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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 |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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;
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
(Address of principal executive offices)
Worcester, Massachusetts 01608
(Address of principal executive offices)
508-459-8100
(Registrants 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 issuers 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
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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 |
Table of Contents
PART I
FINANCIAL INFORMATION
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.
2
Table of Contents
WORLD ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(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.
3
Table of Contents
WORLD ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(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.
4
Table of Contents
WORLD ENERGY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 Companys 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 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 Company also uses the exchanges
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 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 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 Retroficiencys 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 Companys Annual Report on Form 10-K for the year
ended December 31, 2010.
In the opinion of the Companys 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 Companys
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.
5
Table of Contents
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 Companys 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 Companys 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 Companys
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 Companys
common stock during that period.
6
Table of Contents
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 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 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 Companys
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 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 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 | ||||
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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 Companys 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 Companys 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 Companys 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 | |||||
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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 | 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 Companys 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 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 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.
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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 Companys 401(k) savings plan covers the majority of the Companys 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.
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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 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 June 30, 2011. As of June 30, 2011, the Company was in compliance with its covenants under the
facility.
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Item 2. | Managements 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
Companys 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 Companys financial condition and results of operations should be read in
light of those factors and in conjunction with the Companys 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 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 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 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 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 Retroficiencys 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.
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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 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.
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.
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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 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; |
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| 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 | % |
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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.
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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)
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.
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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).
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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. |
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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 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 calculated 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. |
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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.
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.
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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 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 existed. There have
been no indicators of potential impairment during 2011.
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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 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 | Expected | |||||||||||||
Six months ended June 30, | Yield | Interest Rate | Option 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.
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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 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 June
30, 2011, 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.
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 June 30, 2011 that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.
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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.
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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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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 | ||||
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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 |