World Energy Solutions, Inc. - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - World Energy Solutions, Inc.	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - World Energy Solutions, Inc.	c20393exv32w1.htm
EX-31.1 - EXHIBIT 31.1 - World Energy Solutions, Inc.	c20393exv31w1.htm
EX-31.2 - EXHIBIT 31.2 - World Energy Solutions, Inc.	c20393exv31w2.htm
EX-32.2 - EXHIBIT 32.2 - World Energy Solutions, Inc.	c20393exv32w2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2011;


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
(Address of principal executive offices)

508-459-8100

(Registrant’s telephone number)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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


Large Accelerated Filer o	Accelerated Filer o	Non-Accelerated Filer o	Smaller Reporting Company þ
		(Do not check if a smaller reporting company)

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of July 29, 2011, the registrant had 10,765,776 shares of common stock outstanding.

TABLE OF CONTENTS


	Page

PART I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010		2

Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010		3

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010		4

Notes to Condensed Consolidated Financial Statements		5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosure about Market Risk		24

Item 4. Controls and Procedures		24

PART II. Other Information

Item 1. Legal Proceedings		25

Item 1A. Risk Factors		25

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		25

Item 3. Defaults Upon Senior Securities		25

Item 4. Removed and Reserved		25

Item 5. Other Information		25

Item 6. Exhibits		26

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I
FINANCIAL INFORMATION


Item 1.		Financial Statements

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,			December 31,
	2011			2010
	(Unaudited)

Assets
Current assets
Cash and cash equivalents	$	9,216,653		$	3,559,288
Trade accounts receivable, net		3,036,964			3,124,328
Prepaid expenses and other current assets		339,052			229,108

Total current assets		12,592,669			6,912,724
Property and equipment, net		228,130			287,191
Convertible note receivable		650,000			433,333
Intangibles, net		3,244,884			3,723,607
Goodwill		3,178,701			3,178,701
Other assets		184,965			191,238


Total assets	$	20,079,349		$	14,726,794


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	293,647		$	263,746
Accrued commissions		886,193			847,758
Accrued compensation		1,189,387			1,970,639
Accrued expenses		190,826			187,097
Deferred revenue and customer advances		160,314			229,539
Capital lease obligations		8,313			14,798

Total current liabilities		2,728,680			3,513,577
Capital lease obligations, net of current portion		—			1,205

Total liabilities		2,728,680			3,514,782


Commitments and contingencies

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; 10,807,431 shares issued and 10,760,028 shares outstanding at June 30, 2011, and 9,200,306 shares issued and 9,155,281 shares outstanding at December 31, 2010		1,076			916
Additional paid-in capital		39,208,058			33,502,074
Accumulated deficit		(21,639,638	)		(22,081,038	)
Treasury stock, at cost; 47,403 shares at June 30, 2011 and 45,025 shares at December 31, 2010		(218,827	)		(209,940	)

Total stockholders’ equity		17,350,669			11,212,012

Total liabilities and stockholders’ equity	$	20,079,349		$	14,726,794

See accompanying notes to condensed consolidated financial statements.

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Revenue:
Brokerage commissions and transaction fees	$	4,388,968	$	3,764,041		$	9,059,792	$	7,920,711
Management fees		247,714		246,939			495,278		498,375

Total revenue		4,636,682		4,010,980			9,555,070		8,419,086

Cost of revenue		935,981		913,320			1,936,513		1,862,885

Gross profit		3,700,701		3,097,660			7,618,557		6,556,201


Operating expenses:
Sales and marketing		2,416,829		2,405,114			4,873,050		4,905,836
General and administrative		1,099,331		1,190,945			2,317,070		2,275,948

Total operating expenses		3,516,160		3,596,059			7,190,120		7,181,784


Operating income (loss)		184,541		(498,399	)		428,437		(625,583	)

Interest income (expense), net		14,020		(1,250	)		27,463		(2,510	)


Income (loss) before income taxes		198,561		(499,649	)		455,900		(628,093	)

Income tax expense		7,250		—			14,500		—


Net income (loss)	$	191,311	$	(499,649	)	$	441,400	$	(628,093	)


Net income (loss) per share:

Net income (loss) per common share — basic and diluted	$	0.02	$	(0.06	)	$	0.04	$	(0.07	)


Weighted average shares outstanding — basic		10,584,465		9,061,695			9,895,661		9,039,327


Weighted average shares outstanding — diluted		10,650,397		9,061,695			9,939,444		9,039,327

See accompanying notes to condensed consolidated financial statements.

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net income (loss)	$	441,400		$	(628,093	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		622,085			772,201
Share-based compensation		317,508			355,309
Interest on note receivable		(28,956	)		—

Changes in operating assets and liabilities:
Trade accounts receivable		87,364			(471,424	)
Prepaid expenses and other current assets		(109,944	)		(73,136	)
Accounts payable		29,901			(8,363	)
Accrued commissions		38,435			124,553
Accrued compensation		(781,252	)		(182,431	)
Accrued expenses		3,729			72,334
Deferred revenue and customer advances		(69,225	)		(634,706	)

Net cash provided by (used in) operating activities		551,045			(673,756	)


Cash flows from investing activities:
Increase in other assets		(41,109	)		—
Advance against note receivable		(216,667	)		—
Purchases of property and equipment		(7,963	)		(19,480	)

Net cash used in investing activities		(265,739	)		(19,480	)


Cash flows from financing activities:
Proceeds from exercise of stock options		84,657			26,632
Proceeds from exercise of stock warrants		—			1,234
Proceeds from the sale of common stock, net		5,303,979			354,276
Purchase of treasury stock		(8,887	)		(9,788	)
Principal payments on capital lease obligations		(7,690	)		(7,956	)

Net cash provided by financing activities		5,372,059			364,398


Net increase (decrease) in cash and cash equivalents		5,657,365			(328,838	)

Cash and cash equivalents, beginning of period		3,559,288			2,046,909

Cash and cash equivalents, end of period	$	9,216,653		$	1,718,071


Supplemental disclosure of cash flow information:
Net cash paid for interest	$	(1,605	)	$	(2,493	)

Net cash paid for income taxes	$	(14,000	)	$	—

See accompanying notes to condensed consolidated financial statements.

WORLD ENERGY SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

June 30, 2011

1. Nature of Business and Basis of Presentation

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 the Company serves. The Company’s management believes 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. The Company helps 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”) who have agreed to participate on the Company’s auction platform. Although the Company’s 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 Company also uses the exchange’s sophisticated monitoring, triggering and messaging tools to develop, support and implement comprehensive risk management strategies for its more sophisticated clients.

In 2007, the Company created the World Green Exchange^® to support companies’ 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, 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 source of curtailment-ready customers for the industry’s curtailment service providers (“CSPs”). The World DR Exchange^® creates the industry’s 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 July 2010, the Company entered into a convertible note agreement with Retroficiency, Inc. (“Retroficiency”), an emerging company that develops software for identifying and qualifying business energy efficiency measures. Leveraging Retroficiency’s platform, the Company launched a new product for the energy efficiency market, the Virtual Energy Audit™, enabling commercial property owners and managers to more efficiently identify, evaluate, execute and manage retrofit opportunities across their portfolios.

2. Interim Financial Statements

The December 31, 2010 condensed consolidated balance sheet has been derived from audited consolidated financial statements and the accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments consisting of normal recurring adjustments and accruals necessary for the fair presentation of the Company’s financial position as of June 30, 2011, and the results of its operations and cash flows for the three and six months ended June 30, 2011 and 2010, respectively. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2011. Certain prior year amounts have been reclassified to conform to the current year presentation.

The preparation of financial statements in conformity with 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 Company’s most judgmental estimates affecting its condensed 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.

3. Earnings (Loss) Per Share

As of June 30, 2011 and 2010, the Company only had one issued and outstanding class of stock — common stock. As a result, the basic earnings or loss per share for the three and six months ended June 30, 2011 and 2010 is computed by dividing net earnings or loss available to common stockholders by the weighted average number of common shares outstanding for the period.

The following table provides a reconciliation of the denominators of the Company’s reported basic and diluted earnings per share computation for the three and six months ended June 30, 2011:


	Three Months Ended		Six Months Ended
	June 30, 2011		June 30, 2011
Weighted number of common shares — basic		10,584,465		9,895,661
Common stock equivalents		65,932		43,783

Weighted number of common and common equivalent shares — diluted		10,650,397		9,939,444

The computed loss per share does not assume conversion, exercise, or contingent exercise of securities that would have an antidilutive effect on loss per share. As the Company was in a net loss position for the three and six month periods ended June 30, 2010, all common stock equivalents in those periods were antidilutive.

The following represents issuable weighted average share information for the respective periods:


	For the three months ended June 30,				For the six months ended June 30,
	2011		2010		2011		2010
Common stock options		36,203		121,696		31,701		127,026
Common stock warrants		29,309		3,767		11,712		3,797
Unvested restricted stock		420		408		370		408

Total common stock equivalents		65,932		125,871		43,783		131,231

In addition, common stock options and unvested restricted stock of 493,826 and 3,847, respectively, were excluded from the calculation of net earnings per share for the three months ended June 30, 2011, and common stock options, common stock warrants and unvested restricted stock of 541,351, 300,000 and 3,847, respectively, were excluded from the calculation of net earnings per share for the six months ended June 30, 2011, as inclusion of such shares would be antidilutive due to exercise prices or value of proceed shares exceeding the average market price of the Company’s common stock during that period.

Common stock options, common stock warrants and unvested restricted stock of 390,351, 64,500 and 23,488, respectively, were excluded from the calculation of net loss per share for the three and six months ended June 30, 2010, as inclusion of such shares would be antidilutive due to exercise prices or value of proceed shares exceeding the average market price of the Company’s common stock during that period.

4. 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 June 30, 2011, approximately $7,150,000 of the Company’s 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 Company’s revenue is generated from retail energy transactions where the winning bidder pays a commission to the Company, commission payments for certain 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 three						Revenue for the six						Trade Accounts Receivable as
	months ended June 30,						months ended June 30,						of June 30,
Bidder	2011			2010			2011			2010			2011			2010
A		5	%		9	%		5	%		9	%		12	%		20	%
B		11	%		12	%		12	%		12	%		10	%		10	%
C		14	%		12	%		13	%		10	%		18	%		14	%

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 three and six months ended June 30, 2011 and 2010, no energy consumer represented more than 10% individually of the Company’s aggregate revenue.

5. 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 represent management’s 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 certain 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:


	June 30, 2011			December 31, 2010
Unbilled accounts receivable	$	2,786,482		$	2,852,930
Billed accounts receivable		321,804			395,004

		3,108,286			3,247,934
Allowance for doubtful accounts		(71,322	)		(123,606	)

Trade accounts receivable, net	$	3,036,964		$	3,124,328

6. Property and Equipment, Net

Property and equipment, net consists of the following:


	June 30, 2011			December 31, 2010
Leasehold improvements	$	65,451		$	65,451
Equipment		495,527			498,907
Furniture and fixtures		435,579			435,579

		996,557			999,937
Less: accumulated depreciation		(768,427	)		(712,746	)

Property and equipment, net	$	228,130		$	287,191

Depreciation expense for the three months ended June 30, 2011 and 2010 was approximately $32,000 and $41,000, respectively, and depreciation expense for the six months ended June 30, 2011 and 2010 was approximately $67,000 and $72,000, respectively. Property and equipment purchased under capital lease obligations at June 30, 2011 and December 31, 2010 was approximately $35,000 and $46,000, respectively. Accumulated depreciation for property and equipment purchased under capital lease was approximately $27,000 and $32,000 at June 30, 2011 and December 31, 2010, respectively.

7. Common and Preferred Stock

Common Stock

On April 11, 2011 the Company issued approximately 1.5 million shares of common stock at $3.60 per share yielding proceeds of approximately $5.3 million, net of $0.2 million of expenses, to several accredited institutional investors. A shelf registration statement related to these securities was declared effective on April 21, 2010 by the SEC. The Company anticipates using the new capital for strategic initiatives, including investments and acquisitions in the energy management space.

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 2,378 and 3,309 for the six months ended June 30, 2011 and 2010, respectively, were based on the value of the restricted stock on their vesting date as determined by the Company’s closing stock price. Total payment for employees’ tax obligations was approximately $9,000 and $10,000 for the six months ended June 30, 2011 and 2010. 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.

Common Stock Warrants

On March 1, 2011, the Company issued warrants to consultants for the purchase of 300,000 shares of the Company’s common stock at a per share price of $3.00. The warrants vest ratably on a quarterly basis over a twelve month period and have a one year life.

The following table summarizes the Company’s warrant activity for the six months ended June 30, 2011:


			Weighted Average
	Shares		Exercise Price
Warrants outstanding, December 31, 2010		64,500	$	3.03
Granted		300,000	$	3.00
Exercised		—	$	—
Canceled/expired		—	$	—

Warrants outstanding, June 30, 2011		364,500	$	3.00

The weighted average remaining contractual life of warrants outstanding is 1.21 years as of June 30, 2011.

8. Share-Based Compensation

For the six months ended June 30, 2011 and 2010, share-based awards consisted of grants of stock options and stock warrants, respectively. The Company recognizes the compensation from share-based awards on a straight-line basis over the requisite service period of the award. The vesting period of share-based awards is determined by the board of directors, and is generally four years for employees. The restrictions on the restricted stock lapse over the vesting period, which is typically four years. The per-share weighted-average fair value of stock options granted during the six months ended June 30, 2011 was $2.78 on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions and an estimated forfeiture rate of 10%:

Expected

Dividend

Risk-Free

Expected

Six months ended June 30,

Yield

Interest Rate

Life

Volatility

2011

—

1.97

4.75 years

103

The per-share weighted-average fair value of stock warrants granted during the six months ended June 30, 2011 was $1.01 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 0.22%, one year and 58%, respectively, and no estimated forfeiture rate for the six months ended June 30, 2011.

The Company elected to use the Black-Scholes option pricing model to determine the weighted average fair value of options and warrants granted. The Company determined the volatility for stock options based on the reported closing prices of the Company’s stock since its initial public offering in November 2006. The expected life of stock options and stock warrants has been determined utilizing the “simplified” method as prescribed by the SEC’s 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 Financial Accounting Standards Board 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 for each of the six month periods ended June 30, 2011 and 2010, respectively, in determining the expense recorded in the accompanying consolidated statements of operations.

The approximate total share-based compensation expense for the periods presented is included in the following expense categories:


	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Cost of revenue	$	20,000	$	19,000	$	43,000	$	36,000
Sales and marketing		108,000		58,000		174,000		119,000
General and administrative		48,000		125,000		101,000		183,000

Total share-based compensation	$	176,000	$	202,000	$	318,000	$	338,000

As of June 30, 2011, there was approximately $1,034,000 of unrecognized compensation expense related to share-based awards, including approximately $714,000 related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 2.64 years, approximately $35,000 related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 0.63 years and approximately $285,000 related to non-vested stock warrants that is expected to be recognized over a weighted average period of 0.67 years.

9. 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 749,937 shares of common stock reserved for issuance under these plans at June 30, 2011. As of June 30, 2011, 103,201 shares of common stock, representing outstanding stock options, were reserved under the 2003 Plan. No further grants are allowed under the 2003 Plan. As of June 30, 2011, 646,736 shares of common stock were reserved under the 2006 Plan representing 505,405 outstanding stock options, 4,623 shares of restricted stock outstanding and 136,708 shares available for grant. A summary of stock option activity under both plans for the six months ended June 30, 2011 is as follows:


	Number of			Weighted Average
	Stock Options			Exercise Price
Outstanding at December 31, 2010		704,906		$	3.96
Granted		4,200		$	3.78
Cancelled		(25,687	)	$	3.37
Exercised		(74,813	)	$	1.13

Outstanding at June 30, 2011		608,606		$	4.33

A summary of common stock options outstanding and common stock options exercisable as of June 30, 2011 is as follows:


	Options Outstanding					Options Exercisable
			Weighted					Weighted
			Average					Average
			Remaining	Aggregate		Number		Remaining	Aggregate
			Contractual	Intrinsic		Of Shares		Contractual	Intrinsic
Range of Exercise Prices	Options		Life	Value		Exercisable		Life	Value
$2.00 — $2.40		67,005	4.00 Years	$	144,211		44,282	3.77 Years	$	94,220
$2.41 — $3.15		210,800	6.26 Years		280,414		13,125	5.22 Years		13,781
$3.16 — $5.03		214,850	4.80 Years		196,247		102,951	4.11 Years		83,829
$5.04 — $13.40		115,951	2.73 Years		—		109,701	2.60 Years		—

		608,606	4.82 Years	$	620,872		270,059	3.50 Years	$	191,830

The aggregate intrinsic value of options exercised during the six months ended June 30, 2011 was approximately $176,000. At June 30, 2011, the weighted average exercise price of common stock options outstanding and exercisable was $4.33 and $6.02, respectively.

Restricted Stock

A summary of restricted stock activity under the 2006 Plan for the six months ended June 30, 2011 is as follows:


				Weighted Average
	Shares			Grant Price
Outstanding at December 31, 2010		13,828		$	10.10
Granted		5,356		$	3.27
Cancelled		(2,250	)	$	10.76
Vested		(12,311	)	$	7.68

Outstanding at June 30, 2011		4,623		$	8.32

401(k) Plan

The Company’s 401(k) savings plan covers the majority of the Company’s 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.

10. Convertible Note Receivable

In July 2010, the Company made a $650,000 strategic investment in the form of a two-year convertible note with Retroficiency. The convertible note bears interest at 9% per annum 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 its conversion feature and determined it to be immaterial.

11. Credit Arrangement

On March 8, 2011, the Company entered into a Second Loan Modification Agreement (the “Second Modification Agreement”) with Silicon Valley Bank (“SVB”). The Second Modification Agreement amended and extended the Loan and Security Agreement with SVB dated September 8, 2008, as amended on September 30, 2009 (the “Loan Agreement”), through March 6, 2012. Under the Second 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 Company’s 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 June 30, 2011. As of June 30, 2011, the Company was in compliance with its covenants under the facility.


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

This quarterly report on Form 10-Q including this Item 2, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. Readers can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. The Company’s actual results and the timing of certain events may differ significantly from the results and timing discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed or referred to in this report and in the “Risk Factors” section of our Annual Report on Form 10-K and any later publicly available filing with the Securities and Exchange Commission. The following discussion and analysis of the Company’s financial condition and results of operations should be read in light of those factors and in conjunction with the Company’s accompanying consolidated financial statements and notes thereto.

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”) who 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 exchange’s 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 companies’ 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 source of curtailment-ready customers for the industry’s curtailment service providers (“CSPs”). The World DR Exchange^® creates the industry’s 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 July 2010, we entered into a convertible note agreement with Retroficiency, Inc. (“Retroficiency”), an emerging company that develops software for identifying and qualifying business energy efficiency measures. Leveraging Retroficiency’s platform, we launched a new product for the energy efficiency market, the Virtual Energy Audit™, enabling commercial property owners and managers to more efficiently identify, evaluate, execute and manage retrofit opportunities across their portfolios.

In April 2011, we issued approximately 1.5 million shares of common stock to several accredited institutional investors at $3.60 per share, yielding net proceeds of approximately $5.3 million. We anticipate using the new capital for strategic initiatives, including investments and acquisitions in the energy management space.

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 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 approximately 80% today and net income for four consecutive quarters. We have generated positive adjusted EBITDA in eight of the last ten quarters including each of the last seven quarters. Over the last seven quarters we have generated positive adjusted EBITDA of $3.7 million, including $2.9 million over the last four quarters and $0.7 million in our most recent quarter. Our fixed operating cost structure has remained flat over this period and we believe it will remain at these 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 calculated based on the volume of 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. 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 management’s 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.

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 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 the PJM by the CSPs and we receive confirmation of the energy consumer’s 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 consumer’s 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.

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

We recorded income tax expense of approximately $15,000 for the six months ended June 30, 2011. We did not record an income tax benefit for the six months ended June 30, 2010 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. The income tax expense in 2011 reflects an alternative minimum tax liability anticipated to be incurred in calendar 2011.

Results of Operations

The following table sets forth certain items as a percent of revenue for the periods presented:


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
Revenue		100	%		100	%		100	%		100	%
Cost of revenue		20			23			20			22

Gross profit		80			77			80			78
Operating expenses:
Sales and marketing		52			60			51			58
General and administrative		24			29			24			27

Operating income (loss)		4			(12	)		5			(7	)
Interest expense, net		—			—			—			—
Income tax expense		—			—			—			—

Net loss		4	%		(12	)%		5	%		(7	)%

Comparison of the Three Months Ended June 30, 2011 and 2010

Revenue


	For the Three Months Ended
	June 30,
	2011		2010		Increase
Revenue	$	4,636,682	$	4,010,980	$	625,702	16	%

Revenue increased 16% for the three months ended June 30, 2011 as compared to the same period in 2010 primarily due to increased auction activity in our retail and wholesale product lines. This increase was partially offset by a decline in our environmental commodities product line. The retail product line increase reflects new customer wins with a concentration in the Pennsylvania electricity market and further growth in our channel partner network. Our wholesale product line increased primarily due to the timing of transactions in the second quarter of 2011 compared to the same period in 2010.

Cost of revenue


	For the Three Months Ended June 30,
	2011					2010
	$		% of Revenue			$		% of Revenue			Increase
Cost of revenue	$	935,981		20	%	$	913,320		23	%	$	22,661	2	%

Cost of revenue increased 2% for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 as increases in payroll and commission costs were substantially offset by a decrease in amortization of capitalized software. Payroll costs increased due to a net increase in supply desk employees during the quarter ended June 30, 2011 versus the same period last year. Commission costs increased due to the 16% increase in revenue. Cost of revenue as a percent of revenue decreased 3% due to the 16% increase in revenue.

Operating expenses


	For the Three Months Ended June 30,
	2011					2010
	$		% of Revenue			$		% of Revenue			Increase/(Decrease)
Sales and marketing	$	2,416,829		52	%	$	2,405,114		60	%	$	11,715		0	%
General and administrative		1,099,331		24			1,190,945		29			(91,614	)	(8	)

Total operating expenses	$	3,516,160		76	%	$	3,596,059		89	%	$	(79,899	)	(2	%)

Sales and marketing expenses were relatively unchanged for the three months ended June 30, 2011 as compared to the same period in 2010. Increases in channel partner commission costs due to the increase in revenue during the quarter were substantially offset by decreases in third party marketing costs and amortization of intangible assets. Marketing costs decreased due to a decrease in consulting and the timing of certain trade show and marketing programs. Sales and marketing expense as a percentage of revenue decreased 8% due to the 16% increase in revenue.

The 8% decrease in general and administrative expenses for the three months ended June 30, 2011 as compared to the same period in 2010 was primarily due to decreases in costs associated with investor relations activities and compliance costs. General and administrative expenses as a percent of revenue decreased 5% due to the 16% increase in revenue and the cost decreases noted above.

Interest income (expense), net

Interest income, net was approximately $14,000 for the three months ended June 30, 2011 compared to interest expense, net of approximately $1,000 for the three months ended June 30, 2010. The increase in interest income in the second quarter of 2011 was primarily due to interest earned on a convertible note receivable with Retroficiency.

Income tax expense (benefit)

We recorded income tax expense of approximately $7,000 for the three months ended June 30, 2011. We did not record an income tax benefit for the three months ended June 30, 2010 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. The income tax expense in 2011 reflects an alternative minimum tax liability anticipated to be incurred in calendar 2011.

Net income (loss)

We reported net income for the three months ended June 30, 2011 of approximately $0.2 million as compared to a net loss of approximately $0.5 million for the three months ended June 30, 2010. The increase in net income is primarily due to the 16% increase in revenue and a decrease in general and administrative expenses described above.

Comparison of the Six Months Ended June 30, 2011 and 2010

Revenue


	For the Six Months Ended
	June 30,
	2011		2010		Increase
Revenue	$	9,555,070	$	8,419,086	$	1,135,984	13	%

Revenue increased 13% for the six months ended June 30, 2011 as compared to the same period in 2010 primarily due to increased auction activity in our retail product line. This increase was partially offset by declines in our wholesale and environmental product lines. The retail product line increase reflects new customer wins with a concentration in the Pennsylvania electricity market and further growth in our channel partner network. Our wholesale and environmental commodities product lines decreased primarily due to the timing of transactions in the first six months of 2011 compared to the same period in 2010.

Cost of revenue


	For the Six Months Ended June 30,
	2011					2010
	$		% of Revenue			$		% of Revenue			Increase
Cost of revenue	$	1,936,513		20	%	$	1,862,885		22	%	$	73,628	4	%

Cost of revenue increased 4% for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 as increases in payroll and commission costs were substantially offset by a decrease in amortization of capitalized software. Payroll costs increased due to an increase in supply desk employees during the six months ended June 30, 2011 versus the same period last year. Commission costs increased due to the 13% increase in revenue. Cost of revenue as a percent of revenue decreased 2% due to the 13% increase in revenue.

Operating expenses


	For the Six Months Ended June 30,
	2011					2010
	$		% of Revenue			$		% of Revenue			Increase/(Decrease)
Sales and marketing	$	4,873,050		51	%	$	4,905,836		58	%	$	(32,786	)	(1	%)
General and administrative		2,317,070		24			2,275,948		27			41,122		2

Total operating expenses	$	7,190,120		75	%	$	7,181,784		85	%	$	8,336		0	%

The 1% decrease in sales and marketing expense for the six months ended June 30, 2011 as compared to the same period in 2010 primarily reflects decreases in third party marketing costs and amortization of intangible assets, both substantially offset by an increase in channel partner commission costs. Marketing costs decreased due to a decrease in consulting and the timing of certain trade show and marketing programs. Third party commission costs increased due to the 13% increase in revenue, which was driven by our retail product line. Sales and marketing expense as a percentage of revenue decreased 7% as we were able to increase our revenue 13% while decreasing our overall sales and marketing costs.

The 2% increase in general and administrative expenses related to the six months ended June 30, 2011 as compared to the same period in 2010 was primarily due to increases in compensation costs, substantially offset by decreases in costs associated with investor relations activities and compliance costs. Compensation costs increased primarily due to the reclassification and addition of certain employees in our general and administrative group. General and administrative expenses as a percent of revenue decreased 3% due to the 13% increase in revenue.

Interest income (expense), net

Interest income, net was approximately $27,000 for the six months ended June 30, 2011 and interest expense, net was approximately $3,000 for the six months ended June 30, 2010. The increase in interest income in the second quarter of 2011 was primarily due to interest earned on a convertible note receivable with Retroficiency.

Income tax expense (benefit)

Net income (loss)

We reported net income for the six months ended June 30, 2011 of approximately $0.4 million as compared to a net loss of approximately $0.6 million for the six months ended June 30, 2010. The $1.0 million increase in net income is primarily due to the 13% increase in revenue.

Liquidity and Capital Resources

At June 30, 2011, 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 environmental commodities markets and demand response market; making strategic acquisitions; and growing our direct and inside sales force. As of June 30, 2011, our workforce numbered 56 reflecting a net decrease of four from the 60 we employed at December 31, 2010. At June 30, 2011, we had 21 professionals in our sales and marketing and account management groups, 24 in our supply desk group and 11 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 fixed operating costs will remain at current levels in the short-term.

Comparison of June 30, 2011 to December 31, 2010


	June 30,		December 31,
	2011		2010		Increase/(Decrease)
Cash and cash equivalents	$	9,216,653	$	3,559,288	$	5,657,365		159	%
Trade accounts receivable		3,036,964		3,124,328		(87,364	)	(3	)
Days sales outstanding		59		58		1		2
Working capital		9,863,989		3,399,147		6,464,842		190
Stockholders’ equity		17,350,669		11,212,012		6,138,657		55

Cash and cash equivalents increased 159% primarily due to net proceeds of $5.3 million received from the sale of common stock in April 2011 and positive adjusted EBITDA of approximately $1.4 million for the six months ended June 30, 2011. These increases were partially offset by a $0.8 million decrease in accrued compensation from the timing of year end bonus and commission payments and, to a lesser extent, the final advance to Retroficiency in the form of a convertible note receivable. Trade accounts receivable decreased 3% due to lower revenue in the second quarter versus the fourth quarter of 2010. Days sales outstanding (representing accounts receivable outstanding at June 30, 2011 divided by the average sales per day during the current quarter) increased 2% due to the timing of revenue recognized within the second quarter of 2011 as compared to the fourth quarter of 2010. Revenue from bidders representing 10% or more of our revenue increased to 25% from two bidders during the six months ended June 30, 2011, from 22% from the same bidders during the same period in 2010.

Working capital (consisting of current assets less current liabilities) increased 190%, primarily due to the sale of common stock during the second quarter. Stockholders’ equity increased 55% for the six months ended June 30, 2011 due to the sale of common stock in April 2011, net income of $0.4 million and share-based compensation of $0.3 million.

Cash provided by operating activities for the six months ended June 30, 2011 was $0.6 million as compared to a negative $0.7 million in 2010. This improvement was primarily due to positive adjusted EBITDA of $1.4 million in the first six months of 2011 versus $0.5 million during the same period in 2010. Cash provided from investing and financing activities for the six months ended June 30, 2011 was $5.1 million primarily due to net proceeds of $5.3 million received from the sale of common stock. Cash provided by investing and financing activities for the six months ended June 30, 2010 was $0.3 million, primarily due to $0.4 million in net proceeds from the sale of common stock in January 2010.

Adjusted EBITDA, representing net income or loss before interest, income taxes, depreciation, amortization, and share-based compensation charges for the six months ended June 30, 2011 was a positive $1.4 million as compared to a positive $0.5 million for the same period in the prior year. This increase was primarily due to the $1.1 million improvement in net income as we generated $0.4 million during first six months of 2011 compared to a net loss of $0.6 million for the same period in 2010. We have generated positive adjusted EBITDA for seven straight quarters resulting in a cumulative total of $3.7 million, including $2.9 million over the last four quarters. 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”).

In this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q, 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, interest income on invested funds and notes receivable and income taxes. 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, interest expense on capital leases, interest income on invested funds and notes receivable and income taxes, 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;

•

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;

•

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; and

•

We do not regularly pay federal or state income taxes due to our net operating loss carryforwards. Our income tax expense reflects the anticipated alternative minimum tax liability based on statutory rates that 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.


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
GAAP net income (loss)	$	191,311		$	(499,649	)	$	441,400		$	(628,093	)
Add: Interest (income) expense, net		(14,020	)		1,250			(27,463	)		2,510
Add: Share-based compensation		176,316			210,671			317,508			355,309
Add: Amortization		275,588			339,900			555,061			700,424
Add: Depreciation		31,544			41,057			67,024			71,777
Add: Income taxes		7,250			—			14,500			—

Non-GAAP adjusted EBITDA	$	667,989		$	93,229		$	1,368,030		$	501,927

Critical Accounting Policies

The preparation of financial statements 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 within our Annual Report on Form 10-K as filed on February 17, 2011 for a description of our accounting policies.

Revenue Recognition

Retail Electricity Transactions

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 management’s 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 management’s 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 management’s 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 consumer’s 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

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 six months ended June 30, 2011, we estimated usage for approximately 17% of our revenue resulting in a positive 0.3%, or approximately $30,000, adjustment to increase revenue. This increase in revenue resulted in an approximate $7,000 increase 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 $16,000 effect on our revenue for the six months ended June 30, 2011.

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 during the six months ended June 30, 2011 and 2010, respectively. We amortize internally developed and purchased software over the estimated useful life of the software (generally three years). During the six months ended June 30, 2011 and 2010, approximately $73,000 and $152,000 were amortized to cost of revenues, respectively. Accumulated amortization was approximately $1,163,000 and $1,090,000 at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011 and December 31, 2010, capitalized software costs, net was approximately $58,000 and $131,000, respectively.

Our estimates for capitalization of software development costs affect cost of revenue and other assets as reflected on our consolidated statements of operations and on our consolidated balance sheets. During the six months ended June 30, 2011, amortization expense was approximately 3.8% 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.

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 unit’s goodwill over the implied fair value of the reporting unit’s 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 existed. There have been no indicators of potential impairment during 2011.

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 management’s estimate of the asset’s 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 asset’s 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 2011.

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 June 30, 2011, we had net deferred tax assets of approximately $7.6 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 $7.6 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 six months ended June 30, 2011, share-based awards consisted of stock options and stock warrants, respectively. 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 six months ended June 30, 2011 was $2.78, on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions and estimated forfeiture rates of 10%:

Expected

Dividend

Risk-Free

Expected

Six months ended June 30,

Yield

Interest Rate

Option Life

Volatility

2011

—

1.97

4.75 years

103


Item 3.		Quantitative and Qualitative Disclosure 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.

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 a bidder and lister. 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 listers’ 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 4.		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 Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2010. In designing and evaluating the Company’s 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 Company’s 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 June 30, 2011, the Company’s 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 Commission’s 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 Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION


Item 1.		Legal Proceedings

None.


Item 1A.		Risk Factors

No material changes.


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

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 June 30, 2011 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
4/01/11 — 4/30/11		89	$	4.26		—		—
5/01/11 — 5/31/11		78	$	4.87		—		—
6/01/11 — 6/30/11		1,001	$	4.19		—		—

Total		1,168	$	4.24		—		—


Item 3.		Defaults Upon Senior Securities

None.


Item 4.		Removed and Reserved


Item 5.		Other Information

None.


Item 6.		Exhibits


	31.1			Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification of the Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002.

	32.1			Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

	32.2			Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


	World Energy Solutions, Inc.
Dated: August 4, 2011	By:	/s/ Richard Domaleski
		Richard Domaleski
		Chief Executive Officer


Dated: August 4, 2011	By:	/s/ James Parslow
		James Parslow
		Chief Financial Officer

EXHIBIT INDEX


Exhibit		Description

	31.1	Certification of the Chief Executive Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of the Chief Financial Officer pursuant to §302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002

	32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002

Attached files

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

World Energy Solutions, Inc. Reports

Also read