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EX-23.1 - EXHIBIT 23.1 - World Energy Solutions, Inc. | c12724exv23w1.htm |
EX-32.2 - EXHIBIT 32.2 - World Energy Solutions, Inc. | c12724exv32w2.htm |
EX-23.2 - EXHIBIT 23.2 - World Energy Solutions, Inc. | c12724exv23w2.htm |
EX-32.1 - EXHIBIT 32.1 - World Energy Solutions, Inc. | c12724exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - World Energy Solutions, Inc. | c12724exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - World Energy Solutions, Inc. | c12724exv31w2.htm |
EX-21.1 - EXHIBIT 21.1 - World Energy Solutions, Inc. | c12724exv21w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2010
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: 001-34289
World Energy Solutions, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 04-3474959 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
446 Main Street
Worcester, Massachusetts 01608
Worcester, Massachusetts 01608
(Address of principal executive offices)
(508) 459-8100
(Registrants telephone number, including area code)
Securities registered under Section 12(b) of the Act: | Name of each exchange on which registered: | |
Common Stock, $0.0001 par value | NASDAQ Capital Market |
Securities registered under Section 12(g) of the Act:
None
None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. Yes o No þ
Indicate by checkmark 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 checkmark 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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the registrant based on
the last sale price of such stock as reported by the NASDAQ Capital Market on June 30, 2010 (the
last business day of the Registrants most recently completed second fiscal quarter) was
$13,167,051.
As of February 1, 2011, the registrant had 9,213,020 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 17, 2011, are incorporated by reference into Part III of this
Report.
World Energy Solutions, Inc.
Form 10-K
For the Year Ended December 31, 2010
Form 10-K
For the Year Ended December 31, 2010
Table of Contents
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Exhibit 23.1 | ||||||||
Exhibit 23.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
FORWARD-LOOKING STATEMENTS
This Report 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, which statements involve risks and
uncertainties. These statements relate to our future plans, objectives, expectations and
intentions. These statements may be identified by the use of words such as may, could, would,
should, will, expects, anticipates, intends, plans, believes, estimates and similar
expressions. Our actual results and timing of certain events could differ materially from those
discussed in these statements. Factors that could contribute to these differences include but are
not limited to, those discussed under Risk Factors, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and elsewhere in this Report. The cautionary
statements made in this Report should be read as being applicable to all forward-looking statements
wherever they appear in this Report.
Table of Contents
PART I
Item 1. Business
Overview
World Energy Solutions, Inc. (World Energy or the Company) is an energy management
services company that applies a combination of people, process and technology to take the
complexity out of energy management and turn it into bottom line impact for the businesses,
institutions and governments we serve. We believe that energy costs can be expressed in a simple
equation E=P*Q-i. Energy costs are a function of commodity price times quantity used minus any
incentives realized. We help customers optimize this equation by applying the Seven Levers of
Energy Management Planning, Sourcing, Risk Management, Efficiency, Sustainability, Incentives
and Monitoring.
These Seven Levers are supported by state of the art technology developed or licensed by the
Company. We have developed three online auction platforms, the World Energy Exchange®, the World
Green Exchange® and, most recently, the World DR Exchange. On the World Energy Exchange®, retail
energy consumers (commercial, industrial and governmental) and wholesale energy participants
(utilities, electricity retailers, and intermediaries) in North America (listers) are able to
negotiate for the purchase or sale of electricity, natural gas and renewable energy resources from
competing energy suppliers (bidders) which have agreed to participate on our auction platform. The
World Energy Exchange® is supplemented with information about market rules, pricing trends, energy
consumer usage and load profiles. Our energy management staff uses this platform to conduct
auctions, analyze results, guide energy consumers through contracting, and track their contracts,
sites, accounts and usage history. The team also uses the exchanges sophisticated monitoring,
triggering and messaging tools to develop, support and implement comprehensive risk management
strategies for our more sophisticated clients.
In 2007, we created the World Green Exchange® to support customers sustainability goals as
well as provide a marketplace for project developers to sell their environmental credits. On the
World Green Exchange®, bidders and listers negotiate for the purchase or sale of environmental
commodities such as Renewable Energy Certificates (RECs), Verified Emissions Reductions (VERs),
Certified Emissions Reductions (CERs) and Regional Greenhouse Gas Initiative (RGGI) allowances.
In January 2010, we launched the World DR Exchange to create an efficient, transparent and
liquid marketplace to maximize incentive payments available to customers and provide a ready source
of curtailment ready customers for the industrys curtailment service providers (CSPs). The World
DR Exchange creates the industrys first online marketplace for demand response (DR), enabling
customers to source DR more efficiently and effectively bringing together CSPs and energy consumers
in highly-structured auction events designed to yield price transparency, heighten competition, and
maximize the energy consumers share of demand response revenues.
In April 2010, we filed an S-3 registration statement with the Securities and Exchange
Commission, or SEC, using a shelf registration, or continuous offering, process. Under this shelf
registration process, we may, from time to time, issue and sell any combination of preferred stock,
common stock or warrants, either separately or in units, in one or more offerings with a maximum
aggregate offering price of $20,000,000, including the U.S. dollar equivalent if the public
offering of any such securities is denominated in one or more foreign currencies, foreign currency
units or composite currencies. We intend to use the net proceeds from the sale of the securities
under this shelf registration, if any, for general corporate purposes.
In the second half of 2010, the Company made a strategic investment in an emerging company
that develops software that can determine the energy efficiency of buildings and present retrofit
options ordered by return on investment. The Company intends to roll this solution out as a
cornerstone of an energy efficiency practice.
We participate in four major markets today: retail energy, demand response, wholesale energy
and environmental commodities and are entering a fifth efficiency. While the retail product
line represents over 80% of our consolidated revenue, we have continued to develop and build
solutions to assist our customers manage their energy as a strategic asset. One component of these
solutions is helping customers maximize demand response revenues. During 2010, we assisted a
number of customers source their demand response revenues on the World DR Exchange in some cases
yielding the customer greater than 90% of the DR revenues. While not a significant contributor to
revenue in 2010, we expect to build on these successes and expand our penetration of this market
in 2011. Wholesale has evolved into a significant revenue contributor for us and has consistently
contributed more than 10% of our consolidated revenue since 2007. We developed the World Green
Exchange® to support the environmental commodity product line. We have had numerous successful
auctions within the environmental commodities markets and have conducted auctions for every major
type of environmental commodity including U.S. VERs, Canadian and U.S. RECs and CERs in the
international marketplace. In August 2008, we were awarded a two-year contract with RGGI, which
was extended in 2010 for an additional two years through July 2012. RGGI, a consortium of 10
Northeast and Mid-Atlantic states, is the first mandatory, market-based effort in the United
States to reduce greenhouse gas emissions. RGGI selected our World Green Exchange® to sell
allowances for the emitting of carbon dioxide emissions from the power sector. In accordance with
this contract we have successfully completed ten quarterly auctions for RGGI through December 31,
2010.
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Table of Contents
The Retail Energy Industry
Retail Electricity Deregulation
The electricity industry in the United States is governed by both federal and state laws and
regulations, with the federal government having jurisdiction over the sale and transmission of
electricity at the wholesale level in interstate commerce, and the states having jurisdiction over
the sale and distribution of electricity at the retail level.
The federal government regulates the electricity wholesale and transmission business through
the Federal Energy Regulatory Commission, or FERC, which draws its jurisdiction from the Federal
Power Act, and from other legislation such as the Public Utility Regulatory Policies Act of 1978,
the Energy Policy Act of 1992, and the Energy Policy Act of 2005, or EPA 2005. FERC has
comprehensive and plenary jurisdiction over the rates and terms for sales of power at wholesale,
and over the organization, governance and financing of the companies engaged in such sales. States
regulate the sale of electricity at the retail level within their respective jurisdictions, in
accordance with individual state laws which can vary widely in material respects. Restructuring of
the retail electricity industry in the United States began in the mid-1990s, when certain state
legislatures restructured their electricity markets to create competitive markets that enable
energy consumers to purchase electricity from competitive energy suppliers.
Prior to the restructuring of the retail electricity industry, the electricity market
structure in the United States consisted of vertically integrated utilities which had a near
monopoly over the generation, transmission and distribution of electricity to retail energy
consumers. In states that have embraced electricity restructuring, the generation component (i.e.,
the source of the electricity) has become more competitive while the energy delivery functions of
transmission and distribution remain as monopoly services provided by the incumbent local utility
and subject to comprehensive rate regulation. In other words, in these states, certain retail
energy consumers (specifically, those served by investor-owned utilities and not by municipal power
companies or rural power cooperatives) can choose their electricity supplier but must still rely
upon their local utility to deliver that electricity to their home or place of business.
The structure and, ultimately, the success level of industry restructuring has been determined
on a state by state basis. There have been three general models for electricity industry
restructuring: (i) delayed competition, (ii) phased-in competition, and (iii) full competition. The
delayed competition model consists of the state passing legislation authorizing competitive retail
electricity markets (i.e., customer choice of electric energy supplier), however, no action is
taken by the state regulatory authority charged with utility industry oversight within such state
to change the incumbent utility rates for electric energy to encourage competition. The phased-in
competition model consists of the state passing legislation authorizing competitive retail
electricity markets together with a gradual change of the incumbent utilitys retail electric rates
to encourage the competitive supply of electricity over time. The full competition model consists
of the state passing legislation authorizing competitive retail electricity markets together with
an immediate change to the incumbent local utilities retail electric rates that results in the
whole commercial, industrial and government, or CIG, electricity market in such state being
competitive immediately.
Energy consumers who choose to switch electricity suppliers can either do it themselves by
contacting competitive energy suppliers directly, or indirectly, by engaging aggregators, brokers
or consultants, collectively referred to as ABCs, to assist them with their electricity
procurement.
Competitive Energy Suppliers: These entities take title to power and resell it directly to
energy consumers. These are typically well-funded entities, which service both energy consumers
directly and also work with ABCs, to contract with energy consumers. Presently, we estimate there
are over 80 competitive suppliers, several of which operate on a national level and are registered
in nearly all of the 16 states and the District of Columbia that permit CIG energy consumers to
choose their electricity supplier and have deregulated pricing to create competitive markets. Of
the 16 deregulated states, 13 have viable competitive markets.
Aggregators, Brokers and Consultants: ABCs facilitate transactions by having competitive
energy suppliers compete against each other in an effort to get their energy customers the lowest
price. This group generally uses manual request for proposal, or RFP, processes that are labor
intensive, relying on phone, fax and email solicitations. We believe that the online RFP process is
superior to the traditional paper-based RFP process as it involves a larger number of energy
suppliers, can accommodate a larger number of bids within a shorter time span, and allows for a
larger amount of contract variations including various year terms, territories and energy usage
patterns.
Online Brokers: Online brokers are a subset of the ABCs. These entities use online platforms
to run electronic RFP processes in an effort to secure the lowest prices for their energy customers
by having competitors bid against one another. We believe that we are among the pioneering
companies brokering electricity online and we are not aware of any competitor that has brokered
more electricity online than we have.
Retail Natural Gas
The natural gas industry in the United States is governed by both federal and state laws and
regulations, with the federal government having jurisdiction over the transmission of natural gas
in interstate commerce, and the states having jurisdiction over
the sale and distribution at the retail level.
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Table of Contents
The federal government regulates the natural gas transmission business through FERC which
draws its jurisdiction from the Natural Gas Act, and from other legislation such as the EPA 2005.
FERC has comprehensive and plenary jurisdiction over the rates and terms for transmission of gas in
interstate commerce, and over the organization, governance and financing of the companies engaged
in such transmission. States regulate the distribution and sale of gas at the retail level within
their respective jurisdictions, in accordance with individual state laws which can vary widely in
material respects.
The natural gas market in the United States is deregulated in most states and offers retail
energy consumers access to their choice of natural gas commodity supplier.
Following a period of heavy regulation, the gas industry was deregulated in three phases as a
result of legislation enacted in 1978 followed by multiple orders of FERC. The expected result of
this deregulation was to stimulate competition in the natural gas industry down the pipeline to the
distribution level.
At the retail level, reforms and restructuring have taken place on a state by state basis,
with varying nuances to the restructuring in different states. For example, state commissions have
allowed local distribution companies to offer unbundled transportation service to large customers;
occasionally to provide flexible pricing in competitive markets; and to engage in other competitive
activities.
Today, we estimate that utilities in over 40 states permit retail natural gas consumers to
choose their natural gas commodity suppliers. In most instances, the incumbent local distribution
utility still delivers the commodity to the consumers premises, even if a different supplier is
selected to provide the commodity. The level of competitive choice available to retail CIG energy
consumers has increased, with a wide range of products and a significant number of suppliers
participating in both retail and wholesale transactions.
Demand Response
The electric power industry in North America faces enormous challenges to keep pace with the
expected increase in demand for electricity and to manage the increased amount of intermittent
renewable energy resources that are expected to be connected to the power grid in the future.
Because electricity cannot be economically stored using commercially available technology today, it
must be generated, delivered and consumed at the moment that it is needed by end-use customers.
Maintaining a reliable electric power grid therefore requires real-time balancing between supply
and demand. Power generation, transmission and distribution facilities are built to capacity levels
that can service the maximum amount of anticipated demand plus a reserve margin intended to serve
as a buffer to protect the system in critical periods of peak demand or unexpected events such as
failure of a power plant or major transmission line. However, under-investment in generation,
transmission and distribution infrastructure in recent years in key regions, coupled with a
dramatic growth in electricity consumption over that same time period, has led to an increased
frequency of voltage reductionscommonly known as brownoutsand blackouts, which are collectively
estimated to cost the United States $80 billion per year, primarily in lost productivity, according
to a United States Department of Energy 2005 study. These challenges are exacerbated by
environmental concerns and stringent regulatory environments that make it increasingly difficult to
find suitable sites, obtain permits, and construct generation, transmission and distribution
facilities where they are needed most, often in densely populated areas. Although the economic
slowdown in the United States in late 2008 and 2009 has resulted in declining industrial demand for
electricity, mid-range and longer-term expectations of capacity shortfalls continue. In addition,
existing power generation facility construction has slowed.
According to the North American Electric Reliability Corporation, demand for electricity is
expected to increase over the next 10 years by approximately 19% in the United States, but
generation capacity is expected to increase by only approximately 12% in the United States during
that same period. As a result, in North America, the margin between electric supply and demand is
projected to drop below minimum target levels in certain regions in the next two to three years.
According to the International Energy Agency, North America is expected to add 698,000 MWh of
additional capacity at a cost of $2.4 trillion between 2008 and 2030 to reliably meet expected
annual growth in demand. Worldwide, the International Energy Agency expects 4,799,000 MWh of
additional capacity to be required over the same period at a total cost of $13.7 trillion. This
presents enormous economic, environmental and logistical challenges.
In addition to the challenges arising from the need to build additional generation capacity in
North America, under-investment in the transmission and distribution infrastructure required to
deliver power from centralized power plants to end-use customers has resulted in an overburdened
electric power grid. This periodically prevents the transport of power to constrained areas during
periods of peak demand, which can affect reliability and cause significant economic impacts.
As the electric power industry confronts these challenges, demand response has emerged as an
important solution to help address the imbalance in electric supply and demand. For example, the
Energy Policy Act of 2005 declared it the official policy of the United States to encourage demand
response and the adoption of devices that enable it. In addition, the Energy Independence and
Security Act of 2007 ordered the Federal Energy Regulatory Commission, or FERC, to conduct a
nationwide assessment of
demand response potential and create a national action plan to promote demand response at the
federal level and support individual states in their own demand response initiatives.
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Table of Contents
Our customers in the demand response market are energy consumers that agree to curtail their
electricity consumption when requested by Regional Transmission Organizations (RTOs) or Independent
System Operators (ISOs) during times of peak demand. We bring together these energy consumers with
CSPs to auction off the energy consumers capacity. CSPs compete against each in a forward auction,
bidding up the percentage of the demand response revenue that the energy consumer will receive from
a specific DR program.
Energy Efficiency
There is an increasing emphasis on energy efficiency as an important aspect of national energy
policy, smart grid solutions and facility management best practices. For example, the White House
estimates that commercial buildings consumed roughly 20 percent of all energy in the U.S. in 2010.
Additionally Pike Research, a leading industry analyst firm, estimates that if all commercial
buildings underwent efficiency retrofits (noting that 80% of all commercial buildings are more than
10 years old), the payout would be on the order of $41.1 billion each year.
Large drivers of the overall efficiency market include President Obamas Better Buildings
initiative, which aims for 20% efficiency gains in commercial buildings by 2020 through
cost-effective upgrades, and New York City Mayor Bloombergs Greener, Greater Buildings Plan aimed
at reducing energy consumption by existing buildings, which account for 70-80% of the Citys total
greenhouse gas emissions.
Combining our new software investments, extensive base of federal and state government
clients, growing footprint in the commercial property space, and large channel partner network that
includes leading energy service companies, we see 2011 as an opportune time to enter the energy
efficiency market with a differentiated product offering.
Wholesale Energy
The wholesale electricity market is the competitive market that connects generators (sellers)
with utilities, electricity retailers and intermediaries (buyers) who purchase electricity to
re-sell on the retail market. We estimate that total wholesale purchases of electric power in 2010
was over 4.6 billion MWh. Natural gas is an important input fuel for generators, and U.S.
consumption of natural gas in 2010 exceeded 22 trillion cubic feet.
The U.S. wholesale electricity market emerged in the late 1970s when independent power
producers, or IPPs, and other non-utilities entered the electricity generation market, although the
market was restricted until the early 1990s when competitive constraints were removed. These new
generation entities began to compete directly with traditional utilities and offered customers more
than one choice to obtain electricity. Today, participants in the wholesale market include IPPs,
traditional utilities, and intermediary power marketers. In addition, banks, traders, and brokers
participate in the wholesale market.
IPPs and traditional utilities comprise the generation portion of the wholesale market. Many
employ internal sales forces to assist in the sale and distribution of their power, enabling them
to participate as both buyers and sellers within the wholesale market. However, a growing number of
IPPs and utilities have found it easier and more cost effective to sell their generation through
power marketing services, which has contributed to the power marketers increased role within the
market. Power marketers utilize several different platforms to purchase power from generators for
distribution, which include paper RFPs, phone brokerage, electronic exchanges and auctions.
Our customers in the wholesale market can be either buyers or sellers and can include
utilities and municipal utilities that buy power or natural gas to fill in gaps in their portfolios
or to consume in their generation facilities, and retail marketers who buy natural gas and power to
resell to retail customers. If the customer is a buyer, we will run a reverse (descending price)
auction to secure a lower price. If the customer is a seller, we will run a forward (ascending
price) auction to secure a higher price.
Environmental Commodities
Concerns about global warming have spawned a number of initiatives to reduce greenhouse gas
emissions. The most widely adopted of these initiatives is the Kyoto Protocol pursuant to which
many countries in Europe, Asia and elsewhere have created carbon cap and trade systems. In carbon
cap and trade programs, carbon dioxide emission caps are established and producers of these
emissions can buy or sell credits in order to meet their required allocations. While the United
States did not ratify the Kyoto Protocol, there are a number of initiatives in the U.S. at the
regional, state and local levels aimed at limiting greenhouse gas emissions, including RGGI, the
Western Climate Initiative and the Midwestern Greenhouse Gas Reduction Accord, initiatives adopted
by over 25 states and the District of Columbia regarding the minimum requirements mandated to
utilities to derive power from renewable sources.
In August 2008, we were awarded a two-year contract with RGGI, extended for an additional
two-year period, which is the first mandatory, market based effort in the United States to reduce
greenhouse gas emissions. RGGI selected our World Green
Exchange® to sell allowances for the emitting of carbon dioxide emissions from the power
sector. In accordance with this contract the Company has conducted quarterly auctions for RGGI over
the initial two-year period and will conduct additional quarterly auctions through July 2012. We
successfully completed ten quarterly auctions for RGGI through December 31, 2010.
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Additionally, carbon emissions reduction initiatives and mandates are spurring investments in
renewable energy, carbon efficiency and recovery processes to create credits that can be traded to
countries or companies seeking to meet mandated carbon emission limits. Thus far, these credits are
being traded privately or via exchanges that have been formed to take advantage of these
opportunities, although we believe that a structured auction event may be a more efficient
mechanism for transacting these credits.
Company Strategy and Operations
Overview
World Energy is an energy management services company that applies a combination of people,
process and technology to take the complexity out of energy management and turn it into bottom line
impact for the businesses, institutions and governments we serve. We believe that energy costs can
be expressed in a simple equation E=P*Q-i. Energy costs are a function of commodity price times
quantity used minus any incentives realized. We help customers optimize this equation by applying
the Seven Levers of Energy Management Planning, Sourcing, Risk Management, Efficiency,
Sustainability, Incentives and Monitoring.
These Seven Levers are supported by state of the art technology developed or licensed by the
Company. We have developed three online auction platforms, the World Energy Exchange®, the World
Green Exchange® and, most recently, the World DR Exchange. On the World Energy Exchange® energy
consumers in North America are able to negotiate for the purchase or sale of electricity, natural
gas and other energy resources from competing energy suppliers which have agreed to participate on
our auction platform in a given event. On the World Green Exchange®, buyers and sellers negotiate
for the purchase or sale of environmental commodities such as RECs, VERs and CERs. On the World DR
Exchange, curtailment service providers and energy consumers are brought together in
highly-structured auction events designed to yield price transparency, heighten competition, and
maximize the energy consumers share of demand response revenues.
We bring suppliers and consumers together in our online marketplaces, often with the
assistance of our channel partners, who identify and work with customers to consummate
transactions. Our exchanges are comprised of a series of software modules that automate our
comprehensive procurement process including:
| energy and environmental commodities sourcing management a database of suppliers and
contacts; |
| lead management a module to track prospective customers through the sales process; |
| deal and task management a module to list, assign and track steps to complete a
procurement successfully; |
| market intelligence databases of information related to market rules and pricing
trends for markets; |
| request for proposal, or RFP, development a module to create RFPs with a variety of
terms and parameters; |
| conducting auctions underlying software to manage the bidding and timing of an auction
and display the results; |
| portfolio management a database of contracts, sites, accounts and usage; |
| risk management monitoring, triggering and messaging tools; |
| commission reporting a system to display forecasted and actual commissions due to
channel partners; and |
| receivables management a system to upload data received from suppliers and track
payment receipt. |
Our technology-based solution is attractive to channel partners as it provides them with a
business automation platform to enhance their growth, profitability and customer satisfaction.
Channel partners are important to our business because these entities offer our auction platforms
to enhance their service offerings to their customers. By accessing our market intelligence and
automated auction platform, channel partners significantly contribute to our transaction volume,
and in return we pay them a fixed percentage of the revenue we receive from winning bidders (i.e.,
energy suppliers and other buyers). This third party commission structure is negotiated in advance
within the channel partner agreement based on a number of factors, including expected volume,
effort required in the auction process and competitive factors.
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As a requirement to bid in an auction (which is described in greater detail below), bidders
must enter into an agreement to pay our fee if they execute a contract as a result of the auction.
Following an auction event, our employees continue to work with the energy consumer and other
listers or collectively, the customer, and bidder through the contract negotiation process and,
accordingly, we are aware of whether a contract between the customer and bidder is
consummated. If a contract is entered into between a customer and bidder using our auction
platforms, we are compensated based upon a fixed fee, or commission rate, that is built into the
price of the commodity. This approach is attractive to both the customer and bidder as there is no
fee charged to either party if the brokering process does not result in a contract. Our fees are
based on the total amount of the commodity transacted between the customer and bidder multiplied by
our contractual commission rate. We have master agreements with our bidders, whereby bidders are
allowed to bid on customer requirements in exchange for agreeing to pay the fee that we have
negotiated with the customer. In order to participate in any specific auction, bidders are
required to acknowledge and agree to our fee on our online platform prior to participating in that
auction.
Retail Electricity Transactions
For retail electricity transactions, monthly revenue is based on actual usage data obtained
from the energy supplier for a given month or, to the extent actual usage data is not available,
based on the estimated amount of electricity delivered to the energy consumer for that month. While
the number of contracts closed via the World Energy Exchange® in any given period can fluctuate
widely due to a number of factors, this revenue recognition method provides for a relatively
predictable revenue stream, as revenue is based on energy consumers actual historical energy usage
profile. However, monthly revenue can still vary from our expectations because usage is affected by
a number of variables which cannot always be accurately predicted, such as the weather and the
general business conditions affecting our energy consumers.
Contracts between energy consumers and energy suppliers are signed for a variety of term
lengths, with a one-year contract term being typical for commercial and industrial energy
consumers, and government contracts typically having two to three year, and occasionally five-year
terms. Backlog relates to contracts in force on a given date representing transactions between
bidders and listers on our platform related to commodity brokerage assuming listers consume energy
at their historical levels or deliver credits at expected levels. The chart below displays our
annualized and total backlog from year-end 2006 through 2010. Total backlog represents the revenue
that we would derive over the remaining life of those contracts. Annualized backlog represents the
revenue that we would derive from those contracts within the twelve months following the date on
which the backlog is calculated. For any particular contract, annualized backlog is calculated by
multiplying the energy consumers historical usage by our fixed contractual commission rate. This
metric is not intended as an estimate of overall future revenues, since it does not purport to
include revenues that may be earned during the relevant backlog period from new contracts or
renewals of contracts that expire during such period. In addition, annualized backlog does not
represent guaranteed future revenues, and to the extent actual usage under a particular contract
varies from historical usage, our revenues under such contract will differ from the amount included
in backlog.
In addition to retail electricity contracts, we have ongoing contractual arrangements with
retail natural gas customers under which we deliver certain energy management and auction
administration services for which we receive a monthly fee. Total and annualized backlog as at
December 31, 2010 includes monthly management fees related to natural gas contracts of $1.0 million
that have expected revenue associated with them from January 1, 2011 through December 31, 2011.
These contracts can be terminated within 30 days per the terms of the contracts and, therefore,
backlog does not include any revenue from expected contract renewals or expected fees beyond
December 31, 2011.
Annualized Backlog
(in millions)
(in millions)
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Total Backlog
(in millions)
(in millions)
Because the calculation of backlog is a calculation of a contracted commission rate multiplied
by a historical energy usage figure and our management contracts are cancelable by our natural gas
customers, our backlog may not necessarily be indicative of future results. Annualized backlog
should not be viewed in isolation or as a substitute for our historical revenues presented in the
financial statements included in this Form 10-K. Events that may cause future revenues from
contracts in force to differ materially from our annualized backlog include the events that may
affect energy usage, such as overall business activity levels, changes in energy consumers
businesses, weather patterns and other factors described under Risk Factors.
Retail Natural Gas Transactions
There are two primary fee components to our retail natural gas services transaction fees and
management fees. Transaction fees are billed to and paid by the energy supplier awarded business on
the platform. Transaction fees for natural gas and electricity awards are established prior to
award and are the same for each supplier. For the majority of our natural gas transactions, we
invoice the supplier upon the conclusion of the transaction based on the estimated energy volume
transacted for the entire award term multiplied by the transaction fee. Management fees are paid by
our energy consumers and are generally billed on a monthly basis for services rendered based on
terms and conditions included in contractual arrangements. While substantially all of our retail
natural gas transactions are accounted for in accordance with this policy, a certain percentage is
accounted for as the natural gas is consumed by the customer.
Demand Response Transactions
Demand response transaction fees are recognized when we have received confirmation from the
CSP that the energy consumer has performed under the applicable RTO or ISO program requirements.
The energy consumer is either called to perform during an actual curtailment event or is required
to demonstrate its ability to perform in a test event during the performance period. For the PJM
Interconnection (PJM), an RTO that coordinates the movement of wholesale electricity in all or
parts of 13 states and the District of Columbia, the performance period is June through September
in a calendar year. Test results are submitted to PJM by the CSPs and we receive confirmation of
the energy consumers performance in the fourth quarter. CSPs typically pay us ratably on a
quarterly basis throughout the demand response fiscal (June to May) year. As a result, a portion of
the revenue we recognize is reflected as unbilled accounts receivable.
Wholesale Transactions
Wholesale transaction fees are invoiced upon the conclusion of the auction based on a fixed
fee. These revenues are not tied to future energy usage and are recognized upon the completion of
the online auction. For reverse auctions where our customers bid for a consumers business, the
fees are paid by the bidder. For forward auctions where a lister is selling energy, the fees are
typically paid by the lister. While substantially all wholesale transactions are accounted for in
this fashion, a small percentage of our wholesale revenue is accounted for as the electricity or
gas is delivered.
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Environmental Commodity Transactions
Environmental commodity transaction fees are accounted for utilizing two primary methods. For
regulated allowance programs like RGGI, fees are paid by the lister and are recognized as revenue
quarterly as auctions are completed and approved. For all other environmental commodity
transactions both the lister and the bidder pay a transaction fee and revenue is recognized upon
the consummation of the underlying transaction as credits are delivered by the lister and payment
is made by the bidder.
The Brokerage Process
Our brokerage process is supported by a variety of software modules designed with the goal to
find the best possible price while providing step-by-step process management and detailed
documentation prior to, during and following the auction. Our process includes data collection and
analysis, establishing the benchmark price, conducting multiple auction events to enable testing of
various term and price combinations and assisting in contract completion. We create an audit trail
of all the steps taken in a given transaction. Specific web pages track all information provided to
energy suppliers including energy supplier calls, supplier invitations, usage profiles and desired
contract parameters.
At the commencement of the process, non-government energy consumers will enter into a
procurement services agreement with us pursuant to which we are appointed as the brokerage service
provider to solicit and obtain bids for the supply of energy or environmental commodities and to
assist in the procurement of these commodities. Government energy consumers will send out a
solicitation at the commencement of the brokerage process which sets out the contract terms. Only
bidders that are qualified under the solicitation may participate in the auction. Bidders who wish
to bid on the provision of energy or environmental commodities to such customers must partake in
our brokerage process and cannot contract with customers outside of our brokerage process.
For retail energy, the procurement services agreement authorizes us to retrieve the energy
consumers energy usage history from the utility serving its accounts. We utilize the usage history
to identify and analyze the energy consumers energy needs and to run a rate and tariff model which
calculates the utility rate for that energy consumers facilities. This price is used as a
benchmark price to beat for the auction event. For other customers or commodities, the benchmark
price may be negotiated or calculated in another manner.
Prior to conducting the auction, the auction parameters, including target price, supplier
preferences, contract terms, payment terms and product mix, as applicable, are discussed with the
customer and agreed upon. Approximately two to five days prior to the auction, we will post RFPs
with these auction parameters on our World Energy Exchange®, World DR Exchange or World Green
Exchange® and alert the potential bidders. Additionally, bidders are provided with information
about the customer, historical energy usage information relating to the energy consumers
facilities (if retail customers), and the desired contract parameters, several days in advance of
the auction as part of the RFP. This advanced notice gives the bidders the opportunity to analyze
the value of a potential deal and the creditworthiness of the customer. We believe that, using this
information along with the auction parameters described in the RFP, the bidders develop a bidding
strategy for the auction.
The auction is run on the World Energy Exchange®, World DR Exchange or the World Green
Exchange®, depending on the commodity auctioned. The auction creates a competitive bidding
environment that is designed to cause bidders to deliver better prices in response to other
competitive bids. Specifically, bidders enter an auction by submitting an opening bid at or better
than the suggested opening bid posted on the RFP. After they enter the auction and assess the
bidding activity, bidders may begin testing the competition by submitting a bid better than the
then-leading bid. They do this presumably to test their pricing and to gauge the relative level of
competition for the deal. There is typically a modest level of bidding and counter-bidding activity
among bidders until the final 30 seconds of the auction when bidding activity tends to increase. In
the final seconds, all bidders see the then-leading bid and must make a judgment as to how
aggressively to submit their last bid in order to win the deal. At this point in the auction,
bidders make their final bid without knowledge of what any other bidders are bidding. We call this
a final blind bid.
Typically, a number of auctions tailored to the customers specific needs will be held. Our
exchanges provide rapid results and can accommodate a multitude of permutations for offers,
including various year terms, quantities, load factors and green power requirements. For commercial
and industrial customers or project owners, we typically run two to six auction events per
procurement and for large government aggregations that generally are more complex, we typically run
20 to 40 auction events. Each auction event usually lasts 15 minutes or less. Included as part of
any auction transaction are date and time stamping of bids, comparison of each bid with benchmark
prices, as well as automated stop times, which ensure the integrity of auction events. The
exchanges are also periodically synchronized to the atomic clock which is intended to ensure that
auction start and stop times are precise.
Following an auction, the auction results are analyzed and if the auction has been successful,
we assist the customer with the contracting process with the winning bidder which is typically
finalized within one hour of the closing of the last auction event. In the case of a commercial
energy consumer, we facilitate any remaining discussion between the leading energy supplier and the
energy consumer relating to the energy suppliers contract terms that were not addressed in
establishing the auction parameters. In the case of government energy consumers, the energy
suppliers have seen and, in general, have agreed to the form of supply contract being required by
the government energy consumer. Accordingly, the time period between the end of the auction and the
execution of a contract is usually shorter than in the case of non-government energy
consumers. Not all auctions result in awarded contracts.
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For retail energy transactions, the incumbent local utility serving a given location is
typically obligated to deliver the commodity to the customers premises from the location where the
supplier delivers electricity energy into that local utilitys delivery system. However, the energy
supplier is responsible for enrolling the energy consumers account with the applicable local
utility and the energy supplier remains liable for any costs resulting from the physical loss of
energy during transmission and delivery to the customers premises. We never buy, sell or take
title to the energy products or environmental commodities on our auction platforms.
We typically interface directly with the customer throughout the brokerage process. However,
if a channel partner is involved, the channel partner will often perform one or more of the
following functions: working with a customer to sign a procurement services agreement, interacting
with the customer relating to World Energy analyses, supporting the decision-making, and
interfacing with the customer during the contracting process. However, even if a channel partner is
involved, we are still primarily responsible for tasks such as interacting with utilities to obtain
an energy consumers usage history, performing analyses, creating RFPs, interfacing with bidders,
and scheduling, conducting and monitoring auctions and collecting the commission earned from the
bidder.
Growth Strategy
Our overall objective is to achieve a preeminent position as the exchange of choice for
executing transactions in energy, energy related services and environmental commodities. We seek to
achieve our objective by expanding our community of channel partners, customers and bidders on our
exchange, strengthening and expanding long-term relationships with government agencies, broadening
our product offerings, making strategic acquisitions, and growing our sales force. Key elements of
our strategy are as follows:
Leveraging New Products such as Demand Response, Risk Management and Efficiency. We plan to
expand our product offerings to include a suite of risk management services either by cross-selling
into our existing customer base or using new products to win business. New business and new
products offer the opportunity to increase our value proposition to customers and differentiate us
from ABCs that focus solely on procurement.
Continuing to Develop Channel Partner Relationships. A significant amount of the customers
using our auction platforms have been introduced to us through our channel partners. Our primary
growth strategy is to focus on developing and increasing our number of channel partner
relationships in an effort to expand the base of customers using our auction platforms. As
illustrated by the diagram below, we have consistently increased the number of channel partners
since 2006 from 29 to 135. The following table sets out the growth in our channel partner
relationships over the last five fiscal years and data is presented at December 31, 2010.
Number of Channel Partners
Strengthening and Expanding Long-term Relationships with Government Agencies. We intend to
build on the relationships we have established with federal, state and local government agencies.
We expect that our expertise in brokering cost-saving energy contracts for government agencies will
continue to be in demand as contract terms expire and governments look to contract for low energy
prices in a competitive market. We also have seen government agencies leading the way in seeking
energy supply from renewable sources and in purchasing RECs. We intend to continue to leverage our
government presence to secure additional business relationships and opportunities with other
federal, state and local governments for energy, environmental and energy related services.
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Expand our Share in the Natural Gas Market. While our core competence has traditionally been
in electricity brokerage for retail energy consumers, we significantly expanded our share of the
natural gas market with our 2007 acquisition of EnergyGateway, LLC. This acquisition provided us
with additional staff, natural gas expertise and a post-and-respond software solution to add to our
auction capability. We expect this combination to strengthen our natural gas offering and present
cross-selling opportunities.
Leverage Early Wins in the Wholesale Market. An important rationale for our initial public
offering was to enter the wholesale market where we had initial success in 2006. We have grown our
customer base from two in 2006 to sixty-eight as of December 31, 2010, of which thirty-nine have
contributed to revenue to date. This market has become a steady contributor to our growing revenue
base representing more than 10% of our consolidated revenue in each of the last four years. We will
continue our push into this market in order to expand our presence and market share.
Brokering Environmental Commodities. We have expanded our operations by entering into the
environmental commodities markets by creating the World Green Exchange®. We have successfully
transacted VERs, RECs, and CERs representing substantially all of the currently available
environmental commodity types. In August 2008 we were awarded a two-year contract with RGGI,
extended for a two-year option period, to run quarterly auctions to sell regulated allowances as
established by RGGI, the only regulated cap-and-trade carbon dioxide allowance program in the
United States. We successfully completed ten quarterly auctions for RGGI through December 31, 2010
under this program and will conduct additional quarterly auctions through July 2012. The recent
worldwide recession and associated uncertainty surrounding a global approach to carbon emissions
has had a negative effect on the price of carbon credits and transaction volume has declined as a
result. As the economy recovers and countries attempt to reduce their environmental emissions in
order to achieve compliance with international and U.S.-based initiatives, we believe that the
creation and trading of environmental commodities will accelerate. We also believe that the
characteristics of this market and these commodities, namely lack of liquidity, lack of
transparency and product complexity and differentiation, make our auction process an excellent
approach to transacting these commodities. In addition to our work with RGGI in the mandatory
compliance market, we are pursuing other regional programs such as the Western Climate Initiative
and utilities seeking to meet their renewable portfolio standards, working with project owners to
maximize the value of their carbon offsets.
Making Strategic Acquisitions. From time to time, we also pursue strategic acquisitions to
help us expand geographically, add expertise and product depth, provide accretive revenue and
profit streams or a combination of two or more of the above.
Bidders, Listers and Channel Partners
Bidders. Our success is heavily dependent on our bidder relationships, the credibility of our
bidders and the integrity of the auction process. Bidders include over 250 competitive electricity
and natural gas suppliers and over 150 wholesale electricity suppliers registered on the World
Energy Exchange®, representing a majority of all suppliers in the deregulated electricity and
natural gas markets. To date, there are over 150 registered bidders on the World Green Exchange®.
Of the registered energy suppliers, approximately 150 had active contracts with energy consumers
that were brokered through our World Energy Exchange® as of December 31, 2010. Two of these bidders
accounted for 22% in the aggregate of our revenue for the year ended December 31, 2010 and one
bidder accounted for 15% in the aggregate of our revenue for the year ended December 31, 2009. In
order to participate in an auction event, bidders must register with us by either entering into a
standard-form agreement pursuant to which the bidder is granted a license to access our auction
platform and bid at auction events or by qualifying to participate in an auction pursuant to a
government solicitation. Our national standard form agreement is typically for an indefinite term,
may be terminated by either party upon 30 days prior written notice, is non-exclusive,
non-transferable and cannot be sublicensed. Under our standard-form agreement or the government
solicitation, the bidder agrees to pay us a commission, which varies from contract to contract and
is based on a set rate per energy unit consumed by the lister.
Listers. Listers using our auction platform to procure energy, demand response and
environmental commodities include government agencies, commercial and industrial energy consumers,
utilities, municipal utilities, environmental commodity project owners, financial institutions and
brokers. Government energy consumers have complex energy needs in terms of both scope and scale,
which we believe can best be met with a technology-based solution such as our exchanges.
Additionally, the automated nature of our exchanges is designed to support protest free auctions.
We have brokered energy for the General Services Administration (GSA) and over 25 federal
agencies, Montgomery County, Maryland, the State of Maryland, the Commonwealth of Massachusetts,
the Commonwealth of Pennsylvania, the State of Delaware, the State of New Jersey, the State of
Connecticut and the State of Rhode Island, and the 10 Northeast and Mid-Atlantic states
participating in RGGI including New York and the New England states.
Our contracts for the online energy procurements with these governmental entities are
typically for multiple years ranging from two to five years. During this contractual period, the
governmental entity may run various auctions for different locations or agencies that fall under
their purview. As a result, revenue from these customers could extend beyond the actual
contractual term. We have contracts with 7 of the 13 currently deregulated states that are
competitive. As additional states open their electricity markets to competition and suppliers
enter those markets creating a competitive landscape, we plan to actively market our services to
them. These contracts do not require that the government energy consumer use our services and, as
is typical in government
procurements, contain termination for convenience clauses. If a contract was terminated for
convenience, it would typically not have any bearing on energy delivered through the termination
date.
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None of the energy consumers using our auction platform accounted for 10% in the aggregate of
our revenue for the year ended December 31, 2010, and one of these energy consumers accounted for
approximately 10% of our revenue for the year ended December 31, 2009.
Direct Sales. Retail targets of direct sales efforts are typically large companies with
facilities in many geographic locations including hotel chains, property management firms, big box
retailers, supermarkets, department stores, drug stores, convenience stores, restaurant chains,
financial services firms and manufacturers across various industries. We also are pursuing
utilities, municipal utilities, and retail energy providers in the wholesale market, and project
owners, customers seeking to meet compliance obligations, and brokers in the environmental
commodities markets.
Channel Partners. We also target customers through our channel partner model. These are firms
with existing client relationships with certain customers that would benefit from the addition of
an online procurement solution. Channel partners consist of a diverse array of companies including
energy service companies, demand side consultants and manufacturers, ABCs and strategic sourcing
companies, but in the most general terms they are resellers or distributors. As of December 31,
2010, we had entered into agreements with 135 channel partners that are currently engaged in
efforts to source potential transactions to our exchanges, although not all have sourced a
transaction for which an auction has been completed. Upon identifying opportunities with new
channel partners, we enter into a channel partner agreement that grants the channel partner a
non-exclusive right to sell our procurement process typically for a term of one year, which renews
automatically unless terminated upon 30 days written notice. The channel partner receives a
commission based generally on the amount of involvement of the channel partner in the procurement
process.
Competition
Customers have a broad array of options when purchasing energy or environmental commodities.
Retail energy consumers can either purchase energy directly from the utility at the utilitys rate
or purchase energy in the deregulated market through one of the following types of entities:
competitive energy suppliers, ABCs and online brokers. We compete with competitive energy
suppliers, ABCs and other online brokers for energy consumers that are seeking an alternative to
purchasing directly from the utility. Demand response customers typically negotiate demand response
services directly with CSPs. Wholesale customers typically buy from generators, traders,
traditional brokers who use phone-based methods, or bid-ask exchanges. Environmental commodity
customers typically buy or sell directly through bilateral transactions, brokers, traders or
bid-ask exchanges.
Technology
The auction platform that powers our exchanges is comprised of a scalable transaction
processing architecture and web-based user interface. The auction platform is primarily based on
internally developed proprietary software, but also includes third party components for user
interface elements and reporting. The auction platform supports the selling and buying processes
including bid placements, bidder registration and management, channel partner management, deal
process management, contract management, site management, collection and commission management, and
reporting. The auction platform maintains current and historical data online for all of these
components.
Our technology systems are monitored and upgraded as necessary to accommodate increasing
levels of traffic and transaction volume on the website. However, future upgrades or additional
technology licensing may be required to ensure optimal performance of our auction platform
services. See Risk Factors at Item 1A. To provide maximum uptime and system availability, our
auction platform is hosted in a multi-tiered, secure, and reliable fault tolerant environment which
includes backup power supply to computer equipment, climate control, as well as physical security
to the building and data center. In the event of a major system component failure, such as a system
motherboard, spare servers are available.
We strive to offer a high level of data security in order to build the confidence in our
services among customers and to protect the participants private information. Our security
infrastructure has been designed to protect data from unauthorized access, both physically and over
the Internet. The most sensitive data and hardware of the exchanges reside at the data centers.
Seasonality
Our revenue is subject to seasonality and fluctuations during the year primarily as a result
of weather conditions and its impact on the demand for energy. The majority of our revenue is
generated from the commissions we receive under any given energy contract, which is tied to the
energy consumers consumption of energy. Therefore, revenue from natural gas consumption tends to
be strongest during the winter months due to the increase in heating usage, and revenue from
electricity consumption tends to be strongest during the summer months due to the increase in air
conditioning usage. Our revenue is also subject to fluctuations within any given season, depending
on the severity of weather conditions during a particularly cold winter or an unseasonably warm
summer, energy consumption will rise. In addition, transaction revenue in the natural gas and
wholesale markets for which we invoice upon completion of the respective transaction tends to be
higher in the first and fourth quarters when utilities and
natural gas customers make their annual natural gas buys.
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Intellectual Property
We enter into confidentiality and non-disclosure agreements with third parties with whom we
conduct business in order to limit access to and disclosure of our proprietary information.
We operate our
platform under the trade names World Energy Exchange® and World Green
Exchange®. We own
the following registered trademarks in the United States: World Energy Solutions®, World Green Exchange®, and World Energy Exchange®. We also own the following domain
names: worldenergy.com, wesplatform.com, wexch.com, worldenergyexchange.com, echoicenet.com,
e-choicenet.com, worldenergysolutions.com, worldenergysolutions.net, worldenergy.biz,
worldgreenexchange.com, worldgreenexchange.biz, worldgreenexchange.info, worldgreenexchange.us,
worldpowerexchange.com, and worldenergysolutionsinc.com. To protect our intellectual property,
we rely on a combination of copyright and trade secret laws and the domain name dispute resolution
system.
Our corporate name and certain of our trade names may not be eligible for protection if, for
example, they are generic or in use by another party. We may be unable to prevent competitors from
using trade names or corporate names that are confusingly similar or identical to ours. Until
recently, a company organized under the laws of the State of Florida and whose shares are publicly
traded under the symbol WEGY also operated under the name World Energy Solutions, Inc. Pursuant
to a settlement agreement dated January 26, 2009 between us and WEGY,WEGY changed its legal name,
ceased use of the phrase World Energy Solutions, and transferred the domain name
worldenergysolutionsinc.com to us.
We do not have any patents and if we are unable to protect our copyrights, trade secrets or
domain names, our business could be adversely affected. Others may claim in the future that we have
infringed their intellectual property rights.
Personnel
As of December 31, 2010, we had sixty employees consisting of three members of senior
management, twenty-three sales and marketing employees, four information technology employees,
twenty-four trading desk employees and six administrative employees. In addition, we rely on a
number of consultants and other advisors. The extent and timing of any increase in staffing will
depend on the availability of qualified personnel and other developments in our business. None of
the employees are represented by a labor union, and we believe that we have good relationships with
our employees.
Company Information
We commenced operations through an entity named Oceanside Energy, Inc., or Oceanside, which
was incorporated under the laws of the State of Delaware on September 3, 1996. We incorporated
World Energy Solutions, Inc. under the laws of the State of Delaware under the name World Energy
Exchange, Inc. on June 22, 1999, and on October 31, 1999, Oceanside became a wholly-owned
subsidiary of World Energy Solutions, Inc. and was subsequently dissolved. On December 21, 2006, we
incorporated a 100% owned subsidiary, World Energy Securities Corp., under the laws of the
Commonwealth of Massachusetts.
Our registered and principal office is located at 446 Main Street, Worcester, Massachusetts,
01608, United States of America, and our telephone number is (508) 459-8100. Our website is located
at www.worldenergy.com.
Item 1A. Risk Factors
You should carefully consider the risks and uncertainties described below before deciding to
invest in shares of our common stock. If any of the following risks or uncertainties actually
occurs, our business, prospects, financial condition and operating results would likely suffer,
possibly materially. In that event, the market price of our common stock could decline and you
could lose all or part of your investment.
Risks Related to Our Business
We have limited operating experience and a history of operating losses, which may make it
difficult for you to evaluate our business and prospects.
We have a limited operating history upon which you can evaluate our business and prospects. We
began assisting in energy transactions in 2001 and introduced our current auction model in April of
that same year. Further, we have a history of losses and, at December 31, 2010, we had an
accumulated deficit of approximately $22.1 million. You must consider our business, financial
history and prospects in light of the risks and difficulties we face as an early stage company with
a limited operating history.
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A prolonged recession, instability in the financial markets, and insufficient financial sector
liquidity, could negatively impact our business. |
The consequences of a prolonged recession could include a lower level of economic activity and
uncertainty regarding energy prices and the capital and commodity markets. A lower level of
economic activity could result in a decline in energy consumption and further weakened commodity
markets, which could adversely affect our revenues and future growth. Economic downturns or
periods of high energy supply costs typically lead to reductions in energy consumption and
increased conservation measures. During 2009 we experienced a gradual decline in electricity usage
which had a negative impact on our revenue. During 2010 electricity usage, while still slightly
down, generally improved and had a minimal impact on our results. A lag in a subsequent recovery
could continue to have an adverse effect on our results of operations, cash flows or financial
position. Instability in the financial markets as a result of recession or otherwise, as well as
insufficient financial sector liquidity, also could affect the cost of capital and our ability to
raise capital.
Our business is heavily influenced by how much regulated utility prices for energy are above or
below competitive market prices for energy and, accordingly, any changes in regulated prices or
cyclicality or volatility in competitive market prices heavily impacts our business. |
When energy prices increase in competitive markets above the price levels of the regulated
utilities, energy consumers are less likely to lock-in to higher fixed price contracts in the
competitive markets and so they are less likely to use our auction platform. Accordingly,
reductions in regulated energy prices can negatively impact our business. Any such reductions in
regulated energy prices over a large geographic area or over a long period of time would have a
material adverse effect on our business, prospects, financial condition and results of operations.
Similarly, cyclicality or volatility in competitive market prices that have the effect of driving
those prices above the regulated utility prices will make our auction platform less useful to
energy consumers and will negatively impact our business.
We currently derive a substantial amount of our revenue from the brokerage of electricity, and as
a result our business is highly susceptible to factors affecting the electricity market over which
we have no control. |
We derived approximately 58% of our revenue during 2010 from the brokerage of electricity.
Although our reliance on the brokerage of electricity has diminished as we implemented our strategy
to expand into other markets, we believe that our revenue will continue to be highly dependent on
the level of activity in the electricity market for the near future. Transaction volume in the
electricity market is subject to a number of variables, such as consumption levels, pricing trends,
availability of supply and other variables. We have no control over these variables, which are
affected by geopolitical events such as war, threat of war, terrorism, civil unrest, political
instability, environmental or climatic factors and general economic conditions. We are particularly
vulnerable during periods when energy consumers perceive that electricity prices are at elevated
levels since transaction volume is typically lower when prices are high relative to regulated
utility prices. Accordingly, if electricity transaction volume declines sharply, our results will
suffer.
Our success depends on the widespread adoption of purchasing electricity from competitive sources. |
Our success depends, in large part, on the willingness of CIG energy consumers to embrace
competitive sources of supply, and on the ability of our energy suppliers to consistently source
electricity at competitive rates. In most regions of North America, energy consumers have either no
or relatively little experience purchasing electricity in a competitive environment. Although
electricity consumers in deregulated regions have been switching from incumbent utilities to
competitive sources, there can be no assurance that the trend will continue. In a majority of
states and municipalities, including some areas which are technically deregulated, electricity is
still provided by the incumbent local utility at subsidized rates or at rates that are too low to
stimulate meaningful competition by other providers. In addition, extreme price volatility could
delay or impede the widespread adoption of competitive markets. To the extent that competitive
markets do not continue to develop rapidly our prospects for growth will be constrained. Also,
there can be no assurance that trends in government deregulation of energy will continue or will
not be reversed. Increased regulation of energy would significantly damage our business.
Even if our auction brokerage model achieves widespread acceptance as the preferred means to
transact energy and environmental products, we may be unsuccessful in competing against current
and future competitors. |
We expect that competition for online brokerage of energy and environmental products will
intensify in the near future in response to expanding restructured energy markets that permit
consumer choice of energy sources and as technological advances create incentives to develop more
efficient and less costly energy procurement in regional and global markets. The barriers to entry
into the online brokerage marketplace are relatively low, and we expect to face increased
competition from traditional off-line energy brokers, other established participants in the energy
industry, online services companies that can launch online auction services that are similar to
ours and demand response and energy management service providers.
Many of our competitors and potential competitors have longer operating histories, better
brand recognition and significantly greater financial resources than we do. The management of some
of these competitors may have more experience in implementing their business plan and strategy and
they may have pre-existing commercial or other relationships with large listers and/or bidders
which would give them a competitive advantage. We expect that as competition in the online
marketplace increases, brokerage commissions for the energy and environmental commodities
industries will decline, which could have a negative impact on the level of brokerage fees we can
charge per transaction and may reduce the relative attractiveness of our exchange services. We
expect that our costs relating to marketing and human resources may increase as our
competitors undertake marketing campaigns to enhance their brand names and to increase the volume
of business conducted through their exchanges. We also expect many of our competitors to expend
financial and other resources to improve their network and system infrastructure to compete more
aggressively. Our inability to adequately address these and other competitive pressures would have
a material adverse effect on our business, prospects, financial condition and results of
operations.
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If we are unable to rapidly implement some or all of our major strategic initiatives, our ability
to improve our competitive position may be negatively impacted. |
Our strategy is to improve our competitive position by implementing certain key strategic
initiatives in advance of competitors, including the following:
| leveraging new products such as demand response; |
| continue to develop channel partner relationships; |
| strengthen and expand long-term relationships with government agencies; |
| target other energy-related markets; |
| target utilities in order to broker energy-related products for them; and |
| make strategic acquisitions. |
While we have made significant progress in pursuing these initiatives, we cannot assure you
that we will be successful in executing against any of these key strategic initiatives, or that our
time to market will be sooner than that of competitors. Some of these initiatives relate to new
services or products for which there are no established markets, or in which we lack experience and
expertise. If we are unable to continue to implement some or all of our key strategic initiatives
in an effective and timely manner, our ability to improve our competitive position may be
negatively impacted, which would have a material and adverse effect on our business and prospects.
Our costs will continue to increase as we expand our business and our revenue may not increase
proportionately, resulting in operating losses in the future. |
We have significantly increased our operating expenses as we expanded our brokerage
capabilities to offer additional energy-related products, increased our sales and marketing efforts
and developed our administrative organization. For the year ended December 31, 2010 we incurred a
net loss of approximately $0.1 million. As we continue to expand our business, we may incur
additional operating losses. In addition, our budgeted expense levels are based, in significant
part, on our expectations as to future revenue and are largely fixed in the short term. As a
result, we may be unable to adjust spending in a timely manner to compensate for any unexpected
shortfall in revenue which could compound those losses in any given fiscal period.
We may expand our business through the acquisition of other businesses and technologies which will
present special risks. |
We may expand our business in certain areas through the acquisition of businesses,
technologies, products and services from other businesses. Acquisitions involve a number of special
problems, including:
| the need to incur additional indebtedness, issue stock or use cash in order to
complete the acquisition; |
| difficulty integrating acquired technologies, operations and personnel with the
existing business; |
| diversion of management attention in connection with both negotiating the
acquisitions and integrating the assets; |
| strain on managerial and operational resources as management tries to oversee larger
operations; |
| the funding requirements for acquired companies may be significant; |
| exposure to unforeseen liabilities of acquired companies; |
| increased risk of costly and time-consuming litigation, including stockholder
lawsuits; and |
| potential issuance of securities in connection with an acquisition with rights that
are superior to the rights of our common stockholders, or which may have a dilutive
effect on our common stockholders. |
We may not be able to successfully address these problems. Our future operating results will
depend to a significant degree on our ability to successfully integrate acquisitions and manage
operations while also controlling expenses and cash burn.
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We depend on the services of our senior executives and other key personnel, the loss of whom could
negatively affect our business. |
Our future performance will depend substantially on the continued services of our senior
management and other key personnel, including our chief information officer, senior vice president
of operations and our market directors. If any one or more of such persons leave their positions
and we are unable to find suitable replacement personnel in a timely and cost efficient manner, our
business may be disrupted and we may not be able to achieve our business objectives, including our
ability to manage our growth and successfully implement our strategic initiatives. We do not have
long-term employment agreements with any of our senior management or other key personnel and we do
not have a non-competition agreement with our current chief executive officer.
We must also continue to seek ways to retain and motivate all of our employees through various
means, including through enhanced compensation packages. In addition, we will need to hire more
employees as we continue to implement our key strategy of building on our market position and
expanding our business. Competition for qualified personnel in the areas in which we compete
remains strong and the pool of qualified candidates is limited. Our failure to attract, hire and
retain qualified staff on a cost efficient basis would have a material adverse effect on our
business, prospects, financial condition, results of operations and ability to successfully
implement our growth strategies.
We do not have contracts for fixed volumes with the bidders who use our auction platform and we
depend on a small number of key bidders, and the partial or complete loss of one or more of these
bidders as a participant on our auction platform could undermine our ability to execute effective
auctions. |
We do not have contracts for fixed volumes with any of the bidders who use our auction
platform. Two of these bidders represented 22% of our revenue and one of these bidders represented
15% of our revenue for the years ended December 31, 2010 and 2009, respectively. The loss of these
or other significant bidders will negatively impact our operations, particularly in the absence of
our ability to locate additional national bidders. We do not have agreements with any of these
bidders preventing them from directly competing with us or utilizing competing services.
The online brokerage of energy and environmental commodities is a relatively new and emerging
market and it is uncertain whether our auction model will gain widespread acceptance. |
The emergence of competition in the energy and environmental commodities markets is a
relatively recent development, and industry participants have not yet achieved consensus on how to
most efficiently take advantage of the competitive environment. We believe that as the online
energy brokerage industry matures, it is likely to become dominated by a relatively small number of
competitors that can offer access to the largest number of competitive suppliers and consumers.
Brokerage exchanges with the highest levels of transaction volume will likely be able to offer
bidders lower transaction costs and offer listers better prices, which we believe will increasingly
create competitive barriers for smaller online brokerage exchanges. For us to capitalize on our
position as an early entrant into this line of business, we will need to generate widespread
support for our auction platform and continue to rapidly expand the scale of our operations. Other
online auction or non-auction strategies may prove to be more attractive to the industry than our
auction model. If an alternative brokerage exchange model becomes widely accepted in the
electricity industry and/or the environmental commodities brokerage industry we participate in, our
business will be adversely affected.
We depend on a small number of key listers for a significant portion of our revenue, many of which
are government entities that have no obligation to use our auction platform or continue their
relationship with us, and the partial or complete loss of business of one or more of these
consumers could negatively affect our business. |
Our listers are comprised primarily of large businesses and government organizations. None of
these listers represented at least 10% of our revenue for the year ended December 31, 2010 and one
of these listers accounted for approximately 10% of our revenue for the year ended December 31,
2009. Our government contracts are typically for multiple years but are subject to government
funding contingencies and cancellation for convenience clauses. Although our non-government
contracts create a short-term exclusive relationship with the lister, typically this exclusivity
relates only to the specific auction event and expires during the term of the energy contract.
Accordingly, we do not have ongoing commitments from these listers to purchase any of their
incremental energy or environmental commodity requirements utilizing our auction platform, and they
are not prohibited from using competing brokerage services. The loss of any of these key listers
will negatively impact our revenue, particularly in the absence of our ability to attract
additional listers to use our service.
We depend on our channel partners to establish and develop certain of our relationships with
listers and the loss of certain channel partners could result in the loss of certain key listers. |
We rely on our channel partners to establish certain of our relationships with listers. Our
ability to maintain our relationships with our channel partners will impact our operations and
revenue. We depend on the financial viability of our channel partners and their success in
procuring listers on our behalf. One of our channel partners was involved with identifying and
qualifying listers which entered into contracts that accounted for 16% and 24% of our revenue for
the years ended December 31, 2010 and 2009, respectively. Channel partners may be involved in
various aspects of a deal including but not limited to lead identification,
the selling process, project management, data gathering, contract negotiation, deal closing
and post-auction account management. To the extent that a channel partner ceases to do business
with us, or goes bankrupt, dissolves, or otherwise ceases to carry on business, we may lose access
to that channel partners existing client base, in which case the volume of energy traded through
the World Energy Exchange® will be adversely affected and our revenue will decline.
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Our business depends heavily on information technology systems the interruption or
unavailability of which could materially damage our operations. |
The satisfactory performance, reliability and availability of our exchange, processing systems
and network infrastructure are critical to our reputation and our ability to attract and retain
listers and bidders to our exchanges. Our efforts to mitigate systems risks may not be adequate and
the risk of a system failure or interruption cannot be eliminated. Although we have never
experienced a material unscheduled interruption of service, any such interruption in our services
may result in an immediate, and possibly substantial, loss of revenue and damage to our reputation.
Our business also depends upon the use of the Internet as a transactions medium. Therefore, we
must remain current with Internet use and technology developments. Our current technological
architecture may not effectively or efficiently support our changing business requirements.
Any substantial increase in service activities or transaction volume on our exchanges may
require us to expand and upgrade our technology, transaction processing systems and network
infrastructure. Although we continually monitor infrastructure performance and plan for
scalability, there can be no assurance that we will be able to successfully do so, and any failure
could have a material adverse effect on our business, results of operations and financial
condition.
Breaches of online security could damage or disrupt our reputation and our ability to do business. |
To succeed, online communications must provide a secure transmission of confidential
information over public networks. Security measures that are implemented may not always prevent
security breaches that could harm our business. Although to our knowledge we have never experienced
a breach of online security, compromise of our security could harm our reputation, cause users to
lose confidence in our security systems and to not source their energy and environmental
commodities using our auction platform and also subject us to lawsuits, sanctions, fines and other
penalties. In addition, a party who is able to circumvent our security measures could
misappropriate proprietary information, cause interruptions in our operations, damage our computers
or those of our users, or otherwise damage our reputation and business. Our insurance policies may
not be adequate to reimburse us for losses caused by security breaches.
We may need to expend significant resources to protect against security breaches or to address
problems caused by breaches. These issues are likely to become more difficult and costly as our
business expands.
We depend on third-party service and technology providers and any loss or break-down in those
relationships could damage our operations significantly if we are unable to find alternative
providers. |
We depend on a number of third-party providers for web hosting, elements of our online auction
system, data management and other systems, as well as communications and networking equipment,
computer hardware and software and related support and maintenance. There can be no assurance that
any of these providers will be able to continue to provide these services without interruption and
in an efficient, cost-effective manner or that they will be able to adequately meet our needs as
our transaction volume increases. An interruption in or the cessation of such third-party services
and our inability to make alternative arrangements in a timely manner, or at all, could have a
material adverse effect on our business, financial condition and operating results. There is also
no assurance that any agreements that we have in place with such third-party providers will be
renewed, or if renewed, renewed on favorable terms.
To the extent that we expand our operations into foreign markets, additional costs and risks
associated with doing business internationally will apply. |
It is possible that we will have international operations in the future. These operations may
include the brokering of green credits in countries signatory to international treatises and the
brokering of energy in other geographic markets where we believe the demand for our services may be
strong. To the extent we enter geographic markets outside of the United States, our international
operations will be subject to a number of risks and potential costs, including:
| different regulatory requirements governing the energy marketplace; |
| difficulty in establishing, staffing and managing international operations; |
| regulatory regimes governing the Internet and auctioneering that may limit or
prevent our operations in some jurisdictions; |
| different and more stringent data privacy laws; |
| differing intellectual property laws; |
| differing contract laws that prevent the enforceability of agreements between energy
suppliers and energy consumers; |
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| the imposition of special taxes, including local taxation of our fees or of
transactions through our exchange; |
| strong local competitors; |
| currency fluctuations; and |
| political and economic instability. |
Our failure to manage the risks associated with international operations could limit the
future growth of our business and adversely affect our operating results. We may be required to
make a substantial financial investment and expend significant management efforts in connection
with any international expansion.
The application of taxes including sales taxes and other taxes could negatively affect our
business. |
The application of indirect taxes (such as sales and use tax, value added tax, goods and
services tax, business tax, and gross receipt tax) to e-commerce businesses and our users is a
complex and evolving issue. Many of the fundamental statutes and regulations that impose these
taxes were established before the growth of the Internet and e-commerce. In many cases, it is not
clear how existing statutes apply to the Internet or e-commerce. In addition, some jurisdictions
have implemented or may implement laws specifically addressing the Internet or some aspect of
e-commerce. The application of existing or future laws could have adverse effects on our business.
Several proposals have been made at the state and local level that would impose additional
taxes on the sale of goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce, and could diminish our opportunity to derive
financial benefit from our activities. The United States federal governments moratorium on states
and other local authorities imposing access or discriminatory taxes on the Internet is effective
through November 1, 2014. This moratorium, however, does not prohibit federal, state, or local
authorities from collecting taxes on our income or generally from collecting taxes that are due
under existing tax rules.
In conjunction with the Streamlined Sales Tax Project an ongoing, multi-year effort by
certain state and local governments to require collection and remittance of distant sales tax by
out-of-state sellers bills have been introduced in the U.S. Congress to overturn the Supreme
Courts Quill decision, which limits the ability of state governments to require sellers outside of
their own state to collect and remit sales taxes on goods purchased by in-state residents. An
overturning of the Quill decision would harm our users and our business.
The passage of new legislation and the imposition of additional tax requirements could
increase the costs to bidders and listers using our auction platform and, accordingly, could harm
our business. There have been, and will continue to be, ongoing costs associated with complying
with the various indirect tax requirements in the numerous states, localities or countries in which
we currently conduct or will conduct business.
U.S. federal or state legislative or regulatory reform of the current systems governing
commodities or energy may affect our ability to conduct our business profitably. |
We are currently not regulated as an energy provider, broker or commodities dealer. Changes to
the laws or regulations governing activities related to commodities trading or energy procurement,
supply, distribution or sale, or transacting in energy-related products or securities could
adversely affect the profitability of our brokerage operations or even our ability to conduct
auctions. Changes to the current regulatory framework could result in additional costs and expenses
or prohibit certain of our current business activities or future business plans. We cannot predict
the form any such legislation or rule making may take, the probability of passage, and the ultimate
effect on us.
Risks Relating to Intellectual Property
We may be unable to adequately protect our intellectual property, which could harm us and affect
our ability to compete effectively. |
We have developed proprietary software, logos, brands, service names and web sites, including
our proprietary auction platform. Although we have taken certain limited steps to protect our
proprietary intellectual property (including consulting with outside patent and trademark counsel
regarding protection of our intellectual property and implementing a program to protect our trade
secrets), we have not applied for any patents with respect to our auction platform. We have
registered the following trademarks in the United States and certain other countries: World Energy
Solutions, World Green Exchange®, and World Energy Exchange® and filed applications for these
trademarks in additional countries. We have also filed a trademark application for the mark, World
DR Exchange, in the United States. The steps we have taken to protect our intellectual property
may be inadequate to deter misappropriation of our proprietary information or deter independent
development of similar technologies by others. We may not be able to prevent the unauthorized
disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former
employees and current employees, despite the existence of confidentiality agreements and other
contractual restrictions. If our intellectual property rights are not adequately protected, we may
not be able to continue to commercialize our services. We may be unable to detect the unauthorized
use of, or take adequate steps to enforce, our intellectual property rights. In addition,
certain of our trade names may not be eligible for protection if, for example, they are
generic or in use by another party. Accordingly, we may be unable to prevent competitors from using
trade names that are confusingly similar or identical to ours.
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Our auction platform, services, technologies or usage of trade names could infringe the
intellectual property rights of others, which may lead to litigation that could itself be costly,
could result in the payment of substantial damages or royalties, and/or prevent us from using
technology that is essential to our business. |
Although no third party has threatened or alleged that our auction platform, services,
technologies or usage of trade names infringe their patents or other intellectual property rights,
we cannot assure you that we do not infringe the patents or other intellectual property rights of
third parties.
Infringement and other intellectual property claims and proceedings brought against us,
whether successful or not, could result in substantial costs and harm to our reputation. Defending
our intellectual property rights could result in the expenditure of significant financial and
managerial resources, which could adversely affect our business, financial condition, and operating
results. If our business is successful, the possibility may increase that others will assert
infringement claims against us.
We use intellectual property licensed from third parties in our operations. There is a risk
that such licenses may be terminated, which could significantly disrupt our business. In such an
event, we may be required to spend significant time and money to develop a non-infringing system or
process or license intellectual property that does not infringe upon the rights of that other party
or to obtain a license for the intellectual property from the owner. We may not be successful in
that development or any such license may not be available on commercially acceptable terms, if at
all. In addition, any litigation could be lengthy and costly and could adversely affect us even if
we are successful in such litigation.
Our corporate name and certain of our trade names may not be eligible for protection if, for
example, they are generic or in use by another party. We may be unable to prevent competitors from
using trade names or corporate names that are confusingly similar or identical to ours. Until
recently, a company that was organized under the laws of the State of Florida and whose shares were
publicly traded under the symbol WEGY also operated under the name World Energy Solutions, Inc.
Pursuant to a settlement agreement dated January 26, 2009 between us and WEGY, WEGY changed its
legal name, ceased use of the phrase World Energy Solutions, and transferred the domain name
worldenergysolutionsinc.com to us.
Risks Relating to Ownership of Our Common Stock
Because there is a limited trading history for our common stock and our stock trading volume is
low historically, you may not be able to resell your shares at or above your purchase price. |
We cannot predict the extent to which investors interests will provide an active trading
market for our common stock or whether the market price of our common stock will be volatile. The
following factors, many of which are outside of our control, could cause the market price of our
common stock to decrease significantly from recent prices:
| loss of any of the major listers or bidders using our auction platform; |
| departure of key personnel; |
| variations in our quarterly operating results; |
| announcements by our competitors of significant contracts, new transaction
capabilities, enhancements, lower fees, acquisitions, distribution partnerships, joint
ventures or capital commitments; |
| changes in governmental regulations and standards affecting the energy industry and
our products, including implementation of additional regulations relating to consumer
data privacy; |
| decreases in financial estimates by equity research analysts; |
| sales of common stock or other securities by us in the future; and |
| fluctuations in stock market prices and volumes. |
In the past, securities class action litigation often has been initiated against a company
following a period of volatility in the market price of the Companys securities. If class action
litigation is initiated against us, we will incur substantial costs and our managements attention
will be diverted from our operations. All of these factors could cause the market price of our
stock to decline, and you may lose some or all of your investment. Also due to the size of the
market capitalization of our shares, the market for our common stock may be volatile and may not
afford a high level of liquidity.
Our directors and executive officers have substantial control over us and could limit your ability
to influence the outcome of key transactions, including changes of control. |
As of December 31, 2010 our executive officers and directors and entities affiliated with
them, beneficially own, in the aggregate, approximately 26% of our outstanding common stock. In
particular, Richard Domaleski, our chief executive officer, beneficially owns approximately 20% of
our outstanding common stock. Our executive officers, directors and affiliated entities, if acting
together, would be able to control or influence significantly all matters requiring approval by our
stockholders, including the election of directors and the approval of mergers or other significant
corporate transactions. These stockholders may have
interests that differ from yours, and they may vote in a way with which you disagree and that
may be adverse to your interests. The concentration of ownership of our common stock may have the
effect of delaying, preventing or deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their common stock as part of a sale of our
company, and may affect the market price of our common stock.
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Our corporate documents and Delaware law make a takeover of our company more difficult, we have a
classified board of directors and certain provisions of our certificate of incorporation and
by-laws require a super-majority vote to amend, all of which may prevent certain changes in
control and limit the market price of our common stock. |
Our charter and by-laws contain provisions that might enable our management to resist a
takeover of our company. Our certificate of incorporation and by-laws establish a classified board
of directors such that our directors serve staggered three-year terms and do not all stand for
re-election every year. In addition, any action required or permitted to be taken by our
stockholders at an annual meeting or special meeting of stockholders may only be taken if it is
properly brought before the meeting and may not be taken by written action in lieu of a meeting,
and special meetings of the stockholders may only be called by the chairman of the Board, the Chief
Executive Officer or our Board. Further, our certificate of incorporation provides that directors
may be removed only for cause by the affirmative vote of the holders of 75% of our shares of
capital stock entitled to vote, and any vacancy on our Board, including a vacancy resulting from an
enlargement of our Board, may only be filled by vote of a majority of our directors then in office.
In addition, our by-laws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders, including proposed nominations of persons for
election to the Board. These provisions of our certificate of incorporation and by-laws, including
those setting forth the classified board, require a super-majority vote of stockholders to amend.
These provisions might discourage, delay or prevent a change in the control of our company or a
change in our management. These provisions could also discourage proxy contests and make it more
difficult for you and other stockholders to elect directors and take other corporate actions. The
existence of these provisions could limit the price that investors might be willing to pay in the
future for shares of our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We do not own any real property. We lease the business premises in the following locations for
the stated principal uses:
Approx. Floor | ||||||
Location | Space (Sq. Ft.) | Principal Use | ||||
446 Main Street, Worcester, MA (1) |
7,458 | Executive office and general administration | ||||
1215 19th Street NW, Washington, DC (2) |
400 | Branch office | ||||
10001 Woodloch Forest Drive, The Woodlands, TX (3) |
2,027 | Branch office | ||||
1005 Westlakes Drive, Berwyn, PA(4) |
292 | Branch office | ||||
4495 Bradenton Avenue, Dublin OH (5) |
4,500 | Branch office |
Note:
(1) | Pursuant to a five year lease agreement with Sovereign Bank, as
amended, expiring December 31, 2011, at a monthly rate of $12,430
including a base charge for operating expenses and taxes. |
|
(2) | Pursuant to a five-year lease agreement with Roosevelt Land, LP
expiring July 16, 2011, at a monthly rate of $5,000 including a base
charge for operating expenses and taxes. |
|
(3) | Pursuant to a five-year lease agreement with NNN Waterway Plaza,
expiring March 31, 2012, at a monthly rate escalating to $5,574
including a base charge for operating expenses and taxes. |
|
(4) | Pursuant to a one-year lease agreement, expiring March 31, 2011, at a
monthly rate of $1,206, plus certain operating expenses. |
|
(5) | Pursuant to a 62-month lease agreement with Rickert Property
Management, expiring July 31, 2012, at a monthly rate escalating to
$3,750, plus certain operating expenses and taxes. |
Item 3. Legal Proceedings
From time to time we may be a party to various legal proceedings arising in the ordinary
course of our business. Our management is not aware of any litigation outstanding, threatened or
pending as of the date hereof by or against us or our properties which we believe would be material
to our financial condition or results of operations.
Item 4. Reserved
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PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock began trading on the TSX (Symbol XWE) on November 16, 2006, and on the
NASDAQ (Symbol XWES) on April 6, 2009. Prior to trading on the TSX, there was no established
public trading market for our common stock.
Effective at the close of trading on December 31, 2010, we voluntarily delisted from the TSX.
We continue to trade on the NASDAQ Capital Market under the symbol XWES.
On March 27, 2009, we filed a previously approved Certificate of Amendment to the Companys
Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware to (i)
effect a reverse stock split of our outstanding common stock at a ratio of one-for-ten; and (ii)
decrease the number of authorized shares of our common stock from 150,000,000 to 15,000,000. As a
result of the reverse stock split, the issued and outstanding shares of common stock were reduced
on a basis of one share for every ten shares outstanding. All of our stock related information
including issued and outstanding common stock, stock options and warrants to purchase common stock,
restricted stock and loss per share for all periods presented have been restated to reflect the
reverse stock split.
The following table sets forth the high and low closing prices per share reported on the
NASDAQ for April 6, 2009 and periods subsequent to that date, and on the TSX for periods prior to
April 6, 2009 (in U.S. $s):
High | Low | |||||||
2010: |
||||||||
First quarter |
$ | 3.30 | $ | 2.48 | ||||
Second quarter |
$ | 3.45 | $ | 2.81 | ||||
Third quarter |
$ | 3.10 | $ | 2.56 | ||||
Fourth quarter |
$ | 2.97 | $ | 2.75 | ||||
2009: |
||||||||
First quarter |
$ | 3.85 | $ | 2.10 | ||||
Second quarter |
$ | 7.86 | $ | 3.16 | ||||
Third quarter |
$ | 5.20 | $ | 3.00 | ||||
Fourth quarter |
$ | 3.87 | $ | 2.72 |
On February 1, 2011, the last reported sale price of our common stock on the NASDAQ was $2.55
per share and there were 108 holders of record of our common stock.
We have never declared or paid any cash dividends on our common stock. We currently intend to
retain our future earnings, if any, to finance the expansion of our business and do not expect to
pay any dividends in the foreseeable future.
Information regarding our equity compensation plans required by this item is incorporated by
reference to the information appearing under the caption Equity Compensation Plan Information in
our definitive Proxy Statement for the 2010 Annual Meeting of Stockholders.
Recent Sales of Unregistered Securities
We issued shares of common stock pursuant to common stock purchase agreements entered into
with The Pressberg Living Trust U/A/D March 10, 2006 (for the purchase of 336,700 shares of common
stock on November 5, 2009), The Wolf Family Limited Partnership (for the purchase of 94,482 shares
of common stock on January 4, 2010), Feiler Trust Dtd 2/2/01 (for the purchase of 19,305 shares of
common stock on January 21, 2010) and Marc J. Warren (for the purchase of 38,610 shares of common
stock on January 22, 2010). Proceeds from the transaction will be used for general corporate
purposes, including supporting our growth initiatives. The sales were unregistered and were
conducted pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of
Regulation D promulgated thereunder.
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Repurchase of Equity Securities
In connection with the vesting of restricted stock granted to employees, we withheld shares
with value equivalent to employees minimum statutory obligations for the applicable income and
other employment taxes. A summary of the shares withheld to satisfy employee tax withholding
obligations for the three months ended December 31, 2010 is as follows:
Total Number of | Maximum | |||||||||||||||
Total | Shares Purchased | Number of Shares | ||||||||||||||
Number of | Average | As Part of Publicly | That May Yet Be | |||||||||||||
Shares | Price Paid | Announced Plans | Purchased Under | |||||||||||||
Period | Purchased | Per Share | Or Programs | The Plan | ||||||||||||
10/01/10 10/31/10 |
203 | $ | 3.00 | | | |||||||||||
11/01/10 11/30/10 |
72 | $ | 2.95 | | | |||||||||||
12/01/10 12/31/10 |
1,098 | $ | 2.87 | | | |||||||||||
Total |
1,373 | $ | 2.89 | | | |||||||||||
Item 6. Selected Consolidated Financial Data
The following table summarizes our consolidated financial data for the periods presented. You
should read the following financial information together with the information under Managements
Discussion and Analysis of Financial Condition and Results of Operations and our consolidated
financial statements and the notes to those consolidated financial statements appearing elsewhere
in this annual report. The selected consolidated statements of operations data for the fiscal years
ended December 31, 2010, 2009 and 2008, and the selected consolidated balance sheet data as of
December 31, 2010 and 2009 are derived from the audited consolidated financial statements, which
are included elsewhere in this document. The selected consolidated statements of operations data
for the years ended December 31, 2007 and 2006, and the consolidated balance sheet data at December
31, 2008, 2007 and 2006 are derived from our audited consolidated financial statements not included
in this document. Historical results are not necessarily indicative of the results to be expected
in future periods.
For the Years Ended December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Consolidated Statement of Operations
Data: |
||||||||||||||||||||
Revenue |
$ | 17,984,662 | $ | 14,618,275 | $ | 12,444,692 | $ | 9,188,265 | $ | 5,763,098 | ||||||||||
Cost of revenue |
3,715,869 | 3,709,957 | 4,552,215 | 2,874,678 | 1,166,426 | |||||||||||||||
Gross profit |
14,268,793 | 10,908,318 | 7,892,477 | 6,313,587 | 4,596,672 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||
Sales and marketing |
9,483,350 | 9,714,900 | 10,057,361 | 8,598,256 | 3,227,263 | |||||||||||||||
General and administrative |
4,893,212 | 3,520,886 | 4,669,807 | 5,858,810 | 1,862,450 | |||||||||||||||
Total operating expenses |
14,376,562 | 13,235,786 | 14,727,168 | 14,457,066 | 5,089,713 | |||||||||||||||
Operating loss |
(107,769 | ) | (2,327,468 | ) | (6,834,691 | ) | (8,143,479 | ) | (493,041 | ) | ||||||||||
Other income (expense), net |
8,682 | (6,051 | ) | 39,531 | 563,294 | (312,280 | ) | |||||||||||||
Loss before income taxes |
(99,087 | ) | (2,333,519 | ) | (6,795,160 | ) | (7,580,185 | ) | (805,321 | ) | ||||||||||
Income tax (expense) benefit |
| | | (1,061,720 | ) | 304,228 | ||||||||||||||
Net loss |
(99,087 | ) | (2,333,519 | ) | (6,795,160 | ) | (8,641,905 | ) | (501,093 | ) | ||||||||||
Accretion of preferred stock issuance
costs |
| | | | (6,299 | ) | ||||||||||||||
Net loss available to common
stockholders |
$ | (99,087 | ) | $ | (2,333,519 | ) | $ | (6,795,160 | ) | $ | (8,641,905 | ) | $ | (507,392 | ) | |||||
Net loss available to common
stockholders per share: |
||||||||||||||||||||
Basic and diluted |
$ | (0.01 | ) | $ | (0.27 | ) | $ | (0.82 | ) | $ | (1.08 | ) | $ | (0.11 | ) | |||||
Weighted average shares outstanding
Basic and diluted: |
9,067,834 | 8,512,060 | 8,310,315 | 7,979,359 | 4,557,648 | |||||||||||||||
As of December 31, | ||||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 3,559,288 | $ | 2,046,909 | $ | 1,731,411 | $ | 7,001,884 | $ | 17,483,886 | ||||||||||
Working capital |
3,399,147 | 1,548,986 | 742,478 | 5,323,622 | 16,639,898 | |||||||||||||||
Total assets |
14,726,794 | 13,894,125 | 14,776,640 | 20,800,565 | 20,791,381 | |||||||||||||||
Long-term liabilities |
1,205 | 16,003 | 3,737 | 46,222 | 87,844 | |||||||||||||||
Accumulated deficit |
(22,081,038 | ) | (21,981,951 | ) | (19,648,432 | ) | (12,853,272 | ) | (4,211,367 | ) | ||||||||||
Total stockholders equity |
$ | 11,212,012 | $ | 10,258,142 | $ | 11,009,131 | $ | 16,859,799 | $ | 17,945,002 |
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results
of operations together with our consolidated financial statements and related notes appearing
elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion
and analysis includes forward-looking statements that involve risks and uncertainties. You should
review the Risk Factors section of this Annual Report for a discussion of important factors that
could cause actual results to differ materially from the results described in or implied by the
forward-looking statements contained in the following discussion and analysis.
Overview
World Energy is an energy management services company that applies a combination of people,
process and technology to take the complexity out of energy management and turn it into bottom line
impact for the businesses, institutions and governments we serve. We believe that energy costs can
be expressed in a simple equation E=P*Q-i. Energy costs are a function of commodity price times
quantity used minus any incentives realized. We help customers optimize this equation by applying
the Seven Levers of Energy Management Planning, Sourcing, Risk Management, Efficiency,
Sustainability, Incentives and Monitoring.
These Seven Levers are supported by state of the art technology developed or licensed by the
Company. We have developed three online auction platforms, the World Energy Exchange®, the World
Green Exchange® and the World DR Exchange. On the World Energy Exchange®, retail energy consumers
(commercial, industrial and governmental) and wholesale energy participants (utilities, electricity
retailers, and intermediaries) in North America (listers) are able to negotiate for the purchase
or sale of electricity, natural gas and renewable energy resources from competing energy suppliers
(bidders) which have agreed to participate on our auction platform. The World Energy Exchange® is
supplemented with information about market rules, pricing trends, energy consumer usage and load
profiles. Our energy management staff uses this platform to conduct auctions, analyze results,
guide energy consumers through contracting, and track their contracts, sites, accounts and usage
history. The team also uses the exchanges sophisticated monitoring, triggering and messaging
tools to develop, support and implement comprehensive risk management strategies for our more
sophisticated clients.
In 2007, we created the World Green Exchange® to support companys sustainability goals as
well as provide a marketplace for project developers to sell their environmental credits. On the
World Green Exchange®, bidders and listers negotiate for the purchase or sale of environmental
commodities such as RECs, VERs, CERs and RGGI allowances.
In January 2010, we launched the World DR Exchange to create an efficient, transparent and
liquid marketplace to maximize incentive payments available to customers and provide a ready source
of curtailment ready customers for the industrys CSPs. The World DR Exchange creates the
industrys first online marketplace for demand response, enabling customers to source DR more
efficiently and effectively bringing together curtailment service providers and energy consumers in
highly-structured auction events designed to yield price transparency, heighten competition, and
maximize the energy consumers share of demand response revenues.
In the second half of 2010, the Company made a strategic investment in an emerging company
that develops software that can determine the energy efficiency of buildings and present retrofit
options ordered by return on investment. The Company intends to roll this solution out as a
cornerstone of an energy efficiency practice.
On March 27, 2009, we filed a previously approved Certificate of Amendment to the Companys
Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware to (i)
effect a reverse stock split of its outstanding common stock at a ratio of one-for-ten; and (ii)
decrease the number of authorized shares of its common stock from 150,000,000 to 15,000,000. As a
result of the reverse stock split, the issued and outstanding shares of common stock were reduced
on a basis of one share for every ten shares outstanding. All of our stock related information
including issued and outstanding common stock, stock options and warrants to purchase common stock,
restricted stock and loss per share for all periods presented have been restated to reflect the
reverse stock split.
On October 30, 2009, we entered into an agreement with Bond Capital, Ltd. (Bond), a
strategic partner of ours, for the purchase of up to $2.5 million of our common stock. Pursuant to
the agreement, a purchasing entity, an affiliate of Bond, acquired $1.0 million of our common stock
at $2.97 per share on November 6, 2009. We agreed to offer an additional $1.5 million in Company
shares on the same terms to Bond or its designee, with the price to be determined at the time of
investment, through January 15, 2010. In the first quarter of 2010, affiliates of Bond purchased an
additional $400,000 of our common stock at an average price of $2.63 per share bringing the amount
raised under the financing agreement to $1.3 million.
In April 2010, we filed an S-3 registration statement with the Securities and Exchange
Commission, or SEC, using a shelf registration, or continuous offering, process. Under this shelf
registration process, we may, from time to time, issue and sell any combination of preferred stock,
common stock or warrants, either separately or in units, in one or more offerings with a maximum
aggregate offering price of $20,000,000, including the U.S. dollar equivalent if the public
offering of any such securities is
denominated in one or more foreign currencies, foreign currency units or composite currencies.
We intend to use the net proceeds from the sale of the securities under this shelf registration, if
any, for general corporate purposes.
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At our 2010 Annual Meeting of Stockholders held on May 20, 2010, shareholders approved an
amendment to our Certificate of Incorporation to increase the number of authorized shares of common
stock from 15,000,000 to 30,000,000 effective as of May 21, 2010.
We have significantly grown our employee base from 20 at our initial public offering (IPO)
in November 2006 to a high of 66 during the second quarter of 2008. This planned investment allowed
us to execute against our strategic initiatives as outlined in our IPO and has resulted in revenue
growth of over 200% to $18 million in 2010. We aggressively invested in all of our product lines
including building out a direct sales force, expanding our channel partner network, acquiring one
of our largest competitors, and building our wholesale and green teams. As we made these
infrastructure investments in advance of revenue growth, our operating losses increased
significantly in 2007 and 2008. These investments began to generate incremental revenue in the
fourth quarter of 2007 and the scalability inherent in our business model returned to our pre-IPO
levels resulting in gross margins of over 80% and operating profits in the third and fourth quarter
of 2010. We have generated positive adjusted EBITDA in six of the last eight quarters including
each of the last five quarters. Positive adjusted EBITDA was $2.0 million for the year ended
December 31, 2010 and break even for 2009. We believe that our fixed operating cost structure will
remain near current levels in the short-term. However, a portion of our total operating cost
structure, including channel partner and internal commission costs, is variable in nature and will
increase as revenue levels increase. We will continue to be opportunistic and invest in our current
product lines as well as new product offerings both within our existing and new product lines.
Operations
Revenue
Retail Electricity Transactions
We earn a monthly commission on energy sales contracted through our online auction platform
from each bidder or energy supplier based on the energy usage transacted between the bidder and
lister or energy consumer. Our commissions are not based on the retail price for electricity;
rather on the amount of energy consumed. Commissions are based on the energy usage transacted
between the energy supplier and energy consumer multiplied by our contractual commission rate. Our
contractual commission rate is negotiated with the energy consumer on a procurement-by-procurement
basis based on energy consumer specific circumstances, including the size of auction, the effort
required to organize and run the respective auction and competitive factors, among others. Once the
contractual commission is agreed to with the energy consumer, all energy suppliers participating in
the auction agree to that rate. That commission rate remains fixed for the duration of the
contractual term regardless of energy usage. Energy consumers provide us with a letter of
authorization to request their usage history from the local utility. We then use this data to
compile a usage profile for that energy consumer that will become the basis for the auction. This
data may also be used to estimate revenue on a going forward basis, as noted below.
Historically, our revenue and operating results have varied from quarter-to-quarter and are
expected to continue to fluctuate in the future. These fluctuations are primarily due to the buying
patterns of our wholesale and natural gas customers, which tend to have large, seasonal purchases
during the fourth and first quarters and electricity usage having higher demand in our second and
third quarters. In addition, the activity levels on the World Energy Exchange® can fluctuate due to
a number of factors, including market prices, weather conditions, energy consumers credit ratings,
the ability of suppliers to obtain financing in credit markets, and economic and geopolitical
events. To the extent these factors affect the purchasing decisions of energy consumers our future
results of operations may be affected.
Contracts between energy suppliers and energy consumers are signed for a variety of term
lengths, with a one year contract term being typical for commercial and industrial energy
consumers, and government contracts typically having two to three year terms. As a result of recent
commodity price fluctuations, where prices increased sharply in the first half of 2008 and then
fell dramatically in the second half of 2008 and into 2009, we saw our customers take advantage of
what they perceived as low prices and contract for multiple year terms. During this period we saw
customers in some cases contract for four, five and even six year terms. In the latter half of 2009
and into 2010 contract terms returned to one- to three- year contract lengths as tight credit
markets led to reluctance by energy suppliers to lock in longer term contracts. Our revenue has
grown over the last three years through new participants utilizing our World Energy Exchange® as
well as existing energy consumers increasing the size or frequency of their transactions on our
exchange platform.
We do not invoice our electricity energy suppliers for monthly commissions earned and,
therefore, we report a substantial portion of our receivables as unbilled. Unbilled accounts
receivable represents managements best estimate of energy provided by the energy suppliers to the
energy consumers for a specific completed time period at contracted commission rates and is made up
of two components. The first component represents energy usage for which we have received actual
data from the supplier and/or the utility, but for which payment has not been received at the
balance sheet date. The majority of our contractual relationships with energy suppliers require
them to supply actual usage data to us on a monthly basis and remit payment to us based on that
usage. The second component represents energy usage for which we have not received actual data, but
for which we
have estimated usage. Commissions paid in advance by certain bidders are recorded as deferred
revenue and amortized to commission revenue on a monthly basis on the energy exchanged that month.
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Retail Natural Gas Transactions
There are two primary fee components to our retail natural gas services: transaction fees and
management fees. Transaction fees are billed to and paid by the energy supplier awarded business
on the platform. These fees are established prior to award and are the same for each supplier. For
the majority of our natural gas transactions, we bill the supplier upon the conclusion of the
transaction based on the estimated energy volume transacted for the entire award term multiplied by
the transaction fee. Management fees are paid by our energy consumers and are generally billed on a
monthly basis for services rendered based on terms and conditions included in contractual
arrangements. While substantially all of our retail natural gas transactions are accounted for in
accordance with this policy, a certain percentage is accounted for as the natural gas is consumed
by the energy consumer and recognized as revenue in accordance with the retail electricity
transaction revenue recognition methodology described above.
Demand Response Transactions
Demand response transaction fees are recognized when we have received confirmation from the
CSP that the energy consumer has performed under the applicable RTO or ISO program requirements.
The energy consumer is either called to perform during an actual curtailment event or is required
to demonstrate its ability to perform in a test event during the performance period. For the PJM,
the performance period is June through September in a calendar year. Test results are submitted to
PJM by the CSPs and we receive confirmation of the energy consumers performance in the fourth
quarter. CSPs typically pay us ratably on a quarterly basis throughout the demand response fiscal
(June to May) year. As a result, a portion of the revenue we recognize is reflected as unbilled
accounts receivable.
Wholesale Transactions
Wholesale transaction fees are invoiced upon the conclusion of the auction based on a fixed
fee. These revenues are not tied to future energy usage and are recognized upon the completion of
the online auction. For reverse auctions where our customers bid for a consumers business, the
fees are paid by the bidder. For forward auctions where a lister is selling energy products, the
fees are typically paid by the lister. While substantially all wholesale transactions are accounted
for in this fashion, a small percentage of our wholesale revenue is accounted for as electricity or
gas is delivered similar to the retail electricity transaction methodology described above.
Environmental Commodity Transactions
Environmental commodity transaction fees are accounted for utilizing two primary methods. For
regulated allowance programs like RGGI, fees are paid by the lister and are recognized quarterly as
revenue as auctions are completed and approved. For all other environmental commodity transactions
both the lister and the bidder pay the transaction fee and revenue is recognized upon the
consummation of the underlying transaction as credits are delivered by the lister and payment is
made by the bidder.
Cost of revenue
Cost of revenue consists primarily of:
| salaries, employee benefits and share-based compensation associated with our auction
management services, which are directly related to the development and production of the
online auction and maintenance of market-related data on our auction platform and monthly
management fees (our supply desk function); |
| amortization of capitalized costs associated with our auction platform and acquired
developed technology; and |
| rent, depreciation and other related overhead and facility-related costs. |
Sales and marketing
Sales and marketing expenses consist primarily of:
| salaries, employee benefits and share-based compensation related to sales and marketing
personnel; |
| third party commission expenses to our channel partners; |
| travel and related expenses; |
| amortization related to customer relationships and contracts; |
||
| rent, depreciation and other related overhead and facility-related costs; and |
| general marketing costs such as trade shows, marketing materials and outsourced services. |
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General and administrative
General and administrative expenses consist primarily of:
| salaries, employee benefits and share-based compensation related to general and
administrative personnel; |
| accounting, legal, and other professional fees; and |
| rent, depreciation and other related overhead and facility-related costs. |
Interest income (expense), net
Interest expense, net consists primarily of:
| interest income earned on cash held in the bank and notes receivable; and |
| interest expense related to capital leases. |
Income tax expense (benefit)
We did not record an income tax benefit for the years ended December 31, 2010, 2009 and 2008
as we provided a full valuation allowance against our deferred tax assets due to uncertainty
regarding the realization of those deferred tax assets, primarily net operating loss carryforwards,
in the future.
Results of Operations
The following table sets forth certain items as a percent of revenue for the periods
presented:
For the Years Ended | ||||||||||||
December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenue |
100 | % | 100 | % | 100 | % | ||||||
Cost of revenue |
21 | 25 | 37 | |||||||||
Gross profit |
79 | 75 | 63 | |||||||||
Operating expenses: |
||||||||||||
Sales and marketing |
53 | 67 | 81 | |||||||||
General and administrative |
27 | 24 | 38 | |||||||||
Operating loss |
(1 | ) | (16 | ) | (56 | ) | ||||||
Interest income (expense), net |
| | | |||||||||
Income tax expense (benefit) |
| | | |||||||||
Net loss |
(1 | )% | (16 | )% | (56 | )% | ||||||
Comparison of the Years Ended December 31, 2010 and 2009
Revenue
For the Years Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2010 | 2009 | Increase | ||||||||||||||
Revenue |
$ | 17,984,662 | $ | 14,618,275 | $ | 3,366,387 | 23 | % |
Revenue increased 23% primarily due to increased auction activity in our retail product line
and, to a lesser extent, our wholesale product line. These increases were partially offset by a
decline in our environmental commodity product line. The retail product line increase reflects new
customer wins with a concentration in the Ohio electricity market as price caps expired during the
year opening up the territory to competitive supply, increased gas transaction activity and further
growth in our channel partner network. Our environmental commodities product line decreased
slightly as continued execution under our RGGI contract was offset by a decline in transaction
volume due to the uncertain regulatory environment.
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Table of Contents
Cost of revenue
For the Years Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
$ | % of Revenue | $ | % of Revenue | Increase | ||||||||||||||||||||
Cost of revenue |
$ | 3,715,869 | 21 | % | $ | 3,709,957 | 25 | % | $ | 5,912 | | % |
Cost of revenue was relatively flat compared to the year ended December 31, 2009 as increases
in commission costs were substantially offset by decreases in payroll and amortization of
capitalized software. Commission costs increased due to the 23% increase in revenue. Payroll costs
decreased as we continued to leverage our process and technology to drive higher volumes over our
exchanges. Cost of revenue as a percent of revenue decreased 4% as revenue increased with no
corresponding increase in costs.
Operating expenses
For the Years Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
$ | % of Revenue | $ | % of Revenue | Increase / (Decrease) | ||||||||||||||||||||
Sales and marketing |
$ | 9,483,350 | 53 | % | $ | 9,714,900 | 67 | % | $ | (231,550 | ) | (2 | %) | |||||||||||
General and administrative |
4,893,212 | 27 | 3,520,886 | 24 | 1,372,326 | 39 | ||||||||||||||||||
Total operating expenses |
$ | 14,376,562 | 80 | % | $ | 13,235,786 | 91 | % | $ | 1,140,776 | 9 | % |
The 2% decrease in sales and marketing expense for the year ended December 31, 2010 as
compared to the same period in 2009 primarily reflects general decreases in compensation and travel
costs substantially offset by increases in marketing and internal and third party commission costs.
Compensation and travel costs decreased primarily due to adjustments we made in our organizational
structure during the third quarter of 2009 as we realigned our staffing as business and economic
conditions evolved. Internal and third party commission costs increased due to the 23% increase in
revenue and marketing costs increased due to increased trade show and marketing activities. Sales
and marketing expense as a percentage of revenue decreased 14% primarily due to the 23% increase in
revenue and, to a lesser extent, the cost decreases noted above.
The 39% increase in general and administrative expenses related to the year ended December 31,
2010 as compared to the same period in 2009 was primarily due to increases in compensation,
investor relations and other costs. Compensation costs increased due to an increase in variable
compensation resulting from our record performance, the reclassification of certain employees and
the addition of certain staff in our accounting, information technology and human resources
departments. In addition, we increased our investor relations efforts in the U.S. to capitalize on
our 2009 NASDAQ listing and increased our allowance for doubtful accounts. General and
administrative expenses as a percent of revenue increased 3% due to the cost increases noted above
substantially offset by the 23% increase in revenue.
Interest income (expense), net
Interest expense was approximately $2,000 for the year ended December 31, 2010 and $7,000 for
the year ended December 31, 2009. Interest income was approximately $11,000 for the year ended
December 31, 2010 and $1,000 for the year ended December 31, 2009. The decrease in interest
expense is due to certain capital leases maturing during the year. The increase in interest income
was primarily due to interest accrued on a note receivable related to funding of an energy
efficiency and management software and services company in 2010.
Income tax expense
We did not record an income tax benefit for the years ended December 31, 2010 and 2009 as we
provided a full valuation allowance against our deferred tax assets due to uncertainty regarding
the realization of those deferred tax assets, primarily net operating loss carryforwards, in the
future.
Net loss
We reported a net loss for the year ended December 31, 2010 of approximately $0.1 million as
compared to a net loss of approximately $2.3 million for the year ended December 31, 2009. The 96%
decrease in net loss is primarily due to the 23% increase in revenue partially offset by increases
in internal and third party commissions as well as increased investor relations costs.
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Table of Contents
Comparison of the Years Ended December 31, 2009 and 2008
Revenue
For the Years Ended | ||||||||||||||||
December 31, | ||||||||||||||||
2009 | 2008 | Increase | ||||||||||||||
Revenue |
$ | 14,618,275 | $ | 12,444,692 | $ | 2,173,583 | 17 | % |
Revenue increased 17% due to increased auction activity in all of our product lines. The
retail product line increase reflects new customer wins with a concentration in the Ohio
electricity market as price caps expired during the year opening up the territory to competitive
supply. Revenue from our wholesale product line increased over 50% as we grew our customer base 38%
to 54 at December 31, 2009 and both new and existing customers became revenue contributors. Our
environmental commodities product line nearly doubled reflecting a full year of RGGI auctions in
2009. Partially offsetting the retail and green product line increases was a 15% decrease in
management fee revenue resulting from the transitioning of the former EnergyGateway customer base
to a performance-based, transaction fee model.
Cost of revenue
For the Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
$ | % of Revenue | $ | % of Revenue | Decrease | ||||||||||||||||||||
Cost of revenue |
$ | 3,709,957 | 25 | % | $ | 4,552,215 | 37 | % | $ | (842,258 | ) | (19 | %) |
The 19% decrease in cost of revenue related to the year ended December 31, 2009 as compared to
the same period in 2008 was substantially due to decreases in employee costs and, to a lesser
extent, travel costs. At December 31, 2009, we had 21 supply desk employees versus 25 in the same
period last year as we realized operating efficiencies from the integration of the EnergyGateway
operation and aligned our cost structure as business and economic conditions evolved. Cost of
revenue as a percent of revenue decreased 12% due to the cost decreases noted above and the 17%
increase in revenue.
Operating expenses
For the Years Ended December 31, | ||||||||||||||||||||||||
2009 | 2008 | |||||||||||||||||||||||
$ | % of Revenue | $ | % of Revenue | Decrease | ||||||||||||||||||||
Sales and marketing |
$ | 9,714,900 | 67 | % | $ | 10,057,361 | 81 | % | $ | (342,461 | ) | (3 | %) | |||||||||||
General and administrative |
3,520,886 | 24 | 4,669,807 | 38 | (1,148,921 | ) | (25 | ) | ||||||||||||||||
Total operating expenses |
$ | 13,235,786 | 91 | % | $ | 14,727,168 | 119 | % | $ | (1,491,382 | ) | (10 | %) |
The 3% decrease in sales and marketing expense for the year ended December 31, 2009 as
compared to the same period in 2008 primarily reflects general decreases in compensation,
promotional and travel costs substantially offset by increases in third party commission costs.
Compensation and travel costs decreased primarily due to the operating efficiencies created by the
integration of the EnergyGateway operation and adjustments to our organizational structure as we
realigned our staffing as business and economic conditions evolved in the latter half of 2008.
Promotional costs decreased as a result of transferring certain functions in-house. Third party
commission costs increased 12% substantially due to the 17% increase in revenue. Sales and
marketing expense as a percentage of revenue decreased 14% primarily due to the 17% increase in
revenue and, to a lesser extent, the cost decreases noted above.
The 25% decrease in general and administrative expenses related to the year ended December 31,
2009 as compared to the same period in 2008 was primarily due to decreases in compliance and legal
costs, a gain related to a settlement from early termination of a customer contract in 2007 and, to
a lesser extent, a decrease in software expense. These decreases were partially offset by an
increase in consulting costs. General and administrative expenses as a percent of revenue decreased
14% due to the cost decreases noted above and the 17% increase in revenue.
Interest income (expense), net
Interest expense was approximately $7,000 for the year ended December 31, 2009 and $6,000 for
the year ended December 31, 2008. Interest income was approximately $1,000 for the year ended
December 31, 2009 and $45,000 for the year ended December 31, 2008. The decrease in interest
income was primarily due to a lower average cash balance in 2009 as compared to 2008, as we
utilized the proceeds from our initial public offering to pursue our strategic initiatives.
Income tax expense
We did not record an income tax benefit for the years ended December 31, 2009 and 2008 as we
provided a full valuation allowance against our deferred tax assets due to uncertainty regarding
the realization of those deferred tax assets, primarily net operating loss carryforwards, in the
future.
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Net loss
We reported a net loss for the year ended December 31, 2009 of approximately $2.3 million as
compared to a net loss of approximately $6.8 million for the year ended December 31, 2008. The 66%
decrease in net loss is primarily due to decreased operating expenses and the 17% increase in
revenue.
Liquidity and Capital Resources
At December 31, 2010, we had no commitments for material capital expenditures. We have
identified and executed against a number of strategic initiatives that we believe are key
components of our future growth, including: expanding our community of listers, bidders and
channel partners on our exchanges; strengthening and extending our long-term relationships with
government agencies; entering into other energy-related markets including wholesale transactions
with utilities, the emerging environmental commodities markets, and most recently our entry into
the demand response market; making strategic acquisitions; and growing our direct and inside sales
force. As of December 31, 2010, our workforce numbered 60 reflecting a net increase of six from the
54 we employed at December 31, 2009. At December 31, 2010, we had 23 professionals in our sales and
marketing and account management groups, 24 in our supply desk group and 13 in our general and
administrative group. While we will continue to adjust our workforce as the need and/or
opportunity arises, we believe that our operating costs will remain at current levels in the
short-term.
Comparison of December 31, 2010 to December 31, 2009
December 31, | December 31, | |||||||||||||||
2010 | 2009 | Increase/(Decrease) | ||||||||||||||
Cash and cash equivalents |
$ | 3,559,288 | $ | 2,046,909 | $ | 1,512,379 | 74 | % | ||||||||
Trade accounts receivable |
3,124,328 | 2,909,024 | 215,304 | 7 | ||||||||||||
Days sales outstanding |
58 | 76 | (18 | ) | (24 | ) | ||||||||||
Working capital |
3,399,147 | 1,548,986 | 1,850,161 | 119 | ||||||||||||
Stockholders equity |
11,212,012 | 10,258,142 | 953,870 | 9 |
Cash and cash equivalents increased 74% primarily due to positive adjusted EBITDA of $2.0
million and net proceeds from the sale of common stock of $0.4 million. These increases were
partially offset by $0.5 million of cash used in investing activities primarily related to the
funding of an energy efficiency and management software and services company. Trade accounts
receivable increased 7% due to the 40% increase in revenue during the three months ended December
31, 2010 compared to the three months ended December 31, 2009. Days sales outstanding (representing
accounts receivable outstanding at December 31, 2010 divided by the average sales per day during
the current quarter) improved by 18 days as compared to the previous year. Revenue from bidders
representing 10% or more of our revenue increased to 22% from two bidders during the year ended
December 31, 2010, from 15% from a different bidder during the same period in 2009.
Working capital (consisting of current assets less current liabilities) increased 119%,
primarily due to the $1.5 million increase in cash and cash equivalents. Stockholders equity
increased 9% for the year ended December 31, 2010 due to share-based compensation of $0.7 million
and net proceeds of $0.4 million from the sale of common stock.
Cash provided by operating activities for the year ended December 31, 2010 was $1.7 million,
an increase of $2.1 million from a negative $0.4 million in 2009 due to a $2.2 million decrease in
net loss. Cash used in investing and financing activities for the year ended December 31, 2010 was
$0.2 million primarily due to the $0.4 million funding of an energy efficiency and management
software and services company, which was substantially offset by $0.4 million in net proceeds from
the sale of common stock. Cash provided by investing and financing activities for the year ended
December 31, 2009 was approximately $0.7 million primarily due to approximately $0.9 million in net
proceeds from the sale of common stock, partially offset by repurchases of our common stock in
connection with the vesting of restricted stock granted to employees and costs incurred in software
development.
Adjusted EBITDA, representing net loss excluding share-based compensation charges,
depreciation, amortization, and net interest income (expense), for the year ended December 31, 2010
was a positive $2.0 million as compared to a negative $38,000 for the same period in the prior
year. This increase was primarily due to the $2.2 million decrease in net loss. Please refer to the
section below entitled Use of Non-GAAP Financial Measures for a reconciliation of non-GAAP
measures to the most directly comparable measure calculated and presented in accordance with
accounting principles generally accepted in the United States of America (GAAP).
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For the year ended December 31, 2010, we generated positive adjusted EBITDA of $2.0 million
and generated cash from operating activities of $1.7 million. As of December 31, 2010 we had $3.6
million in cash and cash equivalents, $3.1 million of accounts receivable and total contracted
backlog of $26.2 million representing amounts to be recognized through 2014 from completed
procurements if energy consumers use electricity at historical levels. In addition, we have a
$3,000,000 Credit Facility with SVB and have filed a shelf registration statement with the
Securities and Exchange Commission (SEC) to sell approximately $20.0 million of our securities
subject to NASDAQ and SEC limitations. As a result we believe we have adequate financial resources
to continue to execute against our strategic initiatives.
Comparison of December 31, 2009 to December 31, 2008
December 31, | December 31, | |||||||||||||||
2009 | 2008 | Increase/(Decrease) | ||||||||||||||
Cash and cash equivalents |
$ | 2,046,909 | $ | 1,731,411 | $ | 315,498 | 18 | % | ||||||||
Trade accounts receivable |
2,909,024 | 2,343,593 | 565,431 | 24 | ||||||||||||
Days sales outstanding |
76 | 62 | 14 | 23 | ||||||||||||
Working capital |
1,548,986 | 742,478 | 806,508 | 109 | ||||||||||||
Stockholders equity |
10,258,142 | 11,009,131 | (750,989 | ) | (7 | ) |
Cash and cash equivalents increased 18%, primarily due to approximately $935,000 in net
proceeds from the sale of common stock in the fourth quarter of 2009 and an increase in accrued
compensation. These increases were partially offset by an increase in trade accounts receivable,
costs incurred in software development and purchases of treasury stock. Net loss of $2.3 million
was substantially offset by non-cash expense items including depreciation, amortization and
share-based compensation of $2.3 million. Trade accounts receivable increased 24% due to the 17%
increase in revenue and as a result of days sales outstanding increasing 23%. Days sales
outstanding (representing accounts receivable outstanding at December 31, 2009 divided by the
average sales per day during the current quarter) increased 23% due to the timing of revenue
recognized within the fourth quarter of 2009 as compared to the fourth quarter of 2008. Revenue
from bidders representing greater than 10% of our revenue decreased to 15% from one bidder during
the year ended December 31, 2009, from 22% from the same bidder during the same period in 2008.
Working capital (consisting of current assets less current liabilities) increased 109%,
primarily due to an approximately $0.6 million increase in trade accounts receivable and a $0.3
million increase in cash and cash equivalents discussed above. Stockholders equity decreased 7%
primarily due to the $2.3 million net loss for the year ended December 31, 2009, substantially
offset by net proceeds of $0.9 million from the sale of common stock and share-based compensation
of $0.6 million.
Cash used in operating activities for the years ended December 31, 2009 and 2008 was
approximately $0.4 million and $4.7 million, respectively, due primarily to the pre-tax losses in
each respective period, partially offset by depreciation and amortization, share-based
compensation, and increases in trade accounts receivable. Cash provided by investing and financing
activities for the year ended December 31, 2009 was approximately $0.7 million, primarily due to
approximately $0.9 million in net proceeds from the sale of common stock, partially offset by
repurchases of our common stock in connection with the vesting of restricted stock granted to
employees and costs incurred in software development. Cash used in investing and financing
activities for the year ended December 31, 2008 was approximately $0.5 million due primarily to
costs incurred in software development.
Contractual Obligations and Other Commercial Commitments
The table below summarizes our gross contractual obligations and other commercial commitments
as of December 31, 2010. As of December 31, 2010, we did not have any purchase obligations other
than our capital and operating leases.
2013 and | ||||||||||||||||
Contractual Obligations | 2011 | 2012 | Thereafter | Total | ||||||||||||
Capital leases |
$ | 15,327 | $ | 1,211 | $ | | $ | 16,538 | ||||||||
Operating leases |
294,843 | 42,973 | | 337,816 | ||||||||||||
Total contractual obligations |
$ | 310,170 | $ | 44,184 | $ | | $ | 354,354 | ||||||||
Use of Non-GAAP Financial Measures
In this Annual Report on Form 10-K, we provide certain non-GAAP financial measures. A
non-GAAP financial measure refers to a numerical financial measure that excludes (or includes)
amounts that are included in (or excluded from) the most directly comparable financial measure
calculated and presented in accordance with GAAP in our financial statements. In this Annual Report
on Form 10-K, we provide adjusted EBITDA as additional information relating to our operating
results. This non-GAAP measure excludes expenses related to share-based compensation, depreciation
related to our fixed assets, amortization expense related to acquisition-related assets and
capitalized software, interest expense on capital leases and interest income on invested funds and
notes receivable. Management uses this non-GAAP measure for internal reporting and bank reporting
purposes. We have provided this non-GAAP financial measure in addition to GAAP financial results
because we believe that this
non-GAAP financial measure provides useful information to certain investors and financial
analysts in assessing our operating performance due to the following factors:
| We believe that the presentation of a non-GAAP measure that adjusts for the impact of
share-based compensation expenses, depreciation of fixed assets, amortization expense related
to acquisition-related assets and capitalized software, and interest expense on capital
leases provides investors and financial analysts with a consistent basis for comparison
across accounting periods and, therefore, is useful to investors and financial analysts in
helping them to better understand our operating results and underlying operational trends; |
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| Although share-based compensation is an important aspect of the compensation of our
employees and executives, share-based compensation expense is generally fixed at the time of
grant, then amortized over a period of several years after the grant of the share-based
instrument, and generally cannot be changed or influenced by management after the grant; |
| We do not acquire intangible assets on a predictable cycle. Our intangible assets relate
solely to business acquisitions. Amortization costs are fixed at the time of an acquisition,
are then amortized over a period of several years after the acquisition and generally cannot
be changed or influenced by management after the acquisition; |
| We do not regularly incur capitalized software costs. Our capitalized software costs relate
primarily to the build-out of our exchanges. Amortization costs are fixed at the time the
costs are incurred and are then amortized over a period of several years and generally cannot
be changed or influenced by management after the initial costs are incurred; |
| We do not regularly invest in fixed assets. Our fixed assets relate primarily to computer
and office equipment and furniture and fixtures. Depreciation costs are fixed at the time of
purchase and are then depreciated over several years and generally cannot be changed or
influenced by management after the purchase; and |
| We do not regularly enter into capital leases. Our capital leases relate primarily to
computer and office equipment. Interest expense is fixed at the time of purchase and recorded
over the life of the lease and generally cannot be changed or influenced by management after
the purchase. |
| We do not regularly earn interest on our cash accounts and notes receivable. Our cash is
invested in U.S. Treasury funds and has not yielded material returns to date and these
returns generally cannot be changed or influenced by management. |
Pursuant to the requirements of the SEC, we have provided below a reconciliation of the
non-GAAP financial measure used to the most directly comparable financial measure prepared in
accordance with GAAP. This non-GAAP financial measure is not prepared in accordance with GAAP. This
measure may differ from the 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. The
presentation of this additional information is not meant to be considered in isolation or as a
substitute for net loss prepared in accordance with GAAP.
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
GAAP net loss |
$ | (99,087 | ) | $ | (2,333,519 | ) | $ | (6,795,160 | ) | |||
Add: Interest (income) expense, net |
(8,682 | ) | 6,051 | (39,531 | ) | |||||||
Add: Share-based compensation |
671,323 | 633,285 | 1,006,560 | |||||||||
Add: Amortization |
1,294,491 | 1,509,573 | 1,606,625 | |||||||||
Add: Depreciation |
139,612 | 146,322 | 149,443 | |||||||||
Non-GAAP adjusted EBITDA |
$ | 1,997,657 | $ | (38,288 | ) | $ | (4,072,063 | ) | ||||
Critical Accounting Policies
The preparation of financial statements in accordance with in conformity with GAAP requires us
to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Accordingly, actual results
could differ from these estimates.
The most judgmental estimates affecting our consolidated financial statements are those
relating to revenue recognition and the estimate of actual energy delivered from the bidder to the
lister of such energy; software development costs; share-based compensation; the valuation of
intangible assets and goodwill; impairment of long-lived assets; and estimates of future taxable
income as it relates to the realization of our net deferred tax assets. We regularly evaluate our
estimates and assumptions based upon historical experience and various other factors that we
believe to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. To the extent actual results differ from those estimates our future results of
operations may be affected. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated financial
statements. Refer to Note 2 of our consolidated financial statements filed herewith for a
description of our
accounting policies.
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Revenue Recognition
Retail Electricity Transactions
We earn a monthly commission on energy sales contracted through our online auction platform
from each bidder or energy supplier based on the energy usage transacted between the bidder or
energy supplier and lister or energy consumer. Our commissions are not based on the retail price
for electricity; rather on the amount of energy consumed. Commissions are based on the energy usage
transacted between the energy supplier and energy consumer multiplied by our contractual commission
rate. Revenue from commissions is recognized as earned on a monthly basis over the life of each
contract as energy is consumed, provided there is persuasive evidence of an arrangement, the sales
price is fixed or determinable, collection of the related receivable is reasonably assured, and
customer acceptance criteria, if any, has been successfully demonstrated.
We record brokerage commissions based on actual usage data obtained from the energy supplier
for that accounting period, or to the extent actual usage data is not available, based on the
estimated amount of electricity and gas delivered to the energy consumers for that accounting
period. We develop our estimates on a quarterly basis based on the following criteria:
| Payments received prior to the issuance of the financial statements; |
| Usage updates from energy suppliers; |
| Usage data from utilities; |
| Comparable historical usage data; and |
| Historical variances to previous estimates. |
To the extent usage data cannot be obtained, we estimate revenue as follows:
| Historical usage data obtained from the energy consumer in conjunction with the execution
of the auction; |
| Geographic/utility usage patterns based on actual data received; |
| Analysis of prior year usage patterns; and |
| Specific review of individual energy supplier/location accounts. |
In addition, we analyze this estimated data based on overall industry trends including
prevailing weather and usage data. Once the actual data is received, we adjust the estimated
accounts receivable and revenue to the actual total amount in the period during which the payment
is received. Based on managements current capacity to obtain actual energy usage, we currently
estimate four to six weeks of revenue at the end of our accounting period. Differences between
estimated and actual revenue have been within managements expectations and have not been material
to date.
We do not invoice our electricity energy suppliers for monthly commissions earned and,
therefore, we report a substantial portion of our receivables as unbilled. Unbilled accounts
receivable represents managements best estimate of energy provided by the energy suppliers to the
energy consumers for a specific completed time period at contracted commission rates and is made up
of two components. The first component represents energy usage for which we have received actual
data from the supplier and/or the utility but for which payment has not been received at the
balance sheet date. The majority of our contractual relationships with energy suppliers require
them to supply actual usage data to us on a monthly basis and remit payment to us based on that
usage. The second component represents energy usage for which we have not received actual data, but
for which we have estimated usage. Commissions paid in advance by certain energy suppliers are
recorded as deferred revenue and amortized to commission revenue on a monthly basis on the energy
exchanged that month.
Retail Natural Gas Transactions
There are two primary fee components to our retail natural gas services: transaction fees and
management fees. Transaction fees are billed to and paid by the energy supplier awarded business
on the platform. These fees are established prior to award and are the same for each supplier. For
the majority of our natural gas transactions, we bill the supplier upon the conclusion of the
transaction based on the estimated energy volume transacted for the entire award term multiplied by
the transaction fee. Management fees are paid by our energy consumers and are generally billed on
a monthly basis for services rendered based on terms and conditions included in contractual
arrangements. While substantially all of our retail natural gas transactions are accounted for in
accordance with this policy, a certain percentage are accounted for as the natural gas is consumed
by the customer and recognized as revenue in accordance with the retail electricity transaction
revenue recognition methodology described above.
Demand Response Transactions
Demand response transaction fees are recognized when we have received confirmation from the
CSP that the energy consumer has performed under the applicable RTO or ISO program requirements.
The energy consumer is either called to perform during an
actual curtailment event or is required to demonstrate its ability to perform in a test event
during the performance period. For PJM the performance period is June through September in a
calendar year. Test results are submitted to PJM by the CSPs and we receive confirmation of the
energy consumers performance in the fourth quarter. CSPs typically pay us ratably on a quarterly
basis throughout the demand response fiscal (June to May) year. As a result, a portion of the
revenue we recognize is reflected as unbilled accounts receivable.
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Wholesale Transactions
Wholesale transaction fees are invoiced upon the conclusion of the auction based on a fixed
fee. These revenues are not tied to future energy usage and are recognized upon the completion of
the online auction. For reverse auctions where our customers bid for a consumers business, the
fees are paid by the bidder. For forward auctions where a lister is selling energy products, the
fees are typically paid by the lister. While substantially all wholesale transactions are accounted
for in this fashion, a small percentage of our wholesale revenue is accounted for as electricity or
gas is delivered similar to the retail electricity transaction methodology described above.
Environmental Commodity Transactions
Environmental commodity transaction fees are accounted for utilizing two primary methods. For
regulated allowance programs like RGGI, fees are paid by the lister and are recognized as revenue
quarterly as auctions are completed and approved. For most other environmental commodity
transactions both the lister and the bidder pay the transaction fee and revenue is recognized upon
the consummation of the underlying transaction as credits are delivered by the lister and payment
is made by the bidder.
Channel Partner Commissions
We pay commissions to our channel partners at contractual rates based on monthly energy
transactions between energy suppliers and energy consumers. The commission is accrued monthly and
charged to sales and marketing expense as revenue is recognized. We pay commissions to our
salespeople at contractual commission rates based upon cash collections from our customers.
Revenue Estimation
Our estimates in relation to revenue recognition affect revenue and sales and marketing
expense as reflected on our statements of operations, and trade accounts receivable and accrued
commission accounts as reflected on our balance sheets. For any quarterly reporting period, we may
not have actual usage data for certain energy suppliers and will need to estimate revenue. We
initially record revenue based on the energy consumers historical usage profile. At the end of
each reporting period, we adjust this historical profile to reflect actual usage for the period and
estimate usage where actual usage is not available. For the year ended December 31, 2010, we
estimated usage for approximately 8% of our revenue resulting in a negative 0.2%, or approximately
$37,000, adjustment to decrease revenue. This decrease in revenue resulted in an approximate $9,000
decrease in sales and marketing expense related to third party commission expense associated with
those revenues. Corresponding adjustments were made to trade accounts receivable and accrued
commissions, respectively. A 1% difference between this estimate and actual usage would have an
approximate $15,000 effect on our revenue for the year ended December 31, 2010.
Allowance for Doubtful Accounts
We provide for an allowance for doubtful accounts on a specifically identified basis, as well
as through historical experience applied to an aging of accounts, if necessary. Trade accounts
receivable are written off when deemed uncollectible. To date write-offs have not been material.
Capitalized Software
Certain acquired software and significant enhancements to our software are capitalized in
accordance with guidance from the Financial Accounting Standards Board (FASB). No internally
developed software costs were capitalized in 2010 and costs of approximately $82,000 and $403,000
related to implementation, coding and configuration were capitalized in 2009 and 2008,
respectively. We amortize internally developed and purchased software over the estimated useful
life of the software (generally three years). During 2010, 2009 and 2008, approximately $268,000,
$310,000 and $239,000 were amortized to cost of revenues, respectively. Accumulated amortization
was approximately $1,090,000 and $822,000 at December 31, 2010 and 2009, respectively.
Our estimates for capitalization of software development costs affect cost of revenue and
capitalized software as reflected on our consolidated statements of operations and on our
consolidated balance sheets. During the year ended December 31, 2010, amortization expense was
approximately 7.2% of cost of revenue. To the extent the carrying amount of the capitalized
software costs may not be fully recoverable or that the useful lives of those assets are no longer
appropriate, we may need to record an impairment (non-cash) charge and write-off a portion or all
of the capitalized software balance on the balance sheet.
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Goodwill
We use assumptions in establishing the carrying value and fair value of our goodwill.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets
of acquired businesses. We account for goodwill that results from acquired businesses in
accordance with guidance with the FASB, under which goodwill and intangible assets having
indefinite lives are not amortized but instead are assigned to reporting units and tested for
impairment annually or more frequently if changes in circumstances or the occurrence of events
indicate possible impairment.
We perform an annual impairment review during the fourth fiscal quarter of each year, or
earlier, if indicators of potential impairment exist. The impairment test for goodwill is a
two-step process. Step one consists of a comparison of the fair value of a reporting unit with its
carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount
is in excess of the fair value, step two requires the comparison of the implied fair value of the
reporting unit whereby the carrying amount of the reporting units goodwill over the implied fair
value of the reporting units goodwill will be recorded as an impairment loss. We performed our
annual impairment analysis in December 2010 and determined that no impairment of our goodwill or
intangible assets existed.
Intangible Assets
We use assumptions in establishing the carrying value, fair value and estimated lives of our
intangible assets. The criteria used for these assumptions include managements estimate of the
assets continuing ability to generate positive income from operations and positive cash flow in
future periods compared to the carrying value of the asset, as well as the strategic significance
of any identifiable intangible asset in our business objectives. If assets are considered
impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds
the fair value of the assets. Useful lives and related amortization expense are based on an
estimate of the period that the assets will generate revenues or otherwise be used by us. Factors
that would influence the likelihood of a material change in our reported results include
significant changes in the assets ability to generate positive cash flow, a significant decline in
the economic and competitive environment on which the asset depends and significant changes in our
strategic business objectives.
Intangible assets consist of customer relationships and contracts, purchased technology and
other intangibles, and are stated at cost less accumulated amortization. Intangible assets with a
finite life are amortized using the straight-line method over their estimated useful lives, which
range from one to ten years.
Impairment of Long-Lived and Intangible Assets
In accordance with guidance from the FASB, we periodically review long-lived assets and
intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable or that the useful lives of those assets are
no longer appropriate. Recoverability of these assets is determined by comparing the forecasted
undiscounted net cash flows of the operation to which the assets relate to the carrying amount. No
impairment of our long-lived assets was recorded as no change in circumstances indicated that the
carrying value of the assets was not recoverable during 2010.
Income Taxes
In accordance with guidance from the FASB, deferred tax assets and liabilities are determined
at the end of each period based on the future tax consequences that can be attributed to net
operating loss carryforwards, as well as differences between the financial statement carrying
amounts of the existing assets and liabilities and their respective tax basis. Deferred income tax
expense or credits are based on changes in the asset or liability from period to period. Valuation
allowances are provided if based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. The realization of deferred tax
assets is dependent upon the generation of future taxable income. In determining the valuation
allowance, we consider past performance, expected future taxable income, and qualitative factors
which we consider to be appropriate in estimating future taxable income. Our forecast of expected
future taxable income is for future periods that can be reasonably estimated. Results that differ
materially from current expectations may cause us to change our judgment on future taxable income
and adjust our existing tax valuation allowance.
Our estimates in relation to income taxes affect income tax benefit and deferred tax assets as
reflected on our statements of operations and balance sheets, respectively. The deferred tax assets
are reduced by a valuation allowance if it is more likely than not that the tax benefits will not
be realized in the near term. As of December 31, 2010, we had net deferred tax assets of
approximately $7.8 million against which a full valuation allowance has been established. To the
extent we determine that it is more likely than not that we will recover all of our deferred tax
assets, it could result in an approximate $7.8 million non-cash tax benefit.
Share-Based Compensation
In accordance with guidance from the FASB, we recognize the compensation cost of share-based
awards on a straight-line basis over the requisite service period of the award. For the year ended
December 31, 2010, share based awards consisted of stock
options and stock warrants, and for the years ended December 31, 2009 and 2008, share-based
awards consisted of grants of restricted stock and stock options. The restrictions on the
restricted stock lapse over the vesting period. The vesting period of share-based awards is
determined by the board of directors, and is generally four years for employees.
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The per-share weighted-average fair value of stock options granted during the years ended
December 31, 2010, 2009 and 2008 was $2.12, $2.68 and $1.21, respectively, on the date of grant,
using the Black-Scholes option-pricing model with the following weighted-average assumptions and
estimated forfeiture rates of 10%, 11% and 15% in 2010, 2009 and 2008, respectively:
Year ended | Expected | Risk | Expected | Expected | ||||||||||||
December 31, | Dividend Yield | Interest Rate | Life | Volatility | ||||||||||||
2010 |
| 1.93 | % | 4.75 years | 105 | % | ||||||||||
2009 |
| 2.28 | % | 4.75 years | 113 | % | ||||||||||
2008 |
| 1.67 | % | 4.75 years | 87 | % |
The per-share weighted-average fair value of stock warrants granted during the year ended
December 31, 2010 was $2.44 on the date of grant, using the Black-Scholes option-pricing model with
weighted-average assumptions for the risk-free interest rate, expected life and expected volatility
of 2.37%, 5 years and 114%, respectively, and an estimated average forfeiture rate of 7% for the
year ended December 31, 2010.
We have two stock incentive plans: the 2003 Stock Incentive Plan, or the 2003 Plan, and the
2006 Stock Incentive Plan, or the 2006 Plan. There was a total of 837,061 shares of common stock
reserved for issuance under these plans at December 31, 2010. As of December 31, 2010, 168,201
shares of common stock, representing option grants still outstanding, were reserved under the 2003
Plan. No further grants are allowed under the 2003 Plan. In addition, 668,860 shares of common
stock were reserved under the 2006 Plan at December 31, 2010 representing 536,705 outstanding
stock options, 13,828 shares of restricted stock outstanding and 118,327 shares available for
grant. A summary of stock option activity under both plans for the year ended December 31, 2010,
is as follows:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at December 31, 2009 |
659,888 | $ | 3.73 | |||||
Granted |
190,600 | $ | 2.83 | |||||
Canceled |
(21,052 | ) | $ | 7.81 | ||||
Exercised |
(124,530 | ) | $ | 0.35 | ||||
Outstanding at December 31, 2010 |
704,906 | $ | 3.96 | |||||
A summary of common stock options outstanding and common stock options exercisable as of
December 31, 2010 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Remaining | Aggregate | Number | Remaining | Aggregate | ||||||||||||||||||||
Range of | Contractual | Intrinsic | of Shares | Contractual | Intrinsic | |||||||||||||||||||
Exercise Prices | Options | Life | Value | Exercisable | Life | Value | ||||||||||||||||||
$0.25 $2.40 |
144,455 | 2.70 Years | $ | 186,742 | 109,161 | 1.97 Years | $ | 157,095 | ||||||||||||||||
$2.41 $3.15 |
222,850 | 6.72 Years | 5,022 | 11,188 | 5.72 Years | | ||||||||||||||||||
$3.16 $5.03 |
217,400 | 5.28 Years | | 83,076 | 4.28 Years | | ||||||||||||||||||
$5.04 $13.40 |
120,201 | 3.30 Years | | 103,083 | 3.03 Years | | ||||||||||||||||||
704,906 | 4.87 Years | $ | 191,764 | 306,508 | 3.09 Years | $ | 157,095 | |||||||||||||||||
The aggregate intrinsic value of options exercised during the year ended December 31, 2010 was
approximately $313,000. At December 31, 2010, the weighted average exercise price of common stock
options outstanding and exercisable was $3.96 and $5.05, respectively.
Restricted Stock
A summary of restricted stock activity for the year ended December 31, 2010 is as follows:
Weighted Average | ||||||||
Shares | Grant Price | |||||||
Outstanding at December 31, 2009 |
34,301 | $ | 10.38 | |||||
Granted |
12,324 | $ | 2.84 | |||||
Canceled |
(2,885 | ) | $ | 8.55 | ||||
Vested |
(29,912 | ) | $ | 7.58 | ||||
Outstanding at December 31, 2010 |
13,828 | $ | 10.10 | |||||
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Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires details of
transfers in and out of Level 1 and 2 fair value measurements and the gross presentation of
activity within the Level 3 fair value measurement roll forward. The new disclosures are required
of all entities that are required to provide disclosures about recurring and nonrecurring fair
value measurements. We adopted ASU 2010-06 effective January 1, 2010, except for the gross
presentation of the Level 3 fair value measurement roll forward which is effective for annual
reporting periods beginning after December 15, 2010 and for interim reporting periods within those
years. The adoption of ASU 2010-06 did not affect our consolidated financial statements.
In the first quarter of 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 amends Accounting
Standards Codification (ASC) 855, Subsequent Events, so that SEC filers are no longer required to
disclose the date through which subsequent events have been evaluated in financial statements. We
adopted the provisions of ASU 2010-09 in the first quarter of 2010. This adoption did not affect
our consolidated financial statements.
In August 2010, the FASB issued ASU No. 2010-21, Accounting for Technical Amendments to
Various SEC Rules and Schedules. This ASU amends various SEC paragraphs pursuant to the issuance of
Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial
Reporting Policies and became effective upon issuance. We adopted the provisions of ASU 2010-21
upon issuance with no material impact to our financial position or results of operations.
In August 2010, the FASB issued ASU No. 2010-22, Accounting for Various TopicsTechnical
Corrections to SEC Paragraphs. This ASU amends various SEC paragraphs and became effective upon
issuance. The adoption of ASU No. 2010-22 did not have a material impact on our financial position
or results of operations.
In December 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU updates
Accounting Standards Codification (ASC) Topic 350, IntangiblesGoodwill and Other, to amend the
criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or
negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is
more likely than not that a goodwill impairment exists. The ASU is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2010. We do not currently have any
reporting units with zero or negative carrying values.
Seasonality
Our revenue is subject to seasonality and fluctuations during the year primarily as a result
of weather conditions and its impact on the demand for energy. The majority of our revenue is
generated from the commissions we receive under any given energy contract, which is tied to the
energy consumers consumption of energy. Therefore, revenue from natural gas consumption tends to
be strongest during the winter months due to the increase in heating usage, and revenue from
electricity consumption tends to be strongest during the summer months due to the increase in air
conditioning usage. Our revenue is also subject to fluctuations within any given season, depending
on the severity of weather conditions during a particularly cold winter or an unseasonably warm
summer, energy consumption will rise. In addition, transaction revenue in the natural gas and
wholesale markets for which we invoice upon completion of the respective transaction tends to be
higher in the first and fourth quarters when utilities and natural gas customers make their annual
natural gas buys.
Cyclicality
We believe that our business will continue to be cyclical in nature and is tied, in part, to
market energy prices which impact transaction volume. When energy prices increase in competitive
markets above the price levels of the regulated utilities, energy consumers are less likely to
lock-in to higher fixed price contracts in the competitive markets and so they are less likely to
use our auction platform. Conversely, when energy prices decrease in competitive markets below the
price levels of the regulated utilities, energy consumers are more likely to lock-in to lower fixed
price contracts in the competitive markets and they are more likely to use our auction platform.
Although our short term revenue is impacted by usage trends, these cyclical effects will also have
longer term implications on our business because we derive future revenue from current auctions.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices,
such as foreign currency rates, interest rates, and other relevant market rates or price changes.
In the ordinary course of business, we are exposed to market risk resulting from changes in
foreign currency exchange rates, and we regularly evaluate our exposure to such changes. Our
overall risk management strategy seeks to balance the magnitude of the exposure and the costs and
availability of appropriate financial instruments.
35
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Impact of Inflation and Changing Prices
Historically, our business has not been materially impacted by inflation. We provide our
service at the inception of the service contract between the energy supplier and energy consumer.
Our fee is set as a fixed dollar amount per unit of measure and fluctuates with changes in energy
demand over the contract period.
Foreign Currency Fluctuation
Our commission revenue is primarily denominated in U.S. dollars. Therefore, we are not
directly affected by foreign exchange fluctuations on our current orders. However, fluctuations in
foreign exchange rates do have an effect on energy consumers access to U.S. dollars and on
pricing competition. We have entered into non-U.S. dollar contracts but they have not had a
material impact on our operations. We do not believe that foreign exchange fluctuations will
materially affect our results of operations.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements listed in Item 15(a) are incorporated herein by
reference and are filed as a part of this report and follow the signature pages to this Annual
Report on Form 10-K on page 39.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the
Exchange Act), the Company carried out an evaluation under the supervision and with the
participation of the Companys management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Companys disclosure controls and procedures as of
December 31, 2010. In designing and evaluating the Companys disclosure controls and procedures,
the Company and its management recognize that there are inherent limitations to the effectiveness
of any system of disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly, even effective
disclosure controls and procedures can only provide reasonable assurance of achieving their desired
control objectives. Additionally, in evaluating and implementing possible controls and procedures,
the Companys management was required to apply its reasonable judgment. Based upon the required
evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that as of
December 31, 2010, the Companys disclosure controls and procedures were effective at the
reasonable assurance level to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms, and procedures also were effective in ensuring that information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act is accumulated and
communicated to its management, including the Companys Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
a) Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company, as such term is defined in Rule 13a-15(f) under the Exchange
Act. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. Our management
assessed the effectiveness of our internal control over financial reporting as of December 31,
2010. In making this assessment, the Companys management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based on this assessment, our management concluded that, as of December 31, 2010, our internal
control over financial reporting is effective based on those criteria.
b) Attestation Report of the Independent Registered Public Accounting Firm
This annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public
accounting firm, pursuant to rules of the Securities and Exchange Commission that permit us to
provide only managements report in this annual report.
36
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c) Changes in Internal Control Over Financial Reporting
There was no change in the Companys internal control over financial reporting that occurred
during the three months ended December 31, 2010 that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial reporting.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required to be disclosed by this item 10 is hereby incorporated by reference
to the Companys definitive proxy statement to be filed by the Company within 120 days of the close
of its fiscal year.
We have adopted a code of business conduct and ethics applicable to all of our directors,
officers and employees, including our Chief Executive Officer and our Chief Financial Officer. The
code of business conduct and ethics is available on the corporate governance section of Investor
Relations on our website www.worldenergy.com.
Any waiver of the code of business conduct and ethics for directors or executive officers, or
any amendment to the code that applies to directors or executive officers, may only be made by the
board of directors. We intend to satisfy the disclosure requirement under Item 5.05(c) of Form 8-K
regarding an amendment to, or waiver from, a provision of this code of ethics by posting such
information on our website, at the address and location specified above. To date, no such waivers
have been requested or granted.
Item 11. Executive Compensation
The information required to be disclosed by this item 11 is hereby incorporated by reference
to the Companys definitive proxy statement to be filed by the Company within 120 days after the
close of its fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required to be disclosed by this item 12 is hereby incorporated by reference
to the Companys definitive proxy statement to be filed by the Company within 120 days after the
close of its fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required to be disclosed by this item 13 is hereby incorporated by reference
to the Companys definitive proxy statement to be filed by the Company within 120 days after the
close of its fiscal year.
Item 14. Principal Accountant Fees and Services
The information required to be disclosed by this item 14 is hereby incorporated by reference
to the Companys definitive proxy statement to be filed by the Company within 120 days after the
close of its fiscal year.
37
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
For a list of the financial information included herein, see Index to Consolidated Financial
Statements on page 40 of this Annual Report on Form 10-K.
(a)(2) Financial Statements Schedules
All schedules are omitted because they are not applicable or the required information is
included in the financial statements or notes thereto.
(a)(3) Exhibits
The list of exhibits filed as a part of this Annual Report on Form 10-K is set forth on the
Exhibit Index immediately preceding the exhibits hereto and is incorporated herein by reference.
38
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WORLD ENERGY SOLUTIONS, INC. |
||||
By: | /s/ Richard Domaleski | February 17, 2011 | ||
Richard Domaleski | ||||
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature | Title | Date | ||
/s/ Richard Domaleski
|
Chief Executive Officer and Director | February 17, 2011 | ||
/s/ James Parslow
|
Chief Financial Officer | February 17, 2011 | ||
/s/ Edward Libbey
|
Chairman of the Board and Director | February 17, 2011 | ||
/s/ Patrick Bischoff
|
Director | February 17, 2011 | ||
/s/ John Wellard
|
Director | February 17, 2011 | ||
/s/ Thad Wolfe
|
Director | February 17, 2011 |
39
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WORLD ENERGY SOLUTIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
41 | ||||
CONSOLIDATED FINANCIAL STATEMENTS: |
||||
43 | ||||
44 | ||||
45 | ||||
46 | ||||
47 |
40
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
World Energy Solutions, Inc.
Worcester, Massachusetts
World Energy Solutions, Inc.
Worcester, Massachusetts
We have audited the accompanying consolidated balance sheet of World Energy Solutions, Inc.
(the Company) as of December 31, 2010, and the related consolidated statements of operations,
stockholders equity and cash flows for the year ended December 31, 2010. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of World Energy Solutions, Inc. as of
December 31, 2010 and the consolidated results of their operations and their cash flows for the
year ended December 31, 2010, in conformity with accounting principles generally accepted in the
United States of America.
/S/ Marcum LLP
Boston, Massachusetts
February 16, 2011
February 16, 2011
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
World Energy Solutions, Inc.
Worcester, Massachusetts
World Energy Solutions, Inc.
Worcester, Massachusetts
We have audited the accompanying consolidated balance sheet of World Energy Solutions, Inc.
(the Company) as of December 31, 2009, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the two years in the period ended December 31,
2009. These financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. An audit includes consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of World Energy Solutions, Inc. as of
December 31, 2009, and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 2009, in conformity with accounting principles
generally accepted in the United States of America.
/S/ UHY LLP
Boston, Massachusetts
March 4, 2010
March 4, 2010
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WORLD ENERGY SOLUTIONS, INC.
Consolidated Balance Sheets
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 3,559,288 | $ | 2,046,909 | ||||
Trade accounts receivable, net |
3,124,328 | 2,909,024 | ||||||
Prepaid expenses and other current assets |
229,108 | 213,033 | ||||||
Total current assets |
6,912,724 | 5,168,966 | ||||||
Property and equipment, net |
287,191 | 371,033 | ||||||
Intangibles, net |
3,723,607 | 4,750,497 | ||||||
Goodwill |
3,178,701 | 3,178,701 | ||||||
Other assets |
624,571 | 424,928 | ||||||
Total assets |
$ | 14,726,794 | $ | 13,894,125 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 263,746 | $ | 285,212 | ||||
Accrued commissions |
847,758 | 835,342 | ||||||
Accrued compensation |
1,970,639 | 1,280,683 | ||||||
Accrued expenses |
187,097 | 328,816 | ||||||
Deferred revenue and customer advances |
229,539 | 873,752 | ||||||
Capital lease obligations |
14,798 | 16,175 | ||||||
Total current liabilities |
3,513,577 | 3,619,980 | ||||||
Capital lease obligations, net of current portion |
1,205 | 16,003 | ||||||
Total liabilities |
3,514,782 | 3,635,983 | ||||||
Commitments and contingencies (Note 11) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.0001 par value; 5,000,000 shares authorized, no shares issued
or outstanding |
| | ||||||
Common stock, $0.0001 par value; 30,000,000 shares authorized; 9,200,306
shares issued and 9,155,281 shares outstanding at December 31, 2010, and
8,889,357 shares issued and 8,850,474 shares outstanding at December 31,
2009 |
916 | 885 | ||||||
Additional paid-in capital |
33,502,074 | 32,431,240 | ||||||
Accumulated deficit |
(22,081,038 | ) | (21,981,951 | ) | ||||
Treasury stock, at cost; 45,025 shares at December 31, 2010 and 38,883 shares
at December 31, 2009 |
(209,940 | ) | (192,032 | ) | ||||
Total stockholders equity |
11,212,012 | 10,258,142 | ||||||
Total liabilities and stockholders equity |
$ | 14,726,794 | $ | 13,894,125 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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WORLD ENERGY SOLUTIONS, INC.
Consolidated Statements of Operations
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Revenue: |
||||||||||||
Brokerage commissions and transaction fees |
$ | 16,924,689 | $ | 13,524,578 | $ | 11,156,215 | ||||||
Management fees |
1,059,973 | 1,093,697 | 1,288,477 | |||||||||
Total revenue |
17,984,662 | 14,618,275 | 12,444,692 | |||||||||
Cost of revenue |
3,715,869 | 3,709,957 | 4,552,215 | |||||||||
Gross profit |
14,268,793 | 10,908,318 | 7,892,477 | |||||||||
Operating expenses: |
||||||||||||
Sales and marketing |
9,483,350 | 9,714,900 | 10,057,361 | |||||||||
General and administrative |
4,893,212 | 3,520,886 | 4,669,807 | |||||||||
Total operating expenses |
14,376,562 | 13,235,786 | 14,727,168 | |||||||||
Operating loss |
(107,769 | ) | (2,327,468 | ) | (6,834,691 | ) | ||||||
Interest income (expense): |
||||||||||||
Interest income |
11,042 | 611 | 45,132 | |||||||||
Interest expense |
(2,360 | ) | (6,662 | ) | (5,601 | ) | ||||||
Total interest income (expense), net |
8,682 | (6,051 | ) | 39,531 | ||||||||
Loss before income taxes |
(99,087 | ) | (2,333,519 | ) | (6,795,160 | ) | ||||||
Income tax expense |
| | | |||||||||
Net loss |
$ | (99,087 | ) | $ | (2,333,519 | ) | $ | (6,795,160 | ) | |||
Net loss per common share basic and diluted |
$ | (0.01 | ) | $ | (0.27 | ) | $ | (0.82 | ) | |||
Weighted average shares outstanding basic and diluted |
9,067,834 | 8,512,060 | 8,310,315 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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WORLD ENERGY SOLUTIONS, INC.
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2010, 2009, and 2008
Common Stock | Treasury Stock | Additional | Total | |||||||||||||||||||||||||
Number of | $0.0001 | Number of | Stated at | Paid-in | Accumulated | Stockholders | ||||||||||||||||||||||
Shares | Par Value | Shares | Cost | Capital | Deficit | Equity | ||||||||||||||||||||||
Balance, December 31, 2007 |
8,239,924 | $ | 824 | | $ | | $ | 29,712,247 | $ | (12,853,272 | ) | $ | 16,859,799 | |||||||||||||||
Share-based compensation |
| | | | 1,006,560 | | 1,006,560 | |||||||||||||||||||||
Issuance of common stock
in connection with
restricted stock grants |
32,564 | 3 | 13,043 | (98,873 | ) | (3 | ) | | (98,873 | ) | ||||||||||||||||||
Exercise of stock warrants |
67,123 | 7 | | | 20,130 | | 20,137 | |||||||||||||||||||||
Exercise of stock options |
58,073 | 6 | | | 16,662 | | 16,668 | |||||||||||||||||||||
Net loss |
| | | | | (6,795,160 | ) | (6,795,160 | ) | |||||||||||||||||||
Balance, December 31, 2008 |
8,397,684 | 840 | 13,043 | (98,873 | ) | 30,755,596 | (19,648,432 | ) | 11,009,131 | |||||||||||||||||||
Share-based compensation |
| | | | 633,285 | | 633,285 | |||||||||||||||||||||
Issuance of common stock
in connection with
restricted stock grants |
63,070 | 6 | 25,840 | (93,159 | ) | 77,707 | | (15,446 | ) | |||||||||||||||||||
Issuance of common stock
in connection with
private placement, net |
336,700 | 34 | | | 935,442 | | 935,476 | |||||||||||||||||||||
Exercise of stock options |
53,020 | 5 | | | 29,210 | | 29,215 | |||||||||||||||||||||
Net loss |
| | | | | (2,333,519 | ) | (2,333,519 | ) | |||||||||||||||||||
Balance, December 31, 2009 |
8,850,474 | 885 | 38,883 | (192,032 | ) | 32,431,240 | (21,981,951 | ) | 10,258,142 | |||||||||||||||||||
Share-based compensation |
| | | | 671,323 | | 671,323 | |||||||||||||||||||||
Issuance of common stock
in connection with
restricted stock grants |
23,770 | 1 | 6,142 | (17,908 | ) | (1 | ) | | (17,908 | ) | ||||||||||||||||||
Issuance of common stock
in connection with
private placement, net |
152,397 | 16 | | | 354,260 | | 354,276 | |||||||||||||||||||||
Exercise of stock options |
124,530 | 13 | | | 44,019 | | 44,032 | |||||||||||||||||||||
Exercise of stock warrants |
4,110 | 1 | | | 1,233 | | 1,234 | |||||||||||||||||||||
Net loss |
| | | | | (99,087 | ) | (99,087 | ) | |||||||||||||||||||
Balance, December 31, 2010 |
9,155,281 | $ | 916 | 45,025 | $ | (209,940 | ) | $ | 33,502,074 | $ | (22,081,038 | ) | $ | 11,212,012 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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WORLD ENERGY SOLUTIONS, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (99,087 | ) | $ | (2,333,519 | ) | $ | (6,795,160 | ) | |||
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
||||||||||||
Depreciation and amortization |
1,434,103 | 1,655,895 | 1,756,068 | |||||||||
Share-based compensation |
671,323 | 633,285 | 1,006,560 | |||||||||
Loss on disposal of property and equipment |
| 1,604 | | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Trade accounts receivable |
(215,304 | ) | (565,431 | ) | (465,360 | ) | ||||||
Prepaid expenses and other current assets |
(16,075 | ) | 218,213 | (93,197 | ) | |||||||
Accounts payable |
(21,466 | ) | (308,341 | ) | (386,935 | ) | ||||||
Accrued commissions |
12,416 | 57,558 | 64,865 | |||||||||
Accrued compensation |
689,956 | 240,228 | (398,250 | ) | ||||||||
Accrued expenses |
(141,719 | ) | (26,695 | ) | 76,349 | |||||||
Deferred revenue and customer advances |
(644,213 | ) | (2,519 | ) | 512,338 | |||||||
Net cash provided by (used in) operating activities |
1,669,934 | (429,722 | ) | (4,722,722 | ) | |||||||
Cash flows from investing activities: |
||||||||||||
Advances and
changes in other assets |
(467,244 | ) | (80,520 | ) | (403,355 | ) | ||||||
Purchases of property and equipment |
(55,770 | ) | (1,432 | ) | (40,704 | ) | ||||||
Cash received in sale of property and equipment |
| 500 | | |||||||||
Net cash used in investing activities |
(523,014 | ) | (81,452 | ) | (444,059 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from exercise of stock options |
44,032 | 29,215 | 16,668 | |||||||||
Proceeds from exercise of stock warrants |
1,234 | | 20,137 | |||||||||
Proceeds from the sale of common stock, net |
354,276 | 935,476 | | |||||||||
Purchase of treasury stock |
(17,908 | ) | (93,159 | ) | (98,873 | ) | ||||||
Principal payments on capital lease obligations |
(16,175 | ) | (44,860 | ) | (41,624 | ) | ||||||
Net cash provided by (used in) financing activities |
365,459 | 826,672 | (103,692 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
1,512,379 | 315,498 | (5,270,473 | ) | ||||||||
Cash and cash equivalents, beginning of year |
2,046,909 | 1,731,411 | 7,001,884 | |||||||||
Cash and cash equivalents, end of year |
$ | 3,559,288 | $ | 2,046,909 | $ | 1,731,411 | ||||||
Supplemental Disclosure of Cash Flow Information: |
||||||||||||
Net cash received (paid) for interest |
$ | (4,711 | ) | $ | (5,494 | ) | $ | 45,419 | ||||
Non-cash activities: |
||||||||||||
Fair value of restricted common stock granted to employees |
$ | | $ | 77,713 | $ | | ||||||
Net capital lease obligations |
$ | | $ | 30,816 | $ | | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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WORLD ENERGY SOLUTIONS, INC.
Notes to Consolidated Financial Statements
NOTE 1 NATURE OF BUSINESS
World Energy Solutions, Inc. (World Energy or the Company) is an energy management
services company that applies a combination of people, process and technology to take the
complexity out of energy management and turn it into bottom line impact for the businesses,
institutions and governments we serve. We believe that energy costs can be expressed in a simple
equation E=P*Q-i. Energy costs are a function of commodity price times quantity used minus any
incentives realized. We help customers optimize this equation by applying the Seven Levers of
Energy Management Planning, Sourcing, Risk Management, Efficiency, Sustainability, Incentives
and Monitoring.
These Seven Levers are supported by state of the art technology developed or licensed by the
Company. The Company has developed three online auction platforms, the World Energy Exchange®, the
World Green Exchange® and the World DR Exchange. On the World Energy Exchange®, retail energy
consumers (commercial, industrial and government) and wholesale energy participants (utilities,
electricity retailers and intermediaries) in North America (listers) are able to negotiate for
the purchase or sale of electricity, natural gas and renewable energy resources from competing
energy suppliers (bidders) which have agreed to participate on the Companys auction platform.
Although the Companys primary source of revenue is from brokering electricity and natural gas, the
Company adapted its World Energy Exchange® auction platform to accommodate the brokering of green
power in 2003 (i.e., electricity generated by renewable resources), wholesale electricity in 2004
and certain other energy-related products in 2005. The team also uses the exchanges sophisticated
monitoring, triggering and messaging tools to develop, support and implement comprehensive risk
management strategies for our more sophisticated clients.
In 2007, the Company created the World Green Exchange® based on the World Energy Exchange®
technology and business process. On the World Green Exchange®, bidders and listers negotiate for
the purchase or sale of environmental commodities such as Renewable Energy Certificates, Verified
Emissions Reductions, Certified Emissions Reductions and Regional Greenhouse Gas Initiative (RGGI)
allowances.
In January 2010, the Company launched the World DR Exchange to create an efficient,
transparent and liquid marketplace to maximize incentive payments available to customers and
provide a ready source of curtailment ready customers for the industrys CSPs. The World DR
Exchange creates the industrys first online marketplace for demand response, enabling customers
to source DR more efficiently and effectively bringing together curtailment service providers and
energy consumers in highly-structured auction events designed to yield price transparency,
heighten competition, and maximize the energy consumers share of demand response revenues.
In the second half of 2010, the Company made a strategic investment in an emerging company
that develops software that can determine the energy efficiency of buildings and present retrofit
options ordered by return on investment. The Company intends to roll this solution out as a
cornerstone of an energy efficiency practice.
On March 27, 2009, the Company filed a previously approved Certificate of Amendment to the
Companys Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware
to (i) effect a reverse stock split of its outstanding common stock at a ratio of one-for-ten; and
(ii) decrease the number of authorized shares of its common stock from 150,000,000 to 15,000,000.
As a result of the reverse stock split, the issued and outstanding shares of common stock were
reduced on a basis of one share for every ten shares outstanding. All of the Companys stock
related information including issued and outstanding common stock, stock options and warrants to
purchase common stock, restricted stock and loss per share for all periods presented have been
restated to reflect the reverse stock split.
On October 30, 2009, the Company entered into an agreement with Bond Capital, Ltd. (Bond), a
strategic partner of the Company, for the purchase of up to $2.5 million of the Companys common
stock. Pursuant to the agreement, a purchasing entity, an affiliate of Bond, acquired $1.0 million
of World Energys common stock at $2.97 per share on November 6, 2009. The Company agreed to offer
an additional $1.5 million in Company shares on the same terms to Bond or its designee, with the
price to be determined at the time of investment, through January 15, 2010. In the first quarter
of 2010, affiliates of Bond purchased an additional $400,000 of Company stock at an average price
of $2.63 per share bringing the net amount raised under the financing agreement to $1.3 million.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The Companys consolidated financial statements include its wholly-owned subsidiary World
Energy Securities Corp. All intercompany accounts and transactions have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform to the current year
presentation.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
The Companys most judgmental estimates affecting its consolidated financial statements are
those relating to revenue recognition and the estimate of actual energy delivered from the bidder
to the lister of such energy; software development costs; share-based compensation; the valuation
of intangible assets and goodwill; impairment of long-lived assets; and estimates of future taxable
income as it relates to the realization of net deferred tax assets. The Company regularly evaluates
its estimates and assumptions based upon historical experience and various other factors that the
Company believes to be reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. To the extent actual results differ from those estimates, future results of
operations may be affected.
Revenue Recognition
Retail Electricity Transactions
The Company earns a monthly commission on energy sales contracted through its online auction
platform from each bidder or energy supplier based on the energy usage transacted between the
bidder or energy supplier and lister or energy consumer. The Companys commissions are not based on
the retail price for electricity; rather on the amount of energy consumed. Commissions are based on
the energy usage transacted between the energy supplier and energy consumer multiplied by the
contractual commission rate. Revenue from commissions is recognized as earned on a monthly basis
over the life of each contract as energy is consumed, provided there is persuasive evidence of an
arrangement, the sales price is fixed or determinable, collection of the related receivable is
reasonably assured, and customer acceptance criteria, if any, has been successfully demonstrated.
The Company records brokerage commissions based on actual usage data obtained from the energy
supplier for that accounting period, or to the extent actual usage data is not available, based on
the estimated amount of electricity and gas delivered to the energy consumers for that accounting
period. The Company develops its estimates on a quarterly basis based on the following criteria:
| Payments received prior to the issuance of the financial statements; |
| Usage updates from energy suppliers; |
| Usage data from utilities; |
| Comparable historical usage data; and |
| Historical variances to previous estimates. |
To the extent usage data cannot be obtained, the Company estimates revenue as follows:
| Historical usage data obtained from the energy consumer in conjunction with the execution
of the auction; |
| Geographic/utility usage patterns based on actual data received; |
| Analysis of prior year usage patterns; and |
| Specific review of individual energy supplier/location accounts. |
In addition, the Company analyzes this estimated data based on overall industry trends
including prevailing weather and usage data. Once the actual data is received, the Company adjusts
the estimated accounts receivable and revenue to the actual total amount in the period during which
the payment is received. Based on managements current capacity to obtain actual energy usage, the
Company currently estimates four to six weeks of revenue at the end of its accounting period.
Differences between estimated and actual revenue have been within managements expectations and
have not been material to date.
The Company does not invoice its electricity energy suppliers for monthly commissions earned
and, therefore, reports a substantial portion of its receivables as unbilled. Unbilled accounts
receivable represents managements best estimate of energy provided by the energy suppliers to the
energy consumers for a specific completed time period at contracted commission rates and is made up
of two components. The first component represents energy usage for which the Company has received
actual data from the supplier and/or the utility but for which payment has not been received at the
balance sheet date. The majority of the Companys contractual relationships with energy suppliers
requires them to supply actual usage data to the Company on a monthly basis and remit payment to
the Company based on that usage. The second component represents energy usage for which the Company
has not received actual data, but for which it has estimated usage. Commissions paid in advance by
certain energy suppliers are recorded as deferred revenue and amortized to commission revenue on a
monthly basis on the energy exchanged that month.
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Retail Natural Gas Transactions
There are two primary fee components to the Companys retail natural gas services: transaction
fees and management fees. Transaction fees are billed to and paid by the energy supplier awarded
business on the platform. These fees are established prior to award and are the same for each
supplier. For the majority of the Companys natural gas transactions, the supplier is billed upon
the conclusion of the transaction based on the estimated energy volume transacted for the entire
award term multiplied by the transaction fee. Management fees are paid by the Companys energy
consumers and are generally billed on a monthly basis for services rendered based on terms and
conditions included in contractual arrangements. While substantially all of the Companys retail
natural gas transactions are accounted for in accordance with this policy, a certain percentage are
accounted for as the natural gas is consumed by the customer and recognized as revenue in
accordance with the retail electricity transaction revenue recognition methodology described above.
Demand Response Transactions
Demand response transaction fees are recognized when the Company has received confirmation
from the curtailment service provider (CSP) that the energy consumer has performed under the
applicable Regional Transmission Organization (RTO) or Independent System Operator (ISO) program
requirements. The energy consumer is either called to perform during an actual curtailment event or
is required to demonstrate its ability to perform in a test event during the performance period.
For the PJM Interconnection (PJM), an RTO that coordinates the movement of wholesale electricity in
all or parts of 13 states and the District of Columbia, the performance period is June through
September in a calendar year. Test results are submitted to PJM by the CSPs and the Company
receives confirmation of the energy consumers performance in the fourth quarter. CSPs typically
pay ratably on a quarterly basis throughout the demand response fiscal (June to May) year. As a
result, a portion of the revenue recognized is reflected as unbilled accounts receivable.
Wholesale Transactions
Wholesale transaction fees are invoiced upon the conclusion of the auction based on a fixed
fee. These revenues are not tied to future energy usage and are recognized upon the completion of
the online auction. For reverse auctions where the Companys customers bid for a consumers
business, the fees are paid by the bidder. For forward auctions where a lister is selling energy
products, the fees are typically paid by the lister. While substantially all wholesale transactions
are accounted for in this fashion, a small percentage of the Companys wholesale revenue is
accounted for as electricity or gas is delivered similar to the retail electricity transaction
methodology described above.
Environmental Commodity Transactions
Environmental commodity transaction fees are accounted for utilizing two primary methods. For
regulated allowance programs like RGGI, fees are paid by the lister and are recognized as revenue
quarterly as auctions are completed and approved. For most other environmental commodity
transactions both the lister and the bidder pay the transaction fee and revenue is recognized upon
the consummation of the underlying transaction as credits are delivered by the lister and payment
is made by the bidder.
Channel Partner Commissions
The Company pays commissions to its channel partners at contractual rates based on monthly
energy transactions between energy suppliers and energy consumers. The commission is accrued
monthly and charged to sales and marketing expense as revenue is recognized. The Company pays
commissions to its salespeople at contractual commission rates based upon cash collections from its
customers.
Revenue Estimation
The Companys estimates in relation to revenue recognition affect revenue and sales and
marketing expense as reflected on its statements of operations, and trade accounts receivable and
accrued commission accounts as reflected on its balance sheets. For any quarterly reporting period,
the Company may not have actual usage data for certain energy suppliers and will need to estimate
revenue. Revenue is initially recorded based on the energy consumers historical usage profile. At
the end of each reporting period, the Company adjusts this historical profile to reflect actual
usage for the period and estimate usage where actual usage is not available. For the year ended
December 31, 2010, the Company estimated usage for approximately 8% of its revenue resulting in a
negative 0.2%, or approximately $37,000, adjustment to decrease revenue. This decrease in revenue
resulted in an approximate $9,000 decrease in sales and marketing expense related to third party
commission expense associated with those revenues. Corresponding adjustments were made to trade
accounts receivable and accrued commissions, respectively. A 1% difference between this estimate
and actual usage would have an approximate $15,000 effect on the Companys revenue for the year
ended December 31, 2010.
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Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity
of 90 days or less to be cash equivalents. The Company invests excess cash in a US Treasury money
market fund that is Federal Deposit Insurance Corporation insured.
Concentration of Credit Risk and Off-Balance Sheet Risk
Financial instruments that potentially expose the Company to concentrations of credit risk
consist principally of cash and trade accounts receivable. The Company has no significant
off-balance sheet risk such as foreign exchange contracts, option contracts, or other foreign
hedging arrangements. The Company places its cash with primarily one institution, which management
believes is of high credit quality. As of December 31, 2010, approximately $300,000 of the
Companys cash and cash equivalents was invested in a highly liquid, U.S. Treasury money market
fund.
The Company earns commission payments from bidders based on transactions completed between
listers and bidders. The Company provides credit in the form of invoiced and unbilled accounts
receivable to bidders in the normal course of business. Collateral is not required for trade
accounts receivable, but ongoing credit evaluations of bidders are performed. While the majority
of the Companys revenue is generated from retail energy transactions where the winning bidder
pays a commission to the Company, commission payments for forward auctions can be paid by the
lister, bidder or a combination of both. Management provides for an allowance for doubtful
accounts on a specifically identified basis, as well as through historical experience applied to
an aging of accounts, if necessary. Trade accounts receivable are written off when deemed
uncollectible. To date write-offs have not been material.
The following represents revenue and trade accounts receivable from bidders exceeding 10% of
the total in each category:
Revenue for the year ended December 31, | Trade accounts receivable as of December 31, | |||||||||||||||||||
Bidder / Lister | 2010 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||
A |
7 | % | 15 | % | 22 | % | 15 | % | 23 | % | ||||||||||
B |
12 | % | 9 | % | 7 | % | 14 | % | 15 | % | ||||||||||
C |
10 | % | 3 | % | | % | 18 | % | 12 | % |
In addition to its direct relationship with bidders, the Company also has direct contractual
relationships with listers for the online procurement of certain of their energy, demand response
or environmental needs. These listers are primarily large businesses and government organizations
and do not have a direct creditor relationship with the Company. For the year ended December 31,
2010, none of these listers accounted for transactions resulting in 10% of the Companys aggregate
revenue. For the year ended December 31, 2009 one lister accounted for transactions resulting in
10% of the Companys aggregate revenue. For the year ended December 31, 2008 two listers accounted
for transactions resulting in at least 10% individually and 23% in the aggregate of the Companys
revenue.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on a straight-line basis
over the estimated useful lives of the related assets or the life of the related lease, whichever
is shorter, which range from 3 to 7 years.
Other Assets
Certain acquired software and significant enhancements to the Companys software are
capitalized in accordance with guidance from the Financial Accounting Standards Board (FASB). No
internally developed software costs were capitalized in 2010 and costs of approximately $82,000,
and $403,000 related to implementation, coding and configuration were capitalized in 2009, and
2008, respectively. The Company amortizes internally developed and purchased software over the
estimated useful life of the software (generally three years). During 2010, 2009, and 2008,
approximately $268,000, $310,000, and $239,000, respectively, were amortized to cost of revenues.
Accumulated amortization was approximately $1,090,000 and $822,000 at December 31, 2010 and 2009,
respectively. At December 31, 2010 and 2009, capitalized software costs, net was approximately
$131,000 and $399,000, respectively.
At December 31, 2010, future amortization expense for capitalized internally developed
software is as follows:
2011 |
$ | 113,000 | ||
2012 |
18,000 | |||
$ | 131,000 | |||
Pre- and post- software implementation and configuration costs have historically been
immaterial and charged to cost of revenue as
incurred.
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The Company made a strategic investment in an energy efficiency and management software and
services company in the form of a two-year convertible note. The Company committed to provide
funding of up to $650,000 to this company in three equal quarterly installments through January
2011. As of December 31, 2010 a total of approximately $433,000 had been made and is reflected in
Other assets. The convertible note bears interest at 9% with principal and interest due at the end
of the term on July 22, 2012. It includes optional and automatic conversion rights to convert into
shares at $0.54 per share and is subject to adjustment in certain circumstances. The Company
evaluated the value of this conversion feature and determined it to be immaterial. Subsequent to
year end, the Company made its final quarterly installment under this arrangement.
Intangible Assets
The Company uses assumptions in establishing the carrying value, fair value and estimated
lives of its intangible assets. The criteria used for these assumptions include managements
estimate of the assets continuing ability to generate positive income from operations and positive
cash flow in future periods compared to the carrying value of the asset, as well as the strategic
significance of any identifiable intangible asset in the Companys business objectives. If assets
are considered impaired, the impairment recognized is the amount by which the carrying value of the
assets exceeds the fair value of the assets. Useful lives and related amortization expense are
based on an estimate of the period that the assets will generate revenues or otherwise be used by
the Company. Factors that would influence the likelihood of a material change in the Companys
reported results include significant changes in the assets ability to generate positive cash flow,
a significant decline in the economic and competitive environment on which the asset depends and
significant changes in the Companys strategic business objectives.
Intangible assets consist of customer relationships and contracts, purchased technology and
other intangibles, and are stated at cost less accumulated amortization. Intangible assets with a
finite life are amortized using the straight-line method over their estimated useful lives, which
range from one to ten years. Amortization expense was approximately $1,027,000, $1,200,000 and
$1,367,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Accumulated
amortization of intangible assets amounted to approximately $4,407,000 and $3,380,000 at December
31, 2010 and 2009, respectively. The approximate future amortization expense of intangible assets
is as follows:
2011 |
$ | 957,000 | ||
2012 |
675,000 | |||
2013 |
474,000 | |||
2014 |
474,000 | |||
2015 and thereafter |
1,144,000 | |||
$ | 3,724,000 | |||
Impairment of Long-Lived and Intangible Assets
In accordance with guidance from the FASB, the Company periodically reviews long-lived assets
and intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable or that the useful lives of those assets are
no longer appropriate. Recoverability of these assets is determined by comparing the forecasted
undiscounted net cash flows of the operation to which the assets relate to the carrying amount. No
impairment of the Companys long-lived assets was recorded as no change in circumstances indicated
that the carrying value of the assets was not recoverable during 2010.
Goodwill
The Company uses assumptions in establishing the carrying value and fair value of its
goodwill. Goodwill represents the excess of the purchase price over the fair value of identifiable
net assets of acquired businesses. The Company accounts for goodwill that results from acquired
businesses in accordance with guidance with the FASB, under which goodwill and intangible assets
having indefinite lives are not amortized but instead are assigned to reporting units and tested
for impairment annually or more frequently if changes in circumstances or the occurrence of events
indicate possible impairment.
The Company performs an annual impairment review during the fourth fiscal quarter of each
year, or earlier, if indicators of potential impairment exist. The impairment test for goodwill is
a two-step process. Step one consists of a comparison of the fair value of a reporting unit with
its carrying amount, including the goodwill allocated to each reporting unit. If the carrying
amount is in excess of the fair value, step two requires the comparison of the implied fair value
of the reporting unit whereby the carrying amount of the reporting units goodwill over the implied
fair value of the reporting units goodwill will be recorded as an impairment loss. The Company
performed its annual impairment analysis in December 2010 and determined that no impairment of
goodwill or intangible assets existed.
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Income Taxes
In accordance with guidance from the FASB, deferred tax assets and liabilities are determined
at the end of each period based on the future tax consequences that can be attributed to net
operating loss carryforwards, as well as differences between the financial statement carrying
amounts of the existing assets and liabilities and their respective tax basis. Deferred income tax
expense or credits are based on changes in the asset or liability from period to period. Valuation
allowances are provided if based on the weight of available evidence, it is more likely than not
that some or all of the deferred tax assets will not be realized. The realization of deferred tax
assets is dependent upon the generation of future taxable income. In determining the valuation
allowance, the Company considers past performance, expected future taxable income, and qualitative
factors which are considered to be appropriate in estimating future taxable income. The Companys
forecast of expected future taxable income is for future periods that can be reasonably estimated.
Results that differ materially from current expectations may cause the Company to change its
judgment on future taxable income and adjust its existing tax valuation allowance.
The Company has reviewed the tax positions taken, or to be taken, in its tax returns for all
tax years currently open to examination by the taxing authority in accordance with the FASBs
recognition and measurement standards. At December 31, 2010, there are no expected material,
aggregate tax effect of differences between tax return positions and the benefits recognized in the
Companys financial statements. The Company accounts for
interest and penalties related to uncertain tax positions as part of
its provision for income taxes.
Share-based Compensation
The Company recognizes the compensation from share-based awards on a straight-line basis over
the requisite service period of the award. For the year ended December 31, 2010, share based
awards consisted of grants of stock options and stock warrants, and for the years ended December
31, 2009 and 2008, share-based awards consisted of grants of restricted stock and stock options.
The restrictions on the restricted stock lapse over the vesting period. The vesting period of
share-based awards is determined by the board of directors, and is generally four years for
employees.
Advertising Expense
Advertising expense primarily includes promotional expenditures and is expensed as incurred,
as such efforts have not met the direct-response criteria required for capitalization. Amounts
incurred for advertising expense were not material for the years ended December 31, 2010, 2009, and
2008.
Comprehensive Income (Loss)
Guidance from the FASB establishes standards for reporting and displaying comprehensive income
(loss) and its components in financial statements. Comprehensive income (loss) is defined as the
change in stockholders equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. The comprehensive income (loss) for all periods
presented does not differ from the reported net income (loss).
Fair Value of Financial Instruments
Guidance from the FASB requires management to disclose the estimated fair value of certain
assets and liabilities defined as financial instruments. Financial instruments are generally
defined as cash, evidence of ownership interest in an entity, or a contractual obligation that both
conveys to one entity a right to receive cash or other financial instruments from another entity
and imposes on the other entity the obligation to deliver cash or other financial instruments to
the first entity. At December 31, 2010, management believes that the carrying value of cash and
cash equivalents, receivables and payables approximated fair value because of the short maturity of
these financial instruments.
Segment Reporting
Guidance from the FASB establishes standards for reporting information about operating
segments in financial statements. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated regularly by the chief
decision maker in deciding how to allocate resources and in assessing performance. The Companys
chief decision maker is the president and chief operating officer. The Companys chief decision
maker reviews the results of operations based on one industry segment: the brokering of energy and
environmental commodities by conducting structured events utilizing online exchanges. The Company
delivers these services to four distinctive markets: retail energy, wholesale energy, demand
response and environmental commodity. The brokerage process is substantially the same regardless of
the market being serviced and are supported by the same operations personnel utilizing the same
basic technology and back office support. There is no discrete financial information for these
product lines nor are there segment managers who have operating responsibility for each product
line.
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Recent Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving
Disclosures about Fair Value Measurements (ASU 2010-06). ASU 2010-06 requires details of
transfers in and out of Level 1 and 2 fair value measurements and the gross presentation of
activity within the Level 3 fair value measurement roll forward. The new disclosures are required
of all entities that are required to provide disclosures about recurring and nonrecurring fair
value measurements. The Company adopted ASU 2010-06 effective January 1, 2010, except for the gross
presentation of the Level 3 fair value measurement roll forward which is effective for annual
reporting periods beginning after December 15, 2010 and for interim reporting periods within those
years. The adoption of ASU 2010-06 did not affect the Companys consolidated financial statements.
In the first quarter of 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements (ASU 2010-09). ASU 2010-09 amends Accounting
Standards Codification (ASC) 855, Subsequent Events, so that SEC filers are no longer required to
disclose the date through which subsequent events have been evaluated in financial statements. The
Company adopted the provisions of ASU 2010-09 in the first quarter of 2010. This adoption did not
affect the Companys consolidated financial statements. The Company has evaluated subsequent events
through the issuance of its consolidated financial statements.
In August 2010, the FASB issued ASU No. 2010-21, Accounting for Technical Amendments to
Various SEC Rules and Schedules. This ASU amends various SEC paragraphs pursuant to the issuance of
Release No. 33-9026: Technical Amendments to Rules, Forms, Schedules and Codification of Financial
Reporting Policies and became effective upon issuance. The Company adopted the provisions of ASU
2010-21 upon issuance with no material impact to the Companys financial position or results of
operations.
In August 2010, the FASB issued ASU No. 2010-22, Accounting for Various TopicsTechnical
Corrections to SEC Paragraphs. This ASU amends various SEC paragraphs and became effective upon
issuance. The adoption of ASU No. 2010-22 did not have a material impact on the Companys financial
position or results of operations.
In December 2010, the FASB issued ASU No. 2010-28, When to Perform Step 2 of the Goodwill
Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. This ASU updates
Accounting Standards Codification (ASC) Topic 350, IntangiblesGoodwill and Other, to amend the
criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or
negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is
more likely than not that a goodwill impairment exists. The ASU is effective for fiscal years, and
interim periods within those years, beginning after December 15, 2010. The Company does not
currently have any reporting units with zero or negative carrying values.
NOTE 3 TRADE ACCOUNTS RECEIVABLE, NET
The Company does not invoice bidders for the monthly commissions earned on retail electricity
and demand response transactions and, therefore, reports a significant portion of its receivables
as unbilled. Unbilled accounts receivable represents managements best estimate of energy
provided by the energy suppliers to the energy consumers for a specific completed time period at
contracted commission rates.
The Company generally invoices bidders for commissions earned on retail natural gas and
wholesale transactions, which are reflected as billed accounts receivable. The total commission
earned on these transactions is recognized upon completion of the procurement event and is
generally due within 30 days of invoice date. In addition, the Company invoices the bidder, lister
or combination of both for forward auctions performed for environmental commodity product
transactions. These transactions are earned and invoiced either upon lister acceptance of the
auction results or, in some cases, upon delivery of the credits or cash settlement of the
transaction.
Trade accounts receivable, net consists of the following:
December 31, | ||||||||
2010 | 2009 | |||||||
Unbilled accounts receivable |
$ | 2,852,930 | $ | 2,631,792 | ||||
Billed accounts receivable |
395,004 | 314,527 | ||||||
3,247,934 | 2,946,319 | |||||||
Allowance for doubtful accounts |
(123,606 | ) | (37,295 | ) | ||||
Trade accounts receivable, net |
$ | 3,124,328 | $ | 2,909,024 | ||||
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NOTE 4 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
December 31, | ||||||||
2010 | 2009 | |||||||
Leasehold improvements |
$ | 65,451 | $ | 65,451 | ||||
Equipment |
498,907 | 443,137 | ||||||
Furniture and fixtures |
435,579 | 435,579 | ||||||
999,937 | 944,167 | |||||||
Less accumulated depreciation |
(712,746 | ) | (573,134 | ) | ||||
Property and equipment, net |
$ | 287,191 | $ | 371,033 | ||||
Depreciation expense for the years ended December 31, 2010, 2009 and 2008 was $140,000,
$146,000 and $149,000, respectively. Property and equipment purchased under capital lease
obligations at December 31, 2010 and 2009 was $46,000 and $183,000, respectively. Accumulated
depreciation for property and equipment purchased under capital lease was $32,000 and $128,000 at
December 31, 2010 and 2009, respectively.
NOTE 5 COMMON AND PREFERRED STOCK
Preferred Stock
The Companys Amended and Restated Certificate of Incorporation, as amended, authorizes
5,000,000 shares of $0.0001 par value undesignated preferred stock for issuance by the Companys
board of directors. No shares have been issued as of December 31, 2010 and 2009.
Common Stock
At the Companys 2010 Annual Meeting of Stockholders, shareholders approved an amendment to
the Companys Amended and Restated Certificate of Incorporation, as amended, to increase the number
of authorized shares of common stock from 15,000,000 to 30,000,000.
In April 2010, we filed an S-3 registration statement with the Securities and Exchange
Commission, or SEC, using a shelf registration, or continuous offering, process. Under this shelf
registration process, we may, from time to time, issue and sell any combination of preferred stock,
common stock or warrants, either separately or in units, in one or more offerings with a maximum
aggregate offering price of $20,000,000, including the U.S. dollar equivalent if the public
offering of any such securities is denominated in one or more foreign currencies, foreign currency
units or composite currencies. We intend to use the net proceeds from the sale of the securities
under this shelf registration, if any, for general corporate purposes.
On October 30, 2009, the Company entered into an agreement with Bond, a strategic partner of
the Company, for the purchase of up to $2.5 million of the Companys common stock. Pursuant to the
agreement, a purchasing entity, an affiliate of Bond, acquired $1.0 million of World Energys
common stock at $2.97 per share on November 6, 2009. The Company agreed to offer an additional
$1.5 million in Company shares on the same terms to Bond or its designee, with the price to be
determined at the time of investment, through January 15, 2010. In the first quarter of 2010,
affiliates of Bond purchased an additional $400,000 of Company stock at an average price of $2.63
per share, bringing the net amount raised under the financing agreement to $1.3 million. Proceeds
from the transactions will be used for general corporate purposes, including supporting the
Companys growth initiatives.
On March 27, 2009, the Company filed a previously approved Certificate of Amendment to the
Companys Amended and Restated Certificate of Incorporation with the Secretary of State of Delaware
to (i) effect a reverse stock split of its outstanding common stock at a ratio of one-for-ten; and
(ii) decrease the number of authorized shares of its common stock from 150,000,000 to 15,000,000.
As a result of the reverse stock split, the issued and outstanding shares of common stock were
reduced on a basis of one share for every ten shares outstanding. All of the Companys stock
related information including issued and outstanding common stock, stock options and warrants to
purchase common stock, restricted stock and loss per share for all periods presented have been
restated to reflect the reverse stock split.
Treasury Stock
In connection with the vesting of restricted stock granted to employees the Company withheld
shares with value equivalent to employees minimum statutory obligation for the applicable income
and other employment taxes, and remitted the cash to the appropriate taxing authorities. The
total shares withheld of 6,142 and 25,840 for the years ended December 31, 2010 and 2009,
respectively, were based on the value of the restricted stock on their vesting date as determined
by the Companys closing stock price. Total payment for employees tax
obligations was approximately $18,000 and $93,000 for the years ended December 31, 2010 and
2009. These net-share settlements had the effect of share repurchases by the Company as they
reduced the number of shares that would have otherwise been issued as a result of the vesting and
did not represent an expense to the Company.
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Table of Contents
Common Stock Warrants
In 2010 the Company issued warrants to consultants for the purchase of 64,500 shares of the
Companys common stock at an average per share price of $3.03. The warrants vest ratably on a
monthly basis over six and twelve month periods and have five year lives.
The following table summarizes the Companys warrant activity:
Weighted | ||||||||
Average | ||||||||
Exercise | ||||||||
Shares | Price | |||||||
Warrants outstanding, December 31, 2007 |
200,081 | $ | 5.42 | |||||
Granted |
| $ | | |||||
Exercised |
(67,123 | ) | $ | 0.30 | ||||
Canceled/expired |
| $ | | |||||
Warrants outstanding, December 31, 2008 |
132,958 | $ | 8.00 | |||||
Granted |
| $ | | |||||
Exercised |
| $ | | |||||
Canceled/expired |
(128,698 | ) | $ | 8.27 | ||||
Warrants outstanding, December 31, 2009 |
4,260 | $ | 0.30 | |||||
Granted |
64,500 | $ | 3.03 | |||||
Exercised |
(4,110 | ) | $ | 0.30 | ||||
Canceled/expired |
(150 | ) | $ | 0.30 | ||||
Warrants outstanding, December 31, 2010 |
64,500 | $ | 3.03 | |||||
The weighted average remaining contractual life of warrants outstanding is 4.22 years as of
December 31, 2010.
NOTE 6 EMPLOYEE BENEFIT PLANS
Stock Options
The Company has two stock incentive plans: the 2003 Stock Incentive Plan, or the 2003 Plan,
and the 2006 Stock Incentive Plan, or the 2006 Plan. There were 837,061 shares of common stock
reserved for issuance under these plans at December 31, 2010. As of December 31, 2010, 168,201
shares of common stock, representing option grants still outstanding, were reserved under the 2003
Plan. No further grants are allowed under the 2003 Plan. As of December 31, 2010, 668,860 shares of
common stock were reserved under the 2006 Plan representing 536,705 outstanding stock options,
13,828 shares of restricted stock outstanding and 118,327 shares available for grant. A summary of
stock option activity under both plans for the years ended December 31, 2010, 2009 and 2008 are as
follows:
Weighted | ||||||||
Average | ||||||||
Shares | Exercise Price | |||||||
Outstanding at December 31, 2007 |
670,303 | $ | 6.47 | |||||
Granted |
120,600 | $ | 2.00 | |||||
Canceled |
(106,374 | ) | $ | 12.93 | ||||
Exercised |
(58,073 | ) | $ | 0.29 | ||||
Outstanding at December 31, 2008 |
626,456 | $ | 5.08 | |||||
Granted |
242,700 | $ | 3.47 | |||||
Canceled |
(156,248 | ) | $ | 9.85 | ||||
Exercised |
(53,020 | ) | $ | 0.55 | ||||
Outstanding at December 31, 2009 |
659,888 | $ | 3.73 | |||||
Granted |
190,600 | $ | 2.83 | |||||
Canceled |
(21,052 | ) | $ | 7.81 | ||||
Exercised |
(124,530 | ) | $ | 0.35 | ||||
Outstanding at December 31, 2010 |
704,906 | $ | 3.96 | |||||
55
Table of Contents
A summary of common stock options outstanding and common stock options exercisable as of
December 31, 2010 is as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | Average | |||||||||||||||||||||||
Remaining | Aggregate | Number | Remaining | Aggregate | ||||||||||||||||||||
Range of | Contractual | Intrinsic | of Shares | Contractual | Intrinsic | |||||||||||||||||||
Exercise Prices | Options | Life | Value | Exercisable | Life | Value | ||||||||||||||||||
$0.25 $2.40 |
144,455 | 2.70 Years | $ | 186,742 | 109,161 | 1.97 Years | $ | 157,095 | ||||||||||||||||
$2.41 $3.15 |
222,850 | 6.72 Years | 5,022 | 11,188 | 5.72 Years | | ||||||||||||||||||
$3.16 $5.03 |
217,400 | 5.28 Years | | 83,076 | 4.28 Years | | ||||||||||||||||||
$5.04 $13.40 |
120,201 | 3.30 Years | | 103,083 | 3.03 Years | | ||||||||||||||||||
704,906 | 4.87 Years | $ | 191,764 | 306,508 | 3.09 Years | $ | 157,095 | |||||||||||||||||
The aggregate intrinsic value of options exercised during the year ended December 31, 2010 was
approximately $313,000. At December 31, 2010, the weighted average exercise price of common stock
options outstanding and exercisable was $3.96 and $5.05, respectively.
Restricted Stock
A summary of restricted stock activity for the years ended December 31, 2010, 2009 and 2008
are as follows:
Weighted | ||||||||
Average | ||||||||
Shares | Grant Price | |||||||
Outstanding at December 31, 2007 |
144,850 | $ | 11.00 | |||||
Granted |
79,300 | $ | 8.65 | |||||
Canceled |
(59,940 | ) | $ | 10.22 | ||||
Vested |
(45,607 | ) | $ | 11.18 | ||||
Outstanding at December 31, 2008 |
118,603 | $ | 9.76 | |||||
Granted |
38,559 | $ | 3.45 | |||||
Canceled |
(33,943 | ) | $ | 9.45 | ||||
Vested |
(88,918 | ) | $ | 6.90 | ||||
Outstanding at December 31, 2009 |
34,301 | $ | 10.38 | |||||
Granted |
12,324 | $ | 2.84 | |||||
Canceled |
(2,885 | ) | $ | 8.55 | ||||
Vested |
(29,912 | ) | $ | 7.58 | ||||
Outstanding at December 31, 2010 |
13,828 | $ | 10.10 | |||||
401(k) Plan
The Companys 401(k) savings plan covers the majority of the Companys eligible employees.
Employees of the Company may participate in the 401(k) Plan after reaching the age of 21. The
Company may make discretionary matching contributions as determined from time to time. Employee
contributions vest immediately, while Company matching contributions begin to vest after one year
of service and continue to vest at 20% per year over the next five years. To date, the Company has
not made any discretionary contributions to the 401(k) Plan.
NOTE 7 LOSS PER SHARE
As of December 31, 2010, 2009 and 2008, the Company only had one issued and outstanding class
of stock common stock. As a result, the basic loss per share for the years ended December 31,
2010, 2009 and 2008 is computed by dividing net loss by the weighted average number of common
shares outstanding for the period.
The computed loss per share does not assume conversion, exercise, or contingent exercise of
securities that would have an anti-dilutive effect on loss per share. As the Company was in a net
loss position for the reported periods, all common stock equivalents were anti-dilutive.
Therefore, the weighted average of basic and diluted voting shares of common stock outstanding for
the years ended December 31, 2010, 2009 and 2008 were 9,067,834, 8,512,060 and 8,310,315,
respectively.
56
Table of Contents
The following represents issuable weighted average share information for the respective
periods:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Common stock options |
112,699 | 224,490 | 266,647 | |||||||||
Common stock warrants |
1,878 | 10,373 | 82,724 | |||||||||
Unvested restricted stock |
357 | 922 | 24,583 | |||||||||
Total common stock equivalents |
114,934 | 235,785 | 373,954 | |||||||||
In addition, common stock options, common stock warrants and unvested restricted stock of
560,451, 64,500 and 13,079, respectively, were excluded from the calculation of net loss per share,
as inclusion of such shares would be antidilutive due to exercise prices or value of proceed shares
exceeding the average market price of the Companys common stock during the year ended December 31,
2010. Common stock options and unvested restricted stock of 389,778 and 32,676, respectively, were
excluded from the calculation of net loss per share, as inclusion of such shares would be
antidilutive due to exercise prices or value of proceed shares exceeding the average market price
of the Companys common stock during year ended December 31, 2009. Common stock options, common
stock warrants and unvested restricted stock of 221,825, 115,000 and 65,843, respectively, were
excluded from the calculation of net loss per share, as inclusion of such shares would be
antidilutive due to exercise prices or value of proceed shares exceeding the average market price
of the Companys common stock during year ended December 31, 2008.
The Company did not declare or pay any dividends in 2010, 2009 and 2008.
NOTE 8 SHARE-BASED COMPENSATION
The Company recognizes the compensation from share-based awards on a straight-line basis over
the requisite service period of the award. For the year ended December 31, 2010, share based
awards consisted of grants of stock options and stock warrants, and for the years ended December
31, 2009 and 2008, share-based awards consisted of grants of restricted stock and stock options.
The restrictions on the restricted stock lapse over the vesting period. The vesting period of
share-based awards is determined by the board of directors, and is generally four years for
employees. The per-share weighted-average fair value of stock options granted during the years
ended December 31, 2010, 2009 and 2008 was $2.12, $2.68 and $1.21, respectively, on the date of
grant, using the Black-Scholes option-pricing model with the following weighted-average
assumptions and estimated forfeiture rates of 10%, 11% and 15% in 2010, 2009 and 2008,
respectively:
Year ended | Expected | Risk | Expected | Expected | ||||||||||||
December 31, | Dividend Yield | Interest Rate | Life | Volatility | ||||||||||||
2010 |
| 1.93 | % | 4.75 years | 105 | % | ||||||||||
2009 |
| 2.28 | % | 4.75 years | 113 | % | ||||||||||
2008 |
| 1.67 | % | 4.75 years | 87 | % |
The per-share weighted-average fair value of stock warrants granted during the year ended
December 31, 2010 was $2.44 on the date of grant, using the Black-Scholes option-pricing model with
weighted-average assumptions for the risk-free interest rate, expected life and expected volatility
of 2.37%, 5 years and 114%, respectively, and an estimated average forfeiture rate of 7% for the
year ended December 31, 2010.
The Company elected to use the Black-Scholes option pricing model to determine the weighted
average fair value of options and warrants granted. Prior to the fourth quarter of 2009, the
Company determined the volatility for stock options based on a weighted combination of per share
reported closing prices and historical and reported data for a peer group of companies that issued
options with substantially similar terms due to the Companys limited trading history. During the
fourth quarter of 2009, the Company determined the volatility for stock options based on the
reported closing prices of the Companys stock since its initial public offering in November 2006
as management had determined that this weighting was more indicative of the volatility to be in
effect during the expected term of the awards. The expected life of stock options and stock
warrants has been determined utilizing the simplified method as prescribed by the SECs Staff
Accounting Bulletin No. 107, Share-Based Payment. The risk-free interest rate is based on a
treasury instrument whose term is consistent with the expected life of the stock options and stock
warrants. The Company has not paid and does not anticipate paying cash dividends on its common
stock; therefore, the expected dividend yield is assumed to be zero. In addition, guidance from the
FASB requires companies to utilize an estimated forfeiture rate when calculating the expense for
the period. As a result, the Company applied estimated forfeiture rates to unvested share-based
compensation of 10% for stock options and restricted stock and 7% for stock warrants, respectively,
for the year ended December 31, 2010 in determining the expense recorded in the accompanying
consolidated statements of operations. The Company applied estimated forfeiture rates to unvested
share-based compensation of 11% and 15% for stock options and restricted stock for the years ended
December 31, 2009 and 2008, respectively, in determining the expense recorded in the accompanying
consolidated statements of operations.
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The approximate total share-based compensation expense for the periods presented is included
in the following expense categories:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cost of revenue |
$ | 79,000 | $ | 93,000 | $ | 197,000 | ||||||
Sales and marketing |
227,000 | 350,000 | 670,000 | |||||||||
General and administrative |
365,000 | 190,000 | 140,000 | |||||||||
Total share-based compensation |
$ | 671,000 | $ | 633,000 | $ | 1,007,000 | ||||||
As of December 31, 2010, there was approximately $1,019,000 of unrecognized compensation
expense related to share-based awards, including approximately $889,000 related to non-vested stock
option awards that is expected to be recognized over a weighted-average period of 2.94 years,
approximately $126,000 related to non-vested restricted stock awards that is expected to be
recognized over a weighted average period of 0.79 years and approximately $4,000 related to
non-vested stock warrants that is expected to be recognized over a weighted average period of 0.33
years. See Note 6 to the consolidated financial statements for a summary of the share-based
activity under the Companys stock-based employee compensation plans for the years ended December
31, 2010, 2009 and 2008.
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 measured. During 2010, stock warrants were granted
for 64,500 shares of common stock to consultants in consideration for services performed, for which
the Company recognized a charge of approximately $153,000 to general and administrative expense in
the statement of operations for the year ended December 31, 2010. The Company recognized a charge
of approximately $35,000 to sales and marketing expense in the statement of operations for the year
ended December 31, 2008 related to a prior year grant of restricted common stock to non employees
in consideration for services performed.
NOTE 9 RELATED PARTIES
A member of the Board has been performing consulting services for the Company in relation to
certain strategic initiatives. During 2010 and 2009, the Company incurred approximately $32,000 and
$20,000, respectively, of consulting fees for advisory services performed by this Board member. No
amount was outstanding to the member of the Board for advisory services at December 31, 2010.
NOTE 10 INCOME TAXES
The
components of the net deferred tax asset (liability) are as follows:
December 31, | ||||||||
2010 | 2009 | |||||||
Depreciation and amortization |
$ | 897,334 | $ | 689,098 | ||||
Goodwill |
(305,792 | ) | (220,455 | ) | ||||
Accruals and reserves |
58,816 | 9,469 | ||||||
Net operating loss carryforwards |
7,142,950 | 7,470,335 | ||||||
7,793,308 | 7,948,447 | |||||||
Valuation allowance |
(7,793,308 | ) | (7,948,447 | ) | ||||
$ | | $ | | |||||
The Company did not provide for income taxes in any of the three years ending December 31,
2010. A reconciliation of the Companys federal statutory tax rate to its effective rate is as
follows:
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income tax at federal statutory rate |
(34.0 | )% | (34.0 | )% | (34.0 | )% | ||||||
Increase (decrease) in tax resulting from: |
||||||||||||
State taxes, net of federal benefit |
(6.3 | )% | (6.3 | )% | (6.3 | )% | ||||||
Permanent differences |
196.8 | % | 6.0 | % | 0.7 | % | ||||||
Change in valuation allowance |
(156.5 | )% | 34.3 | % | 39.6 | % | ||||||
0.0 | % | 0.0 | % | 0.0 | % | |||||||
As of December 31, 2010, the Company has federal net operating loss carryforwards of
approximately $17.4 million which begin to expire in 2022, and state net operating loss
carryforwards of approximately $14.9 million, which begin to expire in 2011. A valuation allowance
is established, if it is more likely than not, that all or a portion of the deferred tax asset will
not be realized. At December 31, 2010, the Company maintained a full valuation allowance of
approximately $7.8 million against its deferred tax assets.
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The Company files income tax returns in the United States federal jurisdiction and in various
states. The Company has reviewed the tax positions taken, or to be taken, in its tax returns for
all tax years currently open to examination by the taxing authorities. With few exceptions, the
Company is no longer subject to U.S. federal, state and local income tax examination by tax
authorities for years before 2007. At December 31, 2010, there are no expected material, aggregate
tax effect of differences between tax return positions and the benefits recognized in the financial
statements.
Under the provisions of the Internal Revenue Code, certain substantial changes in the
Companys ownership may have limited or may limit in the future the amount of net operating loss
carryforwards which could be utilized annually to offset future taxable income and income tax
liabilities. The amount of any annual limitation is determined based upon the Companys value prior
to an ownership change.
NOTE 11 COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain equipment under capital leases that expire through May 2012 and are
collateralized by the related equipment. The Company has accounted for these leases using
incremental borrowing rates ranging from 5.8% to 10.0%. The Company maintains operating leases for
office space in five locations in the United States, paid in installments due the beginning of each
month and that expire through July 2012. Future aggregate minimum payments under capital and
operating leases as of December 31, 2010 were as follows:
Capital | Operating | |||||||
Leases | Leases | |||||||
2011 |
$ | 15,327 | $ | 294,843 | ||||
2012 |
1,211 | 42,973 | ||||||
Total future minimum lease payments |
16,538 | $ | 337,816 | |||||
Less: amounts representing interest |
(535 | ) | ||||||
Present value of future minimum lease payments |
16,003 | |||||||
Less: current portion |
14,798 | |||||||
Capital lease obligation, net of current portion |
$ | 1,205 | ||||||
The accompanying statement of operations for the years ended December 31, 2010, 2009, and 2008
includes $373,000, $388,000 and $369,000 of rent expense, respectively.
Service Agreement
In 2007, the Company entered into a service agreement with an unrelated party for a hosting
environment and dedicated server for the Companys online energy management software. The terms of
the agreement require quarterly payments amounting to approximately $8,400. The agreement expires
in May 2011 with an automatic one year renewal clause.
NOTE 12 CREDIT ARRANGEMENT
On September 30, 2009, the Company entered into a First Loan Modification Agreement (the
Modification Agreement) with Silicon Valley Bank (SVB). The Modification Agreement extended the
Loan and Security Agreement with SVB dated September 8, 2008 to March 7, 2011. Under the
Modification Agreement, SVB has committed to make advances to the Company in an aggregate amount of
up to $3,000,000, subject to availability against certain eligible accounts receivable and eligible
retail backlog. The credit facility bears interest at a floating rate per annum based on the prime
rate plus 1.25% on advances made against eligible accounts receivable and prime rate plus 2.00% on
advances made against eligible retail backlog, with the prime rate being subject to a 4.00% floor.
These interest rates are subject to change based on the Companys maintenance of an adjusted quick
ratio of one-to-one.
The Company has not taken advances under the facility and there were no outstanding borrowings
at December 31, 2010. As of December 31, 2010, the Company was in compliance with its covenants
under the facility.
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NOTE 13 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected unaudited consolidated financial results for each of the
eight quarters in the two-year period ended December 31, 2010. In the Companys opinion, this
unaudited information has been prepared on the same basis as the audited information and includes
all adjustments necessary for a fair statement of the financial information for the periods
presented.
For The Quarters Ended | ||||||||||||||||
March 31, | June 30, | September 30, | December 31, | |||||||||||||
2010 |
||||||||||||||||
Revenue |
$ | 4,408,106 | $ | 4,010,980 | $ | 4,650,992 | $ | 4,914,584 | ||||||||
Gross profit |
3,458,541 | 3,097,660 | 3,737,540 | 3,975,052 | ||||||||||||
Operating income (loss) |
(127,184 | ) | (498,399 | ) | 144,672 | 373,142 | ||||||||||
Net income (loss) |
(128,444 | ) | (499,649 | ) | 147,227 | 381,779 | ||||||||||
Net income (loss) per common share basic |
$ | (0.01 | ) | $ | (0.06 | ) | $ | 0.02 | $ | 0.04 | ||||||
Net income (loss) per common share diluted |
$ | (0.01 | ) | $ | (0.06 | ) | $ | 0.02 | $ | 0.04 | ||||||
Weighted average shares outstanding basic |
9,016,711 | 9,061,695 | 9,083,807 | 9,107,943 | ||||||||||||
Weighted average shares outstanding diluted |
9,016,711 | 9,061,695 | 9,189,776 | 9,198,720 | ||||||||||||
2009 |
||||||||||||||||
Revenue |
$ | 3,977,779 | $ | 3,682,476 | $ | 3,458,262 | $ | 3,499,758 | ||||||||
Gross profit |
2,887,827 | 2,697,580 | 2,564,594 | 2,758,317 | ||||||||||||
Operating loss |
(663,957 | ) | (793,060 | ) | (635,209 | ) | (235,242 | ) | ||||||||
Net loss |
(665,074 | ) | (795,104 | ) | (636,702 | ) | (236,639 | ) | ||||||||
Net loss per common share basic and diluted |
$ | (0.08 | ) | $ | (0.09 | ) | $ | (0.08 | ) | $ | (0.03 | ) | ||||
Weighted average shares outstanding basic
and diluted |
8,419,721 | 8,446,999 | 8,468,500 | 8,710,305 |
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EXHIBIT INDEX
Exhibit | Description | |||
2.1 | Asset Purchase Agreement by and among World Energy Solutions, Inc., EnergyGateway, LLC and the Members of EnergyGateway, LLC dated May 23,
2007 (incorporated by reference to Exhibit 99.1 to our report on Form 8-K filed May 24, 2007). |
|||
3.1 | Form of Amended and Restated Certificate of Incorporation of World Energy (incorporated by reference to Exhibit 3.4 to our Registration
Statement of Form S-1 (File No. 333-136528)). |
|||
3.2 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of World Energy Solutions, Inc. (incorporated by reference
to Exhibit 3.1 to our report on Form 8-K filed March 30, 2009). |
|||
3.3 | Form of Amended and Restated By-laws of World Energy (incorporated by reference to Exhibit 3.5 to our Registration Statement of Form
S-1(File No. 333-136528)). |
|||
3.4 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of World Energy (incorporated by reference to Exhibit 3.1
to our report on Form 8-K filed May 24, 2010). |
|||
4.1 | Specimen Certificate evidencing shares of common stock (incorporated by reference to Exhibit 4.1 to our Registration Statement of Form S-1
(File No. 333-136528)). |
|||
10.1 | + | 2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to our Registration Statement of Form S-1 (File No. 333-136528)). |
||
10.2 | + | 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to our Registration Statement of Form S-1 (File No. 333-136528)). |
||
10.3 | Note and Warrant Purchase Agreement, dated November 7, 2005, between World Energy and Massachusetts Capital Resource Company (incorporated
by reference to Exhibit 10.3 to our Registration Statement of Form S-1 (File No. 333-136528)). |
|||
10.4 | Subordinated Note due 2013, dated November 7, 2005 (incorporated by reference to Exhibit 10.4 to our Registration Statement of Form S-1
(File No. 333-136528)). |
|||
10.5 | Voting Common Stock Purchase Warrant, dated November 7, 2005 (incorporated by reference to Exhibit 10.5 to our Registration Statement of
Form S-1 (File No. 333-136528)). |
|||
10.6 | Form of Common Stock Purchase Warrants (incorporated by reference to Exhibit 10.6 to our Registration Statement of Form S-1 (File No.
333-136528)). |
|||
10.7 | Solicitation/Contract/Order for Commercial Items, dated September 28, 2005, between U.S. General Services Administration and World Energy
(incorporated by reference to Exhibit 10.7 to our Registration Statement of Form S-1 (File No. 333-136528)). |
|||
10.8 | Agreement to Provide Software and Support for a Reverse Energy Auction Procurement to the Maryland Department of General Services, dated
March 16, 2006, by and between World Energy and the State of Maryland (incorporated by reference to Exhibit 10.8 to our Registration
Statement of Form S-1 (File No. 333-136528)). |
|||
10.9 | ++ | Contract, dated January 9, 2006, by and between Montgomery County, Maryland and World Energy (incorporated by reference to Exhibit 10.9 to
our Registration Statement of Form S-1 (File No. 333-136528)). |
||
10.10 | Emergency Purchase/Interim Agreement, dated March 28, 2006, by and between the Commonwealth of Pennsylvania, Department of General
Services and World Energy (incorporated by reference to Exhibit 10.10 to our Registration Statement of Form S-1 (File No. 333-136528)). |
|||
10.11 | Professional Services Agreement, dated June 1, 2005, between World Energy and Science Applications International Corporation (incorporated
by reference to Exhibit 10.11 to our Registration Statement of Form S-1 (File No. 333-136528)). |
|||
10.12 | Escrow Agreement (incorporated by reference to Exhibit 10.12 to our Registration Statement of Form S-1 (File No. 333-136528)). |
|||
10.13 | + | Offer letter agreement, dated October 1, 2003, between World Energy and Philip V. Adams (incorporated by reference to Exhibit 10.13 to our
Registration Statement of Form S-1(File No. 333-136528)). |
||
10.14 | + | Offer letter agreement, dated April 5, 2006, between World Energy and James Parslow (incorporated by reference to Exhibit 10.14 to our
Registration Statement of Form S-1 (File No. 333-136528)). |
||
10.15 | Lease, dated September 8, 2004, between Sovereign Bank and World Energy (incorporated by reference to Exhibit 10.15 to our Registration
Statement of Form S-1(File No. 333-136528)). |
|||
10.16 | Lease, dated June 21, 2006, between Roosevelt Land, LP and World Energy (incorporated by reference to Exhibit 10.16 to our Registration
Statement of Form S-1 (File No. 333-136528)). |
|||
10.17 | Form of Warrant being issued to Underwriters (incorporated by reference to Exhibit 10.17 to our Registration Statement of Form S-1 (File
No. 333-136528)). |
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Exhibit | Description | |||
10.18 | Form of Registration Rights Agreement with Underwriters (incorporated by reference to Exhibit 10.18 to our Registration Statement of Form
S-1 (File No. 333-136528)). |
|||
10.19 | Loan and Security Agreement with Silicon Valley Bank dated September 8, 2008 (incorporated by reference to Exhibit 10.1 to our report on
Form 8-K filed September 8, 2008). |
|||
10.20 | First Loan Modification, dated September 30, 2009 to Loan and Security Agreement with Silicon Valley Bank (incorporated by reference to
Exhibit 10.1 to our report on Form 8-K filed October 6, 2009). |
|||
10.21 | Form of Securities Purchase Agreement executed with respect to $1.4 million in common stock purchases made by certain investors
(incorporated by reference to Exhibit 10.21 to our report on Form 10-K filed on March 4, 2010). |
|||
21.1 | * | List of Subsidiaries. |
||
23.1 | * | Consent of Marcum LLP, Independent Registered Public Accounting Firm. |
||
23.2 | * | Consent of UHY LLP, Independent Registered Public Accounting Firm. |
||
31.1 | * | Certification of the Chief Executive Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act. |
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31.2 | * | Certification of the Chief Financial Officer pursuant to Rule 15d-14(a) under the Securities Exchange Act. |
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32.1 | * | Certification of the Chief Executive Officer pursuant to Rule 15d-14(b) under the Securities Exchange Act. |
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32.2 | * | Certification of the Chief Financial Officer pursuant to Rule 15d-14(b) under the Securities Exchange Act. |
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99.1 | + | Third Amendment of Consulting Agreement dated October 9, 2007 (incorporated by reference to Exhibit 99.1 to our report on Form 8-K filed
October 12, 2007). |
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99.2 | + | Second Amendment of Consulting Agreement dated July 5, 2007 (incorporated by reference to Exhibit 99.1 to our report on Form 8-K filed
July 5, 2007), |
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99.3 | + | Amended Consulting Agreement dated April 5, 2007 (incorporated by reference to Exhibit 99.1 to our report on Form 8-K filed April 9, 2007). |
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99.4 | + | Consulting Agreement dated January 10, 2007 (incorporated by reference to Exhibit 99.1 to our report on Form 8-K filed January 11, 2007). |
* | Filed herewith |
|
+ | Indicates a management contract or any compensatory plan, contract or arrangement |
|
++ | Confidential treatment requested as to certain portions, which portions have been filed separately with the Securities and
Exchange Commission |
62