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

Overview

World Energy 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 the lowest price for energy, b) engage in energy efficiency projects to minimize quantity used and c) maximize available rebate and incentive programs. We have primarily focused on our retail and wholesale energy procurement clients via our state-of-the-art online auction platforms, the World Energy Exchange®, the World Green Exchange®and the World DR Exchange®. With recent investments and acquisitions, we are building out our energy efficiency practice-offering technology-enabled solutions such as online audits of facilities to identify retrofit options and project management services for retrofit implementation, believing this practice will also enable more cross-selling opportunities for commodity auctions. We are also taking our suite of solutions to the rapidly growing small- and medium-sized customer marketplaces.

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:

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 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 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 segment, enabled the Company 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 our initial public offering ("IPO") in November 2006 to a current high of 92 at March 31, 2012. This planned investment has been, and will continue to be, a key component of our strategic initiatives and has resulted in revenue growth of over 350% since our initial public offering in 2006. While these infrastructure investments result in increased operating costs in the short-term, as they begin to generate incremental revenue the operating leverage within our business model results in positive cash flow and profitability. We have been able to fund our acquisitions and strategic investments primarily with cash on-hand, notes payable and cash we have generated from operations, and we will continue to focus on cash generating acquisitions in the future. These activities, however, 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.

Revenue

Retail Electricity Transactions

We earn a monthly commission on energy sales contracted through our online auction platform from each bidder or energy supplier based on the energy usage transacted between the bidder and lister or energy consumer. Our commissions are not based on the retail price for electricity; rather on the amount of energy consumed. Commissions are calculated based on the volume of energy usage transacted between the energy supplier and energy consumer multiplied by our contractual commission rate. Our contractual commission rate is negotiated with the energy consumer on a procurement-by-procurement basis based on energy consumer specific circumstances, including the size of auction, the effort required to organize and run the respective auction and competitive factors, among others. Once the contractual commission is agreed to with the energy consumer, all energy suppliers participating in the auction agree to that rate. That commission rate remains fixed for the duration of the contractual term regardless of energy usage. Energy consumers provide us with a letter of authorization to request their usage history from the local utility. We then use this data to compile a usage profile for that energy consumer that will become the basis for the auction. This data may also be used to estimate revenue on a going forward basis, as noted below.

Historically, our revenue and operating results have varied from quarter-to-quarter and are expected to continue to fluctuate in the future. These fluctuations are primarily due to the buying patterns of our wholesale and natural gas customers, which tend to have large, seasonal purchases during the fourth and first quarters and electricity usage having higher demand in our second and third quarters. In addition, the activity levels on the World Energy Exchange® can fluctuate due to a number of factors, including market prices, weather conditions, energy consumers' credit ratings, the ability of suppliers to obtain financing in credit markets, and economic and geopolitical events. To the extent these factors affect the purchasing decisions of energy consumers our future results of operations may be affected. Contracts between energy suppliers and energy consumers are signed for a variety of term lengths, with a one year contract term being typical for commercial and industrial energy consumers, and government contracts typically having two to three year terms.

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

Retail Natural Gas Transactions

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

Mid-Market Transactions

Mid-sized energy procurement transactions have components similar to both the retail electricity and natural gas transactions. Commissions are driven primarily by the energy supplier who ultimately serves the customer. The terms and conditions underlying our agreements with each energy supplier can vary from full upfront payment at execution of the energy supply contract (similar to the retail natural gas transactions described above) to monthly over the flow period (similar to our retail electricity transactions.) As a result, we recognize monthly deals as energy flows from the energy suppliers to the energy consumer. On upfront transactions and/or varied payment term deals we recognize revenue as cash is received from the energy supplier. To date, revenue recognized on a monthly basis has approximated cash that has been received from energy suppliers.

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 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 the Regional Greenhouse Gas Initiative ("RGGI"), fees are paid by the lister and are recognized quarterly as revenue as auctions are completed and approved. For all other environmental commodity transactions both the lister and the bidder pay the transaction fee and revenue is recognized upon the consummation of the underlying transaction as credits are delivered by the lister and payment is made by the bidder.

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 generally 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), the Company utilizes the completed-contract method. Revenues are recognized based upon factors such as passage of title, installation, payments and customer acceptance.

Cost of revenue

Cost of revenue consists primarily of:

• salaries, employee benefits and share-based compensation associated with our auction management and efficiency 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);

• project costs including direct labor equipment and materials directly associated with efficiency projects;

• 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 expenses consist primarily of:

• salaries, employee benefits and share-based compensation related to sales and marketing personnel;

• third party commission expenses to our channel partners;

• travel and related expenses;

• amortization related to customer relationships and contracts;

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

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

General and administrative

General and administrative expenses consist primarily of:

• salaries, employee benefits and share-based compensation related to general and administrative personnel;

• accounting, legal, investor relations, information technology 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, bank term loan, note payable and contingent consideration.

Income tax expense

Income tax expense reflects the Company's federal alternative minimum tax liability and state income taxes.

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,
                                               2012              2011
            Revenue                                100 %             100 %
            Cost of revenue                         23                20

            Gross profit                            77                80
            Operating expenses:
            Sales and marketing                     48                50
            General and administrative              24                25

            Operating income                         5                 5
            Interest income (expense), net          (1 )              -
            Other income                             1                -
            Income tax expense                      (1 )              -

            Net income                               4 %               5 %

Comparison of the Three Months Ended March 31, 2012 and 2011

Revenue



                                   For the Three Months Ended
                                            March 31,
                                      2012              2011               Increase
    Energy procurement           $    7,139,247      $ 4,918,388     $ 2,220,859       45 %
    Energy efficiency services          787,144               -          787,144        -

    Total revenue                $    7,926,391      $ 4,918,388     $ 3,008,003       61 %

Revenue increased 61% for the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to a full quarter of revenue from our acquisitions completed in the fourth quarter of 2011 and increased auction activity in our retail product line. Our Energy procurement segment increased 45% due to the additions of the energy procurement contracts of Co-eXprise and GSE and, to a lesser extent, increased gas transactions and new customers. Our Energy efficiency service segment generated approximately $787,000 in revenue in the first quarter of 2012 primarily related to our October 2011 acquisition of NES.

Cost of revenue

                                               For the Three Months Ended March 31,
                                              2012                                2011
                                      $            % of Revenue            $          % of Revenue            Increase
Energy procurement              $   1,246,353                 17 %    $ 1,000,532                20 %    $ 245,821       25 %
Energy efficiency services            577,060                 73 %             -                 -         577,060        -

Total cost of revenue           $   1,823,413                 23 %    $ 1,000,532                20 %    $ 822,881       82 %

Cost of revenue increased 82% for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 primarily due to increases in equipment, material and labor costs associated with projects completed by our Energy efficiency service segment. Cost of revenue for our Energy procurement segment increased 25% due to increases in payroll resulting from a net increase in employees primarily due to our recent acquisitions. Cost of revenue associated with our Energy procurement segment as a percent of revenue declined 3% due to the 45% increase in revenue. The costs of revenue associated with our Energy efficiency services segment was primarily associated with equipment, material and labor costs associated with completed projects during the quarter. Cost of revenue as a percent of our Energy efficiency services revenue was 73% as we continued to invest in our project management team during the quarter.

Operating expenses

                                                 For the Three Months Ended March 31,
                                                2012                                2011
                                        $            % of Revenue            $          % of Revenue             Increase
Sales and marketing               $   3,814,183                 48 %    $ 2,456,221                50 %    $ 1,357,962       55 %
General and administrative            1,875,037                 24        1,217,739                25          657,298       54

Total operating expenses          $   5,689,220                 72 %    $ 3,673,960                75 %    $ 2,015,260       55 %

Sales and marketing expenses increased 55% for the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to increases in payroll, internal commissions and amortization of intangible assets. Payroll and internal commissions increased due to an increase of twenty-one sales and marketing employees versus the same period last year primarily due to our acquisitions and hires in our Energy efficiency services segment. Amortization expense related to intangible assets increased due to our 2011 acquisitions. Sales and marketing expense as a percentage of revenue decreased 2% due to the 61% increase in revenue, which was substantially offset by the increase in costs described above.

The 54% increase in general and administrative expenses for the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to increases in amortization expense, payroll, and back office support functions. Amortization expense related to intangible assets, payroll and administrative costs increased primarily due to our 2011 acquisitions. General and administrative expenses as a percent of revenue decreased 1% as our 61% increase in revenue was substantially offset by the above noted increase in costs.

Interest expense, net

Interest expense, net was approximately $89,000 for the three months ended March 31, 2012 compared to interest income, net of approximately $13,000 for the three months ended March 31, 2011. The increase in interest expense, net in 2012 was primarily due to interest charged on our notes payable, contingent consideration and the term loan with Silicon Valley Bank ("SVB"). The interest income in the first quarter of 2011 was primarily due to interest earned on a convertible note receivable with Retroficiency, Inc. ("Retroficiency").

Other income in the amount of approximately $53,000 was recognized from the sale of our investment in Retroficiency in the first quarter of 2012. There was no other income in 2011.

Income tax expense

We recorded income tax expense of approximately $28,000 for the three months ended March 31, 2012 compared to income tax expense of approximately $7,000 for the three months ended March 31, 2011. Income tax expense reflects the Company's federal alternative minimum tax liability and state income taxes.

Net income

We reported net income for the three months ended March 31, 2012 and 2011 of approximately $0.3 million, respectively, as increases in revenue in the first quarter of 2012 were substantially offset by cost increases and lower margins associated with our Energy efficiency service segment.

Liquidity and Capital Resources

At March 31, 2012, 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, energy efficiency, and demand response; making strategic acquisitions; and growing our direct and inside sales force. As of March 31, 2012 our workforce numbered 92, an increase of ten employees from the number that we employed at December 31, 2011. At March 31, 2012, we had 44 professionals in our sales and marketing and account management groups, 32 in our supply desk group and 16 in our general and administrative group.

As part of the consideration in acquiring NES, we are committed to repay $3.0 million in notes payable to the sellers plus interest in three equal installments on July 2, October 1 and December 28, 2012, respectively. In addition, in the first quarter of 2012 we paid contingent consideration of $0.25 million and we have a commitment to pay contingent consideration of $0.25 million in the first quarter of 2013 if certain milestones and financial performance criteria are met. As part of the consideration paid to the former owners of GSE, in the first quarter of 2012 we paid contingent consideration of $2.0 million and are required to pay up to a maximum of $2.5 million of contingent consideration in each of the first quarters of 2013 and 2014 if certain performance criteria are met.

While we believe we have the resources to meet our long-term obligations under these arrangements based on cash on-hand and the operating cash flows both from our base and our recently acquired businesses, we entered into an amended $5.0 million credit facility with SVB in the first quarter of 2012 to meet our short-term requirements. Under the amended facility, we borrowed $2.5 million under a 4-year term note (9-months interest only; 39 equal installments of principal and interest) and have $2.5 million available under a line-of-credit. At March 31, 2012 we had no borrowings against the line-of-credit. All of our acquisitions have historically generated operating cash flow. During the quarter we generated $1.3 million of EBITDA and ended the quarter with $2.4 million in cash and cash equivalents. We believe our cash flows will be adequate to meet our contingent consideration payments when due, if any, our obligations under the term note, and to repay the notes payable to the sellers when due.

Comparison of March 31, 2012 to December 31, 2011



                               March 31,        December 31,
                                  2012              2011             Increase/(Decrease)
  Cash and cash equivalents   $  2,403,744      $   1,837,801      $      565,943        31 %
  Trade accounts receivable      5,099,472          4,057,215           1,042,257        26
  Days sales outstanding                59                 60                  (1 )      (2 )
  Working capital (deficit)       (737,072 )       (3,471,245 )         2,734,173        79
  Stockholders' equity          21,726,792         21,181,119             545,673         3

Cash and cash equivalents increased 31% primarily due to $1.3 million generated in EBITDA during the first quarter of 2012, proceeds from the $2.5 million from borrowings under our term note with SVB and the receipt of $0.8 million in cash from the sale of our Retroficiency investment. These increases were partially offset by contingent consideration payments of $2.3 million, a 26% increase in trade accounts receivable and a net reduction of $0.9 million in accrued compensation. Trade accounts receivable increased 26% due to the 34% increase in revenue as compared to the fourth quarter of 2011. Days sales outstanding (representing accounts receivable outstanding at March 31, 2012 divided by the average sales per day during the current quarter, as adjusted for non-recurring items) decreased 2% due to the timing of in period revenue recognized within the . . .