World Energy Solutions 10Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2010; or


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

For the transition period from to

Commission file number: 001-34289

World Energy Solutions, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		04-3474959 (I.R.S. Employer Identification Number)

446 Main Street
Worcester, Massachusetts 01608
(Address of principal executive offices)

508-459-8100
(Registrant’s telephone number)

Indicate by check mark whether the registrant: (1) 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. Yesþ Noo

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). Yeso Noo

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 Filero		Accelerated Filero		Non-Accelerated Filero (Do not check if a smaller reporting company)		Smaller Reporting Companyþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of April 30, 2010, the registrant had 9,077,833 shares of common stock outstanding.

TABLE OF CONTENTS


	Page
PART I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009		2

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009		3

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009		4

Notes to Condensed Consolidated Financial Statements		5

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

Item 3. Quantitative and Qualitative Disclosure about Market Risk		24

Item 4(T). Controls and Procedures		25

PART II. Other Information

Item 1. Legal Proceedings		26

Item 1A. Risk Factors		26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26

Item 3. Defaults Upon Senior Securities		26

Item 4. Removed and Reserved		26

Item 5. Other Information		26

Item 6. Exhibits		27

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2010			2009
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	1,421,681		$	2,046,909
Trade accounts receivable, net		3,718,864			2,909,024
Prepaid expenses and other current assets		320,388			213,033

Total current assets		5,460,933			5,168,966
Property and equipment, net		358,033			371,033
Capitalized software, net		319,388			398,884
Intangibles, net		4,469,469			4,750,497
Goodwill		3,178,701			3,178,701
Other assets		28,456			26,044


Total assets	$	13,814,980		$	13,894,125


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	552,090		$	285,212
Accrued commissions		965,208			835,342
Accrued compensation		755,124			1,280,683
Accrued expenses		347,554			328,816
Deferred revenue and customer advances		533,062			873,752
Capital lease obligations		16,442			16,175

Total current liabilities		3,169,480			3,619,980
Capital lease obligations, net of current portion		11,791			16,003

Total liabilities		3,181,271			3,635,983


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; 15,000,000 shares authorized; 9,089,774 shares issued and 9,049,157 shares outstanding at March 31, 2010, and 8,889,357 shares issued and 8,850,474 shares outstanding at December 31, 2009		905			885
Additional paid-in capital		32,940,134			32,431,240
Accumulated deficit		(22,110,395	)		(21,981,951	)
Treasury stock, at cost; 40,617 shares at March 31, 2010 and 38,883 shares at December 31, 2009		(196,935	)		(192,032	)

Total stockholders’ equity		10,633,709			10,258,142


Total liabilities and stockholders’ equity	$	13,814,980		$	13,894,125

See accompanying notes to condensed consolidated financial statements.

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2010			2009
Revenue:
Brokerage commissions and transaction fees	$	4,156,670		$	3,693,674
Management fees		251,436			284,105

Total revenue		4,408,106			3,977,779
Cost of revenue		949,565			1,089,952

Gross profit		3,458,541			2,887,827

Operating expenses:
Sales and marketing		2,500,722			2,570,548
General and administrative		1,085,003			981,236

Total operating expenses		3,585,725			3,551,784


Operating loss		(127,184	)		(663,957	)

Interest expense, net		(1,260	)		(1,117	)


Loss before income taxes		(128,444	)		(665,074	)

Income tax expense		—			—


Net loss	$	(128,444	)	$	(665,074	)


Loss per share:

Net loss per common share — basic and diluted	$	(0.01	)	$	(0.08	)


Weighted average shares outstanding — basic and diluted		9,016,711			8,419,721

See accompanying notes to condensed consolidated financial statements.

WORLD ENERGY SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(128,444	)	$	(665,074	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		391,244			439,076
Share-based compensation		144,638			274,905
Loss on disposal of property and equipment		—			954
Changes in assets and liabilities:
Trade accounts receivable		(809,840	)		(488,635	)
Prepaid expenses and other assets		(109,767	)		(40,683	)
Accounts payable		266,878			(35,922	)
Accrued commissions		129,866			5,487
Accrued compensation		(525,559	)		(97,013	)
Accrued expenses		18,738			(14,679	)
Deferred revenue and customer advances		(340,690	)		(43,112	)

Net cash used in operating activities		(962,936	)		(664,696	)


Cash flows from investing activities:
Cost incurred in software development		—			(41,024	)
Purchases of property and equipment		(17,720	)		(1,432	)
Cash received in sale of property and equipment		—			500

Net cash used in investing activities		(17,720	)		(41,956	)


Cash flows from financing activities:
Proceeds from exercise of stock options		10,000			2,400
Proceeds from the sale of common stock, net		354,276			—
Purchase of treasury stock		(4,903	)		(60,420	)
Principal payments on capital lease obligations		(3,945	)		(10,133	)

Net cash provided by (used in) financing activities		355,428			(68,153	)


Net decrease in cash and cash equivalents		(625,228	)		(774,805	)

Cash and cash equivalents, beginning of period		2,046,909			1,731,411

Cash and cash equivalents, end of period	$	1,421,681		$	956,606


Non-cash activities:

Fair value of restricted common stock granted to employees	$	—		$	77,713

Net capital lease obligations	$	—		$	30,816


Supplemental disclosure of cash flow information:

Net cash paid for interest	$	(1,243	)	$	(627	)

See accompanying notes to condensed consolidated financial statements.

WORLD ENERGY SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

March 31, 2010

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 help listers manage energy as a strategic asset. The Company has developed two online auction platforms, the World Energy Exchange and the World Green Exchange. On the World Energy Exchange, retail energy consumers (commercial, industrial and government) and wholesale energy participants (utilities, electricity retailers and intermediaries) in the United States (“listers”) are able to negotiate for the purchase or sale of electricity and other energy resources from competing energy suppliers (“bidders”) which have agreed to participate on the Company’s auction platform. Although the Company’s primary source of revenue is from brokering electricity and natural gas, the Company adapted its World Energy Exchange auction platform to accommodate the brokering of green power in 2003 (i.e., electricity generated by renewable resources), wholesale electricity in 2004 and certain other energy-related products in 2005. In 2007, the Company created the World Green Exchange based on the World Energy Exchange technology and business process. On the World Green Exchange, bidders and listers negotiate for the purchase or sale of environmental commodities such as Renewable Energy Certificates, Verified Emissions Reductions, Certified Emissions Reductions and Regional Greenhouse Gas Initiative (“RGGI”) allowances.

On October 30, 2009, the Company entered into an agreement with Bond Capital, Ltd. (“Bond”), a strategic partner of the Company, for the purchase of up to $2.5 million of the Company’s common stock. Pursuant to the agreement, a purchasing entity, an affiliate of Bond, acquired $1.0 million of World Energy’s common stock at $2.97 per share on November 6, 2009. The Company agreed to offer an additional $1.5 million in Company shares on the same terms to Bond or its designee, with the price to be determined at the time of investment, through January 15, 2010. In the first quarter of 2010, affiliates of Bond purchased an additional $400,000 of Company stock at an average price of $2.62 per share bringing the amount raised under the financing agreement to $1.3 million.

In January 2010, the Company launched the World DR Exchange to create an efficient, transparent and liquid marketplace that benefits customers and suppliers alike in the demand response (“DR”) industry. The World DR Exchange creates the industry’s first online marketplace for demand response, enabling customers to source DR more efficiently and effectively bringing together curtailment service providers and energy consumers in highly-structured auction events designed to yield price transparency, heighten competition, and maximize the energy consumers' share of demand response revenues.

2. Interim Financial Statements

The December 31, 2009 condensed balance sheet has been derived from audited financial statements and the accompanying unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements and should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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 March 31, 2010 and the results of its operations and cash flows for the three months ended March 31, 2010 and 2009, respectively. The results of operations for the three months ended March 31, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2010.

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. Accordingly, actual results could differ from those 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; 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.

In January 2010, the Financial Accounting Standards Board, (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Improving Disclosures about Fair Value Measurements”. ASU 2010-06 requires details of transfers in and out of Level 1 and 2 fair value measurements and the gross presentation of activity within the Level 3 fair value measurement roll forward. The new disclosures are required of all entities that are required to provide disclosures about recurring and nonrecurring fair value measurements. The Company adopted ASU 2010-06 effective January 1, 2010, except for the gross presentation of the Level 3 fair value measurement roll forward which is effective for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. The adoption of ASU 2010-06 did not affect the Company’s consolidated financial statements.

In the first quarter of 2010, the FASB issued ASU 2010-09,Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements(ASU 2010-09). ASU 2010-09 amends Accounting Standards Codification (“ASC”) 855,Subsequent Events,so that SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in financial statements. We adopted the provisions of ASU 2010-09 in the first quarter of 2010. This adoption did not affect the Company’s consolidated financial statements.

3. Loss Per Share

As of March 31, 2010 and 2009, the Company only had one issued and outstanding class of stock — common stock. As a result, the basic loss per share for the three months ended March 31, 2010 and 2009 is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the period.

The computed loss per share does not assume conversion, exercise, or contingent exercise of securities that would have an anti-dilutive effect on loss per share. As the Company was in a net loss position for the reported periods, all common stock equivalents were anti-dilutive. Therefore, the weighted average of basic and diluted voting shares of common stock outstanding for the three months ended March 31, 2010 and 2009 were 9,016,711 and 8,419,721, respectively.

The following represents issuable weighted average share information excluded from the calculation of net loss per share, since the inclusion of such shares would be antidilutive due to the Company’s net loss position:


	For the three months ended March 31,
	2010		2009
Common stock options		131,993		198,532
Common stock warrants		3,825		16,285
Unvested restricted stock		406		—

Total		136,224		214,817

In addition, at March 31, 2010, common stock options, common stock warrants and unvested restricted stock of 390,901, 60,000 and 28,284 were excluded from the calculation of net loss per share, as inclusion of such shares would be antidilutive due to exercise prices or value of proceed shares exceeding the average market price of the Company’s common stock during the three months ended March 31, 2010. At March 31, 2009 common stock options, common stock warrants and unvested restricted stock of 253,200, 115,000 and 77,514, respectively, were excluded from the calculation of net loss per share, as inclusion of such shares would be antidilutive due to exercise prices or value of proceed shares exceeding the average market price of the Company’s common stock during the three months ended March 31, 2009.

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 March 31, 2010, approximately $300,000 of the Company’s cash and cash equivalents was invested in a highly liquid, U.S. Treasury money market fund.

The Company earns commission payments from bidders based on transactions completed between listers and bidders. The Company provides credit in the form of invoiced and unbilled accounts receivable to bidders in the normal course of business. Collateral is not required for trade accounts receivable, but ongoing credit evaluations of bidders are performed. While the majority of the Company’s revenue is generated from reverse auctions where the winning bidder pays a commission to the Company, commission payments for forward auctions can be paid by the lister, bidder or a combination of both. Management provides for an allowance for doubtful accounts on a specifically identified basis, as well as through historical experience applied to an aging of accounts, if necessary. Trade accounts receivable are written off when deemed uncollectible. To date write-offs have not been material.

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


	Revenue for the three months						Trade Accounts Receivable as
	ended March 31,						of March 31,
Energy Supplier	2010			2009			2010			2009
A		9	%		18	%		18	%		29	%
B		7	%		7	%		7	%		10	%
C		12	%		9	%		11	%		6	%

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 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 months ended March 31, 2010, one of these listers accounted for transactions resulting in 10% of the Company’s aggregate revenue. None of the Company’s listers accounted for transactions resulting in at least 10% of the Company’s aggregate revenue for the three months ended March 31, 2009.

5. Trade Accounts Receivable, Net

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

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 due within 30 days of invoice date. In addition, the Company invoices the bidder, lister or combination of both for forward auctions performed for environmental commodity product transactions. These transactions are earned and invoiced either upon lister acceptance of the auction results or, in some cases, upon delivery of the credits or cash settlement of the transaction.

Trade accounts receivable, net consists of the following:


	March 31, 2010			December 31, 2009
Unbilled accounts receivable	$	3,073,499		$	2,631,792
Billed accounts receivable		695,193			314,527

		3,768,692			2,946,319
Allowance for doubtful accounts		(49,828	)		(37,295	)

Trade accounts receivable, net	$	3,718,864		$	2,909,024

6. Stockholders’ Equity

Common Stock

In the Company’s 2010 definitive proxy statement, shareholders were asked to consider and approve an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from 15,000,000 to 30,000,000 at the 2010 Annual Meeting of Stockholders which will be held on May 20, 2010.

On October 30, 2009, the Company entered into an agreement with Bond, a strategic partner of the Company, for the purchase of up to $2.5 million of the Company’s common stock. Pursuant to the agreement, a purchasing entity, an affiliate of Bond, acquired $1.0 million of World Energy’s common stock at $2.97 per share on November 6, 2009. The Company agreed to offer an additional $1.5 million in Company shares on the same terms to Bond or its designee, with the price to be determined at the time of investment, through January 15, 2010. In the first quarter of 2010, affiliates of Bond purchased an additional $400,000 of Company stock at an average price of $2.62 per share bringing the amount raised under the financing agreement to $1.3 million. Proceeds from the transactions will be used for general corporate purposes, including supporting the Company’s growth initiatives.

As of March 31, 2010 and December 31, 2009, 9,049,157 and 8,850,474 shares of common stock were outstanding, respectively.

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 1,734 and 10,427 for the three months ended March 31, 2010 and 2009, respectively, were based on the value of the restricted stock on their vesting date as determined by the Company’s closing stock price. Total payment for employees’ tax obligations was approximately $5,000 and $32,000 for the three months ended March 31, 2010 and 2009, respectively. 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

In the first quarter of 2010, the Company issued warrants to a consultant for the purchase of 60,000 shares of the Company’s common stock at a per share price of $3.01. The warrants vest ratably on a monthly basis over a six month period and have a five year life.

The following table summarizes the Company’s warrant activity at March 31, 2010:


			Weighted Average
	Shares		Exercise Price
Warrants outstanding, December 31, 2009		4,260	$	0.30
Granted		60,000	$	3.01
Exercised		—	$	—
Canceled/expired		—	$	—

Warrants outstanding, March 31, 2010		64,260	$	2.83

The weighted average remaining contractual life of warrants outstanding is 4.65 years as of March 31, 2010.

7. Property and Equipment, Net

Property and equipment, net consists of the following:


	March 31, 2010			December 31, 2009
Leasehold improvements	$	65,451		$	65,451
Equipment		460,857			443,137
Furniture and fixtures		435,579			435,579

		961,887			944,167
Less: accumulated depreciation		(603,854	)		(573,134	)

Property and equipment, net	$	358,033		$	371,033

Depreciation expense for the three months ended March 31, 2010 and 2009 was $30,720 and $35,895, respectively. Property and equipment purchased under capital lease obligations at March 31, 2010 and December 31, 2009 was $46,294 and $183,132, respectively. Accumulated depreciation for property and equipment purchased under capital lease was $21,697 and $127,783 at March 31, 2010 and December 31, 2009, respectively.

8. Share-Based Compensation

The Company recognizes the compensation from share-based awards on a straight-line basis over the requisite service period of the award. For the three months ended March 31, 2010, share-based awards consisted of grants of stock options and stock warrants, and for the three months ended March 31, 2009, share-based awards consisted of grants of stock options and restricted stock. The restrictions on the restricted stock lapse over the vesting period. The vesting period of share-based awards is determined by the board of directors, and is generally four years for employees. The per-share weighted-average fair value of stock options and stock warrants granted during the three months ended March 31, 2010 was $2.04 on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions and estimated average forfeiture rate of 10% for the three months ended March 31, 2010:

Expected

Risk-Free

Expected

Three-months ended March 31,

Dividend Yield

Interest Rate

Option Life

Volatility

2010

—

1.53

2.78 years

119

The Company elected to use the Black-Scholes option pricing model to determine the weighted average fair value of options and warrants granted. As the Company’s stock has a limited trading history, prior to the fourth quarter of 2009, the Company determined the volatility for stock options based on a weighted combination of per share reported closing prices and historical and reported data for a peer group of companies that issued options with substantially similar terms. During the fourth quarter of 2009, the Company determined the volatility for stock options based on the reported closing prices of the Company’s stock since its initial public offering in November 2006 as management had determined that this weighting was more indicative of the volatility to be in effect during the expected term of the awards. The expected life of stock options and stock warrants has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin No. 107, “Share-Based Payment”.The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options and stock warrants. The Company has not paid and does not anticipate paying cash dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. In addition, guidance from the FASB requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. As a result, the Company applied estimated forfeiture rates of 10% in 2010 and 15% in 2009 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 March 31,
	2010		2009
Cost of revenue	$	18,000	$	50,000
Sales and marketing		60,000		179,000
General and administrative		58,000		30,000

Total share-based compensation	$	136,000	$	259,000

As of March 31, 2010, there was approximately $1,117,000 of unrecognized compensation expense related to share-based awards, including approximately $715,000 related to non-vested stock option awards that is expected to be recognized over a weighted-average period of 2.63 years, approximately $290,000 related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 1.56 years and approximately $112,000 related to non-vested stock warrants that is expected to be recognized over a weighted average period of 0.46 years.

9. Employee Benefit Plans

Stock Options

The Company has two stock incentive plans: the 2003 Stock Incentive Plan, or the 2003 Plan, and the 2006 Stock Incentive Plan, or the 2006 Plan. As of March 31, 2010, 264,731 shares of common stock representing option grants still outstanding were reserved under the 2003 Plan. No further grants are allowed under the 2003 Plan. As of March 31, 2010, 690,752 shares of common stock were reserved under the 2006 Plan representing 356,280 outstanding stock options, 29,315 shares of restricted stock outstanding and 305,157 shares available for grant. A summary of stock option activity under both plans for the three months ended March 31, 2010 is as follows:


	Number of			Weighted Average
	Stock Options			Exercise Price
Outstanding at December 31, 2009		659,888		$	3.73
Granted		4,000		$	3.15
Cancelled		(2,877	)	$	10.29
Exercised		(40,000	)	$	0.25

Outstanding at March 31, 2010		621,011		$	3.92

A summary of common stock options outstanding and common stock options exercisable as of March 31, 2010 is as follows:

Options Outstanding

Options Exercisable

Weighted

Average

Range of

Remaining

Aggregate

Number

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Of Shares

Contractual

Intrinsic

Prices

Options

Life

Value

Exercisable

Life

Value

$0.20 – $1.99

122,530

0.65 Years

361,464

122,530

0.65 Years

361,464

$2.00 – $3.80

364,480

5.62 Years

122,267

91,669

3.19 Years

55,203

$3.81 – $11.29

96,001

4.00 Years

—

64,052

3.32 Years

—

$11.30 – $13.40

38,000

4.06 Years

—

26,880

4.05 Years

—

621,011

4.29 Years

483,731

305,131

2.27 Years

416,667

The aggregate intrinsic value of options exercised during the three months ended March 31, 2010 was approximately $99,000. At March 31, 2010, the weighted average exercise price of common stock options outstanding and exercisable was $3.92 and $4.09, respectively. The weighted average fair value of option grants for the three months ended March 31, 2010 and 2009 was $2.42 and $2.32, respectively.

Restricted Stock

A summary of restricted stock activity under the 2006 Plan for the three months ended March 31, 2010 is as follows:


				Weighted Average
	Shares			Grant Price
Outstanding at December 31, 2009		34,301		$	10.38
Granted		3,409		$	2.57
Cancelled		(375	)	$	13.20
Vested		(8,020	)	$	7.28

Outstanding at March 31, 2010		29,315		$	10.29

There were 955,483 shares reserved for issuance under these plans at March 31, 2010.

401(k) Plan

The Company’s 401(k) savings plan covers the majority of the Company’s eligible employees. Employees of the Company may participate in the 401(k) Plan after reaching the age of 21. The Company may make discretionary matching contributions as determined from time to time. Employee contributions vest immediately, while Company matching contributions begin to vest after one year of service and continue to vest at 20% per year over the next five years. To date, the Company has not made any discretionary contributions to the 401(k) Plan.

10. Credit Arrangement

On September 30, 2009, the Company entered into a First Loan Modification Agreement (the “Modification Agreement”) with Silicon Valley Bank (“SVB”). The Modification Agreement amends and extends the Loan and Security Agreement with SVB dated September 8, 2008. Under the Modification Agreement, SVB has committed to make advances to the Company in an aggregate amount of up to $3,000,000, subject to availability against certain eligible accounts receivable and eligible retail backlog through March 7, 2011. The credit facility now bears interest at a floating rate per annum based on the prime rate plus 1.25% on advances made against eligible accounts receivable and prime rate plus 2.00% on advances made against eligible retail backlog, with the prime rate being subject to a 4.00% floor. These interest rates are subject to change based on the Company’s maintenance of an adjusted quick ratio of one-to-one.

The Company has not taken advances under the facility and there were no outstanding borrowings at March 31, 2010. As of March 31, 2010, the Company was in compliance with its covenants under the facility.

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

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

Overview

World Energy is an energy management services company that applies a combination of people, process and technology to help listers manage energy as a strategic asset. World Energy has developed two online auction platforms, the World Energy Exchange and the World Green Exchange. On the World Energy Exchange, retail energy consumers (commercial, industrial and governmental) and wholesale energy participants (utilities, electricity retailers, and intermediaries) in the United States (“listers”) are able to negotiate for the purchase or sale of electricity and other energy resources from competing energy suppliers (“bidders”) which have agreed to participate on our auction platform. The World Energy Exchange is supplemented with information about market rules, pricing trends, energy consumer usage and load profiles. Our procurement staff uses this auction platform to conduct auctions, analyze results, guide energy consumers through contracting, and track their contracts, sites, accounts and usage history. Although our primary source of revenue is from brokering electricity and natural gas, we adapted our 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. In 2007, we created the World Green Exchange based on the World Energy Exchange technology and business process. On the World Green Exchange, bidders and listers negotiate for the purchase or sale of environmental commodities such as Renewable Energy Certificates, Verified Emissions Reductions, Certified Emissions Reductions and Regional Greenhouse Gas Initiative (“RGGI”) allowances.

On October 30, 2009, we entered into an agreement with Bond Capital, Ltd. (“Bond”), a strategic partner of ours, for the purchase of up to $2.5 million of World Energy’s common stock. Pursuant to the agreement, a purchasing entity, an affiliate of Bond, acquired $1.0 million of our common stock at $2.97 per share on November 6, 2009. The Company agreed to offer an additional $1.5 million in Company shares on the same terms to Bond or its designee, with the price to be determined at the time of investment, through January 15, 2010. In the first quarter of 2010, affiliates of Bond purchased an additional $400,000 of our common stock at an average price of $2.62 per share bringing the amount raised under the financing agreement to $1.3 million.

In January 2010, we launched the World DR Exchange to create an efficient, transparent and liquid marketplace that benefits customers and suppliers alike in the demand response (“DR”) industry. The World DR Exchange creates the industry’s first online marketplace for demand response, enabling customers to source DR more efficiently and effectively bringing together curtailment service providers and energy consumers in highly-structured auction events designed to yield price transparency, heighten competition, and maximize the energy consumers share of demand response revenues.

In our 2010 definitive proxy statement, shareholders were asked to consider and approve an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 15,000,000 to 30,000,000 at our 2010 Annual Meeting of Stockholders, which will be held on May 20, 2010.

Since our IPO we significantly grew our employee base from 20 at December 31, 2006 to a high of 66 during the second quarter of 2008. This planned investment allowed us to pursue our strategic initiatives as outlined in our IPO resulting in revenue growth of over 250% since the fourth quarter of 2006. We aggressively invested in all of our product lines in 2007 including building out a direct sales force, expanding our channel partner network, acquiring our largest competitor in our retail product line and building our wholesale and green teams to pursue the opportunities within both of those emerging markets. As our infrastructure investment continued during the first nine months of 2007 in advance of revenue growth, our operating losses increased significantly. These investments began to generate incremental revenue in the fourth quarter of 2007 and we were able to regain the scalability of our business model and reduce our fixed operating costs in the latter half of 2008 and into 2009. Our gross margin percentages of 78% for the three months ended March 31, 2010 and 79% for the three months ended December 31, 2009 have returned to our pre-IPO levels and our operating loss has declined significantly. Our operating losses were approximately $0.1 million and $0.2 million for the three months ended March 31, 2010 and December 31, 2009, respectively, resulting in positive adjusted EBITDA of $0.4 million and $0.3 million for those respective periods. We believe that our fixed operating cost structure will remain at current levels in the short-term. However, a portion of our operating costs, including channel partner and internal commission costs, are variable in nature and will increase as revenue levels increase.

Calendar year 2008 saw dramatic swings in commodity prices as well as a sharp contraction in the general economy in the third quarter. Beginning in the latter half of the first quarter of 2008 and continuing into the early part of the third quarter of 2008, there was a sharp rise in electricity and natural gas prices, and the third and fourth quarters saw a reversal of this trend as commodity prices fell as sharply as they rose. For our business, we saw some customers in our wholesale and retail product lines delay their energy procurement decisions when prices rose, and then saw them return to the market when prices fell. We believe this pricing environment contributed to an increase in procurement activity in our retail and wholesale product lines during the second half of 2008 and the first six months of 2009 as compared to the same period in the prior year.

U.S. and global economic conditions worsened significantly in the fourth quarter of 2008. The stress on international credit markets due to the sharp contraction of the general economy led to a dramatic tightening in liquidity. The U.S. government responded with several initiatives to alleviate the strain on the financial markets. While these programs have had some positive effects on financial systems, credit remains tight and economic conditions in the U.S. and globally remain uncertain. As a result of the decline in economic output, energy demand in many regions was lower, which led to reduced sales and lower margins. While we did experience a decline in reported usage during the first six months of 2009, energy demand was still within our long-term historical norms. During the last six months of 2009, however, we experienced an approximate 4.5% decline in electricity usage, which resulted in a 2.4% reduction in total revenue. During the first quarter of 2010, we experienced an approximate 2.4% reduction in expected usage, which resulted in a 1.1% reduction in total revenue. While we believe that electricity usage will continue to increase and return to long-term historical trends as economic conditions improve, we do expect that energy demand will continue to be affected in the near term as companies hesitate to increase production, reopen plants and resume hiring and purchasing decisions.

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 energy supplier and lister or energy consumer. Our commissions are not based on the retail price for electricity; rather on the amount of energy consumed. Commissions are based on the energy usage transacted between the energy supplier and energy consumer multiplied by our contractual commission rate. 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 energy usage, particularly electricity, having higher demand in our second and third quarters and lower demand during our fourth and first quarters. In addition, the activity levels on the World Energy Exchange can fluctuate due to a number of factors, including market prices, weather conditions, energy consumers’ credit ratings, the ability of suppliers to obtain financing in credit markets, and economic and geopolitical events. To the extent these factors affect the purchasing decisions of energy consumers our future results of operations may be affected.

Contracts between energy suppliers and energy consumers are signed for a variety of term lengths, with a one year contract term being typical for commercial and industrial energy consumers, and government contracts typically having two to three year terms. As a result of recent commodity price fluctuations, where prices increased sharply in the first half of 2008 and then fell dramatically in the second half of 2008 and into 2009, we saw our customers take advantage of what they perceived as low prices and contract for multiple year terms. During this period we saw customers in some cases contract for four, five and even six year terms. In the latter half of 2009 and into the first quarter of 2010, we have seen contract terms return to one- to three- year contract lengths as tight credit markets led to a reluctance by energy suppliers to lock in longer term contracts. Our revenue has grown over the last three years through new participants utilizing our World Energy Exchange as well as energy consumers increasing the size or frequency of their transactions on our exchange platform.

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

Retail Natural Gas Transactions

There are two primary fee components to our retail natural gas services — transaction fees and management fees. Transaction fees are billed to and paid by the energy supplier awarded business on the platform. These fees are established prior to award and are the same for each supplier. For the majority of our natural gas transactions, we bill the supplier upon the conclusion of the transaction based on the estimated energy volume transacted for the entire award term multiplied by the transaction fee. As with electricity transactions described above, the favorable pricing environment saw certain gas customers also purchase for multiple year terms. Management fees are paid by our energy consumers and are generally billed on a monthly basis for services rendered based on terms and conditions included in contractual arrangements. While substantially all of our retail natural gas transactions are accounted for in accordance with this policy, a certain percentage is accounted for as the natural gas is consumed by the customer and recognized as revenue in accordance with the retail electricity transaction revenue recognition methodology described above.

Wholesale Transactions

Wholesale transaction fees are invoiced upon the conclusion of the auction based on a fixed fee. These revenues are not tied to future energy usage and are recognized upon the completion of the online auction. For reverse auctions where our customers bid for a consumer’s business, the fees are paid by the bidder. For forward auctions where a lister is selling energy products, the fees are typically paid by the lister. While substantially all wholesale transactions are accounted for in this fashion, a small percentage of our wholesale revenue is accounted for as electricity or gas is delivered similar to the retail electricity transaction methodology described above.

Environmental Commodity Transactions

Environmental commodity transaction fees are accounted for utilizing two primary methods. For regulated allowance programs like RGGI, fees are paid by the lister and are recognized as revenue quarterly 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 stock-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 stock-based compensation related to sales and marketing personnel;

•

third party commission expenses to our channel partners;

•

travel and related expenses;

•

amortization related to customer relationships and contracts;

•

rent, depreciation and other related overhead and facility-related costs; and

•

general marketing costs such as trade shows, marketing materials and outsourced services.

General and administrative

General and administrative expenses consist primarily of:

•

salaries, employee benefits and stock-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 income (expense), net consists primarily of:

•

interest income earned on cash held in the bank; and

•

interest expense related to capital leases.

Income tax expense

We did not record an income tax benefit for the three months ended March 31, 2010 and 2009 as we provided a full valuation allowance against our deferred tax assets due to uncertainty regarding the realization of those deferred tax assets, primarily net operating loss carryforwards, in the future.

Results of Operations

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


	For the Three Months
	Ended March 31,
	2010			2009
Revenue		100	%		100	%
Cost of revenue		22			27

Gross profit		78			73
Operating expenses:
Sales and marketing		57			65
General and administrative		24			25

Operating loss		(3	)		(17	)
Interest expense		—			—
Income tax expense		—			—

Net loss		(3	)%		(17	)%

Comparison of the Three Months Ended March 31, 2010 and 2009

Revenue


	For the Three Months Ended
	March 31,
	2010		2009		Increase
Revenue	$	4,408,106	$	3,977,779	$	430,327	11	%

Revenue increased 11% for the three months ended March 31, 2010 as compared to the same period in 2009 due to increased auction activity in all of our product lines. Revenue from our wholesale product line increased over 36% as we grew our customer base 33% to 56 at March 31, 2010 and both new and existing customers contributed to revenue during the period. The retail product line increase reflects new customer wins with a concentration in the Ohio electricity market as price caps expired during the third quarter of 2009 opening up the territory to competitive supply and a 56% increase to 103 in our channel partner network at March 31, 2010. Partially offsetting the retail and wholesale product line increases was an 11% decrease in management fee revenue resulting from the transitioning of the former EnergyGateway customer base to a performance-based, transaction fee model.

Cost of revenue


	For the Three Months Ended March 31,
	2010					2009
	$		% of Revenue			$		% of Revenue			Decrease
Cost of revenue	$	949,565		22	%	$	1,089,952		27	%	$	(140,387	)	(13	%)

The 13% decrease in cost of revenue related to the three months ended March 31, 2010 as compared to the same period in 2009 was substantially due to decreases in employee costs. At March 31, 2010, we had 21 supply desk employees versus 25 in the same period last year as we realigned our cost structure as business and economic conditions evolved in 2009. Cost of revenue as a percent of revenue decreased 5% due to the cost decreases noted above and the 11% increase in revenue.

Operating expenses


	For the Three Months Ended March 31,
	2010					2009
	$		% of Revenue			$		% of Revenue			Decrease
Sales and marketing	$	2,500,722		57	%	$	2,570,548		65	%	$	(69,826	)	(3	%)
General and administrative		1,085,003		24			981,236		25			103,767		11

Total operating expenses	$	3,585,725		81	%	$	3,551,784		90	%	$	33,941		1	%

The 3% decrease in sales and marketing expense for the three months ended March 31, 2010 as compared to the same period in 2009 primarily reflects general decreases in compensation and travel costs substantially offset by increases in third party commission costs and marketing costs. Compensation and travel costs decreased primarily due to adjustments to our organizational structure as we realigned our staffing as business and economic conditions evolved in 2009. Marketing costs increased due to the timing of certain trade show and marketing programs. Third party commission costs increased 11% due to the 11% increase in revenue. Sales and marketing expense as a percentage of revenue decreased 8% primarily due to the 11% increase in revenue and, to a lesser extent, the cost decreases noted above.

The 11% increase in general and administrative expenses related to the three months ended March 31, 2010 as compared to the same period in 2009 was primarily due to increases in compensation and investor relations costs. During the three months ended March 31, 2010, we added staff in accounting, information technology and human resources. In addition, we also increased our investor relations efforts in the U.S. during the three months ended March 31, 2010 to capitalize on our Nasdaq listing in 2009. These increases were partially offset by decreases in compliance and intangible amortization costs. General and administrative expenses as a percent of revenue decreased 1% due to the 11% increase in revenue, substantially offset by the cost increases noted above.

Interest expense, net

Interest expense was approximately $1,000 for both of the three months ended March 31, 2010 and 2009.

Income tax expense

Net loss

We reported a net loss for the three months ended March 31, 2010 of approximately $0.1 million as compared to a net loss of approximately $0.7 million for the three months ended March 31, 2009. The 81% decrease in net loss is primarily due to the 11% increase in revenue and the 5% improvement in gross margin percentage.

Liquidity and Capital Resources

At March 31, 2010, we had no commitments for material capital expenditures. We have identified and executed against a number of strategic initiatives that we believe are key components of our future growth, including: expanding our community of listers, bidders and channel partners on our exchanges; strengthening and extending our long-term relationships with government agencies; entering into other energy-related markets including wholesale transactions with utilities, the emerging environmental commodities markets, and, most recently our entry into the demand response market; making strategic acquisitions; and growing our sales force. As of March 31, 2010, our workforce numbered 57 reflecting a net increase of three from the 54 we employed at December 31, 2009. At March 31, 2010, we had 23 professionals in our sales and marketing and account management groups, 21 in our supply desk group and 13 in our general and administrative group. While we will continue to adjust our workforce as the need and/or opportunity arises, we believe that our fixed operating costs will remain at current levels in the short-term.

Comparison of March 31, 2010 to December 31, 2009


	March 31,		December 31,
	2010		2009		Increase/(Decrease)
Cash and cash equivalents	$	1,421,681	$	2,046,909	$	(625,228	)	(31	)%
Trade accounts receivable		3,718,864		2,909,024		809,840		28
Days sales outstanding		76		76		—		—
Working capital		2,291,453		1,548,986		742,467		48
Stockholders’ equity		10,633,709		10,258,142		375,567		4

Cash and cash equivalents decreased 31%, primarily due to the $0.8 million increase in accounts receivable and a $0.5 million decrease in accrued compensation due to the timing of year end bonus and commission payments. These decreases in cash and cash equivalents were partially offset by adjusted EBITDA of $0.4 million and net proceeds from the sale of common stock of $0.4 million in the first quarter of 2010. Trade accounts receivable increased 28% due to the 26% sequential increase in revenue during the three months ended March 31, 2010 compared to the three months ended December 31, 2009. Days sales outstanding (representing accounts receivable outstanding at March 31, 2010 divided by the average sales per day during the current quarter) for the three months ended March 31, 2010 remained flat as compared to the three months ended December 31, 2009. Revenue from bidders representing greater than 10% of our revenue decreased to 12% from one bidder during the three months ended March 31, 2010, from 18% from a different bidder during the same period in 2009.

Working capital (consisting of current assets less current liabilities) increased 48%, primarily due to the $0.8 million increase in trade accounts receivable. Stockholders’ equity increased 4% for the three months ended March 31, 2010 due to net proceeds of $0.4 million from the sale of common stock during the three months ended March 31, 2010.

Cash used in operating activities for the three months ended March 31, 2010 increased $0.3 million to $1.0 million compared to the same period last year due primarily to the increase in trade accounts receivable. Cash provided by investing and financing activities for the three months ended March 31, 2010 was $0.3 million, primarily due to $0.4 million in net proceeds from the sale of common stock. Cash used in investing and financing activities for the three months ended March 31, 2009 was approximately $0.1 million due primarily to costs incurred in software development and repurchases of our common stock in connection with the vesting of restricted stock granted to employees.

Adjusted EBITDA, representing net loss excluding stock-based compensation charges, depreciation, amortization, and net interest expense, for three months ended March 31, 2010 was a positive $0.4 million as compared to a positive $50,000 for the same period in the prior year and $0.3 million for the three months ended December 31, 2009. This increase was primarily due to the 11% increase in revenue and the 5% improvement in gross margin percentage. 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”).

We have incurred approximately $22.1 million of cumulative operating losses to date. For the three months ended March 31, 2010, we incurred a net loss of approximately $0.1 million, net cash used in operating activities was approximately $1.0 million and positive adjusted EBITDA was $0.4 million. During 2009, we entered into a First Loan Modification Agreement with Silicon Valley Bank (“SVB”) extending the availability of our $3,000,000 Credit Facility through March 7, 2011. No advances have been taken under the facility and we have no bank debt as of March 31, 2010. Cash and cash equivalents were approximately $1.4 million as of March 31, 2010. We expect to continue to fund our operations from existing cash resources, operating cash flow and, when required, the issuance of various debt and equity instruments. To the extent that our cash and cash equivalents and our anticipated cash flows from operating activities, as well as the SVB credit facility, are insufficient to fund our future activities or planned future acquisitions, we may be required to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products. In addition, we may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. Accordingly, we have filed a shelf registration statement with the Securities and Exchange Commission (“SEC”) to register shares of our common stock and other securities for sale, giving us the opportunity to raise funding when needed or otherwise considered appropriate at prices and on terms to be determined at the time of any such offerings. We currently have the ability to sell approximately $20.0 million of our securities under the shelf registration statement subject to Nasdaq, Toronto Stock Exchange and SEC limitations. Any equity or equity-linked financing could be dilutive to existing stockholders. In the event we require additional cash resources, we may not be able to obtain bank credit arrangements or effect any equity or debt financing on terms acceptable to us or at all.

Use of Non-GAAP Financial Measures

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 stock-based compensation, depreciation related to our fixed assets, amortization expense related to acquisition-related assets and capitalized software, and interest expense on capital leases. Management uses this non-GAAP measure for internal reporting and bank reporting purposes. We have provided this non-GAAP financial measure in addition to GAAP financial results because we believe that this non-GAAP financial measure provides useful information to certain investors and financial analysts in assessing our operating performance due to the following factors:

•

We believe that the presentation of a non-GAAP measure that adjusts for the impact of share-based compensation expenses, depreciation of fixed assets, amortization expense related to acquisition-related assets and capitalized software, and interest expense on capital leases provides investors and financial analysts with a consistent basis for comparison across accounting periods and, therefore, is useful to investors and financial analysts in helping them to better understand our operating results and underlying operational trends;

•

Although stock-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 stock-based instrument, and generally cannot be changed or influenced by management after the grant;

•

We do not acquire intangible assets on a predictable cycle. Our intangible assets relate solely to business acquisitions. Amortization costs are fixed at the time of an acquisition, are then amortized over a period of several years after the acquisition and generally cannot be changed or influenced by management after the acquisition;

•

We do not regularly incur capitalized software costs. Our capitalized software costs relate primarily to the build-out of our exchanges. Amortization costs are fixed at the time the costs are incurred and are then amortized over a period of several years and generally cannot be changed or influenced by management after the initial costs are incurred;

•

We do not regularly invest in fixed assets. Our fixed assets relate primarily to computer and office equipment and furniture and fixtures. Depreciation costs are fixed at the time of purchase and are then depreciated over several years and generally cannot be changed or influenced by management after the purchase; and

•

We do not regularly enter into capital leases. Our capital leases relate primarily to computer and office equipment. Interest expense is fixed at the time of purchase and recorded over the life of the lease and generally cannot be changed or influenced by management after the purchase.

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 non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies. 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,
	March 31, 2010			December 31, 2009			March 31, 2009

GAAP net loss	$	(128,444	)	$	(236,639	)	$	(665,074	)
Add: Interest expense, net		1,260			1,397			1,117
Add: Share-based compensation		144,638			127,643			274,905
Add: Depreciation & amortization		391,244			392,980			439,076


Non-GAAP adjusted EBITA	$	408,698		$	285,381		$	50,024

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 revenues and expenses during the reporting period.

The most judgmental estimates affecting our 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 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 March 4, 2010 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 based on the energy usage transacted between the energy supplier and energy consumer multiplied by our contractual commission rate. Revenue from commissions is recognized as earned on a monthly basis over the life of each contract as energy is consumed, provided there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured, and customer acceptance criteria, if any, has been successfully demonstrated.

We record brokerage commissions based on actual usage data obtained from the energy supplier for that accounting period, or to the extent actual usage data is not available, based on the estimated amount of electricity and gas delivered to the energy consumers for that accounting period. We develop our estimates on a quarterly basis based on the following criteria:

•

Payments received prior to the issuance of the financial statements;

•

Usage updates from energy suppliers;

•

Usage data from utilities;

•

Comparable historical usage data; and

•

Historical variances to previous estimates.

To the extent usage data cannot be obtained, we estimate revenue as follows:

•

Historical usage data obtained from the energy consumer in conjunction with the execution of the auction;

•

Geographic/utility usage patterns based on actual data received;

•

Analysis of prior year usage patterns; and

•

Specific review of individual energy supplier/location accounts.

In addition, we analyze this estimated data based on overall industry trends including prevailing weather and usage data. Once the actual data is received, we adjust the estimated accounts receivable and revenue to the actual total amount in the period during which the payment is received. Based on management’s current capacity to obtain actual energy usage, we currently estimate four to six weeks of revenue at the end of our accounting period. Differences between estimated and actual revenue have been within management’s expectations and have not been material to date.

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

Retail Natural Gas Transactions

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

Wholesale Transactions

Environmental Commodity Transactions

Channel Partner Commissions

We pay commissions to our channel partners at contractual rates based on monthly energy transactions between energy suppliers and energy consumers. The commission is accrued monthly and charged to sales and marketing expense as revenue is recognized. We pay commissions to our salespeople at contractual commission rates based upon cash collections from our customers.

Revenue Estimation

Our estimates in relation to revenue recognition affect revenue and sales and marketing expense as reflected on our statements of operations, and trade accounts receivable and accrued commission accounts as reflected on our balance sheets. For any quarterly reporting period, we may not have actual usage data for certain energy suppliers and will need to estimate revenue. We record revenue based on the energy consumers’ historical usage profile. At the end of each reporting period, we adjust historical revenue to reflect actual usage for the period and estimate usage where actual usage is not available. For the three months ended March 31, 2010, we estimated usage for approximately 32% of our revenue resulting in a negative 1.1%, or approximately $49,000, adjustment to reduce total revenue. This decrease in revenue resulted in an approximate $13,000 decrease in sales and marketing expense related to third party commission expense associated with those revenues. Corresponding adjustments were made to trade accounts receivable and accrued commissions, respectively. A 1% difference between this estimate and actual usage would have an approximate $14,000 effect on our revenue for the three months ended March 31, 2010.

Software Development

Certain acquired software and significant enhancements to our software are recorded in accordance with guidance from the Financial Accounting Standards Board (“FASB”). Accordingly, no internally developed software costs were capitalized during the three months ended March 31, 2010 and costs of approximately $41,000 related to implementation, coding and configuration were capitalized during the three months ended March 31, 2009. We amortize internally developed and purchased software over the estimated useful life of the software (generally three years). During the three months ended March 31, 2010 and 2009, approximately $79,000 and $77,000 were amortized to cost of revenues, respectively. Accumulated amortization was approximately $901,000 and $822,000 at March 31, 2010 and December 31, 2009, respectively.

Our estimates for capitalization of software development costs affect cost of revenue and capitalized software as reflected on our consolidated statements of operations and on our consolidated balance sheets. During the three months ended March 31, 2010, amortization expense was approximately 8.4% of cost of revenue. To the extent the carrying amount of the capitalized software costs may not be fully recoverable or that the useful lives of those assets are no longer appropriate, we may need to record an impairment (non-cash) charge and write-off a portion or all of the capitalized software balance on the balance sheet.

Goodwill

We use assumptions in establishing the carrying value and fair value of our goodwill. Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired businesses. We account for goodwill that results from acquired businesses in accordance with guidance with the FASB, under which goodwill and intangible assets having indefinite lives are not amortized but instead are assigned to reporting units and tested for impairment annually or more frequently if changes in circumstances or the occurrence of events indicate possible impairment.

We perform an annual impairment review during the fourth fiscal quarter of each year, or earlier, if indicators of potential impairment exist. The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit whereby the carrying amount of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill will be recorded as an impairment loss. We performed our annual impairment analysis in December, 2009 and determined that no impairment of our goodwill or intangible assets existed.

Intangible Assets

We use assumptions in establishing the carrying value, fair value and estimated lives of our intangible assets. The criteria used for these assumptions include management’s 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 our estimate of the period that the assets will generate revenues or otherwise be used by us. Factors that would influence the likelihood of a material change in our reported results include significant changes in the asset’s ability to generate positive cash flow, a significant decline in the economic and competitive environment on which the asset depends and significant changes in our strategic business objectives.

Intangible assets consist of customer relationships and contracts, purchased technology and other intangibles, and are stated at cost less accumulated amortization. Intangible assets with a definite 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. During 2010, 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.

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 its 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 March 31, 2010, we had deferred tax assets of approximately $8.0 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 $8.0 million non-cash tax benefit.

Share-Based Compensation

In accordance with guidance from the FASB, we recognize the compensation from share-based awards on a straight-line basis over the requisite service period of the award. For the three months ended March 31, 2010, share-based awards consisted of grants of stock options and stock warrants, and for the three months ended March 31, 2009, share-based awards consisted of grants of stock options and restricted stock. The restrictions on the restricted stock lapse over the vesting period. The vesting period of restricted stock and stock options is determined by our board of directors, and is generally four years for employees. The per-share weighted-average fair value of stock options and stock warrants granted during the three months ended March 31, 2010 was $2.04 on the date of grant, using the Black-Scholes option-pricing model with the following weighted-average assumptions:

Expected

Risk-Free

Expected

Three-months ended March 31,

Dividend Yield

Interest Rate

Option Life

Volatility

2010

—

1.53

2.78 years

119

We have two stock incentive plans: the 2003 Stock Incentive Plan, or the 2003 Plan, and the 2006 Stock Incentive Plan, or the 2006 Plan. As of March 31, 2010, 264,731 shares of common stock representing option grants still outstanding were reserved under the 2003 Plan. No further grants are allowed under the 2003 Plan. As of March 31, 2010, 690,752 shares of common stock were reserved under the 2006 Plan representing 356,280 outstanding stock options, 29,315 shares of restricted stock outstanding and 305,157 shares available for grant.

Stock Options

A summary of stock option activity under both plans for the three months ended March 31, 2010 is as follows:


	Number of			Weighted Average
	Stock Options			Exercise Price
Outstanding at December 31, 2009		659,888		$	3.73
Granted		4,000		$	3.15
Cancelled		(2,877	)	$	10.29
Exercised		(40,000	)	$	0.25

Outstanding at March 31, 2010		621,011		$	3.92

A summary of common stock options outstanding and common stock options exercisable as of March 31, 2010 is as follows:

Options Outstanding

Options Exercisable

Weighted

Average

Range of

Remaining

Aggregate

Number

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Of Shares

Contractual

Intrinsic

Prices

Options

Life

Value

Exercisable

Life

Value

$0.20 – $1.99

122,530

0.65 Years

361,464

122,530

0.65 Years

361,464

$2.00 – $3.80

364,480

5.62 Years

122,267

91,669

3.19 Years

55,203

$3.81 – $11.29

96,001

4.00 Years

—

64,052

3.32 Years

—

$11.30 – $13.40

38,000

4.06 Years

—

26,880

4.05 Years

—

621,011

4.29 Years

483,731

305,131

2.27 Years

416,667

Restricted Stock

A summary of restricted stock activity under the 2006 Plan for the three months ended March 31, 2010 is as follows:


				Weighted Average
	Shares			Grant Price
Outstanding at December 31, 2009		34,301		$	10.38
Granted		3,409		$	2.57
Cancelled		(375	)	$	13.20
Vested		(8,020	)	$	7.28

Outstanding at March 31, 2010		29,315		$	10.29

There were 955,483 shares reserved for issuance under these plans at March 31, 2010.

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. The Company’s 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 the energy supplier and energy consumer. Our fee is set as a fixed dollar amount per unit of measure and fluctuates with changes in energy demand over the contract period.

Foreign Currency Fluctuation

Our commission revenue is primarily denominated in U.S. dollars. Therefore, we are not directly affected by foreign exchange fluctuations on our current orders. However, fluctuations in foreign exchange rates do have an effect on energy consumers’ access to U.S. dollars and on pricing competition. We have entered into non-U.S. dollar contracts but they have not had a material impact on our operations. We do not believe that foreign exchange fluctuations will materially affect our results of operations.

Item 4(T). 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 March 31, 2010. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that there are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their desired control objectives. Additionally, in evaluating and implementing possible controls and procedures, the Company’s management was required to apply its reasonable judgment. Based upon the required evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that as of March 31, 2010, 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 first fiscal quarter of 2010 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

No material changes.

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

We registered shares of our common stock in connection with our initial public offering concurrently in Canada under the terms of a Supplemented Prep Prospectus dated November 9, 2006 and in the United States under the Securities Act of 1933, as amended. Our Registration Statement on Form S-1 (No. 333-136528) in connection with our initial public offering was declared effective by the SEC on November 9, 2006.

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 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
1/01/10 – 1/31/10		202	$	2.94		—		—
2/01/10 – 2/28/10		118	$	2.80		—		—
3/01/10 – 3/31/10		1,414	$	2.81		—		—

Total		1,734	$	2.83		—		—

Item 3. Defaults Upon Senior Securities

None.

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits


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

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

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

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

SIGNATURES

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


	World Energy Solutions, Inc.
Dated: May 6, 2010	By:	/s/ Richard Domaleski
		Richard Domaleski
		Chief Executive Officer

Dated: May 6, 2010	By:	/s/ James Parslow
		James Parslow
		Chief Financial Officer

EXHIBIT INDEX


Exhibit		Description

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

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

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

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

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

World Energy Solutions (XWES) Inactive 10-Q2010 Q1 Quarterly report

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