 10 sets out the exclusive rights of the Buyer Indemnified Parties in respect of Losses of the nature referred to in this Article 10 .
           (g) The Buyer agrees to the provisions of this Article 10 as agent for each Buyer Indemnified Party that is not a party to this Agreement and shall procure that each such Person acts in accordance with its provisions as if it were a signatory to this Agreement.
      10.3 Indemnification by Buyer . If the IMO draws on any bank guarantee referred to in Section 8.3(b) at any time after Closing and prior to the release of that bank guarantee, the Buyer will upon becoming aware of the drawing promptly notify the Securityholder Representative and will indemnify and keep indemnified the Securityholders in respect of all Losses suffered or incurred by Securityholders in connection with such drawing or failure to pay.
      10.4 Procedure Relative to Indemnification .
           (a) If an indemnified party shall claim that it is entitled to be indemnified, defended or held harmless pursuant to the terms of this Article 10 (each, a “ Claim ”), such party (the “ Claiming Party ”) shall notify the party or parties against which the claim is made (the “ Indemnifying Party ”) in writing (a “ Claim Notice ”) of such Claim promptly after the Claiming Party receives notice of any action, Proceeding, demand or assessment or otherwise has received notice or become aware of any claim that may reasonably be expected to result in a Claim by the Claiming Party against the Indemnifying Party (provided that in the event of a delay in giving such notice, the Indemnifying Party shall not be relieved of its indemnification obligations hereunder unless it is materially prejudiced thereby and then only to the extent of the prejudice). The Claim Notice shall specify the breach of representation, warranty, agreement or covenant or other basis for indemnification claimed by the Claiming Party and the Losses incurred by, or actually or potentially imposed upon, the Claiming Party on account thereof. If such Losses are liquidated in amount, the Claim Notice shall so state and such amount shall be deemed the amount of the Claim of the Claiming Party. If the amount is not liquidated, the Claim Notice shall so state and in such event a Claim shall be deemed asserted against the Indemnifying Party on behalf of the Claiming Party.
           (b) If any Claims of the Claiming Party are based upon a claim by a third-party (a “ Third-Party Claim ”) (including any form of Proceeding filed or instituted by any Governmental Body), then Indemnifying Party may assume the exclusive right to control and defend such Third-Party Claim, provided that the Buyer is regularly consulted, kept informed and given the reasonable opportunity to comment and object to all aspects of the Third-Party Claim. In all such cases, the Claiming Party will have the right to participate, at the Claiming Party’s expense, in the defense or settlement of such claim with counsel reasonably

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satisfactory to Indemnifying Party. The Indemnifying Party shall have the right to settle and compromise such Third-Party Claim only with the consent of the Claiming Party (which consent shall not be unreasonably withheld or delayed). Notwithstanding anything to the contrary contained herein, in the event that either Buyer or Parent is the Claiming Party and it determines in its reasonable judgment that (x) there is a probability that the amount of Loss claimed will be greater than the Escrow Amount; (y) the Claims include claims seeking equitable or other non-monetary relief, or (z) there is a probability that a Third-Party Claim may adversely affect its rights to conduct the Business after the Closing Date, then Buyer or Parent (as the case may be) may, by written notice to the Securityholder Representative, assume the exclusive right to control, defend, compromise, or settle such Third-Party Claim and the amount of such Loss, if any, and the reasonable fees and expenses of counsel shall be considered Losses of Buyer and/or Parent for purposes of this Agreement. In all such cases, the Indemnifying Party will have the right to participate, at Indemnifying Party’s expense, in the defense or settlement of such claim with counsel reasonably satisfactory to Buyer.
                (i)  If the Indemnifying Party shall notify the Claiming Party that the Indemnifying Party does not wish to defend the Third-Party Claim (or a Claiming Party assumes the conduct of a Third-Party Claim under the circumstances described in the penultimate sentence of Section 10.4(b) ) the Claiming Party shall have the right to:
                     (1)  conduct a defense against such Third-Party Claim provided that it promptly and regularly provides the Indemnifying Party with information material to the conduct and progress of the Third-Party Claim; and
                     (2)  settle and compromise such Third-Party Claim if it acts reasonably and in good faith upon ten (10) days’ notice to, but without having to first obtain the consent of, the Indemnifying Party.
           (c) Upon receipt of a Claim Notice that does not involve a Third-Party Claim, the Indemnifying Party shall have thirty (30) days from the receipt of such Claim Notice (which has been given in accordance with the requirements of Section 10.4(a) ) to notify the Claiming Party that the Indemnifying Party disputes such Claim. If the Indemnifying Party does not provide timely notification to the Claiming Party of such dispute, then the amount of such Claim shall be deemed, conclusively, a liability of the Indemnifying Party hereunder. If the Indemnifying Party does timely notify the Claiming Party of such dispute, then the Claiming Party shall have thirty (30) days from the date of receipt of such notice to respond in a written statement to the objection of the Indemnifying Party. If after such thirty (30)-day period there remains a dispute as to any such Claim, then the Claiming Party and the Indemnifying Party shall attempt in good faith for a period not to exceed thirty (30) additional days to agree upon the rights of the respective parties with respect to such Claim. If the parties should so agree, a memorandum setting forth such agreement shall be prepared and signed by the Buyer and the Indemnifying Party. If the parties do not agree within such additional thirty (30)-day period, then the Claiming Party may pursue any and all other remedies available to it hereunder.
           (d) Once the amount of any Claim under this Article 10 is liquidated and the Claim is finally determined, the Claiming Party shall be entitled to pursue each and every remedy available to it at law or in equity to enforce the indemnification provisions of this Article 10 and, in the event it is determined, or the Indemnifying Party agrees, that it is obligated to indemnify the Claiming Party for such Claim, the Indemnifying Party agrees to

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pay all reasonable costs, expenses and fees, including all reasonable attorneys’ fees which may be incurred by the Claiming Party in attempting to enforce indemnification under this Article 10 , whether the same shall be enforced by suit or otherwise which the Indemnifying Party and the Claiming Party agree are due to the Claiming Party or which a court, arbitrator or other judicial body determines are due to the Claiming Party.
           10.5 Limits on Indemnification .
           (a) Notwithstanding anything contained in the Transaction Documents to the contrary, the Securityholders shall not be obligated to indemnify, defend or hold harmless any Buyer Indemnified Party with respect to any Losses from any Claim or Claims under Section 10.2(a)(i):
                (i)  for less than $5,000 for any particular item or series of related items; provided that this clause (i) shall cease to apply once the total Losses from all Claims (other than any Claims for less than A$5,000) equal or exceed A$100,000; and
                (ii)  unless and until the aggregate Losses from all Claims under Section 10.2(a)(i) , not including Claims excluded by clause (i) above, exceed A$100,000 (the “ Basket Amount ”), in which case the Buyer Indemnified Parties shall be entitled to be indemnified against the full amount of such Losses (which full amount shall include Losses previously excluded under Section 10.5(a)(i) and the portion of such Losses below A$100,000) and thereafter, the limitation set forth in Section 10.5(a)(i) shall cease to apply.
           (b) In no event shall the total indemnity obligations of any individual Securityholder exceed the Purchase Price actually paid to such Securityholder by the Buyer.
           (c) The Securityholders’ indemnification obligations under this Article 10 shall also be subject to the following limitations:
                (i)  The Escrow Amount shall be, subject to the proviso of this clause (i), the sole source to satisfy the indemnification provisions of Article 10 with respect to Claims in respect of any Losses relating to any breach of the representations or warranties of the Company as the date hereof or as of the Closing Date other than a breach of Section 4.6 (and, subject to the other provisions of this Agreement, the Securityholders’ liability shall be limited to that amount); provided that the Buyer may also by giving notice in writing to the Securityholder Representative offset Losses which relate to such Claims which are based on fraud or criminal matters from any Earnout Payment otherwise due; provided that in the event that the Securityholder Representative objects to such offset, the offset shall be deemed unresolved until such amount, if any, has been agreed with the Securityholder Representative or judicially determined. Any amounts indemnifiable by Securityholders under this Article 10 out of any Earnout Payment shall be limited, as to each Securityholder, to such Securityholder’s Pro Rata Portion of such Earnout Payment.
                (ii)  The Escrow Amount shall be the first source, but not the sole source, to satisfy the indemnification provisions of Article 10 relating to any other Losses (including breaches of Section 4.6 ); provided, however, that with respect to indemnification under Sections 10.2(b) , 10.2(c) , 10.2(d) and 10.2(e) the portion of related Losses that may be claimed against the Escrow shall be limited to the breaching Securityholders’ share of the Escrow Amount at the relevant time.

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                (iii)  No Securityholder shall be liable in respect of a Claim under this Article 10 if, within six months of the date by which the Securityholder or the Securityholder Representative (as the case may be) receives the Claim Notice in respect of the Claim, (A) the Claim has not been agreed, compromised or settled, and (B) a Buyer Indemnified Party has not issued and served legal proceedings against the party in respect of the Claim.
                (iv)  No Buyer Indemnified Party is entitled to recover under any Claim more than once in respect of the same Loss.
                (v)  No Buyer Indemnified Party is entitled to recover in respect of any Loss caused by any act, omission or arrangement:
  (1)   of, by or on behalf of the Buyer or any Related Entity of the Buyer before or after the Closing (but subject to the duties to mitigate Losses provided in this Article 10 , this clause shall not apply to any increasing Losses caused by a Claim remaining unresolved);
  (2)   of any other person, made at the request of or with the prior consent of the Buyer or any Related Entity of the Buyer; or
  (3)   implementing, or permitted or contemplated by, the terms of any Transaction Document; or
                (vi)  No Buyer Indemnified Party is entitled to recover in respect of any Loss caused by any change after the date of this Agreement in any applicable law or in its interpretation or in any administrative practice or ruling of a Government Body (even if the change has retrospective effect).
                (vii)  No Claim in respect of any representation or warranty in Section 4.14 may be made where the Claim:
  (1)   concerns or arises out of a fact, matter or circumstance arising from ordinary trading activities of a Group Company between 31 March 2011 and Closing;
  (2)   concerns or arises out of a fact, matter or circumstance which is GST which is recoverable from the recipient of a supply or for which an input tax credit is available;
  (3)   does not exceed any overprovision for Tax in the Financial Statements;
  (4)   does not exceed any Tax refund, offset or credit received by the Company or a Company Subsidiary for a period before Closing;
  (5)   concerns or arises out of a fact, matter or circumstance arising from an election or choice made after Closing without the fully

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informed prior written consent of Securityholder Representative (which must not unreasonably withhold or delay consent) in connection with a Return or a request to amend an assessment of Tax.
                (viii)  In the event that the Buyer (A) claims that a Material Adverse Effect has occurred due to events, actions or omissions occurring after the date of this Agreement, (B) claims that such Material Adverse Effect causes the condition in Section 3.2(g) not to be satisfied and (C) decides to waive such condition and consummate the transactions contemplated hereby, then Buyer shall not be entitled to make any indemnification claims against the Securityholders relating to the events, actions or omissions after the date of this Agreement that led to the Material Adverse Effect claim. Buyer shall give the Company notice promptly after it determines that a Material Adverse Effect has occurred.
           (d) Save for the limitation in Section 10.5(b) , none of the limitations set forth in Section 10.1 or this Section 10.5 shall apply in respect of a Securityholder in the case of indemnification for any Losses or other indemnification matter based upon, arising out of, or relating to fraud or criminal matters (i) (x) which occurred on or before the date of the Agreement and (y) of which such Securityholder was aware prior to the date of the Agreement, and (ii) if the covenant contained in the immediately following sentence has been complied with, (x) which occurred on or before the date of the Agreement and (y) of which such Securityholder becomes aware during the period from the date of the Agreement until Closing. The Company and the Securityholders each agree to notify the Buyer immediately (which must be within one business day) if it becomes aware, during the period between the date of this Agreement and Closing, of any fraud or criminal matter which occurred on or prior to the date of the Agreement. If the covenant contained in the immediately following sentence has not been complied with, then with respect to clause (iii)(x) above, the date of occurrence shall be the date of Closing instead of the date of the Agreement.
           (e) The amount of any Losses for which indemnification is provided under this Article 10 shall be net of:
                (i)  any amounts actually recovered by a Buyer Indemnified Party from any third person (by contribution, indemnification or otherwise) with respect to such Losses; and
                (ii)  any amounts that the Buyer Indemnified Party actually recovers under any contract of insurance in respect of any fact, matter or circumstance giving rise to the Claim.
           (f)  If a Buyer Indemnified Party recovers any such amount after any one or more Securityholders has made a payment to the Buyer Indemnified Party (or an amount has been appropriated from the Escrow Account) to settle or discharge any indemnification obligation under this Article 10 , the Buyer Indemnified Party must promptly make a payment to the relevant Securityholder or Securityholders (as the case may be) of an amount necessary to give effect to Section 10.5(e) .
           (g)  Each Buyer Indemnified Party must take commercially reasonable steps to avoid or mitigate any Loss in respect of which it is entitled to seek indemnification under this Article 10 ; provided that the foregoing shall not require any Buyer Indemnified Party to take any action that will result in increased expenses to any Buyer Indemnified Party, such as an

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increase in insurance premiums. If a Buyer Indemnified Party does not comply with its obligations under this Section 10.5(g) and compliance would have mitigated the Loss, no party shall be liable under this Article 10 for the amount by which the Loss would have been so reduced.
      10.6 Certain Indemnification Matters .
           (a) The Securityholders shall have no right to seek contribution from the Company with respect to all or any part of any of the Securityholders’ indemnification obligations under this Article 10 .
           (b) In connection with any exercise by the Buyer of its indemnification rights under this Article 10 in respect of a Claim in relation to any matter for which Securityholders are jointly and severally liable under this Agreement, the Buyer shall be entitled to make all such Claims through and deal exclusively and settle such Claims with the Securityholder Representative for any Securityholder who is an indemnifying party hereunder. Unless the Securityholder Representative agrees otherwise in writing, the Buyer must deal directly with a Securityholder in respect of a Claim in relation to any matter for which that Securityholder is severally liable.
           (c) For the purpose of determining the amount of the Losses resulting from a breach or inaccuracy of a representation, warranty, or covenant of the Company or the Securityholders (but not for the purpose of determining the existence of such breach or inaccuracy), any “materiality” or “Material Adverse Effect” qualifiers or words of similar import contained in such representation or warranty giving rise to the claim of indemnity hereunder shall in each case be disregarded and without effect (as if such standard or qualification were deleted from such representation or warranty).
           (d) The right of any Buyer Indemnified Party to indemnification under this Article 10 is personal to that Buyer Indemnified Party and may not be assigned or otherwise transferred to any other person.
           (e) Subject to Section 10.5(c)(v) and save in respect of information disclosed in Schedules 4.1 to 4.28 of this Agreement, the right to indemnification, reimbursement or other remedy provided by this Agreement shall not be affected by any investigation (including any environmental investigation or assessment) conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with any representation, warranty, covenant, agreement or obligation providing the basis for any indemnification obligation owed to, reimbursement obligation owed to or any other remedy of any Buyer Indemnified Party.
ARTICLE 11
TAX MATTERS
      11.1 In this clause: (a) GST means GST as defined in the GST Act or any replacement or other relevant legislation and regulations; (b) words used in this clause which have a particular meaning in the GST law (as defined in the GST Act, and also including any applicable legislative determinations and Australian Taxation Office (including the New Zealand equivalent) public rulings) have the same meaning, unless the context otherwise requires; (c) any reference to GST payable by a party includes any corresponding GST

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payable by the representative member of any GST group of which that party is a member; and (d) if the GST law treats part of a supply as a separate supply for the purpose of determining whether GST is payable on that part of the supply or for the purpose of determining the tax period to which that part of the supply is attributable, such part of the supply is to be treated as a separate supply.
           (a) Unless GST is expressly included, the consideration expressed to be payable under any other clause of this Agreement for any supply made under or in connection with this Agreement does not include GST.
           (b) To the extent that any supply made under or in connection with this Agreement is a taxable supply, the GST exclusive consideration otherwise payable for that supply is increased by an amount equal to that consideration multiplied by the rate at which GST is imposed in respect of the supply, and is payable at the same time.
           (c) Each party agrees to do all things, including providing tax invoices and other documentation, that may be necessary or desirable to enable or assist the other party to claim any input tax credit, adjustment or refund in relation to any amount of GST paid or payable in respect of any supply made under or in connection with this Agreement.
           (d) If a payment to a party under this Agreement is a payment by way of reimbursement or indemnity and is calculated by reference to the GST inclusive amount of a loss, cost or expense incurred by that party, then the payment is to be reduced by the amount of any input tax credit to which that party is entitled in respect of that loss, cost or expense before any adjustment is made for GST pursuant to Section 11.1(b) .
      11.2 Transfer Taxes. All stock transfer, property transfer, excise, sales, use, documentary, stamp duty, Taxes and all conveyance fees, recording charges and other similar Taxes (including interest, penalties and additions to any such taxes) in each case including any such Taxes or fees levied upon the transfer of stock or other equity interests in an entity on account of such entity’s direct or indirect ownership of property (“ Transfer Taxes ”) incurred in connection with the transactions contemplated by this Agreement shall be paid by the Buyer. The Buyer shall prepare and file all necessary Returns and other documentation with respect to such Transfer Taxes.
      11.3 Tax Treatment of Certain Payments . For all relevant Tax purposes, all indemnification payments paid pursuant to Article 10 shall be treated as adjustments to the Purchase Price.
      11.4 Tax Cooperation .
           (a)  From and after the Closing Date, each of the Buyer, the Securityholder Representative and the officers and directors of the Company prior to Closing (to the extent they are also Securityholders) shall cooperate, as reasonably requested, in connection with the preparation of any Returns of the Company, and each Company Subsidiary and in connection with any Tax Audit or Tax dispute. Such cooperation shall include the retention and (upon the other party’s request, at the requesting parties cost and expense) the provision of records and information which are reasonably relevant to any such Tax Audit or Tax dispute. Buyer, the Securityholder Representative and the officers and directors of the Company prior to Closing (to the extent they are also Securityholders) shall, upon request, use their commercially reasonable efforts to obtain any certificate or other document from any Governmental Body or any other

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Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby).
           (b)  Notwithstanding anything to the contrary in Section 11.4(a) , the obligations of the Securityholder Representative and the officers and directors of the Company prior to Closing (to the extent they are also Securityholders) under Section 11.4(a) shall be limited to the provision of such cooperation and assistance as it would be reasonable to expect them to provide having regard to their respective knowledge of factual information, possession of relevant records and entitlement or standing to obtain any certificate or other document from any Person. All costs incurred in connection with providing such cooperation and assistance shall be borne by the Buyer.
ARTICLE 12
SECURITYHOLDER REPRESENTATIVE
      12.1 Appointment, Powers and Duties of the Securityholder Representative . By approval and adoption of this Agreement, each Securityholder hereby irrevocably appoints Semibreve Pty Ltd ACN 139 654 541 (the “ Securityholder Representative ”) as its, his or her exclusive agent and representative with full power and authority to act on behalf of such Securityholder to:
           (a)  enforce the Transaction Documents for the benefit of the Securityholders;
           (b)  defend any dispute in relation to the Transaction Documents involving the Securityholder (other than any Claim concerning a matter for which such Securityholder is severally liable and not jointly and severally liable);
           (c)  do or refrain from doing all such further acts and things relating to the Transaction Documents, execute all such documents as the Securityholder Representative shall deem necessary or appropriate and bind any Securityholder in any matter relating to the Transaction Documents, in each case, to the extent that the Securityholder Representative determines in its absolute discretion, is reasonably necessary or desirable to give effect to the Transactions;
           (d)  receive notices required to be made or delivered by the Buyer or the Company to any one or more of the Securityholders pursuant this Agreement (receipt of which shall discharge in full all other notice obligations of the Buyer or the Company to the Securityholders with respect thereto), except in relation to any Claim concerning a matter for which such Securityholder is severally liable and not jointly and severally liable;
           (e)  complete and execute all such instruments or other documents on behalf of a Securityholder as are required to give effect to any provision of the Escrow Rules (including execution and delivery of stock powers); and
           (f)  undertake the other functions and discharge the other responsibilities expressly allocated to the Securityholder Representative by the other Sections of this Agreement.

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     For the avoidance of doubt, in acting in connection with Claims or other disputes referred to above, the Securityholder Representative shall act only as agent and representative of Securityholders and will assume no personal responsibility to any Buyer Indemnified Party for any amounts which may be due from any Securityholder in connection with any such dispute or Claim and will not be obliged to assist any Buyer Indemnified Party in recovering any such amounts from Securityholders.
      12.2 Term of appointment. The Securityholder Representative’s appointment shall commence on the date of this Agreement and continue until the date by which the Earnout Payment is paid or (as the case may be) the date by which the Securityholder Representative determines acting reasonably that the Earnout Milestones will not be satisfied within the Earnout Period (or any extension of that period that may arise under Section 2.6(a) ); provided that if on either of those dates the Securityholder Representative is acting in respect of any Claim or other dispute pursuant to its appointment under this Agreement, the Securityholder Representative’s appointment shall continue until, and only terminate upon, the date by which the last of such Claims or other disputes is settled or finally judicially determined. On the termination of the Securityholder Representative’s appointment, the Securityholder Representative shall cease to have any obligation to perform any further function or discharge any further responsibility under this Agreement and each Securityholder shall thereafter become responsible for enforcing its rights under, and defending any Claim or other dispute against it in respect of, any Transaction Document.
      12.3 Confirmation of acts. Any action taken by the Securityholder Representative in the course of performing its functions or discharging its responsibilities under this Agreement is binding on all Securityholders. The appointment of the Securityholder Representative shall be deemed coupled with an interest and shall be irrevocable, and the parties hereto and any other Person may conclusively and absolutely rely, without inquiry, upon any action of the Securityholder Representative in all matters referred to herein. The Securityholders hereby irrevocably confirm and ratify all that the Securityholder Representative shall do or cause to be done by virtue of its appointment as the agent and representative of the Securityholders under this Agreement.
      12.4 Discretion of Securityholder Representative; reliance by the Securityholder Representative .
           (a)  The Securityholder Representative must act as it, in its absolute discretion, considers is in the best interests of Securityholders as a whole and need not have regard to the individual circumstances of any one or more Securityholders. Without limitation to the foregoing, the Securityholder Representative is not obliged to (but may in its absolute discretion) consult with any one or more Securityholders before performing any of its functions or discharging any of its responsibilities under this Agreement.
           (b)  The Securityholder Representative shall be entitled to rely, and shall be fully protected in relying, upon any statements furnished to it by any party hereto or any other evidence reasonably deemed by the Securityholder Representative to be reliable, and the Securityholder Representative shall be entitled to act on the advice of counsel selected by it. The Securityholder Representative shall be fully justified in failing or refusing to take any action under this Agreement unless it shall have received such advice or information from, or concurrence of, any one or more Securityholders as it deems appropriate in its absolute discretion or it shall have been expressly indemnified to its reasonable satisfaction by the

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Securityholders (severally but not jointly) against any and all liability and expense that the Securityholder Representative may incur by reason of taking or continuing to take any such action.
      12.5 Liability of the Securityholder Representative.
           (a)  To the maximum extent permitted by law, the Securityholder Representative shall not be liable to any Securityholder for:
                (i)  any failure by the Buyer or the Parent to perform any of its obligations under a Transaction Document; or
                (ii)  any action taken or omitted to be taken by the Securityholder Representative pursuant to its appointment,
except in the case of the Securityholder Representative’s bad faith or fraud or any breach by the Securityholder Representative of its express obligations under this Agreement.
           (b)  The Securityholder Representative is not a fiduciary and owes no fiduciary or similar duties to any Securityholder. The Securityholder Representative’s only obligations are those expressly stated in this Agreement.
      12.6 Expenses of the Securityholder Representative . The Securityholder Representative shall be entitled to:
           (a)  retain counsel or any other professional adviser, consultant or expert;
           (b)  engage the services of any former director, officer, employee or Securityholder of the Company; and
           (c)  otherwise incur such expenses (including, without limitation, court costs and reasonable attorneys’ fees and expenses),
as the Securityholder Representative deems to be necessary or appropriate in connection with its performance of its obligations under this Agreement; and may also take out and maintain such insurance cover for itself and its directors and officers as it reasonably considers appropriate.
      12.7 Indemnification . Each Securityholder hereby agrees (severally but not jointly) to indemnify the Securityholder Representative (in its capacity as such) against, and to hold the Securityholder Representative (in its capacity as such) harmless from, its proportionate share (based on its Pro Rata Portion) of any and all Losses of whatever kind which may at any time be imposed upon, incurred by or asserted against the Securityholder Representative in such capacity in any way relating to or arising out of the Securityholder Representative’s action or failure to take action pursuant to this Agreement (including, without limitation, the Escrow Rules) or in connection herewith or therewith in such capacity; provided , however , that no Securityholder shall be liable for the payment of any portion of such Losses to the extent resulting from the bad faith or fraud of the Securityholder Representative or any breach by the Securityholder Representative of its express obligations under this Agreement. Each Securityholder hereby authorizes the Securityholder Representative to apply proceeds otherwise distributable to the Securityholders pursuant to this Agreement or the Escrow Rules to satisfy any of such Securityholder’s obligations under this Section 12.7 .

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      12.8 Payment of costs, expenses, etc. Pursuant to Section 3.5 , the Securityholders have directed the Buyer to pay, on Completion, an amount of $200,000 of the Closing Purchase Price (the “ SR Retention Amount ”) to the Securityholder Representative to be applied by the Securityholder Representative to pay any expense referred to in Section 12.6 or to satisfy the Securityholders’ obligations under Section 12.7 . Not later than 10 Business Days following the termination of the Securityholder Representative’s appointment under this Article 12 , the Securityholder Representative must pay the remaining balance of the SR Retention Amount (if any) to the Securityholders in their Pro Rata Portions and provide each Securityholder with a statement showing how the SR Retention Amount has been applied.
      12.9 If the SR Retention Amount is insufficient to cover expenses contemplated by Section 12.6 or to satisfy the Securityholders’ obligations under Section 12.7 , the Securityholder Representative may, in the event any of the amount referred to in Section 8.4 , the Earnout Payment or any amounts of the Escrow Amount are to be distributed to Securityholders, take such action as is necessary to procure the deduction of such amounts from the payment that is otherwise due to be distributed to the Securityholders as is necessary to cover such expenses contemplated by Section 12.6 or to satisfy the Securityholders’ obligations under Section 12.7 .
      12.10 Assistance . Each Securityholder must promptly do all things reasonably requested by the Securityholder Representative to assist the Securityholder Representative to perform its functions and discharge its responsibilities under this Agreement.
      12.11 Survival . The agreements in this Article 12 shall survive termination of this Agreement.
ARTICLE 13
DEFINITIONS
     “ 2011/2012 IMO Deposit ” means the balance sheet asset associated with a bank deposit in the amount of A$2,051,500 made to secure the Company Group’s Curtailable Load Facility and/or DSM Programme for the Capacity Year 2011/2012 as set forth on the IMO’s Wholesale Electricity Market System.
     “ Accredited Holder ” has the meaning set forth in Section 2.3(c) .
     “ Acquisition Proposal ” means any offer or proposal relating to any transaction or series of related transactions involving: (a) any purchase or acquisition by any Person or “group” of Persons acting in concert or in a coordinated manner of any equity interest or other voting securities of any member of the Company Group or similar transaction involving any member of the Company Group, other than any transaction contemplated by proviso (iv) at the bottom of Section 7.2 ; (b) any purchase or acquisition by any Person or “group” of Persons acting in concert or in a coordinated manner or any sale, lease, exchange, transfer, license or disposition by any member of the Company Group of, a substantial amount of assets or properties of any member of the Company Group, other than in the ordinary course of business; or (c) any liquidation, dissolution or winding up of any member of the Company Group.
     “ Affiliate ” means with reference to any Person, another Person controlled by, under the control of or under common control with, that Person.

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     “ Agent ” means with respect to a particular Person, any director, manager, officer, employee, agent, consultant, advisor or other representative of such Person, including legal counsel, accountants and financial advisors.
     “ Agreement ” has the meaning set forth in the Preamble to this Agreement.
     “ Bayard ” means Bayard Metering Pty Ltd ACN 105 787 399.
     “ BDO ” means BDO Audit (NSW-VIC) Pty Ltd or any of its related or affiliated entities
     “ Business ” means the business of the Company or any Company Subsidiary as currently conducted.
     “ Business Day ” means a day that is not a Saturday, Sunday or public holiday or a bank holiday in the place where an act is to be performed or payment to be made.
     “ Buyer ” has the meaning set forth in the Preamble to this Agreement.
     “ Buyer Indemnified Parties ” means the Buyer, the Parent and, from and after the Closing, the Company and each of their respective officers, directors and Affiliates.
     “ Cash Consideration ” means the amount of the Purchase Price to be paid in cash.
     “ Cash Escrow Agreement ” has the meaning given in Section 3.2(i)(vi) .
     “ CGT ” means capital gains tax.
     “ Claim ” has the meaning set forth in Section 10.4(a) .
     “ Claim Notice ” has the meaning set forth in Section 10.4(a) .
     “ Claiming Party ” has the meaning set forth in Section 10.4(a) .
     “ Closing ” means the closing of the purchase by the Buyer and the sale by the Securityholders of the Ordinary Shares and the other Transactions.
     “ Closing Date ” means the date on which the Closing occurs.
     “ Closing Purchase Price ” shall mean the Purchase Price minus the Escrow Amount, the SR Retention Amount, the amount referred to in Section 8.4 and the Earnout Payment.
     “ Closing Statement ” has the meaning set forth in Section 2.4(a) .
     “ Code ” shall mean the United Stated Internal Revenue Code of 1986, as amended.
     “ Commissioner ” means the Commissioner of Taxation and the New Zealand equivalent.
     “ Company ” has the meaning set forth in the Preamble to this Agreement.
     “ Company Group ” means the Company and the Company Subsidiaries, on a consolidated basis.

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     “ Company Subsidiary ” means each of Energy Response Pty Ltd ACN 104 710 278, High Street Corporation Pty Ltd ACN 101 659 554 and the New Zealand Company Subsidiary.
     “ Company Transaction Expenses ” means all legal, accounting, investment banking, broker’s and finder’s fees and expenses incurred by the Company or a Company Subsidiary in connection with this Agreement, the other Transaction Documents and the Transactions; provided that the reasonable fees and expenses of BDO and Moore Stephens and the costs of additional internal accounting resources utilized by the Company in connection with the preparation of the financial statements contemplated by Sections 3.2 , 3.7 and 4.13 and all associated work (including valuation work) shall not be deemed Company Transaction Expenses.
     “ Contract ” means any agreement, contract, obligation, promise or undertaking that is legally binding.
     “ Convertible Note ” means any of the convertible notes issued by the Company and which are outstanding as at the date of this Agreement.
     “ Curtailable Load Facility ” shall have the meaning ascribed to it in the Wholesale Electricity Market Rules located at www.imowa.com.au/market-rules.
     “ DSM Programme ” shall have the meaning ascribed to it in the Wholesale Electricity Market Rules located at www.imowa.com.au/market-rules.
     “ Earnout Payment ” has the meaning given in Section 2.6 .
     “ EFI Financing ” means the arrangement for the supply and financing of metering assets contained in the Interruptible Load Project Agreement dated on or about October 21, 2009 between Energy for Industry Limited, and the Company Group and related agreements.
     “ EFI Funding Receivables ” means the balance sheet asset associated with the EFI Financing.
Employees ” means those employees employed by the Company or a Company Subsidiary as at the Closing.
     “ Environment ” means components of the earth, including (a) land, air and water, (b) any layer of the atmosphere (c) any organic or inorganic matter and any living organism and (d) human-made or modified structures and areas and includes interacting natural ecosystems that include components referred to in paragraphs (a)—(c).
     “ Environmental, Health and Safety Laws ” means all existing and applicable Legal Requirements of federal, state and local Governmental Bodies (including, both in Australia and New Zealand) concerning pollution or protection of the Environment, public health and safety or employee health and safety, including Legal Requirements relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern into ambient air, surface water, ground water or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern, as such requirements are enacted and in effect on the Closing Date.

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     “ Escrow Amount ” means an amount of $2,750,000, comprised of:
     (a) Cash Consideration of A$523,986 attributable to Non-Accredited Holders; and
     (b) as to the balance, such amount of Stock Consideration determined by dividing the amount of the balance by the Thirty Day Trading Average Price applicable to the issuance of Stock Consideration on Closing, which shall be attributable to the Accredited Holders
     For the avoidance of doubt, Securityholders that do not meet the criteria set forth in Section 2.3(c) shall have no rights to any Escrow Amount consisting of Stock Consideration, and Securityholders that meet the criteria set forth in Section 2.3(c) shall have no rights to any Escrow Amount consisting of Cash Consideration.
Escrow Rules ” means the terms and conditions set forth in Schedule 13.
     “ Exchange Act ” means the United States Securities Exchange Act of 1934, as amended.
     “ Financial Statements ” has the meaning set forth in Section 4.13 .
     “ GAAP ” means generally accepted United States accounting principles and practices recognized as such by the American Institute of Certified Public Accountants acting through its Accounting Principles Board or by the Financial Accounting Standards Board or through other appropriate boards or committees thereof and which are consistently applied for all periods so as to properly reflect the financial position, the result of operations and operating cash flow on a consolidated basis of the party, except that any accounting principle or practice required to be changed by the Accounting Principles Board or Financial Accounting Standards Board (or other board or committee) in order to continue as generally accepted accounting principles or practice may be so changed.
     “ Government Bid ” means a bid, offer, tender submission or the like in connection with a proposal to be awarded a Government Contract.
     “ Government Contract ” means any Contract with a Governmental Body .
     “ Governmental Authorization ” means any approval, consent, license, permit, waiver or other authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.
     “ Governmental Body ” means any (i) nation, state, county, city, town, village, district or other jurisdiction of any nature, (ii) federal, state, local, municipal, foreign or other government, (iii) governmental or quasi-governmental authority of any nature (including any governmental agency, branch, department, official or entity and any court or other tribunal) or (iv) body exercising, or entitled to exercise, any administrative, executive, judicial, legislative, police, regulatory, or taxing authority or power of any nature.
     “ GST Act ” means A New Tax System (Goods and Services Tax) Act 1999 (cth) or the equivalent New Zealand legislation as amended as the case may be. References to specific

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sections of, or expressions used in, the GST Act are intended to cover corresponding sections of the equivalent New Zealand legislation, where they exist.
     “ Indebtedness ” of any Person means any liability (including guarantees of liability and accrued but unpaid interest) of any Person (i) for borrowed money, (ii) under any reimbursement obligation relating to a letter of credit, banker’s acceptance or note purchase facility, (iii) evidenced by a bond, note, debenture or similar instrument (including a purchase money obligation), and (iv) for the payment of money relating to leases that are required to be classified as capitalized lease obligations in accordance with GAAP for all or any part of the deferred purchase price of such property. For the avoidance of doubt Indebtedness includes the loans advanced to the Company under the Loan Agreement dated on or about 28 June 2011 between the Company and Givia Pty Limited, Flowers ‘N Trees Pty Limited as trustee of the Sades Family Trust, Stonnington Securities Pty Ltd as trustee for New Century Super Fund, Jitendar Tomar and Uplands Group Pty Limited and the Loan Agreement dated on or about 30 June 2011 between the Company and Uplands Group Pty Limited.
     “ Indemnifying Party ” has the meaning set forth in Section 10.4(a) .
     “ Insurance Policies ” has the meaning set forth in Section 4.21 .
     “ Intellectual Property ” means and include all algorithms, application programming interfaces, circuit designs and assemblies, databases and data collections, diagrams, formulae, gate arrays, IP cores, inventions (whether or not patentable), know-how, logos, marks (including brand names, product names, logos, and slogans), methods, network configurations and architectures, net lists, photomasks, processes, proprietary information, protocols, schematics, specifications, software, software code (in any form including source code and executable or object code), subroutines, test results, test vectors, user interfaces, techniques, URLs, web sites, works of authorship, and other forms of technology (whether or not embodied in any tangible form and including all tangible embodiments of the foregoing such as instruction manuals, laboratory notebooks, prototypes, samples, studies, and summaries).
     “ Intellectual Property Rights ” mean and include all rights of the following types, which may exist or be created under the laws of any jurisdiction in the world: (a) rights associated with works of authorship, including exclusive exploitation rights, copyrights, moral rights, and mask works; (b) trademark and trade name rights and similar rights; (c) trade secret rights; (d) patents and industrial property rights; (e) other proprietary rights in Intellectual Property of every kind and nature; and (f) all registrations, renewals, extensions, continuations, divisions, or reissues of, and applications for, any of the rights referred to in clauses (a) through (e) above.
     “ Interim Financial Statements ” has the meaning set forth in Section 4.13 .
     “ Knowledge ” with respect to (i) a Securityholder shall mean the actual knowledge of such Securityholder; and (ii) the Company, a Company Subsidiary or the Company Group shall mean (A) the actual knowledge of Michael Zammit, Ross Fraser, Stephen Drew, Rob Rohrlach, Ann Contini, Jitendra Tomar and Paul Troughton or (B) such knowledge as any of the individuals identified in clause (A) would have had if they had conducted due and diligent inquiry prior to the date of this Agreement.

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     “ Leased Real Estate ” means property leased, used or occupied by the Company or a Company Subsidiary pursuant to a Real Property Lease.
     “ Legal Requirement ” means any applicable federal, state, local, municipal or foreign, law (whether derived from legislation or common (or court made) law), including in respect of the United States, Australia and New Zealand.
     “ Liens ” means all mortgages, pledges, security interests, encumbrances, title defects, title retention agreements, voting trust agreements, liens, charges or similar restrictions or limitations, including a restriction on the right to vote, sell or otherwise dispose of any shares of capital stock of the Company (other than restrictions on transfers imposed by federal or state securities laws), other than Permitted Liens.
     “ Loss ” or “ Losses ” means all damages, losses, deficiencies, liabilities, claims, actions, demands, judgments, fines, fees, costs and expenses (including, without limitation, reasonable attorneys’ and accountants’ fees), Taxes and interest on any of the foregoing.
     “ Material Adverse Effect ” means a change, effect, event, occurrence or circumstance that is materially adverse to the Business and the condition (financial or otherwise), prospects, assets, liabilities or results of operations of the Company Group taken as a whole and shall include, without limitation, any fraud or criminal matter in relation to the Company and its affiars; provided that none of the following shall constitute a Material Adverse Effect: (i) adverse changes in financial, capital or commodity markets, adverse changes primarily and directly related to general economic conditions or adverse changes affecting the industry generally in which the Company operates, in each case that do not disproportionately affect the Company Group as compared to other companies in the industry, (ii) any failure to meet internal projections or forecasts in and of itself (it being understood that the facts and circumstances giving rise to such failure to meet internal projections or forecasts may be considered and shall be taken into account in determining whether that has a Material Adverse Effect), or (iii) anything specifically resulting from or specifically arising in connection with the execution or performance of this Agreement or the consummation of any Transaction.
     “ Material Contract ” means any of the following Contracts currently in effect:
     (a) under which the Company or a Company Subsidiary is or is likely to be entitled to receive revenues of more than A$100,000 in any calendar year;
     (b) under which the Company or a Company Subsidiary is or is likely to become subject to any obligation to pay a liability of more than A$100,000 in any calendar year;
     (c) by which assets owned or used by the Company or a Company Subsidiary having a net book value of A$100,000 or more are bound;
     (d) which creates a Lien on any property or asset of the Company or a Company Subsidiary (other than Permitted Liens) or the Shares;
     (e) under which the Company or a Company Subsidiary has entered into a financial derivative or hedging arrangement;

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     (f) with any provider which, when measured in terms of revenues likely to be generated for the Company or a Company Subsidiary, falls into (i) the Company Group’s top 20 providers in the Wholesale Electricity Market System, (ii) the Company Group’s top 10 providers in the New Zealand Instantaneous Reserves Market, or (iii) the Company Group’s top 5 providers in Network Support in the National Electricity Market;
     (g) under which the Company or a Company Subsidiary has granted or received a license or sublicense or under which the Company or a Company Subsidiary is obligated to pay or has the right to receive a royalty, license fee or similar payment, in each case that is material to the Business (excluding any Contract made in the ordinary course of business for information technology products or services (including software, hardware and telecommunication services) which is expected to be fully performed within one year after the date thereof, which does not require annual expenditures in excess of A$100,000 or which may be terminated without material penalty or payment on 30 days’ notice or less);
     (h) between the Company or a Company Subsidiary and any Securityholder which holds more than 1% of the Shares, any Related Person of any such Securityholder or any Affiliate of any such Securityholder;
     (i) between the Company or a Company Subsidiary and any officer, director, employee or manager of the Company or a Company Subsidiary;
     (j) containing covenants that limit the freedom of the Company or a Company Subsidiary to engage in any business or line of business or to compete with any Person;
     (k) governing Indebtedness of the Company or a Company Subsidiary;
     (l) granting to any Person a first refusal, a first offer or similar preferential right to purchase or acquire any Shares;
     (m) with any customer involving the Company’s or a Company Subsidiary’s license, sale or provision of products or services, or assets that has generated more than A$100,000 in consolidated revenues for the Company or a Company Subsidiary during either of the years ended December 31, 2009 or December 31, 2010 or anticipated to generate more than A$100,000 in consolidated revenues for the Company or a Company Subsidiary during the current fiscal year;
     (n) any partnership, joint venture or other similar Contract;
     (o) granting most favored customer pricing, preferred pricing, exclusive sales, distribution, marketing or other exclusive rights, rights of first refusal, rights of first negotiation or similar rights and/or terms by the Company or a Company Subsidiary to any Person;
     (p) with any supplier or provider of services or content, in excess of A$100,000, that are resold by the Company or a Company Subsidiary or that are otherwise incorporated into any product or service, other than any services or content

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that are not material and which can be promptly replaced without material increase in cost to the Company or a Company Subsidiary;
     (q) involving the acquisition by the Company or a Company Subsidiary of any business enterprise whether via stock or asset purchase or otherwise; or
     (r) not made in the ordinary course of business.
Materials of Environmental Concern ” means any solid, liquid, gas, odour, radiation or substance which is or may be:
     (a) noxious or poisonous or offensive to the senses of human beings;
     (b) harmful to the health, welfare, safety or property of human beings;
     (c) poisonous or harmful to the Environment; or
     (d) any mould or other fungus, any toxic substance, oil or hazardous material, or any other chemical or substance regulated by any Environmental, Health and Safety Laws, and any other legislation regulating hazardous or dangerous goods.
     “ Most Recent Balance Sheet ” has the meaning set forth in Section 4.13 .
     “ National Electricity Market ” means the Australian market for the wholesale sale and purchase of electricity in Queensland, Victoria, New South Wales, the Australian Capital Territory, South Australia and Tasmania.
     “ New Zealand Company Subsidiary ” means Energy Response Pty Limited (Company No. 1808393) (incorporated in New Zealand).
     “ Non-Accredited Holder ” means any holder of capital stock of the Company who is not an Accredited Holder.
     “ Non-Competition Restricted Period ” means:
     (a) 2 years after the Closing Date, but if that is not enforceable, then
     (b) 1 year after the Closing Date.
     “ Option ” means any option, warrant or other right to acquire shares of capital stock of the Company other than a Convertible Note.
     “ Option Holder ” has the meaning given to such term in the Preamble to this Agreement.
     “ Order ” means any award, decision, injunction, judgment, order, ruling, subpoena, or verdict, entered, issued, made or rendered by any court, administrative agency or any other Governmental Body or by any arbitrator.
     “ Ordinary Share ” means a fully paid ordinary share in the issued capital of the Company.

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     “ Parent ” means EnerNOC, Inc., a Delaware corporation.
     “ Parent Common Stock ” means the shares of common stock of the Parent, par value $0.001 per share.
     “ Payoff Letters ” has the meaning set forth in Section 3.2(d) .
     “ Permitted Liens ” means (i) liens for Taxes, assessments or other governmental charges not yet due and payable, (ii) mechanics’, workmen’s, repairmen’s, warehousemen’s, carriers’ or other like liens arising or incurred in the ordinary course of business if the underlying obligations are not past due, (iii) the EnerNOC Charge and (iv) any Liens contemplated by a Transaction Document as remaining in place following Closing.
     “ Person ” means any individual, corporation, general or limited partnership, limited liability company, joint venture, estate, trust, association, organization, labor union or other entity or Governmental Body.
     “ Pre-Closing Tax Period ” shall mean (a) any Taxable Period that begins before the Closing Date and ends on or before the Closing Date, and (b) with respect to any other Taxable Period that includes the Closing Date, the portion of such Taxable Period prior to and including the Closing Date.
     “ Preferred Shares ” means fully paid preferred shares in the issued capital of the Company.
     “ Pro Rata Portion ” means, with respect to each Securityholder, the fraction specified in relation to that Securityholder in the Closing Statement.
     “ Proceeding ” means any action, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal or administrative) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Body or arbitrator.
     “ Purchase Price ” has the meaning set forth in Section 2.1 .
     “ Real Property Leases ” means those Contracts pursuant to which the Company or a Company Subsidiary leases real property.
     “ Records ” means all books, records, manuals and other materials and information of the Company and each Company Subsidiary including, without limitation, customer records, personnel and payroll records, accounting records, purchase and sale records, price lists, correspondence, quality control records and all research and development files, wherever located.
     “ Required Consents ” means those consents identified in Exhibit B .
     “ Related Entity ” of a corporation means:
     (a) a related body corporate of that corporation within the meaning of section 50 of the Corporations Act 2001 (Cth); and
     (b) a trustee of any unit trust in relation to which that corporation, or any corporation referred to in paragraph (a), directly or indirectly:

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     (i) controls the right to appoint the trustee;
     (ii) is in a position to control the casting of, more than one half of the maximum number of votes that might be cast at a meeting of holders of units in the trust; or
     (iii) holds or is in a position to control the disposal of more than one half of the issued units of the trust.
     “ Related Person ” means, in relation to a Securityholder who is a natural person, a spouse or de facto spouse of the Securityholder.
     “ Restraint Area ” means Western Australia.
     “ Restricted Party ” means each of Bayard, the Starfish Investors and John Clifford.
     “ Returns ” means all returns, informational returns and statements required to be filed by the Company or any Company Subsidiary in respect of any Taxes.
     “ Revenue Authority ” means any person or agency authorised by law to impose, collect or otherwise administer any Tax.
     “ Rights Agreement ” has the meaning set forth in Section 4.4 .
     “ Schedules ” means the schedules attached hereto pursuant to the provisions of this Agreement.
     “ Securityholders ” has the meaning given to such term in the Preamble to this Agreement.
     “ Securityholder Loan ” means any loan made by any Securityholder (or Affiliate of a Securityholder) for the exclusive purpose of providing additional funding to the Company to cover reasonable and ordinary operating expenses, consistent with past practice and Section 7.2 , incurred between April 15, 2011 and the Closing, which loans are permitted by Section 2.4(b) after providing notice to Buyer or have been consented to by the Buyer to the extent required in Section 2.4(b) .
     “ Securityholder Representative ” has the meaning set forth in Section 12.1 .
     “ Shares ” means all of the issued and outstanding shares in the Company designated under the Company’s constitution, including the Ordinary Shares and Preferred Shares of the Company.
     “ SR Retention Amount ” means an amount of $200,000, to be applied in accordance with Section 12.8 .
     “ Stamp Duty ” means duty imposed under the Duties Act 2000 (VIC) and any other similar legislation of a State or Territory of Australia.
     “ Starfish Investors ” means Starfish Technology Fund II Nominees A Pty Ltd ACN 126 881 365 (as trustee of the Starfish Technology Fund II Trust A), Starfish Technology Fund II Nominees B Pty Ltd ACN 126 881 392 (as trustee of the Starfish Technology Fund II

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Trust B) and Starfish VicSuper Cleantech Companion Fund Nominees Pty Ltd ACN 126 881 436 (as trustee of the Starfish VicSuper Cleantech Companion Fund).
     “ Stock Consideration ” means the amount of the Purchase Price to be paid in shares of Parent Common Stock.
     “ Stockholders ” has the meaning given to such term in the Preamble to this Agreement.
     “ Superannuation Guarantee Charge ” has the meaning given in the Superannuation Guarantee (Administration) Act 1992 (Cth).
     “ Tax ” and “ Taxes ” means taxes, duties, fees, rates, charges and imposts of all kinds assessed, levied or imposed by the Commonwealth of Australia or New Zealand, a state or any other government, regional, municipal or local authority (Australian or overseas) and includes capital gains tax, fringe benefits tax, income tax, prescribed payments tax, Superannuation Guarantee Charge, PAYG withholding, undistributed profits tax, payroll tax, GST, fringe benefit tax, accident compensation levies, KiwiSaver contributions, group tax, land tax, import duty, excise, Stamp Duty, municipal and water rates, withholdings of any nature whatever imposed by a Revenue Authority, interest on tax payments and additional tax by way of penalty.
     “ Tax Act ” means the Income Tax Assessment Act 1997 (Cth) or the Income Tax Assessment Act 1936 (Cth), or the equivalent New Zealand legislation (including the Tax Administration and Income Tax Acts), as amended and as the case may be. References to specific sections of, or expressions used in, the Australian Tax Act are intended to cover corresponding sections of the equivalent New Zealand legislation, where they exist.
     “ Tax Claim ” means any letter, request, advice, notice, demand, notice of assessment, amended assessment or determination, deemed assessment, other communication, instrument or document lodged under self assessment or issued, served or made by or on behalf of a Revenue Authority, whether before or after the date of this Agreement, as a result of which the Company or a Company Subsidiary is liable to make a payment for Tax (including Tax primarily chargeable against some other company or person that is assessed to the Company or a Company Subsidiary by reason of the other company or person having been part of the same group of companies) or is not entitled to any credit, rebate, refund, relief, allowance, deduction, or tax loss.
     “ Tax Period ” means any period for which Tax must be paid or accounted for.
     “ Tax Warranties ” means the warranties contained in Section 4.14 .
     “ Thirty Day Trading Average Price ” means (a) in relation to Stock Consideration to be issued on Closing, the volume weighted average of the per share last sale price reported on the NASDAQ website for the Parent Common Stock on The NASDAQ Global Market for the thirty trading day period ending three trading days prior to the date of the Closing expressed in A$ by way of conversion using the exchange rate published in the Wall Street Journal on the date three trading days prior to the date of Closing; and (b) in relation to Stock Consideration comprising part of the Earnout Payment, the volume weighted average of the per share last sale price reported on the NASDAQ website for the Parent Common Stock on The NASDAQ Global Market for the thirty trading day period ending three trading days prior

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to the date on which such Stock Consideration is required to be issued under this Agreement expressed in A$ by way of conversion using the exchange rate published in the Wall Street Journal on the date three trading days prior to the date on which such Stock Consideration is required to be issued under this Agreement.
     “ Termination Date ” has the meaning set forth in Section 9.1(b) .
     “ Third-Party Claim ” has the meaning set forth in Section 10.4(b) .
     “ Transaction ” means the purchase by the Buyer and the sale by the Securityholders of the Ordinary Shares and the other transactions contemplated in the Transaction Documents.
     “ Transaction Documents ” means this Agreement and the agreements, documents and instruments to be executed and delivered by any party to this Agreement or its representative pursuant to this Agreement, excluding any employment or other agreement entered into by any Securityholder in its capacity as an employee of or consultant to the Company.
     “ Transfer Taxes ” has the meaning set forth in Section 11.2 .
     “ Trustee Securityholder ” means each of:
           (a)  Franjee Nominees Pty Ltd;
           (b)  Bargen Pty Ltd;
           (c)  Libnom Pty Ltd;
           (d)  Peggy Anne Duel and Ian Duel;
           (e)  Christopher Bryan Ballard;
           (f)  TSA Pty Ltd;
           (g)  Alain Grossbard and Judith Grossbard;
           (h)  Anthony Fraser and Jill Fraser;
           (i)  Elizabeth Frances Fraser and Ross Stuart Fraser;
           (j)  Beverly Smyth and Kurt Francis Smyth;
           (k)  Deanna Zammit and Michael Zammit; and
           (l)  the Starfish Investors.
     “ Wholesale Electricity Market System ” means the electricity market system administered and operated by the IMO.

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ARTICLE 14
SECURITYHOLDER REPRESENTATIONS WARRANTIES, COVENANTS AND RELEASES
      14.1 Representations and Warranties of Securityholders . Each Securityholder hereby severally represents and warrants to Buyer as of the date hereof and as of the Closing Date that the following statements are true and correct and that each statement is in no way limited by any other statement except to the extent the representations or warranties relate to the Earnout Stock Consideration, in which case, to the extent the representation or warranty relates to the Earnout Stock Consideration, the representation or warranty is given on the date of issue of the Earnout Stock Consideration:
           (a)  Representations and Warranties given by Securityholders receiving Stock Consideration . If the Securityholder is nominated in the Closing Statement as a recipient of Stock Consideration and Earnout Stock Consideration:
                (i)  such Securityholder, individually, or together with such Stockholder’s purchaser representative, is an “accredited investor” as defined in Rule 501 promulgated under the Securities Act of 1933, as amended, either because (x) if a natural person (i) such Securityholder’s net worth, either individually or jointly with such person’s spouse, at the time of such person’s purchase, exceeds $1,000,000 or (ii) such Securityholder had individual income in excess of $200,000, or joint income with such Securityholder’s spouse in excess of $300,000, in the previous two calendar years and reasonably expects to reach the same income level in the current calendar year, or (y) if an entity (i) such Securityholder is a corporation, partnership, limited liability company or business trust, not formed for the purpose of acquiring the Shares, or an organization described in Section 501(c)(3) of the Code, in each case with total assets in excess of $5,000,000, (ii) such Securityholder is a bank, insurance company, investment company registered under the Companies Act, a broker or dealer registered pursuant to Section 15 of the Exchange Act, a business development company, a Small Business Investment Company licensed by the United States Small Business Administration, a plan with total assets in excess of $5,000,000 established and maintained by a state for the benefit of its employees, or a private business development company as defined in Section 202(a)(22) of the United States Investment Advisers Act of 1940, as amended, or (iii) such Securityholder is an employee benefit plan and either all investment decisions are made by a bank, savings and loan association, insurance company, or registered investment advisor, or the Investor has total assets in excess of $5,000,000 or, if such plan is a self-directed plan, investment decisions are made solely by persons who are accredited investors; and
                (ii)  the Securityholder:
                     (1)  either (i) is a person who has net assets of at least $2,500,000 or has a gross income for each of the last 2 financial years of at least $250,000 (“ Sophisticated Investor Exemption ”) or is a company or trust controlled by a person who meets one of the Sophisticated Investor Exemptions, or (ii) does not otherwise require a disclosure document pursuant to section 708 of the Corporations Act 2001 (Cth) in connection with the offer and issuance of Parent Company Stock under this Agreement;
                     (2)  if the Securityholder is receiving the Parent Company Stock for an account of one or more persons, the Securityholder has the authority to

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acknowledge and make the representations, warranties and agreements contained in this Section 13.1(a)(ii) on behalf of each such person;
                     (3)  assuming compliance by the Buyer and the Parent with the applicable securities laws of Australia and the United States, the Securityholder will not be in breach of any applicable provision of the securities laws of Australia or the United States in accepting the offer of Parent Company Stock under this Agreement and in acquiring the Parent Company Stock;
                     (4)  the Securityholder is aware and understands that no disclosure document has or will be lodged with the Australian Securities and Investments Commission in connection with the issue of Parent Company Stock under this Agreement;
                     (5)  in accepting the offer of Parent Company Stock under this Agreement, the Securityholder has not relied upon any information provided, or investigation conducted, by the Parent or the Buyer;
                     (6)  in deciding to accept Parent Company Stock under this Agreement and to acquire the Parent Company Stock, the Securityholder has relied on all information that the Securityholder believes is necessary or appropriate to assess the Parent and the Parent Company Stock and in so doing the Securityholder has made and relied entirely on its own assessment of, and has conducted its own independent investigation with respect to, the Parent, its prospects and the Parent Company Stock;
                     (7)  in deciding to accept Parent Company Stock under this Agreement, the Securityholder will obtain its own tax advice regarding the tax consequences (in any jurisdiction) of purchasing, owning or disposing of the Parent Company Stock and any consequences arising under the laws of Australia or of any other taxing jurisdiction;
                     (8)  the Securityholder is aware that the offer for sale by the Securityholder in Australia, within 12 months of issue, of the Parent Company Stock issued to the Securityholder may be prohibited; and
                     (9)  the offer of Parent Company Stock under this Agreement does not constitute a recommendation regarding the Parent or any securities of the Parent.
           (b)  Authorization; Binding Agreement . The Securityholder has the power and authority to enter into each Transaction Document to which it is a party and to perform its obligations under each Transaction Document. The execution, delivery and performance by such Securityholder of the Transaction Documents to which it is a party has been duly and validly authorized by all necessary corporate action. This Agreement has been, and at Closing each other Transaction Document to which such Securityholder is a party will be, duly and validly executed and delivered by that Securityholder. This Agreement constitutes, and at Closing each other Transaction Document to which the Securityholder is a party will constitute, the legal, valid and binding obligations of the Securityholder, enforceable against the Securityholder in accordance with their respective terms, subject in each case to bankruptcy, reorganization, insolvency and other similar laws affecting the enforcement of creditors’ rights in general and to general principles of equity (regardless of whether considered in a proceeding in equity or an action at law).

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           (c)  No Conflicts with Laws . The execution, delivery and performance by it of this Agreement does not and will not conflict with or violate any law, regulation, judgment, injunction, order or decree binding upon or applicable to it. There is no action, suit, investigation or proceeding pending against or, to the Knowledge of such Securityholder, threatened against such Securityholder that seeks to alter or impair the sale of the Shares contemplated herein or the other transactions contemplated by the other Transaction Documents, nor to the Knowledge of such Securityholder is there any basis for any such action, suit, investigation or proceeding. The Securityholder will make any and all filings required with Governmental Bodies as a result of the transactions contemplated hereby.
           (d)  Ownership of Stock . Such Securityholder:
                (i)  is the registered owner of the shares and options of the Company set forth after such Securityholder’s name on Schedule 1.1 hereto;
                (ii)  owns all such shares free and clear of any and all Liens or save as provided in the Company’s constitution, any rights of first refusal, voting trusts, proxies or other arrangements or understandings, whether written or oral;
                (iii)  has the sole and exclusive right and power to exercise all voting rights and other rights with respect to such shares.
           (e)  Transfer of Title . Effective as of the Closing, all the legal and beneficial ownership of the shares or options of the Company set forth after such Securityholder’s name on Schedule 1.1 hereto shall be transferred to the Buyer free and clear of any and all Liens or any rights of first refusal, voting trusts, proxies or other arrangements or understandings, whether written or oral.
           (f)  No Trust . Unless it is specified to be a Trustee Securityholder (as defined), the Securityholder is not entering into this Agreement as trustee of any trust or settlement.
      14.2 Restraint .
      (a) In order to protect the goodwill of the Company and each Company Subsidiary each Restricted Party agrees severally to not, and to procure that each Related Entity of the Restricted Party does not, during the Non-Competition Restricted Period either, directly or indirectly:
                (i)  within the Restraint Area, canvass or solicit (other than, during the period prior to Closing, for the Company or a Company Subsidiary):
                     (1)  orders for goods or services of the type supplied by the Company or a Company Subsidiary in relation to its demand response capacity market bidding programs business (“ Restricted Business ”) in the 12 months prior to the Closing Date;
                     (2)  business the same as or similar to the Restricted Business in the 12 months prior to the Closing Date; or
                     (3)  in connection with any business the same as or similar

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to the Restricted Business in the 12 months prior to the Closing Date, any person who is or has been in the 12 months prior to the Closing Date a client or customer of the Company or a Company Subsidiary; or
                (ii)  engage or be concerned or interested or involved in any business carried on in the Restraint Area which is:
                     (1)  the same as or similar to the Restricted Business or a material part of it, other than in the capacity of a customer;
                     (2)  competitive with the Restricted Business;
                     (3)  competitive with a material part of the Restricted Business; or
                (iii)  within the Restraint Area, induce, solicit or encourage any employee, contractor or agent to leave the employment or agency of the Company or a Company Subsidiary or to cease providing services to the Company or a Company Subsidiary, save for (a) any bona fide recruitment advertisement or campaign that is not specifically targeted at any employee, contractor or agent of the Company or a Company Subsidiary, or (b) any action taken in response to an unsolicited approach by any such employee, contractor or agent.
           (b) The agreement by the Restricted Party in Section 14.2(a) applies to any person mentioned in Section 14.2(a) acting:
                (i)  either alone or in partnership or association with another person;
                (ii)  as principal, agent, representative, director, officer or employee;
                (iii)  as member, shareholder, debenture holder, note holder or holder of any other security;
                (iv)  as trustee of or as a consultant or advisor to any person (other than the Buyer); or
                (v)  in any other capacity including a financier.
           (c) Sections 14.2(a) and 14.2(b) have effect as comprising each of the separate provisions which results from each combination of a capacity referred to in Section 14.2(b) , an area referred to in the definition of Restraint Area, a period referred to in the definition Non-Competition Restricted Period and a category of conduct referred to in Sections 14.2(a)(i) , 14.2(a)(ii) and 14.2(a)(iii) . Each of these separate provisions operates concurrently and independently.
           (d) For the purposes of interpreting this Section 14.2 , the duration of the Non-Competition Restricted Period will be given precedence over the boundaries of the Restraint Area.
           (e) If any provision in this Section 14.2 is unenforceable, illegal or void

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that provision is severed and the other provisions remain in force. Each Restricted Party acknowledges that each of those separate provisions is a fair and reasonable restraint of trade.
           (f) This Section 14.2 does not preclude any person mentioned in Section 14.2(a) from owning securities of a corporation or trust which are quoted on a recognised stock exchange in Australia or elsewhere provided that it holds not more than 5% each of the total quoted securities of any corporation or trust carrying on a business of a type referred to in this Section 14.2 .
           (g) Each Restricted Party acknowledges that damages alone would not be adequate to compensate the Buyer for any breach by any Restricted Party of this Section 14.2 and agrees that, without limiting the relief that the Buyer is entitled to seek, the Buyer may seek an injunction if a Restricted Party is in breach of, or threatens to breach, the provisions of this Section 14.2 .
      14.3 Acknowledgment . Each Restricted Party (a) acknowledges that he has obtained extensive and valuable knowledge and confidential information concerning the Business, the Company, each Company Subsidiary and the Buyer, (b) expressly acknowledges that the covenants included in Section 14.2 are a material inducement and fundamental to Buyer’s willingness to engage in the Transaction and absent these covenants, Buyer would not have acquired the Company, and (c) further acknowledges and agrees that he or it will personally obtain substantial benefits from the Transaction as a Securityholder, and agrees that such benefits represent adequate and fair consideration for the covenants in Section 14.2 .
      14.4 Option Holders . Each Option Holder covenants and agrees with the Buyer that, prior to the Closing or the termination of this Agreement, whichever is sooner, it shall not sell, dispose, pledge, encumber or otherwise transfer any Option or exercise any such Option.
      14.5 Noteholders . Each Noteholder covenants and agrees with the Buyer that:
           (a)  prior to the Closing or the termination of this Agreement, whichever is sooner, it shall not sell, dispose, pledge, encumber or otherwise transfer any Convertible Note which it beneficially owns; and
           (b)  prior to the Closing it shall convert all Convertible Notes into Ordinary Shares in a manner which will not cause the Company to be in breach of section 113(1) of the Corporations Act 2001 (Cth).
      14.6 Trustee Securityholders .
           (a)  In this Section 14.6 :
                (i)  Trust means the trust established by the Trust Deed; and
                (ii)  Trust Deed means the trust deed entered into by a Trustee Securityholder which trust deed sets out the terms on which the Trustee Securityholder acts a trustee of the trust for whose benefit the Trustee Securityholder holds Ordinary Shares, Convertible Notes or Options (as the case may be).

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           (b)  Each Trustee Securityholder enters into this Agreement in its capacity as trustee of the Trust and not in its personal capacity.
           (c)  Each Trustee Securityholder warrants severally and not jointly to Buyer as of the date hereof and as of the Closing Date that the following statements are true and correct and that each statement is in no way limited by any other statement:
                (i)  it is the sole trustee of the Trust and no action has been taken to remove or replace it;
                (ii)  it has power under the Trust Deed to execute and perform its obligations under this Agreement; and
                (iii)  it has a right to be indemnified out of the assets of the Trust in respect of all of its obligations and liabilities incurred by it under this Agreement.
      14.7 Remedies .
           (a)  The rights and remedies of any Buyer Indemnified Party for monetary redress for any breach by a Securityholder of Section 14.2 are not limited by this Agreement and are not exclusive of or limited by any other rights or remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative.
           (b)  The rights and remedies of any Buyer Indemnified Party for monetary redress for any breach by a Securityholder of this Article 14 (other than Section 14.2 ) are limited to indemnification under Article 10 .
           (c)  The rights and remedies of Buyer for non-monetary redress for any breach by a Securityholder of this Article 14 are not limited by this Agreement and are not exclusive of or limited by any other rights or non-monetary remedies which they may have, whether at law, in equity, by contract or otherwise, all of which shall be cumulative.
      14.8 Exclusive warranties from Securityholders : The Buyer and the Parent acknowledge and agree that:
           (a)  the representations and warranties contained in this Article 14 are the only representations and warranties from the Securityholders that the Buyer and Parent require and on which the Buyer and the Parent have relied in entering into this Agreement; and
           (b)  to the maximum extent permitted by law, all other representations and warranties (whether express or implied and whether oral or in writing) on the part of Securityholders or their respective directors, officers, employees, agents or representatives are expressly excluded.
      14.9 Covenant to Update . In the event that any of the representations and warranties given by a Securityholder will not be accurate as of the Closing, such Securityholder shall notify the Buyer in writing, specifying in detail the inaccuracies.
      14.10 Securityholder Releases . Effective as of the Closing Date, each Securityholder, on behalf of himself, herself or itself and his, her or its (as applicable) past, present and future successors, assigns, predecessors and Affiliates (collectively, the “ Securityholder Releasing Parties ”), irrevocably releases to the maximum extent permitted by

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law the Company, each Company Subsidiary and their respective successors, assigns, predecessors, employees, officers and directors (collectively, the “ Securityholder Released Parties ”) from any and all claims, actions, causes of action, demands, liens, agreements, Contracts, covenants, actions, suits, obligations, controversies, debts, costs, fees, dues, expenses, damages, judgments, orders and all other claims and liabilities of every nature and description, known or unknown, matured or unmatured, at law or equity or mixed, and whether or not contingent, which any Securityholder Releasing Party now has or has had against any of the Securityholder Released Parties or hereafter can, shall or may have against any of the Securityholder Released Parties, in respect of or arising from any event, act or omission occurring or circumstances existing on or prior to the date hereof and the Closing Date, in each case, to the extent related to the Business and the Transactions, provided that no Securityholder is releasing (i) any rights under this Agreement or any Transaction Document; (ii) any indemnification obligations of the Company, or any rights with respect to limitations of liability or corporate opportunities, under the Company’s articles of formation or bylaws (or equivalent governing documents) for claims that may arise against the Securityholder Releasing Party in his or her capacity as a director or officer of such entity; (iii) any wages, salaries and any employee entitlements due to the Securityholder Released Parties on account of their employment with the Company or any Company Subsidiary; (iv) the arrangements pursuant to which Securityholders have provided the bank guarantees referred to in Section 8.3(b), including any fees and interest due to the Securityholder Released Parties in connection with those arrangements.
      14.11 Buyer, Parent and Company Releases . Effective as of the Closing Date, each of the Buyer, Parent and Company, on behalf of itself and its past, present and future successors, assigns, predecessors and Affiliates (collectively, the “ Buyer Releasing Parties ”), and subject to the provisions of this Section, irrevocably releases to the maximum extent permitted by law the directors of the Company and each Company Subsidiary holding office immediately prior to Closing (collectively, the “ Directors ”) from any and all claims, actions, causes of action, demands, liens, agreements, Contracts, covenants, actions, suits, obligations, controversies, debts, costs, fees, dues, expenses, damages, judgments, orders and all other claims and liabilities of every nature and description, known or unknown, matured or unmatured, at law or equity or mixed, and whether or not contingent (collectively, “ Director Claims ”), which any Buyer Releasing Party now has or has had against any of the Directors or hereafter can, shall or may have against any of the Directors, in respect of or arising from any event, act or omission occurring or circumstances existing on or prior to the date hereof and the Closing Date; provided, however, that the Directors shall not and are not being released from any Director Claims (1) that may be made under this Agreement against the Directors in their capacity as Securityholders, (2) related to fraudulent actions committed by the Directors and (3) related to any criminal activity.
     The Buyer Releasing Parties agree that the Securityholder Representative holds the benefit of the releases in the previous paragraph on trust and as agent for each Director who is not a signatory to this Agreement and may enforce such releases for and on behalf of such Director.

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ARTICLE 15
PARENT GUARANTEE
      15.1 Guarantee. In consideration for the Securityholders jointly promising to pay $10 to the Parent on demand:
           (a)  the Parent unconditionally and irrevocably guarantees the due and punctual payment of all sums which become payable by the Buyer to the Securityholders under or in respect of any of the Transaction Documents and undertakes to cause the Buyer to perform its obligations under the Transaction Documents; and
           (b)  if the Buyer defaults in payment of any amount due under a Transaction Document, the Parent agrees to pay to the Securityholders on demand an amount equal to that amount.
      15.2 No Prejudice. The guarantee contained in Section 15.1 is not affected by any matter which would have the effect of reducing, discharging or abrogating the Parent’s obligations, including (without limitation) any variation or amendment of a Transaction Document, any waiver of any rights or other transaction, arrangement, compromise, release, abandonment, renewal or relinquishment on the part of any party or other person, or any act, omission or delay on the part of the Securityholders.
      15.3 Continuing. The guarantee contained in Section 15.1 is to continue and remain in full force and effect until the Buyer has fulfilled all of its obligations under and in respect of the Transaction Documents.
ARTICLE 16
MISCELLANEOUS
      16.1 Expenses . Except as otherwise specifically provided herein, the Securityholders shall pay all of their own, and the Company and each Company Subsidiary (prior to Closing) shall pay the Company’s and the Company Subsidiaries’, expenses, including, without limitation, accountants’ and attorneys’ fees, incurred in connection with the negotiation and consummation of the Transactions. Buyer and Parent shall be responsible for their own expenses.
      16.2 Service of Process on Parent . The Parent hereby irrevocably appoints and designates Norton Rose (Melbourne office) as its true and lawful attorney and duly authorized agent for acceptance of service of legal process on the Parent.
      16.3 Notices . All notices or other communications required or permitted to be given hereunder shall be in writing and shall be considered to be given and received in all respects when hand delivered, when received if sent by prepaid, overnight, express or courier delivery service, when sent by facsimile transmission actually received by the receiving equipment, when sent by email when such email is delivered, or five days after deposited in the mail, certified mail, postage prepaid, return receipt requested, in each case addressed as follows, or to such other address as shall be designated by notice duly given:

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  (a)   If to the Parent:
 
      EnerNOC, Inc.
101 Federal Street, Suite 1100
Boston, Massachusetts 02110
Fax No.: (617) 224-9910
Email: dsamuels@enernoc.com
Attention: General Counsel
 
      With a Copy To:
 
      Cooley LLP
500 Boylston Street
Boston, Massachusetts 02116-3736
Fax No.: (617) 937-2400
Email: mvega@cooley.com
Attention: Miguel Vega, Esq.
 
  (b)   If to the Buyer, or after the Closing, the Company:
 
      EnerNOC, Inc.
c/o Norton Rose
RACV Tower, 485 Bourke Street
Melbourne VIC 3000
Fax No.: +61 3 8686 6505
Email: jrenaud@enernoc.com
Attention: Jeff Renaud
 
      With a Copy To:
 
      EnerNOC, Inc.
101 Federal Street, Suite 1100
Boston, Massachusetts 02110
Fax No.: (617) 224-9910
Email: dsamuels@enernoc.com
Attention: General Counsel
 
  (c)   If to the Securityholder Representative (whether in its own right or where this Agreement permits any notice or other communication to a Securityholder to be given to the Securityholder Representative):
 
      Semibreve Pty Ltd
Level 1
120 Jolimont Road
East Melbourne VIC 3002
Australia
Fax No.: (613) 9654 2922
Email:
Attention: The Directors

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  (d)   If to any Securityholder, to his, her or its address as shown in the Company’s register of members as at Closing.
 
  (e)   If, prior to the Closing, the Company:
      Energy Response Holdings Pty Ltd
Level 1
250 Queen Street
Melbourne VIC 3000
Fax No.: (613) 8643 5999
Email:
Attention:
      16.4 Entire Agreement; Amendments and Waivers . This Agreement, the Schedules and the other Transaction Documents constitute the entire agreement among the parties hereto relating to the subject matter hereof, and all prior agreements, correspondence, discussions and understandings of the parties (whether oral or written) are merged herein and made a part hereof, it being the intention of the parties hereto that this Agreement and the instruments and agreements contemplated hereby shall serve as the complete and exclusive statement of the terms of their agreement with respect to the Transactions. Prior to the Closing, no amendment, waiver or modification hereto or hereunder shall be valid unless in writing signed by an authorized signatory of the Buyer, the Company and the Securityholder Representative; and from and after the Closing, no amendment, waiver or modification hereto or hereunder shall be valid unless in writing signed by and authorized signatory of the Buyer and the Securityholder Representative.
      16.5 Construction . The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption of burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.
      16.6 Assignment . This Agreement and the rights hereunder shall not be assignable or transferable by any party without the prior written consent of the Buyer, the Company and the Securityholder Representative prior to the Closing and without the prior written consent of the Buyer and the Securityholder Representative after the Closing.
      16.7 Binding Effect . This Agreement shall be binding upon the parties hereto and their respective heirs, successors, legal representatives and permitted assigns.
      16.8 Paragraph Headings . The headings in this Agreement are for purposes of convenience and ease of reference only and shall not be construed to limit or otherwise affect the meaning of any part of this Agreement.
      16.9 Severability . The parties agree that if any provision of this Agreement shall under any circumstances be deemed invalid or inoperative, this Agreement shall be construed with the invalid or inoperative provision deleted, and the rights and obligations of the parties shall be construed and enforced accordingly.
      16.10 Governing Law; Dispute Resolution . The law of Victoria governs this Agreement and the parties irrevocably:

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           (a) submit to the non exclusive jurisdiction of the courts of Victoria, courts of the Commonwealth of Australia having jurisdiction in that state and the courts competent to determine appeals from those courts, with respect to any proceedings that may be brought at any time relating to this Agreement; and
           (b) waive any objection they may have now or in the future to the venue of any proceedings, and any claim they may have now or in the future that any proceedings have been brought in an inconvenient forum, if that venue falls within Section 16.10(a) .
      16.11 Use of Terms . In this Agreement (a) the words “hereof,” “herein,” “hereto,” “hereunder,” and words of similar import may refer to this Agreement as a whole and not merely to a specific section, paragraph, or clause in which the respective word appears, (b) words importing gender include the other genders as appropriate, (c) any terms defined in this Agreement may, unless the context otherwise requires, be used in the singular or the plural depending on the reference, (d) unless otherwise stated, references to any Section, Article, party, Schedule or Exhibit are to such Section or Article of, or party, Schedule or Exhibit to, this Agreement, (e) the word “including” or any other form of that word is not a word of limitation, (f) a reference to “A$”, “$” or “dollar” is to Australian currency.
      16.12 Counterparts . This Agreement may be executed in one or more counterparts, all of which shall be considered but one and the same agreement. A facsimile or PDF email signature of this Agreement shall be as effective as an original.
      16.13 No Third Party Beneficiary . Except as otherwise provided in this Agreement, nothing in this Agreement, express or implied, is intended to confer upon any Person, other than the parties hereto, a Claiming Party or their respective heirs, successors, legal representatives and permitted assigns, any rights or remedies under or by reason of this Agreement.
      16.14 Post Closing Operations . The parties acknowledge that upon the Closing and except as expressly provided to the contrary in this Agreement, Buyer has the right to operate the Company and the Business and its other businesses in any manner that Buyer deems appropriate in Buyer’s sole discretion.
      16.15 Waivers . Without prejudice to any other provision of this Agreement, the parties agree that:
           (a) failure to exercise or enforce, or a delay in exercising or enforcing, or the partial exercise or enforcement of, a right, power or remedy provided by law or under this Agreement by a party does not preclude, or operate as a waiver of, the exercise or enforcement, or further exercise or enforcement, of that or any other right, power or remedy provided by law or under this Agreement;
           (b) a waiver given by a party under this Agreement is only effective and binding on that party if it is given or confirmed in writing by that party; and
           (c) no waiver of a breach of a term of this Agreement operates as a waiver of another breach of that term or of a breach of any other term of this Agreement.
[SIGNATURES APPEAR ON NEXT PAGE]

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     IN WITNESS WHEREOF, the parties have executed this document as a deed as of the day, month and year first above written.
             
Executed by ENERNOC AUSTRALIA
PTY LTD
ACN 143 762 350 in
accordance with section 127 of the
Corporations Act 2001 :
       
 
           
/s/ Robert Bett
 
Director/company secretary
      /s/ David Brewster
 
Director
   
 
           
Robert Bett
 
Name of director/company secretary
      David Brewster
 
Name of director
   
(BLOCK LETTERS)
      (BLOCK LETTERS)    
 
ENERNOC, INC.
 
 
  By:   /s/ David Brewster    
    Name:   David Brewster   
    Title:   President   


 

         
     IN WITNESS WHEREOF, the parties have executed this document as a deed as of the day, month and year first above written.
COMPANY:
                 
Executed by ENERGY RESPONSE
HOLDINGS PTY LTD
ACN 136
721 312 in accordance with
section 127 of the Corporations Act 2001 :
           
 
               
/s/ John Clifford
 
Director/company secretary
      /s/ Ross Fraser
 
Director
   
 
               
John Clifford
 
Name of director/company secretary
      Ross Fraser
 
Name of director
   
(BLOCK LETTERS)
      (BLOCK LETTERS)
   


 

IN WITNESS WHEREOF, the parties have executed this document as a deed as of the day, month and year first above written.
SECURITYHOLDER REPRESENTATIVE:
             
Executed by SEMIBREVE PTY LTD ACN 139 654 541 in accordance with section 127 of the Corporations Act 2001 :        
 
           
/s/ Michael Panaccio
 
Director/company secretary
      /s/ John Clifford
 
Director
   
 
           
Michael Panaccio
 
Name of director/company secretary
      John Clifford
 
Name of director
   
(BLOCK LETTERS)
      (BLOCK LETTERS)    


 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the day, month and year first above written.
STOCKHOLDERS:
Signed by:
Ross Fraser
as attorney for and on behalf of ARNGO
NOMINEES PTY LTD
ACN 005 419
536 under a power of attorney dated 9 th June 2011
in the presence of:
       
       
/s/ John Clifford
 
  /s/ Ross Fraser  
 
     
Witness
  Attorney  
 
     
John Clifford
 
     
Name of Witness
     
(BLOCK LETTERS)
     
Executed by FRASER CONSULTING
SERVICES PTY LTD
ACN 074 499
782 as trustee for FRASER FAMILY
TRUST
in accordance with section 127 of
the Corporations Act 2001:
       
       
/s/ SOLE DIRECTOR
 
  /s/ Ross Fraser  
 
     
Director/company secretary
  Director  
 
     
 
  Ross S. Fraser  
 
     
 
Name of director/company secretary
  Name of director  
(BLOCK LETTERS)
  (BLOCK LETTERS)  

 


 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the day, month and year first above written.
STOCKHOLDERS:
Signed by:
Ross Fraser
as attorney for and on behalf of
ARGONET PTY LTD ACN 134 684
254 as trustee for THE SWINGLER
FAMILY TRUST
under a power of
attorney dated 20 th June 2011
in the presence of:
       
       
/s/ John Clifford
 
  /s/ Ross Fraser  
 
     
Witness
  Attorney  
 
     
John Clifford
 
     
Name of Witness
     
(BLOCK LETTERS)
     
Signed by:
Ross Fraser
as attorney for and on behalf of GUANG
MING PTY LTD
ACN 069 930 703
under a power of attorney dated 20 th June, 2011
in the presence of:
       
       
/s/ John Clifford
 
  /s/ Ross Fraser  
 
     
Witness
  Attorney  
 
     
John Clifford
 
     
Name of Witness
     
(BLOCK LETTERS)
     

 


 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the day, month and year first above written.
STOCKHOLDERS:
Signed by:
Ross Fraser
as attorney for and on behalf of GARY
DOUGLAS
under a power of attorney
dated 9 th June 2011
in the presence of:
       
       
/s/ John Clifford
 
  /s/ Ross Fraser  
 
     
Witness
  Attorney  
 
     
John Clifford
 
     
Name of Witness
     
(BLOCK LETTERS)
     
Signed by:
Ross Fraser
as attorney for and on behalf of KILREA
PTY LTD
ACN 005 841 654 SUPER
A/C
under a power of attorney dated 8 th June 2011
in the presence of:
       
       
/s/ John Clifford
 
  /s/ Ross Fraser  
 
     
Witness
  Attorney  
 
     
John Clifford
 
     
Name of Witness
     
(BLOCK LETTERS)
     

 


 

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the day, month and year first above written.
STOCKHOLDERS:
Signed by:
Ross Fraser
as attorney for and on behalf of GAUNT
INVESTMENTS PTY LTD
ACN 077
714 722 under a power of attorney dated 9 th June 2011
in the presence of:
       
       
/s/ John Clifford
 
  /s/ Ross Fraser  
 
     
Witness
  Attorney  
 
     
John Clifford
 
     
Name of Witness
     
(BLOCK LETTERS)
     
Signed by:
Ross Fraser
as attorney for and on behalf of
ANOTHONY & JILL FRASER as trustee
for FRASER SUPERANNUATION
FUND
under a power of attorney dated 6 th June 2011
in the presence of:
       
       
/s/ John Clifford
 
  /s/ Ross Fraser  
 
     
Witness
  Attorney  
 
     
John Clifford
 
     
Name of Witness
     
(BLOCK LETTERS)