UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission file number: 001-34289

World Energy Solutions, Inc.

(Exact name of registrant as specified in its charter)

 

100 Front Street

Worcester, Massachusetts 01608

(Address of principal executive offices)

508-459-8100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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  x    No  ¨

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

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.

 

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

As of August 1, 2014, the registrant had 12,740,139 shares of common stock outstanding.

 

 

 

 

 

---

TABLE OF CONTENTS

 

 

 

 

 

 

---

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

See accompanying notes to condensed consolidated financial statements.

2

 

---

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3

 

---

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4

 

---

 

WORLD ENERGY SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 30, 2014

 

World Energy Solutions, Inc. (“World Energy” or the “Company”) offers a range of energy management solutions to commercial and industrial businesses, institutions, utilities, and governments to reduce their overall energy costs. The Company comes to market with a holistic approach to energy management helping customers a) contract for a competitive price for energy, b) engage in energy efficiency projects to minimize quantity used and c) pursue available rebate and incentive programs. The Company made its mark on the industry with an innovative approach to procurement via its online auction platform, the World Energy Exchange^®. With recent investments and acquisitions, World Energy is building out its energy efficiency practice engaging new customers while also pursuing more cross-selling opportunities for its procurement services.

 

The December 31, 2013 condensed consolidated balance sheet has been derived from audited consolidated financial statements and the accompanying June 30, 2014 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 consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the SEC on March 31, 2014.

In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments consisting of normal recurring adjustments and accruals necessary for the fair presentation of the Company’s financial position as of June 30, 2014, the results of its operations for the three and six months ended June 30, 2014 and 2013 and the results of its cash flows for the six months ended June 30, 2014 and 2013, respectively.

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 revenue and expenses during the reporting period. Accordingly, actual results could differ from these estimates.

The Company’s most judgmental estimates affecting its condensed consolidated financial statements are those relating to revenue recognition and the estimate of actual energy delivered from the bidder to the lister of such energy; stock-based compensation; the valuation of intangible assets and goodwill; the valuation of contingent consideration; impairment of long-lived assets; and estimates of future taxable income as it relates to the realization of our 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.

 

As of June 30, 2014 and 2013, the Company only had one issued and outstanding class of stock – common stock. The basic income (loss) per share for the three and six months ended June 30, 2014 and 2013 is computed by dividing net income (loss) by the weighted average number of shares outstanding for the period. The diluted income (loss) per share for the three and six months ended June 30, 2014 and 2013 is calculated by dividing the net income (loss) by the weighted average number of common shares outstanding for the period plus the amounts representing the dilutive effect of common stock options, common stock warrants and restricted stock that would be issuable upon conversion, exercise, or contingent exercise.

5

 

---

 

The following table provides a reconciliation of the denominators of the Company’s reported basic and diluted earnings per share computation for the three and six months ended June 30, 2014 and 2013, respectively:

 

As the Company was in a net loss position for the three months ended June 30, 2013 and the six months ended June 30, 2014 and 2013, the computed diluted loss per share does not assume conversion, exercise, or contingent exercise of securities as that would have an anti-dilutive effect on the loss per share in those periods.

For the three months ended June 30, 2014, 373,000 and 45,045 shares issuable relative to common stock options and common stock warrants, respectively, were excluded from net income (loss) per share since the inclusion of such shares would be anti-dilutive. For the six months ended June 30, 2014, 674,867, 49,545 and 251,750 shares issuable relative to common stock options, common stock warrants and restricted stock, respectively, were excluded from net loss per share since the inclusion of such shares would be anti-dilutive. For the three and six months ended June 30, 2013, 770,714, 49,545, and 122,000 shares issuable relative to common stock options, common stock warrants and restricted stock, respectively, were excluded from net loss per share since the inclusion of such shares would be anti-dilutive. The Company did not declare or pay any dividends in 2014 or 2013.

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company has no material off-balance sheet risk such as foreign exchange contracts, option contracts, or other foreign hedging arrangements. The Company places its cash and cash equivalents with two institutions, which management believes are of high credit quality. As of June 30, 2014, all of the Company’s cash and cash equivalents are held in interest bearing accounts.

The Company provides credit in the form of invoiced and unbilled accounts receivable in the normal course of business. Collateral is not required for trade accounts receivable, but ongoing credit evaluations are performed. While the majority of the Company’s revenue is generated from retail energy transactions where the winning bidder pays a commission to the Company, commission payments for certain auctions can be paid by the lister, bidder or a combination of both.

The following represents revenue and trade accounts receivable from bidders exceeding 10% of the total in each category:

 

Two bidders merged at the end of 2013 and have been combined for presentation purposes above. 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, 2014 and 2013, no lister represented more than 10% individually of the Company’s aggregate revenue.

 

6

 

---

 

The Company does not invoice bidders for the commissions earned on retail electricity, certain natural gas and demand response transactions and, therefore, reports a significant portion of its receivables as “unbilled.” Unbilled accounts receivable represent management’s best estimate of energy provided by the energy suppliers to the energy consumers for a specific completed time period at contracted commission rates.

The Company does invoice bidders for commissions earned on wholesale, a substantial portion of retail natural gas and energy efficiency transactions, which are reflected as billed accounts receivable. For natural gas and wholesale transactions, the total commission earned on these transactions is recognized upon completion of the procurement event and are generally due within 30 days of invoice date. For efficiency projects, revenue is recognized and invoiced upon project installation and acceptance, as required, and are 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. 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. Trade accounts receivable, net consists of the following:

 

 

6.Inventory

Inventory is maintained in the Company’s Energy efficiency services segment and consists of prepaid expendables and project materials. Prepaid expendables represents consumable components that are used in project installations and are stated at the lower of cost or market, with cost being determined on a first-in, first-out (FIFO) basis. Historical inventory usage and current trends are considered in estimating both excess and obsolete inventory. To date, there have been no material write-downs of inventory and therefore no allowance for excess or obsolete inventory was recorded at June 30, 2014 or December 31, 2013. Project materials represent direct costs incurred on projects-in-process as of each reporting period. Inventory consists of the following:

 

 

Intangibles, net with finite lives are summarized as follows as of June 30, 2014 and December 31, 2013:

 

 

The Company also recorded acquisition related intangible assets with indefinite lives in the amount of $1,736,000 pertaining to customer relationships, which is not reflected in the above tables.

7

 

---

 

Amortization expense was approximately $1.8 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively. The approximate future amortization expense of intangible assets is as follows:

 

 

Deferred revenue and customer advances arise when energy suppliers pay the Company a commission prior to the Company meeting all the requirements necessary to recognize revenue. In addition, deferred revenue and customer advances includes cash received for Energy efficiency services projects that have not been completed. Deferred revenue and customer advances expected to be recognized as revenue by year are approximately as follows: 

The following table provides a rollforward of deferred revenue and customer advances:

 

The Company operates its business based on two industry segments: Energy procurement and Energy efficiency services. The Company delivers its Energy procurement services to four markets: retail energy, wholesale energy, demand response and environmental commodity. The Energy procurement process is substantially the same regardless of the market being serviced and is supported by the same operations personnel utilizing the same basic technology and back office support. There is no discrete financial information for these product lines nor are there segment managers who have operating responsibility for each product line. Energy efficiency services focuses on turn-key electrical, mechanical and lighting energy efficiency measures servicing commercial, industrial and institutional customers.

Segment operating income represents income from operations, including share-based compensation, amortization of intangible assets and depreciation. The following tables present certain continuing operating division information in accordance with the provisions of Accounting Standards Codification (“ASC”) 280, “Segment Reporting”.

 

8

 

---

 

 

 

 

 

In accordance with ASC 740, Income Taxes, each interim period is considered integral to the annual period and the tax benefit (expense) is measured using an estimated annual effective tax rate. An entity is required to record income tax provision each quarter based on its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis, as adjusted for discrete taxable events that occur during the interim period. If, however, the entity is unable to reliably estimate its annual effective tax rate, then the actual effective tax rate for the year-to-date period may be the best annual effective tax rate estimate. For the six months ended June 30, 2014, the Company determined that it was unable to make a reliable estimate of the annual effective tax rate as relatively small changes in its projected income or loss produce significant variances in its annual effective tax rate. Therefore, the Company recorded a tax benefit in the amount of $88,000 and $25,000 for the three and six months ended June 30, 2014, respectively, based on the actual effective rate for the six months ended June 30, 2014. The effective tax rate for the three and six months ended June 30, 2013 was calculated based on an estimated annual effective tax rate resulting in an income tax expense of $131,000 and $263,000, respectively.

 

9

 

---

 

The Company follows ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) for fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value, which focuses on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.

The hierarchy established under ASC 820 gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Level 1 - Pricing inputs are quoted prices available in active markets for identical investments as of the reporting date. As required by ASC 820, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

Level 2 - Pricing inputs are quoted prices for similar investments, or inputs that are observable, either directly or indirectly, for substantially the full term through corroboration with observable market data. Level 2 includes investments valued at quoted prices adjusted for legal or contractual restrictions specific to these investments.

Level 3 - Pricing inputs are unobservable for the investment, that is, inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability. Level 3 includes investments that are supported by little or no market activity.

As of June 30, 2014, the Company did not have any assets and liabilities measured at fair values on a recurring basis.

Assets and liabilities of the Company measured at fair values on a recurring basis as of December 31, 2013 are summarized as follows:

 

The Company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the Company would be required to make such future payment. Changes to the fair value of contingent consideration are recorded in general and administrative expense. During the three months ended June 30, 2014, the Company settled its contingent consideration obligations. As part of the settlement, the Company issued 200,000 shares of common stock to GSE Consulting, L.P. (“GSE”) that had a fair value of $928,000 on the date of issuance.

The following table provides a rollforward of the fair value, as determined by Level 3 inputs, of the contingent consideration.

 

10

 

---

 

The carrying amounts and fair values of the Company’s debt obligations are as follows

The carrying amount for fixed rate long-term debt and variable rate long-term debt approximate fair value because the underlying instruments are primarily at current market rates available to the Company for similar borrowings. The interest rate on the Commerce Bank and Trust Company (“Commerce”) debt is tied to the prime rate and will fluctuate with changes in that rate. Related party notes payable are classified as short-term on the Company’s accompanying condensed consolidated balance sheets.

 

Credit Facility

The Company has a $8.5 million credit facility with Commerce consisting of a revolving credit facility of up to $2.5 million (the “Revolver”) that matures on December 30, 2016 and a 60-month term loan of $6.0 million (the “Term Loan”).

The Revolver bears interest at the prime rate plus 1.75% (totaling 5% at June 30, 2014) and is adjusted every six months for any change in the prime rate. In addition to changes in the Prime Rate, the rate can be reduced by up to .50% based on certain EBITDA achievement levels. Under the Revolver, the Company may borrow, repay and re-borrow an amount not to exceed the lesser of $2.5 million or the total of 80% of eligible billed and unbilled accounts receivable (less the aggregate outstanding on any letters of credit). There have been no borrowings under the Revolver. The Term Loan bears interest for the first 6 months at the prime rate plus 2.75% (totaling 6% at June 30, 2014), and is adjusted every six months for any change in the prime rate. In addition to changes in the prime rate, the rate can be reduced by up to .50% based on certain EBITDA achievement levels. The Term Loan is interest only for six months followed by 54 monthly principal and interest payments commencing on July 30, 2014 with a balloon payment for any remaining principal balance at maturity.

Subordinated Notes

On October 3, 2012, the Company entered into a Note Purchase Agreement with Massachusetts Capital Resource Company (“MCRC”), in which the Company entered into an 8-year, $4.0 million Subordinated Note due September 30, 2020 with MCRC (the “MCRC Note”). The MCRC Note bears interest at 10.5% and is interest only for the first four years followed by 48 equal principal payments commencing October 31, 2016. The Company must pay a premium of 3% if it prepays the MCRC Note before October 1, 2014 and a 1% premium if it prepays the MCRC Note before October 1, 2015. The MCRC Note is subordinated to the Company’s credit facility with Commerce and contains a Minimum Fixed Charge Ratio covenant that the Company is in compliance with at June 30, 2014.

 

11

 

---

 

Litigation

Two former employees/consultants of GSE have filed two separate complaints in the District Courts of Dallas County and Tarrant County Texas alleging, among other things, claims related to breach of contract, quantum meruit, promissory estoppel, tortious interference, and civil conspiracy. Each plaintiff claims that GSE and/or the Company failed to pay commissions due for services that they provided prior to the date of the Company’s purchase of certain GSE assets, based on their respective employment or independent contractor agreements with GSE. Each plaintiff has also asserted claims for recovery of their attorneys’ fees. The Company denies the allegations and has filed counterclaims for damages, asserting claims for conversion, unjust enrichment, misappropriation of confidential information, and violation of the Texas Theft Liability Act against each of the plaintiffs. The Company has also filed a counterclaim against one of the plaintiffs for her breach of a non-competition and non-solicitation agreement, based on her working for a competitor of the Company’s during her one-year restrictive period and her improper solicitation of former GSE customers on behalf of the competitor.  The plaintiffs have also asserted claims against the GSE affiliates and their individual principals. The Company’s motions for summary judgment seeking dismissal of all of the plaintiff’s claims was denied in its entirety in one of the cases.  In the other case, the Company’s motion for summary judgment was partially granted, dismissing the plaintiff’s civil conspiracy claim.   The courts have assigned trial dates of September 29, 2014 and November 17, 2014.

The Company has estimated the potential commissions allegedly due to the two plaintiffs to be approximately $0.3 million. The Company has not recorded any accrual for contingent liabilities associated with these legal proceedings based on its belief that any potential loss, while reasonably possible, is not probable. The Company intends to continue to defend these actions vigorously and is currently unable to estimate a range of payments, if any, it may be required to pay, with respect to these claims.  Further, the Company believes that the resolution of these matters will not result in a material effect to its condensed consolidated financial statements.  However, due to uncertainties that accompany litigation of this nature, there could be no assurance that the Company will be successful, and the resolution of the lawsuits could have a material effect on its accompanying condensed consolidated financial statements.

In addition, the Company had filed cross claims against GSE for indemnification under the Asset Purchase Agreement in each of the plaintiffs’ cases.  The GSE affiliates and principals had also asserted cross claims against the Company seeking indemnification under the Asset Purchase Agreement.  In December 2013, GSE had amended its cross claims in one of the matters to include claims asserting breach of the earnout provisions in the Asset Purchase Agreement.  During the three months ended June 30, 2014, the Company and GSE settled all claims against each other related to these lawsuits and the earnout provisions.  The Company and GSE filed with the court agreed motions to dismiss all claims against one another, which were allowed by the court.  The settlement called for the Company to issue 200,000 shares of common stock to GSE and its affiliates that had a fair value of $0.9 million on the date issued.  

From time to time, the Company may be subject to legal proceedings and claims arising from the conduct of its business operations, including litigation related to employment matters. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, management believes that the aggregate amount of such liabilities, if any, will not have a material adverse effect on its condensed consolidated financial position and/or results of operations. It is possible, however, that future financial position or results of operations for any particular period could be materially affected by changes in the Company’s assumptions or strategies related to those contingencies or changes out of its control.

 

12

 

---

 

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

This quarterly report on Form 10-Q including this Item 2, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. Readers can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. Our 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 (“SEC”). The following discussion and analysis of our financial condition and results of operations should be read in light of those factors and in conjunction with our accompanying condensed consolidated financial statements and notes thereto.

Overview

World Energy offers a range of energy management solutions to commercial and industrial businesses, institutions, utilities, and governments to reduce their overall energy costs. We come to market with a holistic approach to energy management helping customers a) contract for a competitive price for energy, b) engage in energy efficiency projects to minimize quantity used and c) pursue available rebate and incentive programs. We made our mark on the industry with an innovative approach to procurement via our online auction platform, the World Energy Exchange^®. With recent investments and acquisitions, we are building out our energy efficiency practice by engaging new customers while also pursuing more cross-selling opportunities for our procurement services.

We provide energy management services utilizing state-of-the-art technology and the experience of a seasoned management team to bring lower energy costs to its customers. We use a simple equation

E = P · Q - i

to help customers to understand the holistic nature of the energy management problem. Total energy cost (E) is a function of Energy Price (P) times the Quantity of Energy Consumed (Q), minus any rebates or incentives (i) the customer can earn. This approach not only makes energy management more approachable for customers, simplifying what has become an increasingly dynamic and complex problem, it also highlights the inter-related nature of the energy management challenge. We assert that point solution vendors may optimize one of the three elements, but we believe it takes looking at the problem holistically to unlock the most savings.

Acquisitions are an important component of our business strategy. Our focus is on both our core procurement business as well as new product lines within the energy management services industry such as energy efficiency services.

During the fourth quarter of 2012, we acquired substantially all of the assets and assumed certain obligations of Northeast Energy Partners, LLC (“NEP”) pursuant to an Asset Purchase Agreement (the “Asset Purchase Agreement”) between us, NEP, and its members. NEP was a Connecticut based energy management and procurement company. During the third and fourth quarters of 2011 we acquired the energy procurement business of Co-eXprise, Inc. (“Co-eXprise”), Northeast Energy Solutions, LLC (“NES”) and GSE Consulting, LP (“GSE”). These acquisitions expanded our capabilities in the Energy efficiency services segment, enabled us to enter the growing small- and medium-sized customer Energy procurement marketplaces, and consolidate the large commercial, industrial and government auction space. With the acquisition of NES, we are managing the business as two business segments: Energy procurement and Energy efficiency services.

Our business model is heavily dependent on our people. We have significantly grown our employee base from 20 at the time of our initial public offering in November 2006 to 127 at June 30, 2014. This planned investment in staffing has been, and will continue to be, a key component of our strategic initiatives and revenue growth. These infrastructure investments will result in increased operating costs in the short–term, but in the long-term we expect them to generate cash flow and profitability as we build incremental revenue. To date we have funded our acquisitions and strategic investments primarily with cash on-hand, notes payable, cash from operations and long-term debt. We have also deferred portions of the purchase prices through the use of earnouts that are tied to the ongoing performance of the acquired entity. Through the utilization of seller notes and earnouts, we have been able to finance a portion of the cost of the acquisitions over time with the targets’ ongoing cash flow. These acquisition activities will increase our operating costs both in the short and long-term and may require us to borrow against our current credit facility and/or raise funds through additional capital raises.

13

 

---

 

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 to two year contract term being typical for commercial and industrial energy consumers, and government contracts typically having two to three year terms.

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 is based on management’s best estimate of energy provided by the energy suppliers to the energy consumers for a specific completed time period at contracted commission rates and is made up of two components. The first component represents energy usage for which we have received actual data from the supplier and/or the utility, but for which payment has not been received at the balance sheet date. The majority of our contractual relationships with energy suppliers require them to supply actual usage data to us on a monthly basis and remit payment to us based on that usage. The second component represents energy usage for which we have not received actual data, but for which we have estimated usage. Commissions paid in advance by certain bidders are recorded as deferred revenue and amortized to commission revenue on a monthly basis on the energy exchanged that month.

Retail Natural Gas Transactions

There are two primary fee components to our retail natural gas services: transaction fees and management fees. Transaction fees are billed to and paid by the energy supplier awarded business on the platform. These fees are established prior to award and are the same for each supplier. For the majority of our natural gas transactions, we bill the supplier upon the conclusion of the transaction based on the estimated energy volume transacted for the entire award term multiplied by the transaction fee. Management fees are paid by our energy consumers and are generally billed on a monthly basis for services rendered based on terms and conditions included in contractual arrangements. While substantially all of our retail natural gas transactions are accounted for in accordance with this policy, a significant 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.

14

 

---

 

Mid-Market Transactions

We earn a monthly commission on energy sales from each energy supplier based on the energy usage transacted between the energy supplier and energy consumer. The commissions are not based on the retail price for electricity but 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 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 fee is reasonably assured, and customer acceptance criteria, if any, has been successfully demonstrated. We generally recognize revenue on these transactions when we have received verification from the energy supplier of the end-users energy usage and energy supplier’s subsequent collection of the fees billed to the end user. The verification is generally accompanied with payment of the agreed upon fee to us, at which time the revenue is recognized. Commissions paid in advance are recorded as customer advances and are recognized monthly as commission revenue based on the energy exchanged that month. To the extent we do not receive verification of actual energy usage or we cannot reliably estimate what actual energy usage was for a given period, revenue is deferred until usage and collection data is received from the energy supplier. To the extent that we do not receive actual usage data from the energy supplier, we will recognize revenue at the end of the contract flow date.

Demand Response Transactions

Demand response transaction fees are recognized when we have received confirmation from the demand response provider (“DRP”) 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 DRPs and we receive confirmation of the energy consumer’s performance in the fourth quarter. DRPs 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 and Environmental Commodity Transactions

Wholesale transaction fees are invoiced upon the conclusion of the auction based on a fixed fee. These revenues are not tied to future energy usage and are recognized upon the completion of the online auction. For reverse auctions where our customers bid for a consumer’s business, the fees are paid by the bidder. For forward auctions where a lister is selling energy products, the fees are typically paid by the lister.

Environmental commodity transaction fees are accounted for utilizing two primary methods. For regulated allowance programs like Regional Greenhouse Gas Initiative, Inc. (“RGGI”), fees are paid by the lister and are recognized quarterly as revenue 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.

Energy Efficiency Services

Our Energy efficiency services segment is primarily project driven where we identify efficiency measures that energy consumers can implement to reduce their energy usage. We present retrofit opportunities to customers, get approval from them to proceed and submit the proposal to the local utility for cost reimbursement. Once the utility approves funding for the project, we install the equipment, typically new heating, ventilation or air conditioning equipment, or replace lighting fixtures to more efficient models. We recognize revenue for Energy efficiency services when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Due to the short-term nature of projects (typically two to three weeks), we utilize the completed-contract method. We also assess multiple contracts entered into by the same customer in close proximity to determine if the contracts should be combined for revenue recognition purposes. Revenues are recognized based upon factors such as passage of title, installation, payments and customer acceptance.

15

 

---

 

Cost of revenue

Cost of revenue consists primarily of:

Sales and marketing

Sales and marketing expenses consist primarily of:

General and administrative

General and administrative expenses consist primarily of:

Interest expense, net

Interest expense, net consists primarily of:

Income tax benefit (expense)

Income tax benefit (expense) is based on projected annualized taxable income or loss when this can be reliably estimated. In the event that we cannot reliably estimate due to the fact that a relatively small change in projected annualized taxable income or loss produces a significant variance in our annual effective tax rate then we utilize the actual effective rate for the year to date period. Under both scenarios, the benefit (expense) also reflects our deferred tax provision, federal alternative minimum liability and state income taxes.

16

 

---

 

Results of Operations

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

 

Comparison of the Three Months Ended June 30, 2014 and 2013

Revenue

Revenue increased 18% for the three months ended June 30, 2014 as revenue from both segments increased as compared to the same period in 2013. Energy procurement segment revenue increased 14% due to increased transaction activity from our auction and mid-market customers as well as increased revenue recognized from previously deferred items. Energy efficiency services segment revenue increased 47% as the rebuilt Massachusetts sales team gained traction in the market and delivered an increase in the number of projects as well as an increase in the average project size compared to the second quarter of 2013.

Cost of revenue

Cost of revenue decreased 1% for the three months ended June 30, 2014 as compared to the same period in 2013. Cost of revenue for our Energy procurement segment decreased 22% due to decreases in payroll reflecting our integration, automation and reorganization efforts. Cost of revenue associated with our Energy procurement segment as a percent of revenue decreased by 6% primarily due to the cost decreases described above and, to a lesser extent, the 14% increase in Energy procurement revenue. Cost of revenue associated with our Energy efficiency services segment increased 28% primarily due to an increase in project costs associated with the 47% increase in revenue. Cost of revenue associated with our Energy efficiency services segment as a percent of revenue decreased by 12% primarily due to improved contribution margins on projects completed in the second quarter of 2014 as compared to the second quarter of 2013.

17

 

---

 

Operating expenses

Sales and marketing expenses decreased 5% for the three months ended June 30, 2014 as compared to the same period in 2013 primarily due to decreases in internal commissions and amortization of intangible assets. Internal commissions decreased due to the change in commission policy for our mid-market group that we implemented in the second quarter of 2013. Under the revised policy, we continued to pay commissions based on cash received from mid-market transactions that were deferred for revenue purposes and provided for a bookings bonus to offset the impact of the change in our policy. We converted the bookings bonus to a draw program in 2014, eliminating that component of commission expense. Amortization expense related to intangible assets decreased as certain intangible assets related to our acquisitions became fully amortized in 2014. These decreases were partially offset by an increase in third party commission expense as we continue to expand our channel partner network. Sales and marketing expense as a percentage of revenue decreased 13% due to the decrease in costs described above, and the 18% increase in total revenue.

The 3% increase in general and administrative expenses for the three months ended June 30, 2014 as compared to the same period in 2013 was primarily due to an increase in bad debt expense and payroll costs. The increases were partially offset by a reduction in legal costs. Payroll costs increased due to investments in our product development team. General and administrative expenses as a percent of revenue decreased 3% primarily due to the cost increases described above, offset by the 18% increase in total revenue.

Other income (expense), net

We recorded net interest expense of approximately $0.2 million for the three months ended June 30, 2014 compared to net interest expense of approximately $0.3 for the three months ended June 30, 2013.  The decrease in net interest expense in 2014 was primarily due to a reduction in the interest charged on our long-term debt resulting from the replacement of our credit facility in the fourth quarter of 2013.

Income tax benefit (expense)

We recorded an income tax benefit of approximately $0.1 million for the three months ended June 30, 2014 and an income tax expense of approximately $0.1 million for the three months ended June 30, 2013.  For the three months ended June 30, 2014, we were unable to make a reliable estimate of our annual effective tax rate as relatively small changes in our projected income or loss could produce a significant variance in our annual effective tax rate and as a result we utilized the actual effective tax rate as the basis for the income tax benefit.  For the three months ended June 30, 2013, the effective tax rate was based on our estimated annual effective tax rate.  Both periods reflect a deferred tax provision, federal alternative minimum tax liability and state income taxes.

Net income (loss)

We reported net income of approximately $0.3 million for the three months ended June 30, 2014 and a net loss of approximately $1.7 million for the three months ended June 30, 2013. The $2.0 million increase was primarily due to the increase in revenue, improved gross margin and the decrease in sales and marketing expenses.

Comparison of the Six Months Ended June 30, 2014 and 2013

Revenue

18

 

---

 

Revenue increased 14% for the six months ended June 30, 2014 as revenue from both segments increased as compared to the same period in 2013. Energy procurement segment revenue increased 11% due to increased transaction activity from our auction and mid-market customers as well as increased revenue recognized from previously deferred items. These increases were partially offset by decreases in wholesale and gas transaction activity in the six months ended June 30, 2014 as increased commodity prices during the first quarter resulted in delayed contracting decisions by listers. Energy efficiency services segment revenue increased 35% as the rebuilt Massachusetts sales team delivered increased revenue in the NSTAR territory in Massachusetts during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.  

Cost of revenue

Cost of revenue increased 1% for the six months ended June 30, 2014 as compared to the same period in 2013. Cost of revenue for our Energy procurement segment decreased 19% due to decreases in payroll reflecting our integration, automation and reorganization efforts. Cost of revenue associated with our Energy procurement segment as a percent of revenue decreased by 4% primarily due to the cost decreases described above and, to a lesser extent, the 11% increase in Energy procurement revenue. Cost of revenue associated with our Energy efficiency services segment increased 28% primarily due to an increase in project costs associated with the 35% increase in revenue. Cost of revenue associated with our Energy efficiency services segment as a percent of revenue decreased by 4% primarily due to improved contribution margins on projects completed in the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.

Operating expenses

Sales and marketing expenses decreased 5% for the six months ended June 30, 2014 as compared to the same period in 2013 primarily due to decreases in internal commissions and amortization of intangible assets. Internal commissions decreased due to lower quota attainment in 2014 compared to 2013 and due to the change in commission policy for our mid-market group that we implemented in the second quarter of 2013. Under the revised policy, we continued to pay commissions based on cash received from mid-market transactions that were deferred for revenue purposes and provided for a bookings bonus to offset the impact of the change in our policy. We converted the bookings bonus to a draw program in 2014, eliminating that component of commission expense. Amortization expense related to intangible assets decreased as certain intangible assets related to our acquisitions became fully amortized in 2014. These decreases were partially offset by an increase in third party commission expense as we continued to expand our channel partner network. Sales and marketing expense as a percentage of revenue decreased 9% due to the decrease in costs described above the 14% increase in revenue.

The 16% increase in general and administrative expenses for the six months ended June 30, 2014 as compared to the same period in 2013 was due to increased legal and consulting costs of approximately $0.4 million primarily related to a shareholder action during the first quarter of 2014. In addition, payroll costs increased due to investments in our product development team. General and administrative expenses as a percent of revenue was substantially consistent with the prior year period as the 14% increase in revenue offset the above noted cost increases.

19

 

---

 

Other income (expense), net

We recorded net interest expense of approximately $0.4 million for the six months ended June 30, 2014 compared to net interest expense of approximately $0.5 million for the six months ended June 30, 2013.  The decrease in net interest expense in 2014 was primarily due to a reduction in the interest charged on our long-term debt resulting from the replacement of our credit facility in the fourth quarter of 2013.  

 

Income tax benefit (expense)

We recorded an income tax benefit of approximately $25,000 for the six months ended June 30, 2014 and an income tax expense of approximately $0.3 million for the six months ended June 30, 2013.  For the six months ended June 30, 2014, we were unable to make a reliable estimate of our annual effective tax rate as relatively small changes in our projected income or loss could produce a significant variance in our annual effective tax rate and as a result we utilized the actual effective tax rate as the basis for the income tax benefit.  For the three months ended June 30, 2013, the effective tax rate was based on our estimated annual effective tax rate.  Both periods reflect a deferred tax provision, federal alternative minimum tax liability and state income taxes.

Net income (loss)

Net loss decreased approximately $2.4 million for the six months ended June 30, 2014 compared to the same period in 2013, primarily due the increase in revenue, improved gross margin and the decrease in sales and marketing expenses. These decreases in net loss were partially offset by the increase in general and administrative expense.

Liquidity and Capital Resources

At June 30, 2014, 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: making strategic acquisitions; entering into other energy-related markets including energy efficiency; expanding our community of listers, bidders and channel partners on our exchanges; strengthening and extending our long-term relationships with government agencies; and growing our direct and inside sales force. As of June 30, 2014 our workforce numbered 127, an increase of one from the number that we employed at December 31, 2013. At June 30, 2014, we had 61 professionals in our sales and marketing and account management groups, 40 in our supply desk group and 26 in our general and administrative group.

We paid $10.4 million to acquire three businesses in 2011 through the use of cash on hand, cash flow from ongoing operations as well as cash flow generated by the acquisitions. In addition, we have paid $6.7 million in seller notes and contingent consideration bringing the total cash paid for the 2011 acquisitions to $17.1 million. In October 2012, we borrowed $8.0 million in long-term bank debt and entered into a $2.0 million seller note to acquire NEP. While the expansion/addition of these debt instruments significantly increased our commitments, we believe we have the resources to meet both our short- and long-term obligations under these arrangements based on cash on-hand, operating cash flows from our base business and cash expected to be generated from all of our acquired businesses. During 2013, we paid an additional $1.3 million in cash related to NEP contingent consideration and retired $1.5 million against the NEP seller note. During 2014, we repaid the remaining $0.5 million NEP Seller note and settled all outstanding earnout claims with GSE by issuing 200,000 shares of common stock, which had a fair value of approximately $0.9 million. As of June 30, 2014 we have retired all of our seller-note and earnout obligations related to these acquisitions. During the six months ended June 30, 2014 we generated cash flow from operations of $1.2 million and ended the quarter with $2.3 million in cash and cash equivalents.

Comparison of June 30, 2014 to December 31, 2013

20

 

---

 

Cash and cash equivalents increased 33% primarily due to cash flows from operations of approximately $1.2 million. Trade accounts receivable at June 30, 2014 decreased 7% as compared to the fourth quarter of 2013 as days sales outstanding (representing accounts receivable outstanding at June 30, 2014 divided by the average sales per day during the three months ended June 30, 2014, as adjusted) decreased 9%. Days sales outstanding decreased 9% due to the timing of in-period revenue recognized and cash receipts within the six months ended June 30, 2014 as compared to the same period in 2013. Revenue from bidders representing 10% or more of our revenue decreased to 26% from two bidders during the six months ended June 30, 2014, from an aggregate 28% for two bidders in the same period of the previous year. Two bidders merged at the end of 2013 and have been combined to determine the percentages above in both periods.

The working capital balance at June 30, 2014 (consisting of current assets less current liabilities) improved $2.0 million from December 31, 2013.  Current assets increased $0.4 million primarily due to the increase in cash and cash equivalents. Current liabilities decreased $1.5 million due to the settlement of our contingent consideration obligations and the $0.5 million payment against the short-term related party note.  Stockholders’ equity increased 5% for the six months ended June 30, 2014 primarily due to the issuance of shares under the GSE settlement and share-based compensation, both partially offset by the $0.2 million net loss.

Cash provided by operating activities for the six months ended June 30, 2014 and 2013 was approximately $1.2 million for both periods. Cash used in investing activities for the six months ended June 30, 2014 was approximately $0.2 million primarily due to capitalized software cost and capital expenditures. Cash used in financing activities for the six months ended June 30, 2014 and 2013 was approximately $0.4 million and $2.4 million, respectively. Cash used in financing activities for the six months ended June 30, 2014 primarily resulted from the final payment of the NEP seller note, partially offset by proceeds from the exercise of stock options. Cash used in financing activities for the six months ended June 30, 2013 was $2.4 million, primarily resulting from a $1.4 million payment of contingent consideration and $1.0 million of principal payments on long term debt.

EBITDA, representing net income (loss) before interest, income taxes, depreciation and amortization for the six months ended June 30, 2014 was $2.1 million as compared to $0.2 million for the same period in the prior year. Please refer to the section below discussing non-GAAP financial measures for a reconciliation of non-GAAP measures to the most directly comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

In this Quarterly Report on Form 10-Q, we provide certain “non-GAAP financial measures”. A non-GAAP financial measure refers to a numerical financial measure that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable financial measure calculated and presented in accordance with GAAP in our financial statements. In this Quarterly Report on Form 10-Q, we provide EBITDA and adjusted EBITDA as additional information relating to our operating results. These non-GAAP measures exclude expenses related to share-based compensation, depreciation related to our fixed assets, amortization expense related to acquisition-related assets and other assets, interest expense on bank borrowings, notes payable to sellers and contingent consideration, interest income on invested funds, and income taxes. Management uses these non-GAAP measures for internal reporting and bank reporting purposes. We have provided these non-GAAP financial measures in addition to GAAP financial results because we believe that these non-GAAP financial measures provide useful information to certain investors and financial analysts in assessing our operating performance due to the following factors:

21

 

---

 

Pursuant to the requirements of the SEC, we have provided below a reconciliation of the non-GAAP financial measures used to the most directly comparable financial measures prepared in accordance with GAAP. These non-GAAP financial measures are not prepared in accordance with GAAP. These measures 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 income (loss) prepared in accordance with GAAP.

 

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; stock-based compensation; the valuation of intangible assets and goodwill; the valuation of contingent consideration; 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; future results of operations may be affected. Refer to Note 2 of our consolidated financial statements within our Annual Report on Form 10-K as filed with the SEC on March 31, 2014 for a description of our accounting policies.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

22

 

---

 

Item 3. Quantitative and Qualitative Disclosure about Market Risk

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2013. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, the Company’s management was required to apply its reasonable judgment. Based upon the required evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that as of June 30, 2014, the Company’s disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and procedures also were effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to its management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

23

 

---

 

PART II

OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Two former employees/consultants of GSE have filed two separate complaints in the District Courts of Dallas County and Tarrant County Texas alleging, among other things, claims related to breach of contract, quantum meruit, promissory estoppel, tortious interference, and civil conspiracy. Each plaintiff claims that GSE and/or we failed to pay commissions due for services that they provided prior to the date of our purchase of certain GSE assets, based on their respective employment or independent contractor agreements with GSE. Each plaintiff has also asserted claims for recovery of their attorneys’ fees. We deny the allegations and have filed counterclaims for damages, asserting claims for conversion, unjust enrichment, misappropriation of confidential information, and violation of the Texas Theft Liability Act against each of the plaintiffs. We have also filed a counterclaim against one of the plaintiffs for her breach of a non-competition and non-solicitation agreement, based on her working for a competitor of ours during her one-year restrictive period and her improper solicitation of former GSE customers on behalf of the competitor. The plaintiffs have also asserted claims against the GSE affiliates and their individual principals. Our motions for summary judgment seeking dismissal of all of the plaintiff’s claims was denied in its entirety in one of the cases.  In the other case, our motion for summary judgment was partially granted, dismissing the plaintiff’s civil conspiracy claim.   The courts have assigned trial dates of September 29, 2014 and November 17, 2014.

We have estimated the potential commissions allegedly due to the two plaintiffs to be approximately $0.3 million. We have not recorded any accrual for contingent liabilities associated with these legal proceedings based on its belief that any potential loss, while reasonably possible, is not probable. We intend to continue to defend these actions vigorously and are currently unable to estimate a range of payments, if any, we may be required to pay, with respect to these claims. Further, we believe that the resolution of these matters will not result in a material effect to our condensed consolidated financial statements. However, due to uncertainties that accompany litigation of this nature, there could be no assurance that we will be successful, and the resolution of the lawsuits could have a material effect on our accompanying condensed consolidated financial statements.

In addition, we had filed cross claims against GSE for indemnification under the Asset Purchase Agreement in each of the plaintiffs’ cases.  The GSE affiliates and principals had also asserted cross claims against us seeking indemnification under the Asset Purchase Agreement.  In December 2013, GSE had amended its cross claims in one of the matters to include claims asserting breach of the earnout provisions in the Asset Purchase Agreement.  During the three months ended June 30, 2014, GSE and we settled all claims against each other related to these lawsuits and the earnout provisions.  We and GSE filed with the court agreed motions to dismiss all claims against one another, which were allowed by the court.  The settlement called for us to issue 200,000 shares of common stock to GSE and its affiliates that had a fair value of $0.9 million on the date issued.  

From time to time, we may be subject to legal proceedings and claims arising from the conduct of its business operations, including litigation related to employment matters. While it is impossible to ascertain the ultimate legal and financial liability with respect to contingent liabilities, including lawsuits, we believe that the aggregate amount of such liabilities, if any, will not have a material adverse effect on our condensed consolidated financial position and/or results of operations. It is possible, however, that future financial position or results of operations for any particular period could be materially affected by changes in our assumptions or strategies related to those contingencies or changes out of our control.

 

 

 

Item 1A. Risk Factors

There have been no material changes from risk factors previously disclosed in our annual report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 31, 2014.

 

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

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

During the quarter ended June 30, 2014, The Company issued 200,000 shares of common stock to Bruner & Bruner PC, GSE Consulting, LP, Great Lakes Energy, LP, Brian Dafferner, Glenwood Energy Partners, LTD, and Gulf States Energy, Inc.  as part of an agreement between the Company and GSE Consulting, LP and related entities and affiliates to settle litigation and claims related to contingent consideration between the parties.   The shares were issued on April 4, 2014 under an exemption from registration pursuant to Rule 506 of Regulation D under the Securities Act of 1933, and the shares were subsequently registered for resale on Form S-3 effective on June 19, 2014. 

24

 

---

 

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In connection with the vesting of restricted stock granted to employees, we withheld certain 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, 2014 is as follows:

 

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

 

 

 

25

 

---

 

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.

 

 

26